UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(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 1, 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
----------------
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 33,802,391 shares of Common Stock, $.01 par
value, outstanding at April 1, 2000.
<PAGE>
CERNER CORPORATION AND SUBSIDIARIES
I N D E X
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheets as of April 1, 2000 (unaudited)
and January 1, 2000 1
Consolidated Statements of Earnings for the
three months ended April 1, 2000
and April 3, 1999 (unaudited) 2
Consolidated Statements of Cash Flows
for the three months ended April 1, 2000
and April 3, 1999 (unaudited) 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 3. Quantative and Qualitative Disclosures About
Market Risk (Not applicable)
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 14
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
<TABLE>
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
April 1, January 1,
(In thousands) 2000 2000
----------- ----------
(unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 93,672 $ 75,677
Receivables 148,763 161,174
Inventory 1,091 1,262
Prepaid expenses and other 4,268 4,316
---------- ----------
Total current assets 247,794 242,429
Property and equipment, net 76,747 77,938
Software development costs, net 74,167 71,007
Intangible assets, net 7,106 7,511
Investments, net 310,489 252,123
Other assets 11,553 9,883
---------- ----------
$ 727,856 $ 660,891
========== ==========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 21,653 $ 20,261
Deferred revenue 25,270 21,245
Income taxes 8,047 10,987
Accrued payroll and tax withholdings 19,050 17,241
Other accrued expenses 3,528 2,642
---------- ----------
Total Current Liabilities 77,548 72,376
---------- ----------
Long-term debt, net 100,000 100,000
Deferred income taxes 115,973 93,578
Deferred revenue 15,000 16,000
Stockholders' Equity:
Common stock, $.01 par value, 150,000,000
shares authorized, 35,004,001 shares issued
in 2000 and 34,932,703 issued in 1999 350 349
Additional paid-in capital 167,637 166,735
Retained earnings 128,043 125,651
Treasury stock, at cost (1,201,610 shares in
2000 and 1,201,518 shares in 1999) (20,799) (20,796)
Accumulated other comprehensive income:
Foreign currency translation adjustment (254) 23
Unrealized gain on available-for-sale equity
securities (net of deferred tax liability
of $81,201 for 2000 and $59,806 for 1999) 144,358 106,975
---------- ----------
Total stockholders' equity 419,335 378,937
---------- ----------
$ 727,856 $ 660,891
========== ==========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
<TABLE>
CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<CAPTION>
Three Months Ended
April 1, April 3,
------------------------
2000 1999
----------- ----------
(In thousands, except per share data)
<S> <C> <C>
Revenues:
System sales $ 54,077 $ 60,813
Support and maintenance 26,524 22,365
Other 6,506 3,565
--------- ---------
Total revenues 87,107 86,743
--------- ---------
Costs and expenses:
Cost of revenues 18,382 23,568
Sales and client service 37,324 34,103
Software development 19,531 17,526
General and administrative 6,935 6,672
--------- ---------
Total costs and expenses 82,172 81,869
--------- ---------
Operating earnings 4,935 4,874
Interest expense, net (949) (331)
--------- ---------
Earnings before income taxes 3,986 4,543
Income Taxes (1,594) (1,726)
--------- ---------
Net earnings $ 2,392 $ 2,817
========= =========
Basic earnings per share $ .07 $ .08
========= =========
Basic weighted average shares outstanding 33,778 33,559
--------- ---------
Diluted earnings per share $ .07 $ .08
========= =========
Diluted weighted average shares outstanding 34,697 33,923
--------- ---------
</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 1, 2000 April 3, 1999
------------- -------------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 2,392 $ 2,817
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 8,815 7,606
Issuance of stock as compensation 31 41
Non-employee stock option compensation expense 62 57
Equity in losses of investee companies 466 590
Provision for deferred income taxes 896 492
Loss on disposal of capital equipment 28 --
Tax benefit from disqualifying dispositions
of stock options -- 11
Gain on sale of investments (11) --
Changes in assets and liabilities:
Receivables, net 12,411 1,498
Inventory 171 31
Prepaid expenses and other (2,586) 56
Accounts payable 986 1,153
Accrued income taxes (2,836) (178)
Deferred revenue 3,025 (9,620)
Other accrued liabilities 2,786 (2,917)
-------- --------
Total adjustments 24,244 (1,180)
-------- --------
Net cash provided by operating activities 26,636 1,637
-------- --------
Cash flows from investing activities:
Purchase of capital equipment (2,272) (2,031)
Investment in investee companies (704) (272)
Proceeds from sale of stock in investee company 511 --
Repayment of advances to investee companies 1,000 --
Capitalized software development costs (7,706) (7,316)
-------- --------
Net cash used in investing activities (9,171) (9,619)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt -- (9)
Proceeds from exercise of options 807 152
-------- --------
Net cash provided by financing activities 807 143
-------- --------
Foreign currency translation adjustment (277) 94
-------- --------
Net increase (decrease) in cash and cash equivalents 17,995 (7,745)
Cash and cash equivalents at beginning of period 75,677 42,658
-------- --------
Cash and cash equivalents at end of period $ 93,672 $ 34,913
======== ========
</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, 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 has adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income". This
statement establishes requirements for reporting and display of
comprehensive income and its components. For the three months
ended April 1, 2000 and April 3, 1999, total Comprehensive
Income, which includes foreign currency translation adjustments
and unrealized gain on available-for-sale equity security
adjustments, amounted to $39,498,000 and $3,027,000,
respectively.
(2) Earnings Per Share
Basic earning 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
April 1, 2000 April 3, 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 $ 2,392 33,778 $ .07 $ 2,817 33,559 $ .08
Effect of dilutive securities
Stock options -- 919 -- 364
Diluted earnings per share
Income available to
common stockholders
including assumed -------------------------------------------------------------------------
conversions $ 2,392 34,697 $ .07 2,817 33,923 $ .08
=========================================================================
</TABLE>
4
<PAGE>
(3) Business Acquisitions
As of April 1, 2000 the Company owned 50% of Health Network
Ventures ("HNV"), a joint venture investment which is accounted
for under the equity method. Under the terms of the joint
venture agreement, the Company may require its partner to sell to
the Company its share of HNV for $12,000,000, subject to certain
adjustments, ("Call Option") at anytime after July 1, 2000. In
addition the partner may require the Company to purchase its
share of HNV for $6,000,000, subject to certain adjustments,
("Put Option") at any time after July 1, 2000.
In April 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.
The Company also purchased the assets of Mitch Cooper &
Associates (MC&A) for $2 million in April 2000. MC&A is a supply
chain re-engineering consulting practice.
The acquisitions were accounted for using the purchase method of
accounting. The Company has not computed an allocation of the
purchase price, but does not believe the effect of these
transactions will not be material to the operations of the
Company.
(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) April 1, January 1,
2000 2000
---------------------------
<S> <C> <C>
Accounts receivable $ 67,194 85,814
Contracts receivable 81,569 75,360
--------------------------------------------------------
Total receivables $ 148,763 161,174
===========================
</TABLE>
(5) Investments
Included in the Company's investments is the ownership of
13,149,259 shares (18.7%) of common stock, of CareInsite, Inc.
("CareInsite"), formerly known as Synetic Healthcare
Communications, Inc. which have a cost basis of $81,804,000 and a
carrying value of $307,364,000 at April 1, 2000. 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. On June 16, 1999, CareInsite
undertook an initial public offering of common stock. The common
stock of CareInsite is traded in the public market and listed on
the Nasdaq National Market. The stock of CareInsite held by the
Company is not registered and is subject to certain lock-up
provisions. A permanent impairment in the value of CareInsite
common 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. The Company has not engaged in equity swaps or other
hedging techniques to manage the equity risk inherent in the
CareInsite shares.
Under Statement of Financial Accounting Standards no. 115
"Accounting for Certain Investments in Debt and Equity Securities"
(SFAS No. 115), the Company is required to mark to market those
shares which
5
<PAGE>
are classified as available-for-sale. As of April 1, 2000, the
Company has marked to market all 13,149,259 shares of CareInsite
common stock, with a market value of $307,364,000, that are
considered available-for-sale under SFAS No.115.
If the Company realizes certain performance metrics related to
specified levels of physician usage, CareInsite will issue to the
Company 2,503,125 shares of common stock at a price of $.01 per
share ("Performance Shares"). 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.
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 1,008,445 THINC
Warrants became immediately exercisable, with the remaining
amount forfeited. The THINC Warrants expire in three years.
On February 13, 2000 CareInsite entered into an agreement to
merge with Healtheon/Web MD Corporation ("Merger Agreement"). As
part of the Merger Agreement, the Company will receive 1.3 shares
of Healtheon/Web MD Corporation in exchange for each common share
of CareInsite held by the Company. In addition the Performance
Shares will be adjusted at a rate of 1.3 shares of Healtheon/Web
MD Corporation for each share of CareInsite. All physician users
of systems of Healtheon/Web MD Corporation or its affiliates
shall be included for purposes of determining the specified
levels of physician usage. The THINC Warrants will also be
adjusted at a rate of 1.3 shares of Healtheon/Web MD Corporation
for each share of CareInsite. The proposed merger of CareInsite
and Healtheon/Web MD Corporation ("Merger") is subject to
shareholder and regulatory approval. There is no guarantee the
Merger will close.
The Company has agreed under terms of the Merger Agreement to
certain lock-up provisions, which differ from the terms of its
lock-up provisions with CareInsite. The Merger is expected to
close in the second or third quarter of 2000. If the Merger
closes the Company will record the Healtheon/Web MD Corporation
shares received at their then fair value and recognize a gain on
the disposition of the CareInsite shares. Based on proposed lock-
up provisions, 50% of the Healtheon/Web MD Corporation shares
would thereafter be considered available-for-sale and would be
marked to market at each balance sheet date. The remainder would
be carried at cost until the third quarter of 2000, at which time
these remaining shares would be considered available-for-sale.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------------
Condition and Results of Operations
-----------------------------------
Results of Operations
- ---------------------
Three Months Ended April 1, 2000 Compared to Three Months Ended April 3, 1999
The Company's revenues increased to $87,107,000 for the three-
month period ended April 1, 2000 from $86,743,000 for the three-
month period ended April 3, 1999. Net earnings decreased 15% to
$2,392,000 in the 2000 period from $2,817,000 for the 1999
period.
System sales revenues decreased 11% to $54,077,000 for the three-
month period ended April 1, 2000 from $60,813,000 for the
corresponding period in 1999. The decrease in system sales is
due to a decrease from the sale of hardware. The sale of hardware
products decreased 53% in the first quarter of 2000 over the same
period in 1999. Management believes this is a temporary trend
related to Y2K hardware purchases.
At April 1, 2000, the Company had $367,014,000 in contract
backlog and $168,693,000 in support and maintenance backlog,
compared to $315,065,000 in contract backlog and $155,757,000 in
support and maintenance backlog at April 3, 1999.
Support and maintenance revenues increased 19% to $26,524,000
during the first quarter of 2000 from $22,365,000 during the same
period in 1999. This increase was due primarily to the increase
in the Company's installed and converted client base.
Other revenues increased 82% to $6,506,000 in the first quarter
of 2000 from $3,565,000 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 $2,596,000 and $557,000 respectively.
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 21% of
total revenues in the first quarter of 2000 compared to 27% 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 39% in the first quarter
of 2000 and 1999, respectively. The increase in total sales and
client service expenses to $37,324,000 in 2000 from $34,103,000
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 quarter of 2000 and 1999
were $22,691,000 and $21,269,000, respectively. These amounts
exclude amortization. Capitalized software costs were $7,706,000
and $7,316,000 for the first quarter of 2000 and 1999,
respectively. The increase in aggregate expenditures for
software development in 2000 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 2000 and 1999. Total general and administrative expenses
for the first quarter of 2000 and 1999 were $6,935,000 and
$6,672,000, respectively.
7
<PAGE>
Net interest expense was $949,000 in the first quarter of 2000
compared to $331,000 in the first quarter of 1999. This increase
is primarily 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 Company's effective tax rates were 40% and 38% for the first
quarter of 2000 and 1999, respectively. This increase is due
primarily to and increase in permanent differences.
Capital Resources and Liquidity
- -------------------------------
The Company's liquidity position remains strong with total cash
and cash equivalents of $93,672,000 at April 1, 2000 and working
capital of $170,246,000. The Company generated net cash from
operations of $26,636,000 and $1,637,000 during the three-month
periods ended April 1, 2000 and April 3, 1999, respectively.
Cash flow from operations increased in the first quarter of 2000,
due to increased collection of receivables and improved payment
terms. On April 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 will be used for proposed 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 April 1, 2000.
Cash used in investing activities consisted primarily of
capitalized software development costs of $7,706,000 and
$7,316,000 and purchases of capital equipment of $2,272,000 and
$2,031,000, in the first quarter of 2000 and 1999, respectively.
The Company also made additional investments in affiliates of
$704,000. The major source of cash from financing activities in
the first quarter of 2000 was from a repayment of an advance to
affiliates and the sale of stock in an investee company.
Revenues provided under the Company's support and maintenance
agreements represent recurring cash flows. Support and
maintenance revenues increased 19% in the first quarter of 2000
over the first 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 Statments", (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,"
8
<PAGE>
"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 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 six
months to three years and involve significant efforts both by the
Company and the client. In addition, implementation of the
Company's HNA 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 the common stock of
certain affiliates over which the Company exerts significant
influence are accounted for by the equity method. Investments in
other equity securities are reported at cost. All equity
securities are reviewed by the Company for declines in fair
9
<PAGE>
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
13,149,259 shares (18.7%) of common stock, of CareInsite, Inc.
("CareInsite"), formerly known as Synetic Healthcare
Communications, Inc. which have a cost basis of $81,804,000 and a
carrying value of $307,364,000 at April 1, 2000. 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. On June 16, 1999, CareInsite
undertook an initial public offering of common stock. The common
stock of CareInsite is traded in the public market and listed on
the Nasdaq National Market. The stock of CareInsite held by the
Company is not registered and is subject to certain lock-up
provisions. A permanent impairment in the value of CareInsite
common 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. The Company has not engaged in equity swaps or other
hedging techniques to manage the equity risk inherent in the
CareInsite shares.
Under Statement of Financial Accounting Standards no. 115
"Accounting for Certain Investments in Debt and Equity
Securities" (SFAS No. 115), the Company is required to mark to
market those shares which are classified as available-for-sale.
As of April 1, 2000, the Company has marked to market all
13,149,259 shares of CareInsite common stock, with a market value
of $307,364,000, that are considered available-for-sale under
SFAS No.115.
If the Company realizes certain performance metrics related to
specified levels of physician usage, CareInsite will issue to the
Company 2,503,125 shares of common stock at a price of $.01 per
share ("Performance Shares"). 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.
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 1,008,445 THINC
Warrants became immediately exercisable, with the remaining
amount forfeited. The THINC Warrants expire in three years.
On February 13, 2000 CareInsite entered into an agreement to
merge with Healtheon/Web MD Corporation ("Merger Agreement"). As
part of the Merger Agreement, the Company will receive 1.3 shares
of Healtheon/Web MD Corporation in exchange for each common share
of CareInsite held by the Company. In addition the Performance
Shares will be adjusted at a rate of 1.3 shares of Healtheon/Web
MD Corporation for each share of CareInsite. All physician users
of systems of Healtheon/Web MD Corporation or its affiliates
shall be included for purposes of determining the specified
levels of physician usage. The THINC Warrants will also be
adjusted at a rate of 1.3 shares of Healtheon/Web MD Corporation
for each share of CareInsite. The proposed merger of CareInsite
and Healtheon/Web MD Corporation ("Merger") is subject to
shareholder and regulatory approval. There is no guarantee the
Merger will close.
The Company has agreed under terms of the Merger Agreement to
certain lock-up provisions, which differ from the terms of its
lock-up provisions with CareInsite. The Merger is expected to
close in the second or third quarter of 2000. If the Merger
closes the Company will record the Healtheon/Web MD Corporation
shares received at their then fair value and recognize a gain on
the disposition of the CareInsite shares. Based on proposed lock-
up provisions, 50% of the Healtheon/Web MD Corporation shares
would thereafter be considered available-for-sale and would be
marked to market at each balance sheet date.
10
<PAGE>
The remainder would be carried at cost until the third quarter of
2000, at which time these remaining shares would be considered
available-for-sale.
The Company is exposed to market risk from changes in marketable
securities (which consist of money market and commercial paper).
At April 1, 2000, marketable securities of the Company were
recorded at cost, which approximates fair value of approximately
$94 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 a result of the short-term nature of the
investments.
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.
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 principal 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,
11
<PAGE>
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
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 ("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
actively regulated medical devices by the FDA, the Company could
be subject to extensive requirements governing pre- and post-
marketing requirements including premarket notification clearance
prior to marketing. Complying with these FDA regulations would
be time consuming 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 Form FDA 483 (Notice of Inspectional Observations)
alleging non-compliance with certain aspects of FDA's Quality
System Regulation with respect to the Company's PathNet HNAC
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 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 FDA 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. FDA has many enforcement tools including recalls,
seizures, injunctions, civil fines and/or criminal prosecutions.
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.
12
<PAGE>
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 contracts 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.
Year 2000 - As of the date of this quarterly report, the
- ----------
Company has not seen any adverse impact as a result of the Year
2000 transition on any of its systems or those of its clients or
suppliers. Nonetheless, the Company will continue to monitor the
effect of the Year 2000 transition, and there can be no absolute
assurance that Year 2000 issues will not materialize in the
future and have a material adverse effect on the Company, its
products or its operations.
13
<PAGE>
Part II. Other Information
Item 5. Other Information.
-----------------
On May 15, 2000, the Company entered into an agreement to acquire
CITATION Computer Systems, Inc. The Company issued a press
release on May 15, 2000, a copy of which is attached hereto as
Exhibit 99 and is incorporated herein by reference, announcing
the above described transaction.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
Exhibit 11 Computation of Earnings Per Share
Exhibit 27 Financial Data Schedule
Exhibit 99 Press Release issued May 15, 2000
(b) Reports on Form 8-K
No reports were filed by the Company during the quarter
ended April 1, 2000.
14
<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 15, 2000 By:\s\Marc G. Naughton
- ------------ -------------------
Date Marc G. Naughton
Chief Financial Officer
15
<PAGE>
Exhibit 11
<TABLE>
CERNER CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
<CAPTION>
Three Months Ended
April 1, April 3,
----------- -----------
2000 1999
----------- -----------
<S> <C> <C>
Net earnings: $ 2,392,000 $ 2,817,000
=========== ===========
Weighted average number of common and
common stock equivalent shares:
Basic average number of
outstanding common shares 33,778,000 33,559,000
----------- -----------
Basic earnings per common shares: $ .07 $ .08
----------- -----------
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) 919,000 364,000
----------- -----------
34,697,000 33,923,000
----------- -----------
Diluted earnings per common and common
stock equvalent shares: $ .07 $ .08
----------- -----------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-30-2000
<PERIOD-END> APR-01-2000
<CASH> 93,672,000
<SECURITIES> 0
<RECEIVABLES> 153,520,000
<ALLOWANCES> 4,757,000
<INVENTORY> 1,091,000
<CURRENT-ASSETS> 247,794,000
<PP&E> 142,226,000
<DEPRECIATION> 65,479,000
<TOTAL-ASSETS> 727,856,000
<CURRENT-LIABILITIES> 75,548,000
<BONDS> 0
0
0
<COMMON> 350,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 727,856,000
<SALES> 87,107,000
<TOTAL-REVENUES> 87,107,000
<CGS> 18,382,000
<TOTAL-COSTS> 63,790,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,392,000
<INCOME-PRETAX> 3,986,000
<INCOME-TAX> 1,594,000
<INCOME-CONTINUING> 2,392,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,392,000
<EPS-BASIC> .07
<EPS-DILUTED> .07
</TABLE>
CERNER CORPORATION
MEDIA: Ashley Crosby Davidson, (816) 201-1580
[email protected]
INVESTORS: Wendy Coffey, (816) 201-1976
[email protected]
CERNER ANNOUNCES AGREEMENT TO ACQUIRE CLINICAL INFORMATION
SYSTEMS PROVIDER CITATION
KANSAS CITY, MO - MAY 15, 2000 - Cerner Corporation (NASDAQ:
CERN), the world's leading clinical and healthcare
information technology company, today announced the signing
of a definitive agreement to acquire CITATION Computer
Systems, Inc. (NASDAQ: CITA), St. Louis, MO, a market leader
in laboratory systems for small to mid-sized hospitals.
Under terms of the agreement, Cerner will pay .153 shares of
Cerner stock and $.51 in cash for each share of Citation,
based on a calculation of 598,000 shares of Cerner stock for
90 percent of Citation and payment of $2 million for the
remaining 10 percent (determined at an effective cash price
of $5.10 per share of Citation). The transaction will be
accounted for as a purchase and is expected to close in the
third quarter this year pending Citation shareholder and
regulatory approval. The stock portion of the transaction is
expected to be tax-free to Citation shareholders. The
transaction is expected to be non-dilutive to Cerner's
earnings per share for 2000 and accretive in 2001.
Citation provides clinical laboratory systems to
approximately 300 clients throughout the United States,
Canada, and through distribution partners in Latin America
and Asia Pacific. Founded in 1979, Citation has significant
laboratory systems expertise, with the majority of the
company's clients utilizing its C-LAB product.
"Citation is a unique compliment to our significant
laboratory client base that primarily consists of larger
hospitals, health systems and independent laboratories,"
said Neal L. Patterson, Chairman and Chief Executive Officer
of Cerner. "The strategic acquisition of Citation will allow
Cerner to broaden our market presence in the lab industry,"
continued Patterson. "The clinical laboratory is the nexus
or diagnostic center of healthcare in a community. A broad
install base of clinical laboratories furthers Cerner's
mission to improve healthcare efficiencies, patient safety
and appropriate clinical decision-making."
"Cerner's $250 million investment in HNA Millenniumr will
provide Citation clients an excellent opportunity to expand
their automation of clinical processes," said Patterson.
"Cerner will also leverage relationships with these small to
mid-sized hospitals that are well-suited to realize
significant benefits from Cerner's application service
provider (ASP) business," he continued. "Each HNA
Millennium information product line is currently available
or will be available via ASP, providing Citation clients the
opportunity to deploy the advanced technology and
contemporary architecture of Cerner's HNA Millennium product
suite quickly and affordably. In the laboratory and
throughout the entire healthcare organization, Citation
clients will have unprecedented access to Cerner's premier,
integrated, enterprise-wide clinical systems."
"The model for the new health enterprise is the connection
of entire communities - linking all constituencies involved
in the health of an individual through an online,
interactive personal health record," said Patterson. "A
large percent of the data that populates the personal health
record originates in the laboratory, making the lab one of
the vital automation and communication points within the
healthcare community," he continued. "The acquisition of
Citation will enhance Cerner's position as the dominant
clinical systems provider for the laboratory marketplace, a
key
<PAGE>
component of our strategy to become the standard in
enterprise-wide quality, safety, efficiency and connectivity
for the healthcare industry worldwide."
"As the premier clinical systems provider in the world,
Cerner's focus upon clinical information systems and its
innovation and experience within the laboratory systems
industry echoes Citation's mission to improve healthcare
quality and promote greater efficiencies," said J. Robert
Copper, Citation Chairman and Chief Executive Officer.
"Through Cerner's commitment to client service and continued
research, development and advancements within the
laboratory, Citation clients will have access to a broader
range of technological options and solutions to meet the
evolving needs of their organizations," continued Copper.
"The leadership of both organizations believe that this
transaction will benefit each of our constituencies and the
entire healthcare marketplace."
"The unity of Citation's laboratory expertise and client
base with Cerner's broad and deep clinical technology,
financial stability and superior client service standards
will create a new chapter in the history of the laboratory
information systems marketplace," said Patterson. "The
strategic acquisition of Citation is an illustration of
Cerner's commitment to market leadership within the lab
industry through powerful information technology and content
to make healthcare smarter, safer and more efficient."
Cerner Corporation (www.cerner.com)
-------------- is the leading supplier
of clinical and management information and knowledge systems
to more than 1,000 healthcare organizations worldwide.
Cerner's mission is to connect the appropriate persons,
knowledge, and resources at the appropriate time and
location to achieve the optimal health outcome. Cerner's
vision of proactive healthcare management drives innovation
today, while creating a foundation for tomorrow's healthy
populations. With HNA Millennium, Cerner has developed a
comprehensive suite of solutions that promote personal and
community health management by providing the link between
individuals and the care process. HNA Millennium
applications work on a cohesive platform that is open,
intelligent and scalable. This allows for communication,
access, and data to be shared throughout the healthcare
community. The following are trademarks and/or service marks
of Cerner Corporation: Cerner, Cerner's logo, Health
Network Architecture, and HNA Millennium.
This release may contain forward-looking statements that
involve a number of risks and uncertainties. It is
important to note that the company's performance, financial
condition or business could differ materially from those
expressed in such forward-looking statements. 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. Factors that could affect
results include those relating to the proposed merger,
including failure to achieve expected synergies, failure to
obtain required regulatory or shareholder approval, and loss
of key personnel. Other factors that could cause or
contribute to such differences include, but are not limited
to: variations in the Company's quarterly operating results,
volatility of the Company's stock price, market risk of
investments, changes in the healthcare industry, significant
competition, the Company's proprietary technology may be
subjected to infringement claims or may be infringed upon,
regulation of the Company's software by the U.S. Food and
Drug Administration or other government regulation, the
possibility of product-related liabilities, possible
failures or defects in the performance of the Company's
software, the possibility that the Company's anti-takeover
defenses could delay or prevent an acquisition of the
Company and uncertainties related to the Year 2000
transition. Additional discussion of these and other
factors affecting the company's business is contained in the
company's filings with the Securities and Exchange
Commission. The company undertakes no obligation to update
forward-looking statements to reflect changed assumptions,
the occurrence of unanticipated events or changes in future
operating results, financial condition or business over
time.
# # #
