-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KbkdP7bDta/dMcaqyYY8UoO/lGmehQvKV2HAkSzw3hPCltMARDYVN8zOztNeHb8d xK9iqVj2gKk9uClvewElwg== 0000804753-00-000064.txt : 20000517 0000804753-00-000064.hdr.sgml : 20000517 ACCESSION NUMBER: 0000804753-00-000064 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000401 FILED AS OF DATE: 20000516 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CERNER CORP /MO/ CENTRAL INDEX KEY: 0000804753 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 431196944 STATE OF INCORPORATION: DE FISCAL YEAR END: 1230 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-15386 FILM NUMBER: 637886 BUSINESS ADDRESS: STREET 1: 2800 ROCKCREEK PKWY-STE 601 CITY: KANSAS CITY STATE: MO ZIP: 64117 BUSINESS PHONE: 8162211024 MAIL ADDRESS: STREET 1: 2800 ROCKCREEK PKWY STREET 2: DROP 1624 CITY: KANSAS CITY STATE: MO ZIP: 64117 10-Q/A 1 AMENDED 10-Q 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. 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 Part I. Financial Information Item 1. Financial Statements CERNER CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
April 1, January 1, (In thousands) 2000 2000 ----------- ---------- (unaudited) 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 ========== ==========
See notes to consolidated financial statements. 1 CERNER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
Three Months Ended April 1, April 3, ------------------------ 2000 1999 ----------- ---------- (In thousands, except per share data) 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 --------- ---------
See notes to consolidated financial statements. 2 CERNER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended April 1, 2000 April 3, 1999 ------------- ------------- (In thousands) 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 ======== ========
See notes to consolidated financial statements. 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, 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: 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) 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 =========================================================================
4 (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: (In thousands) April 1, January 1, 2000 2000 --------------------------- Accounts receivable $ 67,194 85,814 Contracts receivable 81,569 75,360 -------------------------------------------------------- Total receivables $ 148,763 161,174 ===========================
(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 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 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 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 "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 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 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 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 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 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 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 EX-11 2 EXHIBIT 11 Exhibit 11 CERNER CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE
Three Months Ended April 1, April 3, ----------- ----------- 2000 1999 ----------- ----------- 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 ----------- -----------
EX-27 3 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-30-2000 APR-01-2000 93,672,000 0 153,520,000 4,757,000 1,091,000 247,794,000 142,226,000 65,479,000 727,856,000 75,548,000 0 0 0 350,000 0 727,856,000 87,107,000 87,107,000 18,382,000 63,790,000 0 0 2,392,000 3,986,000 1,594,000 2,392,000 0 0 0 2,392,000 .07 .07
EX-99 4 CERNER CORPORATION MEDIA: Ashley Crosby Davidson, (816) 201-1580 acrosby@cerner.com INVESTORS: Wendy Coffey, (816) 201-1976 wcoffey@cerner.com 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 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. # # # -----END PRIVACY-ENHANCED MESSAGE-----