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 April 3, 1999
------------------------
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
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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) 201-1024
------------------------------------------------------------
(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 33,600,380 shares of Common Stock, $.01 par
value, outstanding at April 3, 1999.
<PAGE>
CERNER CORPORATION AND SUBSIDIARIES
-----------------------------------
I N D E X
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Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheets as of April 3, 1999
and January 2, 1999 (unaudited) 1
Consolidated Statements of Earnings for the
three months ended April 3, 1999
and April 4, 1998 (unaudited) 2
Consolidated Statements of Cash Flows
for the three months ended April 3, 1999
and April 4, 1998 (unaudited) 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 13
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
<TABLE>
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
April 3, January 2,
(In thousands) 1999 1999
---------- ----------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 34,913 $ 42,658
Receivables 165,876 167,374
Inventory 2,621 2,651
Prepaid expenses and other 4,001 4,234
---------- ----------
Total current assets 207,411 216,917
Property and equipment, net 75,881 77,292
Software development costs, net 58,714 54,971
Intangible assets, net 8,574 8,884
Investments, net 71,590 71,719
Other assets 6,594 6,702
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$ 428,764 $ 436,485
========== ==========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 15,245 $ 14,092
Current installments of long-term debt 5,021 5,030
Deferred revenue 24,301 33,921
Income taxes 25,880 26,057
Accrued payroll and tax withholdings 14,593 16,625
Other accrued expenses 1,626 2,511
---------- ----------
Total Current Liabilities 86,666 98,236
---------- ----------
Long-term debt, net 25,000 25,000
Deferred income taxes 22,670 22,106
Deferred revenue 20,000 20,000
Stockholders' Equity:
Common stock, $.01 par value,
150,000,000 shares authorized,
34,801,898 shares issued in 1999
and 34,674,164 issued in 1998 348 347
Additional paid-in capital 165,499 165,239
Retained earnings 129,676 126,862
Treasury stock, at cost (1,201,518
shares in 1999 and 1998) (20,796) (20,796)
Accumulated other comprehensive income:
Foreign currency translation adjustment (149) (243)
Unrealized loss on available-for-sale
equity security (net of deferred
tax asset of $92 for 1999 and
$165 for 1998) (150) (266)
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Total stockholders' equity 274,428 271,143
---------- ----------
$ 428,764 $ 436,485
========== ==========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
<TABLE>
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<CAPTION>
Three Months
Ended
April 3, April 4,
--------------------------
1999 1998
---------- ----------
(In thousands, except per share data)
<S> <C> <C>
Revenues:
System sales $ 60,813 $ 53,373
Support and maintenance 22,365 18,012
Other 3,565 2,289
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Total revenues 86,743 73,674
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Costs and expenses:
Cost of revenues 23,568 22,072
Sales and client service 34,103 25,950
Software development 17,526 13,634
General and administrative 6,672 6,034
Write-off of in-process
research and development -- 5,038
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Total costs and expenses 81,869 72,728
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Operating earnings 4,874 946
Interest income (expense), net (331) 160
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Earnings before income taxes 4,543 1,106
Income Taxes 1,726 435
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Net earnings $ 2,817 $ 671
========== ==========
Basic earnings per share $ .08 $ .02
========== ==========
Basic weighted average shares outstanding 33,559 32,669
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Diluted earnings per share $ .08 $ .02
========== ==========
Diluted weighted average shares outstanding 33,923 33,352
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</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
<TABLE>
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Three Months Ended
April 3, 1999 April 4, 1998
------------- -------------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 2,817 $ 671
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 7,606 5,915
Issuance of stock as compensation 41 --
Write-off of acquired in-process research
and development -- 5,038
Non-employee stock option compensation expense 57 --
Equity in losses of investee companies 590 151
Provision for deferred income taxes 492 (1,940)
Tax benefit from disqualifying dispositions
of stock options 11 --
Changes in assets and liabilities:
Receivables, net 1,498 (12,148)
Inventory 31 (142)
Prepaid expenses and other 56 (894)
Accounts payable 1,153 1,917
Accrued income taxes (178) 2,114
Deferred revenue (9,620) (511)
Other accrued liabilities (2,917) 748
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Total adjustments (1,180) 248
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Net cash provided by operating activities 1,637 919
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Cash flows from investing activities:
Purchase of capital equipment (2,031) (4,012)
Acquisition of business -- (6,874)
Investment in investee companies (272) (250)
Capitalized software development costs (7,316) (5,750)
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Net cash used in investing activities (9,619) (16,886)
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Cash flows from financing activities:
Repayment of long-term debt (9) (10)
Proceeds from exercise of options 152 638
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Net cash provided by financing activities 143 628
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Foreign currency translation adjustment 94 (5)
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Net decrease in cash and cash equivalents (7,745) (15,344)
Cash and cash equivalents at beginning of year 42,658 77,543
--------- ---------
Cash and cash equivalents at end of year $ 34,913 $ 62,199
========= =========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
CERNER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Interim Statement Presentation & Accounting Policies
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 April 3, 1999 and
January 2, 1999 and the results of operations and cash flows for
the periods presented. The results of the three-month periods
are not necessarily indicative of the operating results for the
entire year.
The Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" at the
beginning of 1998. This statement establishes requirements for
reporting and display of comprehensive income and its components.
For the three months ended April 3, 1999 and April 4, 1998, total
Comprehensive Income, which includes foreign currency translation
adjustments and unrealized loss on available-for-sale equity
security adjustments amounted to $3,207,000 and $666,000,
respectively.
(2) Earnings Per Share
Basic earnings per share (EPS) excludes dilution and is
computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue stock were
exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the
Company. A reconciliation of the numerators and denominators of
the basic and diluted per-share computations is as follows:
<TABLE>
April 3, 1999 April 4, 1998
-----------------------------------------------------------------------
Earnings Shares Per-Share Earnings Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Basic earnings
per share
Income available
to common
stockholders $ 2,817 33,559 $ .08 671 32,669 $ .02
Effect of dilutive
securities
Stock options -- 364 -- 683
Diluted earnings
per share Income
available to common
stockholders
including assumed-----------------------------------------------------------------------
conversions $ 2,817 33,923 $ .08 671 33,352 $ .02
=======================================================================
</TABLE>
4
<PAGE>
(3) Acquisition of Business
On March 16, 1998, the Company purchased all of the
outstanding common stock of Multum Information Systems, Inc.,
(Multum) for $6,900,000 million. Multum is a supplier to the
healthcare industry of drug knowledge databases and intelligent
software components that improve the quality and cost-
effectiveness of medical care. The Company plans to incorporate
Multum's drug information and expert dosing component into its
Health Network Architecture Millennium solutions to enable
Multum's expert knowledge to become executable within the process
of care delivery.
The acquisition has been accounted for using the purchase
method of accounting with the operating results of Multum
included in the Company's consolidated statement of earnings
since the date of acquisition. Approximately, $5,000,000 of the
purchase price was allocated to in-process research and
development that had not reached technological feasibility and
was treated as a one-time charge to earnings reducing after tax
income for the quarter ended April 4, 1998 by $3,100,000 million
or $.09 per share on a diluted basis. This acquisition would not
have materially affected revenues, net earnings, or net earnings
per share on a pro forma basis for any period presented.
The acquired in-process research and development related to
Multum's component based, drug information software development
kit (SDK) for use in clinical information systems. Its
components are designed for use in a variety of configurations
and to provide complete control over the retrieval of drug
information from Multum's knowledge databases. SDK was
approximately 80% complete at the time of the acquisition. When
Multum was acquired, it was projected that SDK would be completed
in 12-18 months at an estimated cost of $1,900,000. The risks
associated with completing SDK are like any other software
development project and include changes in technology and
competition. The SDK project was valued using the income
approach with the following assumptions: material net cash
inflows are expected to commence in 2000; no material changes
from historical pricing, margins or expense levels are
anticipated; and, a 20% risk adjusted discount rate was applied
to estimated net cash flows. SDK was approximately 95% complete
at the end of the first quarter of 1999; management expects it to
be completed in 1999.
The allocation of the purchase price to the estimated fair
values of the identified tangible and intangible assets acquired
and liabilities assumed, resulted in goodwill of $1,581,000. The
goodwill is being amortized straight-line over seven years.
(4) Borrowings
On April 15, 1999, the Company completed a $100,000,000
private placement of debt pursuant to a Note Agreement dated as
of April 1, 1999. The series A Senior Notes, with a $60,000,00
principal amount at 7.14% are due on April 15, 2006 and the Series
B Senior Notes, with a $40,000,000 principal amount at 7.66% are
due April, 15, 2009. The proceeds will be used to retire the
Company's existing $30,000,000 of debt, fund proposed capital
improvements and strengthen the Company's cash position.
5
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
Results of Operations
- ---------------------
Three Months Ended April 3, 1999 Compared to Three Months Ended April 4, 1998
The Company's revenues increased 18% to $86,743,000 for the three-
month period ended April 3, 1999 from $73,674,000 for the three-
month period ended April 4, 1998. Net earnings increased 320% to
$2,817,000 in the 1999 period from $671,000 for the 1998 period.
Excluding a one-time write-off of in-process research and
development, net earnings would have decreased 25% from
$3,769,000, relative to the 1998 period.
System sales revenues increased 14% to $60,813,000 for the three-
month period ended April 3, 1999 from $53,373,000 for the
corresponding period in 1998. This increase in system sales
resulted primarily from an increase in the sale of additional
hardware and software products to the installed client base. The
revenue from the sale of additional hardware and software
products to the installed client base increased 58% in the first
quarter of 1999 over the same period in 1998.
At April 3, 1999, the Company had $315,065,000 in contract
backlog and $155,757,000 in support and maintenance backlog,
compared to $230,529,000 in contract backlog and $138,395,000 in
support and maintenance backlog at April 4, 1998.
Support and maintenance revenues increased 24% to $22,365,000
during the first quarter of 1999 from $18,012,000 during the same
period in 1998. This increase was due primarily to the increase
in the Company's installed and converted client base.
Other revenues increased 56% to $3,565,000 in the first quarter
of 1999 from $2,289,000 in the same period of 1998. This
increase was due primarily to services performed beyond
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 27% of
total revenues in the first quarter of 1999 compared to 30% in
1998. 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 39% and 35% in the first quarter
of 1999 and 1998, respectively. The increase in total sales and
client service expenses to $34,103,000 in 1999 from $25,950,000
in 1998 was attributable to the cost of a larger field sales and
services organization and marketing of new products.
Software development expenses include salaries, documentation and
other direct expenses incurred in product development, and
amortization of software development costs. Total expenditures
for software development, including both capitalized and
noncapitalized portions, for the first quarter of 1999 and 1998
were $21,269,000 and $16,720,000, respectively. These amounts
exclude amortization. Capitalized software costs were $7,316,000
and $5,750,000 for the first quarter of 1999 and 1998,
respectively. The increase in aggregate expenditures for
software development in 1999 is 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 8% in the first quarter of
both 1999 and 1998. Total general and administrative expenses
for the first quarter of 1999 and 1998 were $6,672,000 and
$6,034,000, respectively.
6
<PAGE>
Write-off of in process research and development in the first
quarter or 1998 is a one-time expense resulting from the
acquisition of Multum.
Net interest expense was $331,000 in the first quarter of 1999
compared to net interest income of $160,000 in the first quarter
of 1998. This decrease is primarily due to a decrease in
invested cash.
The Company's effective tax rates were 38% and 39% for the first
quarter of 1999 and 1998, respectively.
Capital Resources and Liquidity
- -------------------------------
The Company's liquidity position remains strong with total cash
and cash equivalents of $34,913,000 at April 3, 1999 and working
capital of $120,745,000. The Company generated net cash from
operations of $1,637,000 and $919,000 during the three month
periods ended April 3, 1999 and April 4, 1998, respectively. The
Company acquired Multum on March 16, 1998 for $6,900,000. The
Company has $18,000,000 of long-term, revolving credit from
banks, all of which was available as of April 3, 1999.
Revenues provided under the Company's support and maintenance
agreements represent recurring cash flows. Support and
maintenance revenues increased 24% in the first quarter of 1999
over the first quarter of 1998, and the Company expects these
revenues to continue to grow as the base of installed systems
grows.
The Company's liquidity is influenced by many factors, including
the amount and timing of the Company's revenues, its cash
collections from its clients as implementation of its products
proceed and the amounts the Company invests in software
development and capital expenditures. The Company's liquidity
has decreased over the three year period ended April 3, 1999 due
primarily to increased investment in software development and
increase in receivables due to increased sales. The Company
expects that its cash position will decrease during the second
quarter of 1999 as it continues its investment in software
development, but the Company expects to have an increase in its
cash position for the fourth quarter of 1999. The Company
believes that its present cash position, together with cash
generated from operations, will be sufficient to meet anticipated
cash requirements during 1999. In addition to the Company's
$18,000,000 line of credit, it has obtained additional debt capital
in order to provide greater financial flexibility.
The effects of inflation were minimal on the Company's business
during the period discussed herein.
Factors that may Affect Future Results of Operations, Financial Condition
- -------------------------------------------------------------------------
or Business
- -----------
Statements made in this report, other reports and proxy
statements filed with the Securities and Exchange Commission,
communications to stockholders, press releases and oral
statements made by representatives of the Company that are not
historical in nature, or that state the Company's or management's
intentions, hopes, beliefs, expectations, or predictions of the
future, are "forward-looking statements" within the meaning of
Section 21E of the Securities and Exchange Act of 1934, as
amended, and involve risks and uncertainties. The words
"should," "will be," "intended," "continue," "believe," "may,"
"expect," "hope," "anticipate," "goal," "forecast" and similar
expressions are intended to identify such forward-looking
statements. It is important to note that any such performance,
and actual results, financial condition or business could differ
materially from those expressed in such forward-looking
statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed
below as well as those discussed elsewhere in reports filed with
the Securities and Exchange Commission. 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.
Quarterly Operating Results May Vary - The Company's quarterly
- -------------------------------------
operating results have varied in the past and may continue to vary
in future periods. Quarterly operating results may vary for a number
of reasons including demand for the Company's products and services,
the Company's long sales cycle, the long installation and implementation
cycle for these larger, more complex and costlier systems and other
7
<PAGE>
factors described in this section and elsewhere in this report. As
a result of healthcare industry trends and the market for the
Company's HNA Millennium products, a large percentage of the
Company's revenues are generated by the sale and installation of
larger, more complex and costlier systems. The sales process for
these systems is lengthy and involves a significant technical
evaluation and commitment of capital and other resources by the
customer. The sale may be subject to delays due to customers'
internal budgets and procedures for approving large capital
expenditures and by competing needs for other capital expenditures
and deploying new technologies or personnel resources. Delays in
the expected sale or installation of these large contracts may have
a significant impact on the Company's anticipated quarterly revenues
and consequently its earnings, since a significant percentage of the
Company's expenses are relatively fixed.
These larger, more complex and costlier systems are installed and
implemented over time periods ranging from approximately nine
months to three years and involve significant efforts both by the
Company and the client. In addition, implementation of the
Company's Millennium products is a new and evolving process. The
Company recognizes revenue upon the completion of standard
milestone conditions and the amount of revenue recognized in any
quarter depends upon the Company's and the client's ability to
meet these project milestones. Delays in meeting these milestone
conditions or modification of the contract relating to one or
more of these systems could result in a shift of revenue
recognition from one quarter to another and could have a material
adverse effect on results of operations for a particular quarter.
In addition, support payments by clients for the Company's
products do not commence until the product is in use.
The Company's revenues from system sales historically have been
lower in the first quarter of the year and greater in the fourth
quarter of the year.
Stock Price May Be Volatile - The trading price of the
- -------------------------------
Company's common stock may be volatile. The market for the
Company's common stock may experience significant price and
volume fluctuations in response to a number of factors including
actual or anticipated quarterly variations in operating results,
changes in expectations of future financial performance or
changes in estimates of securities analysts, governmental
regulatory action, healthcare reform measures, client
relationship developments and other factors, many of which are
beyond the Company's control.
Furthermore, the stock market in general, and the market for
software, healthcare and high technology companies in particular,
has experienced extreme volatility that often has been unrelated
to the operating performance of particular companies. These
broad market and industry fluctuations may adversely affect the
trading price of the Company's common stock, regardless of actual
operating performance.
Market Risk of Investments - The Company accounts for its
- -----------------------------
investments in equity securities which have readily determinable
fair values as available-for sale. Available-for-sale securities
are reported at fair value with unrealized gains and losses
reported, net of tax, as a separate component of accumulated
other comprehensive income. Investments in other equity
securities are reported at cost. All equity securities are
reviewed by the Company for declines in fair value. If such
declines are considered to be other than temporary, the cost
basis of the individual security is written down to fair value as
a new cost basis, and the amount of the write-down is included in
earnings.
Included in the Company's investments is the ownership of 19.9%
of the common stock of CareInsite, Inc. ("CareInsite") formerly
known as Synetic Healthcare Communications, Inc. There is no
current market for this common stock and it is not accounted for
as available-for-sale. As a result, the stock was valued at
$70,000,000 based on a methodology which utilized both a comparable
company and the expected underlying discounted future cash flows.
The common stock is subject to certain lock-up provisions. A
permanent impairment in the value of CareInsite stock would result
in a charge to earnings in either the then current or future periods.
There would be no effect on cash flows because the revenue was
earned through contractual rights granted in exchange for CareInsite
stock. An increase in the value of the CareInsite stock would have
no effect on reported earnings. Synetic, Inc., the parent of
CareInsite, has publicly announced that CareInsite plans to conduct
an initial public offering of its shares. The Company has agreed
to purchase additional CareInsite shares in that offering which may
maintain its proportionate
8
<PAGE>
ownership of CareInsite. The Company has not engaged in equity swaps
or other hedging techniques to manage the equity risk inherent in the
CareInsite shares.
The Company is exposed to market risk from changes in marketable
securities (which consist of money market and commercial paper).
At April 3, 1999, marketable securities of the Company were
recorded at a fair value of approximately $35 million, with an
overall average return of approximately 5% and an overall
weighted maturity of less than 90 days. The marketable
securities held by the Company are not subject to price risk as
they are held to maturity.
The Company is not exposed to material future earnings or cash
flow exposures from changes in interest rates on long-term debt
since 100% of its long-term debt is at a fixed rate. To date,
the Company has not entered into any derivative financial
instruments to manage interest rate risk and is currently not
evaluating the future use of any such financial instruments.
The Company conducts business in several foreign jurisdictions.
However, the business transacted is in the local functional
currency and the Company does not currently have any material
exposure to foreign currency transaction gains or losses. All
other business transactions are in U.S. dollars. To date, the
Company has not entered into any derivative financial instrument
to manage foreign currency risk and is currently not evaluating
the future use of any such financial instruments.
Changes in the Healthcare Industry - The healthcare industry is
- ----------------------------------
highly regulated and is subject to changing political, economic
and regulatory influences. For example, The Balanced Budget Act
of 1997 (Public Law 105-32) contains significant changes to
Medicare and Medicaid and began to have its initial impact in
1998 due to limitations on reimbursement, resulting cost
containment initiatives, and effects on pricing and demand for
capital intensive systems. These factors affect the purchasing
practices and operation of healthcare organizations. Federal and
state legislatures have periodically considered programs to
reform or amend the U.S. healthcare system at both the federal
and state level and to change healthcare financing and
reimbursement systems. These programs may contain proposals to
increase governmental involvement in healthcare, lower
reimbursement rates or otherwise change the environment in which
healthcare industry participants operate. Healthcare industry
participants may respond by reducing their investments or
postponing investment decisions, including investments in the
Company's products and services.
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 the Company's products and services. As the
healthcare industry consolidates, the Company's customer base
could be eroded, competition for customers could become more
intense and the importance of acquiring each customer becomes
greater.
Significant Competition - The market for healthcare information
- -----------------------
systems is intensely competitive, rapidly evolving and subject to
rapid technological change. The Company believes that the
principal competitive factors in this market include the breadth
and quality of system and product offerings, the stability of the
information systems provider, the features and capabilities of
the information systems, the ongoing support for the system, and
the potential for enhancements and future compatible products.
Certain of the Company's competitors have greater financial,
technical, product development, marketing and other resources
than the Company and some of its competitors offer products that
it does not offer. The Company's principle existing competitors
include Shared Medical Systems Corporation, IDX Systems
Corporation, McKesson HBOC, Inc. and Eclipsys Corporation, each
of which offers a suite of products that compete with many of the
Company's products. There are other competitors that offer a
more limited number of competing products.
In addition, the Company 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 compet-
itive products or services. The pace of change in the healthcare
information systems market is rapid and there are frequent new product
introductions, product enhancements and evolving industry standards
and requirements. As a result,
9
<PAGE>
the Company's success will depend upon its ability to keep pace with
technological change and to introduce, on a timely and cost-effective
basis, new and enhanced products that satisfy changing customer require-
ments and achieve market acceptance.
Proprietary Technology May Be Subjected to Infringement Claims or
- -----------------------------------------------------------------
May Be Infringed Upon - The Company relies upon a combination of
- ---------------------
trade secret, copyright and trademark laws, license agreements,
confidentiality procedures, employee nondisclosure agreements and
technical measures to maintain the trade secrecy of its
proprietary information. The Company has not historically filed
patent applications or copyrights covering its software
technology. As a result, the Company may not be able to protect
against misappropriation of its intellectual property.
In addition, the Company could be subject to intellectual
property infringement claims as the number of competitors grows
and the functionality of its products overlaps with competitive
offerings. These claims, even if not meritorious, could be
expensive to defend. If the Company becomes liable to third
parties for infringing their intellectual property rights, it
could be required to pay a substantial damage award and to
develop noninfringing technology, obtain a license or cease
selling the products that contain the infringing intellectual
property.
Government Regulation - The United States Food and Drug
- ----------------------
Administration (the "FDA") has declared that software products
that are intended for the maintenance of data used in making
decisions regarding the suitability of blood donors and the
release of blood or blood components for transfusion are medical
devices under the 1976 Medical Device Amendments to the Federal
Food, Drug and Cosmetic Act and the Safe Medical Devices Act of
1990. As a consequence, the Company is subject to extensive
regulation by the FDA with regard to its blood bank software. If
other of the Company's products are deemed to be medical devices
by the FDA, the Company could be subject to extensive
requirements governing pre- and post- marketing conditions, such
as device investigation, approval, labeling and manufacturing.
Complying with these FDA regulations would be time consuming,
burdensome and expensive. The Company expects that the FDA is
likely to become more active in regulating computer software that
is used in healthcare.
Following an inspection by the FDA in March of 1998, the Company
received a two-item Form FDA 483 (Notice of Inspectional
Observations) containing observations of non-compliance with the
Federal Food, Drug and Cosmetic Act (the "Act") with respect to
the Company's PathNet HNA Blood Bank Transfusion and Donor
products (the "Blood Bank Products"). The Company subsequently
received a Warning Letter, dated April 29, 1998, as a result of
the same inspection. The Company responded promptly to the FDA
and undertook a number of actions in response to the Form 483 and
Warning Letter, including an audit by a third party of the
Company's Blood Bank Products. A copy of the third party audit
was submitted to the FDA in October of 1998 and, at the request
of the FDA, additional information and clarification was
submitted to the FDA in January of 1999.
There can be no assurance, however, that the Company's actions
taken in response to the Form 483 and Warning Letter will be
deemed adequate by the FDA or that additional actions on behalf
of the Company will not be required. In addition, the Company
remains subject to periodic inspections and there can be no
assurances that the Company will not be required to undertake
additional actions to comply with the Act and any other
applicable regulatory requirements. Any failure by the Company
to comply with the Act and any other applicable regulatory
requirements could have a material adverse effect on the
Company's ability to continue to manufacture and distribute its
products, and in more serious cases, could result in seizure,
recall, injunction and/or civil fines. Any of the foregoing
would have a material adverse effect on the Company's business,
results of operations or financial condition.
Product Related Liabilities - Many of the Company's products
- -----------------------------
provide data for use by healthcare providers in providing care to
patients. Although no such claims have been brought against the
Company to date regarding injuries related to the use of its products,
such claims may be made in the future. Although the Company main-
tains product liability insurance coverage in an amount that it
believes is sufficient for its business, there can be no assurance
that such coverage will prove to be adequate or that such coverage
will continue to remain available on acceptable terms, if at all.
A successful claim brought
10
<PAGE>
against the Company which is uninsured or under-insured could materially
harm its business, results of operations or financial condition.
Year 2000 - The following statements are a "Year 2000 Readiness
- ----------
Disclosure" within the meaning of the Year 2000 Information and
Readiness Disclosure Act. Computer programs that use two digits
to identify a year may fail or create errors in the year 2000,
leading to system failures or miscalculations causing disruptions
to the operations of the user. The Company has conducted a Year
2000 review of its operations focusing on the Company's products
and their use by its clients, the computers, operating systems
and data bases used in conjunction with its products and the
Company's internal operations.
The Company's software products currently being marketed are Year
2000 compliant. The costs incurred to make the Company's current
versions compliant have occurred in the ordinary course of
software development and enhancement and have not been material.
All of the Company's clients using older versions of its software
products are entitled to upgrade to the compliant versions with
no charge for the compliant version. However, some have elected
not to do so for a variety of reasons. The Company is working
with the clients who wish to upgrade to address Year 2000 issues.
These clients have either been upgraded to compliant versions or
are scheduled to be upgraded to compliant versions of the
Company's software by August 1999. The Company is assisting
those clients to upgrade using electronic access from the
Company's facilities without charge. If the client desires on-
site assistance, the Company is assessing its normal charges.
These services are being conducted in the ordinary course of the
Company's business by its employees, and the costs to the Company
are not expected to be material. The Company is also engaged in
many projects to implement its products at client sites. These
projects require efforts both by the Company and its clients.
For some of these clients, these projects constitute their
solution to Year 2000 issues. Substantially all of these
projects are planned to be completed by September 1999. The
Company is working with its clients, or the clients are working
independently, on contingency plans for Year 2000 issues where
there is a reasonable likelihood the project may not be completed
by the end of 1999.
As clients and potential customers focus on efforts to update
their current systems, they may elect to delay capital
investments in information systems in order to focus their
capital budgets on the expenditures necessary to bring their
existing systems into Year 2000 compliance. As a result, the
Company may not achieve expected sales revenues and its business,
financial condition and results of operations could be materially
adversely affected.
The Company believes that its internal third-party software
applications, operating systems and telephone systems are Year
2000 compliant. The Company did have some internally developed
software applications that required upgrading to be Year 2000
compliant. These upgrades were done internally and have been
completed. The Company has also replaced some older computers
and operating systems that were not Year 2000 compliant in the
normal course of infrastructure maintenance.
The suppliers of the computers, operating systems and data bases
necessary to operate the current versions of the Company's
software products have indicated to the Company that those
products either are Year 2000 compliant or they would be by the
end of 1999. The Company has conducted tests of such computers,
operating systems and databases with its products now being
marketed and currently has no reasonable cause to believe that
the Company's products are not Year 2000 compliant when operated
with such computers, operating systems and databases. However,
in operation at clients' sites, the Company's software products
interchange data with many third party systems through interfaces
that may be unique to the client or the third party system. Such
interfaces or data interchanged may contain inaccuracies or such
data may not be in a format that allows the Company's system to
correctly identify the date. There can be no assurance that the
Company will not be subject to claims that result from the
failure of third party systems or their related interfaces to be
Year 2000 compliant. These claims, even if not meritorious,
could be expensive to defend.
Although the Company believes its Year 2000 review and the actions
it has taken and plans to take in response to the review are
appropriate, there can be no assurance that the review identified
all possible issues or that all identified issues will be satis-
factorily resolved. A material failure of the Company's internal
systems to be Year 2000 compliant, a material failure in suppliers
of the computers, operating
11
<PAGE>
systems and databases used in conjunction with the Company's products
to be Year 2000 compliant or a material delay in client projects related
to Year 2000 issues could have a material adverse effect on the Company's
business, results of operations or financial condition.
System Errors and Warranties - The Company's systems,
- ---------------------------------
particularly the Millennium versions, are very complex. As with
complex systems offered by others, the Company's systems may
contain errors, especially when first introduced. Although the
Company conducts extensive testing, it has discovered software
errors in its products after their introduction. The Company's
systems are intended for use in collecting and displaying
clinical information used in the diagnosis and treatment of
patients. Therefore, users of the Company products have a
greater sensitivity to system errors than the market for software
products generally. The Company's agreements with its clients
typically provide warranties against material errors and other
matters. Failure of a client's system to meet these criteria
could constitute a material breach under such contracts allowing
the client to cancel the contract, or could require the Company
to incur additional expense in order to make the system meet
these criteria. The Company's contract with its clients
generally limit the Company's liability arising from such claims
but such limits may not be enforceable in certain jurisdictions.
Anti-Takeover Defenses - The Company's charter, bylaws,
- ------------------------
shareholders' rights plan and certain provisions of Delaware law
contain certain provisions that may have the effect of delaying
or preventing an acquisition of the Company. Such provisions are
intended to encourage any person interested in acquiring the
Company to negotiate with and obtain the approval of the Board of
Directors in connection with any such transaction. These
provisions include (i) a Board of Directors that is staggered
into three classes to serve staggered three-year terms, (ii)
blank check preferred stock, (iii) supermajority voting
provisions, (iv) inability of stockholders to act by written
consent or call a special meeting, (v) limitations on the ability
of stockholders to nominate directors or make proposals at
stockholder meetings, and (vi) triggering the exercisability of
stock purchase rights on a discriminatory basis, which may invoke
extensive economic and voting dilution of a potential acquirer if
its beneficial ownership of the Company's common stock exceeds a
specified threshold. Certain of these provisions may discourage
a future acquisition of the Company not approved by the Board of
Directors in which shareholders might receive a premium value for
their shares.
12
<PAGE>
Part II. 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
A Form 8-K was filed by the Company on March 18,
1999, reporting amendments to the Rights Agreement,
dated as of November 21, 1996, between the Company
and UMB Bank, n.a.
13
<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
May 17, 1999 By:\s\Marc G. Naughton
- ------------ -----------------------
Date Marc G. Naughton
Chief Financial Officer
14
<PAGE>
Exhibit 11
<TABLE>
CERNER CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
<CAPTION>
Three Months Ended
April 3, April 4,
----------- -----------
1999 1998
----------- -----------
<S> <C> <C>
Net earnings: $ 2,817,000 $ 671,000
=========== ===========
Weighted average number of common and
common stock equivalent shares:
Basic average number of
outstanding common shares 33,559,000 32,669,000
----------- -----------
Basic earnings per common shares: $ 0.08 $ 0.02
----------- -----------
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) 364,000 683,000
----------- ------------
33,923,000 33,352,000
----------- ------------
Diluted earnings per common and common
stock equivalent shares: $ 0.08 $ 0.02
----------- ------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-END> APR-03-1999
<CASH> 34,913,000
<SECURITIES> 0
<RECEIVABLES> 170,281,000
<ALLOWANCES> 4,405,000
<INVENTORY> 2,621,000
<CURRENT-ASSETS> 207,411,000
<PP&E> 129,070,000
<DEPRECIATION> 53,189,000
<TOTAL-ASSETS> 428,764,000
<CURRENT-LIABILITIES> 86,666,000
<BONDS> 0
0
0
<COMMON> 348,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 428,764,000
<SALES> 86,743,000
<TOTAL-REVENUES> 86,743,000
<CGS> 23,568,000
<TOTAL-COSTS> 58,301,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 331,000
<INCOME-PRETAX> 4,543,000
<INCOME-TAX> 1,726,000
<INCOME-CONTINUING> 2,817,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,817,000
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
