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 30, 2000
--------------------
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
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(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 34,556,532 shares of Common Stock, $.01 par value,
outstanding at September 30, 2000.
<PAGE>
CERNER CORPORATION AND SUBSIDIARIES
-----------------------------------
I N D E X
---------
<TABLE>
<S> <C> <C>
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 2000 (unaudited)
and January 1, 2000 1
Consolidated Statements of Operations for the
three months and nine months ended September 30, 2000
and October 2, 1999 (unaudited) 2
Consolidated Statements of Cash Flows
for the nine months ended September 30, 2000
and October 2, 1999 (unaudited) 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosure about Market Risk 16
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 16
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
</TABLE>
<TABLE>
September 30, January 1,
(Dollars in thousands) 2000 2000
------------- ----------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 78,199 $ 75,677
Receivables 161,431 161,174
Inventory 876 1,262
Prepaid expenses and other 5,718 4,316
--------- ---------
Total current assets 246,224 242,429
Property and equipment, net 78,629 77,938
Software development costs, net 79,481 71,007
Intangible assets, net 18,285 7,511
Investments, net 291,216 252,123
Other assets 10,316 9,883
--------- ---------
$ 724,151 $ 660,891
========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 21,815 $ 20,261
Current installments of long-term debt 83 -
Deferred revenue 31,279 21,245
Income taxes 13,056 10,987
Accrued payroll and tax withholdings 22,751 17,241
Other accrued expenses 2,842 2,642
--------- ---------
Total current liabilities 91,826 72,376
--------- ---------
Long-term debt, net 100,022 100,000
Deferred income taxes 101,388 93,578
Deferred revenue 14,063 16,000
Stockholders' Equity:
Common stock, $.01 par value,
150,000,000 shares authorized,
35,758,157 shares issued in 2000 and
34,932,703 shares issued in 1999 358 349
Additional paid-in capital 186,544 166,735
Retained earnings 248,766 125,651
Treasury stock, at cost
(1,201,625 shares in 2000 and
1,201,518 shares in 1999) (20,799) (20,796)
Accumulated other comprehensive income:
Foreign currency translation adjustment (840) 23
Unrealized gain on available-for-sale
equity securities
(net of deferred taxes of $1,588 in
2000 and $59,806 in 1999) 2,823 106,975
--------- ---------
Total stockholders' equity 416,852 378,937
--------- ---------
$724,151 $660,891
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 1
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
Three Months Ended Nine Months Ended
----------------------------------------------------
September 30, October 2, September 30, October 2,
----------------------------------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues:
System sales $ 68,700 $ 52,004 $ 181,610 $ 167,022
Support and maintenance 28,834 23,640 83,624 68,924
Other 6,791 5,285 19,700 14,508
--------- --------- --------- ---------
Total revenues 104,325 80,929 284,934 250,454
--------- --------- --------- ---------
Costs and expenses:
Cost of revenues 23,903 17,900 61,764 63,399
Sales and client service 42,975 35,460 122,049 103,716
Software development 19,064 18,210 56,650 54,256
General and administrative 7,312 7,191 20,898 20,638
Write-off of acquired in-
process research and development 3,200 - 3,200 -
Write-down of intangible assets - - 6,687 -
--------- --------- --------- ---------
Total costs and expenses 96,454 78,761 271,248 242,009
--------- --------- --------- ---------
Operating earnings 7,871 2,168 13,686 8,445
Interest expense, net (937) (1,022) (2,722) (2,328)
Realized gain on exchange of
investments 188,654 - 188,654 -
--------- --------- --------- ---------
Earnings before income taxes
and extraordinary item 195,588 1,146 199,618 6,117
Income taxes (72,252) (466) (76,503) (2,359)
--------- --------- --------- ---------
Earnings before extraordinary
item
123,336 680 123,115 3,758
--------- --------- --------- ---------
Extraordinary loss on early
extinguishment of debt,
net of taxes of $865 - - - (1,395)
--------- --------- --------- ---------
Net earnings $ 123,336 $ 680 $ 123,115 $ 2,363
========= ========= ========= =========
Basic earnings per share:
Basic earnings per share before
extraordinary item $ 3.61 $ 0.02 $ 3.63 $ 0.11
========= ========= ========= =========
Basic earnings per share $ 3.61 $ 0.02 $ 3.63 $ 0.07
========= ========= ========= =========
Basic weighted average shares
outstanding 34,188 33,622 33,932 33,599
--------- --------- --------- ---------
Diluted earnings per share:
Diluted earnings per share
before extraordinary item $ 3.45 $ 0.02 $ 3.52 $ 0.11
========= ========= ========= =========
Diluted earnings per share $ 3.45 $ 0.02 $ 3.52 $ 0.07
========= ========= ========= =========
Diluted weighted average shares
outstanding 35,757 33,862 35,025 33,930
--------- --------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
<PAGE> 2
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
Nine Months Ended
-----------------
September 30, 2000 October 2, 1999
---------------------------------------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 123,115 $ 2,363
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 27,517 23,170
Extraordinary item, net of tax - 1,395
Realized gain on exchange of investments (188,654) -
Write-off of acquired in-process research
and development 3,200 -
Write-down of intangible assets 6,687 -
Revenue from non-monetary transactions (6,773) (12,200)
Issuance of stock as compensation 31 40
Non-employee stock option compensation
expense 173 178
Equity in losses of investee companies 641 1,378
Provision for deferred income taxes 70,525 1,409
Tax benefit from disqualifying
dispositions of stock options 712 11
Loss on disposal of capital equipment 33 474
Gain on sale of investments (11) -
Changes in assets and liabilities
(net of businesses acquired):
Receivables, net 4,789 2,935
Inventory 498 137
Prepaid expenses and other (5,027) (1,016)
Accounts payable 21 (4,048)
Accrued income taxes 4,458 (743)
Deferred revenue 5,448 (4,899)
Other accrued liabilities 5,039 942
--------- ---------
Total adjustments (70,693) 9,163
--------- ---------
Net cash provided by operating activities 52,422 11,526
--------- ---------
Cash flows from investing activities:
Purchase of capital equipment (10,598) (10,815)
Acquisition of businesses (12,950) -
Investment in investee companies (7,764) (12,801)
Advances to investee company 1,000 (750)
Proceeds from sale of investment 511 -
Executive stock purchase program 186 (3,343)
Capitalized software development costs (22,251) (22,437)
--------- ---------
Net cash used in investing activities (51,866) (50,146)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt - 99,568
Repayment of long-term debt (919) (30,030)
Prepayment penalty on early extinguishment of debt - (2,137)
Proceeds from exercise of options 3,748 244
--------- ---------
Net cash provided by financing activities 2,829 67,645
--------- ---------
Foreign currency translation adjustment (863) 286
--------- ---------
Net increase in cash and cash equivalents 2,522 29,311
Cash and cash equivalents at beginning of period 75,677 42,658
--------- ---------
Cash and cash equivalents at end of period $ 78,199 $ 71,969
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 3
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 September 30, 2000 and
January 1, 2000 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.
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
nine months ended September 30, 2000 and October 2, 1999, total
Comprehensive Income, which includes foreign currency translation
adjustments and unrealized gain (loss) on available-for-sale
equity securities adjustments, amounted to $18,100,000 and
$58,091,000 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>
Three months ended Three months ended
September 30, 2000 October 2, 1999
------------------------------------------------------------------------
Earnings Shares Per-Share Earnings Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per
share:
Income available to
common stockholders $ 123,336 34,188 $ 3.61 $ 680 33,622 $ 0.02
========= =========
Effect of dilutive
securities (stock
options) - 1,569 - 240
Diluted earnings
per share:
Income available to
common stockholders
including assumed
conversions ---------------------------------------------------------------------
$ 123,336 35,757 $ 3.45 $ 680 33,862 $ 0.02
=====================================================================
</TABLE>
Options to purchase 189,000 and 3,395,000 shares of common stock
at per share prices ranging from $36.31 to $84.07 and $16.75 to
$31.00 were outstanding at the three months ended September 30,
2000
<PAGE> 4
and October 2, 1999, but were not included in the
computation of diluted earnings per share because the options'
exercise price was greater than the average market price of the
common shares.
<TABLE>
Nine months ended Nine months ended
September 30, 2000 October 2, 1999
-----------------------------------------------------------------------
Earnings Shares Per-Share Earnings Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-----------------------------------------------------------------------
(In thousands, except per share data)
Earnings per share before extraordinary item
--------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per
share:
Income available to
common stockholders $ 123,115 33,932 $ 3.63 $ 3,758 33,599 $ 0.11
========= =========
Effect of dilutive
securities (stock
options) - 1,093 - 331
Diluted earnings
per share:
Income available to
common stockholders
including assumed
conversions ------------------------------------------------------------------------
$ 123,115 35,025 $ 3.52 $ 3,758 33,930 $ 0.11
========================================================================
</TABLE>
<TABLE>
Nine months ended Nine months ended
September 30, 2000 October 2, 1999
-------------------------------------------------------------------------
Earnings Shares Per-Share Earnings Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-------------------------------------------------------------------------
Net earnings per share
-------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per
share:
Income available to
common stockholders $ 123,115 33,932 $ 3.63 $ 2,363 33,599 $ 0.07
========= =========
Effect of dilutive
securities (stock
options) - 1,093 - 331
Diluted earnings
per share:
Income available to
common stockholders
including assumed
conversions
------------------------------------------------------------------------
$ 123,115 35,025 $ 3.52 $ 2,363 33,930 $ 0.07
========================================================================
</TABLE>
Options to purchase 715,000 and 3,174,000 shares of common stock
at per share prices ranging from $29.63 to $84.07, and $18.06 to
$31.00 were outstanding at the nine months ended September 30,
2000 and October 2, 1999, but were not included in the
computation of diluted earnings per share because the options'
exercise price was greater than the average market price of the
common shares.
(3) Business Acquisitions
On April 2, 2000 the Company purchased the remaining 50% of the
outstanding common stock of Health Network Ventures, Inc. (HNV)
for $8.3 million. HNV develops software solutions that enable
transaction processing between providers, and other health-
related entities. Subsequent to the acquisition, the Company
determined that it would shut down the portion of the business
focused on individual physician practice connectivity and
transaction processing given that it is the Company's strategy to
use CareInsite to process transactions. As a result of this
decision, the Company recorded a non-recurring charge in the
second quarter of 2000 in the amount of $6,687,000 or $.20 per
share on a diluted basis related to a write-down of intangible
assets.
The Company also purchased the assets of Mitch Cooper &
Associates (MC&A) for $2 million on April 2, 2000. MC&A is a
supply chain re-engineering consulting practice. The allocation
of the purchase price to
<PAGE> 5
the estimated fair values of the identified tangible and
intangible assets acquired and liabilities assumed, resulted
in goodwill of $1,957,000. The goodwill is being amortized
straight-line over five years.
On August 22, 2000, the Company purchased CITATION Computer
Systems, Inc, a market leader in laboratory systems for small to
mid-sized hospitals. The purchase price was financed with
approximately $2 million in cash and $14 million in stock. $3.2
million of the purchase price was allocated to in-process
research and development that had not reached technological
feasibility and is reflected as a one-time charge to earnings in
the third quarter of 2000. 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 $8,310,000. The goodwill is being amortized straight-
line over seven years.
The acquisitions were accounted for using the purchase method of
accounting with the operating results of HNV, MC&A and CITATION
included in the Company's consolidated statement of earnings
since the date of acquisition. Management has determined that
the proforma impact on earnings is not material.
On October 23, 2000, the Company entered into an agreement to
acquire ADAC Laboratories' Health Care Information Systems (HCIS)
business, excluding its Cardiology Systems Group, for
approximately $6 million. The companies expect to complete the
transaction in November 2000, pending customary closing
conditions and regulatory approval.
(4) Receivables
Receivables consist of accounts receivable and contracts
receivable. Accounts receivable represent recorded revenues that
have been billed. Contracts receivable represent recorded
revenues that are billable by the Company at future dates under
the terms of a contract with a client. Billings and other
consideration received on contracts in excess of related revenues
recognized under the percentage-of -completion method are
recorded as deferred revenue. A summary of receivables is as
follows:
<TABLE>
(In thousands) September 30, January 1,
2000 2000
--------------------------------
<S> <C> <C>
Accounts receivable $ 73,943 85,814
Contracts receivable 87,488 75,360
-----------------------------------------------------------
Total receivables $ 161,431 161,174
===================================
</TABLE>
(5) Investments
In 1998 and 1999 the Company acquired a 17.5% interest
(13,149,259 shares of common stock) in CareInsite with a cost
basis of $81,804,000. 12,437,500 of these shares were received in
1998 as consideration for the sale of license software, and an
additional 711,759 shares were purchased in 1999. The value
assigned to the shares acquired in 1998 was $70,000,000 and was
based on a methodology which utilized both a comparable company
and the expected underlying discounted future cash flows. The
Company was also granted, by CareInsite, 1,008,445 common stock
warrants with an exercise price of $4.00 per share ("THINC
Warrants"). The THINC Warrants were exercisable only in the
event that The Health Information Network Connections, LLC
("THINC") exercised warrants granted to them by CareInsite at
$4.00 per share. THINC was allowed to exercise their warrants
180 days after the initial public offering of CareInsite. On
January 29, 2000 CareInsite completed an acquisition of THINC.
As part of that agreement, 806,756 of the Company's 1,008,445
THINC Warrants became immediately exercisable, with the remaining
amount forfeited.
On February 13, 2000 CareInsite entered into an agreement to
merge with Healtheon/WebMD Corporation ("Merger Agreement"). As
part of the Merger Agreement, the Company received 1.3 shares of
Healtheon/WebMD Corporation (Web MD) in exchange for each common
share of CareInsite held by the Company. The warrants were also
converted at the same exchange ratio. The merger of CareInsite
<PAGE> 6
and WebMD ("Merger") closed on September 12, 2000. Accordingly,
the Company recorded a non-recurring investment gain of
$120,362,000, net of tax, as a result of the exchange.
At September 30, 2000, the Company owned 17,094,037 shares of
common stock of WebMD, which have a cost basis of $256,411,000
and a carrying value of $260,684,000, as these shares are
accounted for as available-for-sale. The stock of WebMD held by
the Company is registered but is subject to certain lock-up
provisions. At September 30, 2000 the Company also holds
1,048,783 warrants of WebMD with an exercise price of $3.08 and a
cost basis and carrying value of $13,685,000. The warrants are
carried at cost, as they do not have a fair value that is
currently available on a securities exchange.
If the Company realizes certain performance metrics related to
specified levels of physician usage, WebMD will issue to the
Company 3,254,063 shares of common stock at a price of $0.01 per
share ("Performance Shares"). The Performance Shares were
adjusted at a rate of 1.3 shares of WebMD for each share of
CareInsite. The measurement date is February 15, 2001. No
amounts have been recognized in the consolidated financial
statements for the Performance Shares due to the uncertainty of
the future events. All physician users of systems of WebMD
Corporation or its affiliates shall be included for purposes of
determining the specified levels of physician usage.
<PAGE> 7
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------------
Condition and Results of Operations
-----------------------------------
Results of Operations
---------------------
Three Months Ended September 30, 2000 Compared to Three Months
Ended October 2, 1999
The Company's revenues increased 29% to $104,325,000 for the
three-month period ended September 30, 2000 from $80,929,000 for
the three-month period ended October 2, 1999. Net earnings,
before non-recurring items were $6,174,000 for the three-month
period ended September 30, 2000, compared to $680,000 for the
three-month period ended October 2, 1999. Revenues from non-
monetary transactions were $1,645,000 for the three-month period
ended September 30, 2000 and $1,000,000 for the three-month
period ended October 2, 1999. The increase in net earnings,
before non-recurring items, is due to an increase in new contract
bookings in the three-month period ended September 30, 2000
compared to the three-month period ended October 2, 1999. The
1999 earnings were adversely affected by what management believes
were delays in purchasing decisions related to Year 2000 and the
Balanced Budget Act of 1997. After the gain on exchange of
investments and the write-off of acquired in-process research and
development, the Company's net earnings were $123,336,000 for the
three-month period ended September 30, 2000.
System sales revenues increased 32% to $68,700,000 for the three-
month period ended September 30, 2000 from $52,004,000 for the
corresponding period in 1999. This increase in system sales
resulted primarily from an increase in new business signed in the
three-month period ended September 30, 2000 compared to the three-
month period ended October 2, 1999.
Support and maintenance revenues increased 22% to $28,834,000
during the third quarter of 2000 from $23,640,000 during the same
period in 1999. This increase was due primarily to the increase
in the Company's installed and converted client base.
At September 30, 2000, the Company had $413,001,000 in contract
backlog and $179,078,000 in support and maintenance backlog,
compared to $326,581,000 in contract backlog and $159,819,000 in
support and maintenance backlog at October 2, 1999.
Other revenues increased 28% to $6,791,000 in the third quarter
of 2000 from $5,285,000 in the same period of 1999. This
increase was due primarily to subscriptions to clients; this
increase was $1,001,000.
The cost of revenues includes the cost of third party consulting
services, 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 23% of total revenues in the third quarter of 2000
compared to 22% in 1999. 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 41% and 44% in the third quarter
of 2000 and 1999, respectively. The increase in total sales and
client service expenses to $42,975,000 in 2000 from $35,460,000
in 1999 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 third quarter of 2000 and 1999
were $22,001,000 and $22,295,000, respectively. These amounts
exclude amortization. Capitalized
<PAGE> 8
software development costs were $7,545,000 and $7,470,000 for the
third quarter of 2000 and 1999, respectively. The decrease in
aggregate expenditures for software development in 2000 is due
to a reduction in third party software development expenses.
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 7% and 9% in the third
quarter of 2000 and 1999, respectively. Total general and
administrative expenses for the third quarter of 2000 and 1999
were $7,312,000 and $7,191,000, respectively.
Write-off of in-process research and development is a one-time
expense resulting from the acquisition of CITATION.
Net interest expense was $937,000 in the third quarter of 2000
compared to $1,022,000 in the third quarter of 1999. This
decrease is due to an increase in invested cash, resulting from
an increase in cash collections.
The realized gain on exchange of investments is a non-recurring
investment gain related to the exchange of CareInsite shares for
Web MD shares.
After adjusting for the non-recurring investment gain and the
write-off of in-process research and development, the Company's
effective tax rates were 39% and 41% for the third quarter of
2000 and 1999, respectively. The higher tax rate in the third
quarter of 1999 was due to the impact of permanent differences on
the lower net earnings for the quarter.
Nine Months Ended September 30, 2000 Compared to Nine Months
Ended October 2, 1999
The Company's revenues increased 14% to $284,934,000 for the nine-
month period ended September 30, 2000 from $250,454,000 for the
nine-month period ended October 2, 1999. Net earnings before
extraordinary and non-recurring items were $12,640,000 for the
nine-months ended September 30, 2000, compared to $3,758,000 for
the nine-months ended October 2, 1999. The increase in net
earnings, before extraordinary and non-recurring items, is due to
an increase in new contract bookings in the nine-month period
ended September 30, 2000 compared to the nine-month period ended
October 2, 1999. The 1999 earnings were adversely affected by
what management believes were delays in purchasing decisions
related to Year 2000 and the Balanced Budget Act of 1997.
Revenues from non-monetary transactions were $6,773,000 for the
nine-month period ended September 30, 2000 and $12,200,000 for
the nine-month period ended October 2, 1999. After non-recurring
and extraordinary items, net earnings were $123,115,000 and
$2,363,000 for the first nine-months of 2000 and 1999,
respectively.
System sales revenues increased 9% to $181,610,000 for the nine-
month period ended September 30, 2000 from $167,022,000 for the
corresponding period in 1999.
Support and maintenance revenues increased 21% to $83,624,000
during the first nine months of 2000 from $68,924,000 during the
same period in 1999. This increase was due primarily to the
increase in the Company's installed and converted client base.
At September 30, 2000, the Company had $413,001,000 in contract
backlog and $179,078,000 in support and maintenance backlog,
compared to $326,581,000 in contract backlog and $159,819,000 in
support and maintenance backlog at October 2, 1999.
Other revenues increased 36% to $19,700,000 in the first nine
months of 2000 from $14,508,000 in the same period of 1999. This
increase is due primarily to additional revenues derived from
gains on investments received on previous license software
arrangements and subscriptions to clients; these increases were
$2,686,000 and $2,044,000, respectively.
The cost of revenues includes the cost of third party consulting
services, computer hardware and sublicensed software purchased
from computer and software manufacturers for delivery to clients.
It also
<PAGE> 9
includes the cost of hardware maintenance and sublicensed
software support subcontracted to manufacturers. The cost of
revenue was 22% of total revenues in the first nine months of
2000 compared to 25% in 1999. 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 43% and 41% in the first nine
months of 2000 and 1999, respectively. The increase in total
sales and client service expenses to $122,049,000 in 2000 from
$103,716,000 in 1999 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 nine months of 2000 and
1999 were $65,124,000 and $66,040,000 respectively. These
amounts exclude amortization. Capitalized software development
costs were $22,251,000 and $22,437,000 for the first nine months
of 2000 and 1999, respectively. The decrease in aggregate
expenditures for software development in 2000 is due to a
reduction in third party software development expenses.
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 7% and 8% in the first nine
months of 2000 and 1999, respectively. Total general and
administrative expenses for the first nine months of 2000 and
1999 were $20,898,000 and $20,638,000, respectively.
Write-off of in-process research and development is a one-time
expense resulting from the acquisition of CITATION.
Write-down of intangible assets is a one-time expense resulting
from the decision to shut down a portion of the HNV business, as
more fully described in Note 3 to the Consolidated Financial
Statements.
Net interest expense was $2,722,000 in the first nine months of
2000 compared to $2,328,000 in the first nine months of 1999.
This increase in expense is due to an increase in borrowings. On
April 15, 1999, the Company completed a $100,000,000 private
placement of debt pursuant to a Note Agreement dated April 1,
1999. The Series A Senior Notes, with a $60,000,000 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 were used to retire the Company's existing
$30,000,000 of debt, and the remaining funds are being used for
proposed capital improvements and to strengthen the Company's
cash position. In connection with the early extinguishment of
debt, the Company incurred a $1,395,000, net of taxes,
extraordinary loss for a prepayment penalty and write-off of
deferred loan costs.
The realized gain on exchange of investments is a non-recurring
investment gain related to the exchange of CareInsite shares for
Web MD shares.
After adjusting for the non-deductible write-down of intangibles,
the non-recurring investment gain and the write-off of in-process
research and development, the Company's effective tax rate was
39% for the first nine months of both 2000 and 1999.
Capital Resources and Liquidity
-------------------------------
The Company's liquidity position remains strong with total cash
and cash equivalents of $78,199,000 at September 30, 2000 and
working capital of $154,398,000. The Company generated net cash
from operations of $52,422,000 and $11,526,000 during the nine-
month periods ended September 30, 2000 and October 2, 1999,
respectively. Cash flow from operations increased in the first
nine-months of 2000, due to increased earnings and increased
collection of receivables and improved payment terms. On April
<PAGE> 10
15, 1999, the Company completed a $100,000,000 private placement
of debt as previously discussed. The proceeds were used to
retire the Company's existing $30,000,000 of debt, and the
remaining funds are being used for capital improvements and to
strengthen the Company's cash position. The Company has
$18,000,000 of long-term, revolving credit from banks, all of
which was available as of September 30, 2000.
Cash used in investing activities consisted primarily of
capitalized software development costs of $22,251,000 and
$22,437,000 and purchase of capital equipment of $10,598,000 and
$10,815,000 in the first nine months of 2000 and 1999,
respectively. Also, included in investing activities in the
first nine months of 2000 was $12,950,000 for the acquisition of
three businesses, as previously discussed.
Revenues provided under the Company's support and maintenance
agreements represent recurring cash flows. Support and
maintenance revenues increased 22% in the third quarter of 2000
over the third quarter of 1999, 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 believes that
its present cash position, together with cash generated from
operations, will be sufficient to meet anticipated cash
requirements during 2000.
The effects of inflation were minimal on the Company's business
during the period discussed herein.
Recent Accounting Pronouncements
--------------------------------
During the second quarter of 1998, the Financial Accounting
Standards Board issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities", (Statement 133).
Statement 133 will be adopted by the Company in the first quarter
of 2001. The Company believes the adoption of Statement 133 will
not have a significant effect on its reported earnings per share.
In December of 1999, the Securities and Exchange Commission staff
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements, (SAB 101). The Company believes SAB 101
will not have a significant effect on its reported earnings per
share.
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 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 factors described in this
section and elsewhere in this report. As a result of healthcare
industry trends and
<PAGE> 11
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.
In 1998 and 1999 the Company acquired a 17.5% interest
(13,149,259 shares of common stock) in CareInsite with a cost
basis of $81,804,000. 12,437,500 of these shares were received in
1998 as consideration for the sale of license software, and an
additional 711,759 shares were purchased in 1999. The value
assigned to the shares acquired in 1998 was $70,000,000 and was
based on a methodology which utilized both a comparable company
and the expected underlying discounted future cash flows. The
Company was also granted, by CareInsite, 1,008,445 common stock
warrants with an exercise price of $4.00 per share ("THINC
Warrants"). The THINC Warrants were exercisable only in the
event that The Health Information Network Connections, LLC
("THINC") exercised warrants granted to them by CareInsite at
$4.00 per share. THINC was allowed to exercise their warrants
180 days after the initial public offering of CareInsite. On
January 29, 2000 CareInsite completed an acquisition of THINC.
As part of that agreement, 806,756 of the Company's 1,008,445
THINC Warrants became immediately exercisable, with the remaining
amount forfeited.
<PAGE> 12
On February 13, 2000 CareInsite entered into an agreement to
merge with Healtheon/WebMD Corporation ("Merger Agreement"). As
part of the Merger Agreement, the Company received 1.3 shares of
Healtheon/WebMD Corporation (Web MD) in exchange for each common
share of CareInsite held by the Company. The warrants were also
converted at the same exchange ratio. The merger of CareInsite
and WebMD ("Merger") closed on September 12, 2000. Accordingly,
the Company recorded a non-recurring investment gain of
$120,362,000, net of tax, as a result of the exchange.
At September 30, 2000, the Company owned 17,094,037 shares of
common stock of WebMD, which have a cost basis of $256,411,000
and a carrying value of $260,684,000, as these shares are
accounted for as available-for-sale. The stock of WebMD held by
the Company is registered but is subject to certain lock-up
provisions. At September 30, 2000 the Company also holds
1,048,783 warrants of WebMD with an exercise price of $3.08 and a
cost basis and carrying value of $13,685,000. The warrants are
carried at cost, as they do not have a fair value that is
currently available on a securities exchange.
If the Company realizes certain performance metrics related to
specified levels of physician usage, WebMD will issue to the
Company 3,254,063 shares of common stock at a price of $0.01 per
share ("Performance Shares"). The Performance Shares were
adjusted at a rate of 1.3 shares of WebMD for each share of
CareInsite. The measurement date is February 15, 2001. No
amounts have been recognized in the consolidated financial
statements for the Performance Shares due to the uncertainty of
the future events. All physician users of systems of WebMD
Corporation or its affiliates shall be included for purposes of
determining the specified levels of physician usage.
The Company is exposed to market risk from changes in marketable
securities (which consist of money market and commercial paper).
At September 30, 2000, marketable securities of the Company were
recorded at a fair value of approximately $78 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 not currently
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 not currently 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
<PAGE> 13
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 competitive 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, 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 requirements 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 Federal Food, Drug and Cosmetic Act (the "Act")
and amendments to the Act. 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 including premarket
notification clearance prior to marketing. Complying with these
FDA regulations would be time consuming, burdensome and
expensive. It is possible that the FDA may 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 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 and improvements to Cerner's
Quality System. A copy
<PAGE> 14
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 maintains 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 against
the Company which is uninsured or under-insured could materially
harm its business, results of operations or financial condition.
System Errors and Warranties
--------------------------------- - The Company's systems,
particularly the HNA 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.
<PAGE> 15
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
Information contained under the caption "Factors the may Affect
Future Results of Operations, Financial Condition or Business -
Market Risk of Investments" set forth under Management's
Discussion and Analysis of Financial Conditions and Results of
Operations" in Item 2 is incorporated herein by reference.
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
No reports on Form 8-K were filed by the Company during the quarter
ended September 30, 2000.
<PAGE> 16
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 13, 2000 By:\s\Marc G. Naughton
----------------- -------------------
Date Marc G. Naughton
Chief Financial Officer
<PAGE> 17
