-----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, MS0tmSCmk9yczCdyTJcHXoEwxBY5Dbu+9352Wb8FdPEsq567uxyBdVe6o0+rOULN XqoYMxZZv+f//HD6ts6R3g== /in/edgar/work/20000815/0000804753-00-000106/0000804753-00-000106.txt : 20000922 0000804753-00-000106.hdr.sgml : 20000921 ACCESSION NUMBER: 0000804753-00-000106 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CERNER CORP /MO/ CENTRAL INDEX KEY: 0000804753 STANDARD INDUSTRIAL CLASSIFICATION: [7373 ] IRS NUMBER: 431196944 STATE OF INCORPORATION: DE FISCAL YEAR END: 1230 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15386 FILM NUMBER: 703067 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 1 0001.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 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 33,888,981 shares of Common Stock, $.01 par value, outstanding at July 1, 2000. CERNER CORPORATION AND SUBSIDIARIES ----------------------------------- I N D E X --------- Part I. Financial Information: Item 1. Financial Statements: Consolidated Balance Sheets as of July 1, 2000 (unaudited) and January 1, 2000 1 Consolidated Statements of Operations for the three months and six months ended July 1, 2000 and July 3, 1999 (unaudited) 2 Consolidated Statements of Cash Flows for the six months ended July 1, 2000 and July 3, 1999 (unaudited) 3 Notes to Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosure about Market Risk 16 Part II. Other Information: Item 4 Submission of Matters to a Vote of Security Holders 16 Item 6. Exhibits and Reports on Form 8-K 16 Part I. Financial Information Item 1. Financial Statements CERNER CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
July 1, January 1, (In thousands) 2000 2000 --------- ---------- Assets Current Assets: Cash and cash equivalents $ 89,288 $ 75,677 Receivables 146,853 161,174 Inventory 830 1,262 Prepaid expenses and other 5,233 4,316 ---------- ---------- Total current assets 242,204 242,429 Property and equipment, net 77,080 77,938 Software development costs, net 76,544 71,007 Intangible assets, net 7,894 7,511 Investments, net 245,694 252,123 Other assets 10,653 9,883 ---------- ---------- $ 660,069 $ 660,891 ========== ========== Liabilities and Stockholders' Equity Current Liabilities: Accounts payable $ 17,478 $ 20,261 Deferred revenue 36,947 21,245 Income taxes 10,467 10,987 Accrued payroll and tax withholdings 21,800 17,241 Other accrued expenses 805 2,642 ---------- ---------- Total current liabilities 87,497 72,376 ---------- ---------- Long-term debt, net 100,013 100,000 Deferred income taxes 85,457 93,578 Deferred revenue 15,125 16,000 Stockholders' Equity: Common stock, $.01 par value, 150,000,000 shares authorized, 35,090,591 shares issued in 2000 and 34,932,703 issued in 1999 351 349 Additional paid-in capital 169,203 166,735 Retained earnings 125,430 125,651 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 (282) 23 Unrealized gain on available-for-sale equity security (net of deferred taxes of $55,165 in 2000 and $59,806 in 1999) 98,074 106,975 ---------- ---------- Total stockholders' equity 371,977 378,937 ---------- ---------- $ 660,069 $ 660,891 ========== ==========
See notes to consolidated financial statements. 1 CERNER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended ------------------------------------------- July 1, July 3, July 1, July 3, ------------------------------------------- 2000 1999 2000 1999 ---------- ---------- --------- ---------- (In thousands, except per share data) Revenues: System sales $ 58,833 $ 54,206 $ 112,910 $ 115,019 Support and maintenance 28,266 22,918 54,790 45,283 Other 6,403 5,658 12,909 9,223 ---------- ---------- ---------- ---------- Total revenues 93,502 82,782 180,609 169,525 ---------- ---------- ---------- ---------- Costs and expenses: Cost of revenues 19,479 21,932 37,861 45,500 Sales and client service 41,750 34,153 79,074 68,256 Software development 18,055 18,520 37,586 36,046 General and administrative 6,651 6,773 13,586 13,445 Write-down of intangible assets 6,687 - 6,687 - ---------- ---------- ---------- ---------- Total costs and expenses 92,622 81,378 174,794 163,247 ---------- ---------- ---------- ---------- Operating earnings 880 1,404 5,815 6,278 Interest expense, net (836) (976) (1,785) (1,307) ---------- ---------- ---------- ---------- Earnings before income taxes and extraordinary item 44 428 4,030 4,971 Income Taxes (2,657) (168) (4,251) (1,894) ---------- ---------- ---------- ---------- Earnings (loss) before extraordinary item (2,613) 260 (221) 3,077 ---------- ---------- ---------- ---------- Extraordinary loss on early extinguishment of debt, net of taxes of $865 - (1,395) - (1,395) ---------- ---------- ---------- ---------- Net earnings (loss) $ (2,613) $ (1,135) $ (221) $ 1,682 ========== ========== ========== ========== Basic earnings (loss) per share: Basic earnings (loss) per share before extraordinary item $ (0.08) $ 0.01 $ (0.01) $ 0.09 ========== ========== ========== ========== Basic earnings (loss) per share $ (0.08) $ (0.03) $ (0.01) $ 0.05 ========== ========== ========== ========== Basic weighted average shares outstanding 33,830 33,615 33,804 33,587 ---------- ---------- ---------- ---------- Diluted earning (loss) per share: Diluted earnings (loss) per share before extraordinary item $ (0.08) $ 0.01 $ (0.01) $ 0.09 ========== ========== ========== ========== Diluted earning (loss) per share $ (0.08) $ (0.03) $ (0.01) $ 0.05 ========== ========== ========== ========== Diluted weighted average shares outstanding 33,830 33,911 33,804 33,918 ---------- ---------- ---------- ----------
See notes to consolidated financial statements. 2 CERNER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended ---------------- July 1, 2000 July 3, 1999 -------------------------- (In thousands) Cash flows from operating activities: Net earnings (loss) $ (221) $ 1,682 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 17,774 15,562 Extraordinary item, net of tax - 1,395 Write-down of intangible assets 6,687 - Revenue from non-monetary transactions (5,128) (10,200) Issuance of stock as compensation 31 40 Non-employee stock option compensation expense 117 116 Equity in losses of investee companies 206 890 Provision for deferred income taxes (638) 155 Tax benefit from disqualifying dispositions of stock options - 11 Loss on disposal of capital equipment 33 178 Gain on sale of investments (11) - Changes in assets and liabilities: Receivables, net 14,823 12,077 Inventory 455 101 Prepaid expenses and other (4,611) (914) Accounts payable (3,297) (4,548) Accrued income taxes 1,129 155 Deferred revenue 13,709 (5,624) Other accrued liabilities 2,727 (1,386) --------- --------- Total adjustments 44,006 8,008 --------- --------- Net cash provided by operating activities 43,785 9,690 --------- --------- Cash flows from investing activities: Purchase of capital equipment (6,126) (6,414) Acquisition of business (10,333) - Investment in investee companies (2,254) (12,705) Advances to investee company 1,000 (750) Proceeds from sale of stock in investee company 511 - Executive stock purchase program - (3,343) Capitalized software development costs (14,706) (14,967) --------- --------- Net cash used in investing activities (31,908) (38,179) --------- --------- Cash flows from financing activities: Proceeds from issuance of long-term debt - 99,568 Repayment of long-term debt (280) (30,019) Prepayment penalty on early extinguishment of debt - (2,137) Proceeds from exercise of options 2,319 218 --------- --------- Net cash provided by financing activities 2,039 67,630 --------- --------- Foreign currency translation adjustment (305) 335 --------- --------- Net increase in cash and cash equivalents 13,611 39,476 Cash and cash equivalents at beginning of period 75,677 42,658 --------- --------- Cash and cash equivalents at end of period $ 89,288 $ 82,134 ========= =========
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 at July 1, 2000 and January 1, 2000 and the results of operations and cash flows for the periods presented. The results of the three-month and six-month periods are not necessarily indicative of the operating results for the entire year. The Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" at the beginning of 1998. This statement establishes requirements for reporting and display of comprehensive income and its components. For the six months ended July 1, 2000 and July 3, 1999, total Comprehensive Income, which includes foreign currency translation adjustments and unrealized gain (loss) on available-for-sale equity security adjustments, amounted to ($9,427,000) and $41,461,000 respectively. (2) Earnings Per Share Basic earnings per share (EPS) excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. A reconciliation of the numerators and denominators of the basic and diluted per-share computations is as follows: (In thousands, except per share data)
Three months ended Three months ended July 1, 2000 July 3, 1999 ------------------------------------------------------------------------------- Earnings (loss) Shares Per-Share Earnings Shares Per-Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ------------------------------------------------------------------------------- Earnings (loss) per share before extraordinary item - ---------------------------------------------------- Basic earnings(loss)per share: Income available to common Stockholders $ (2,613) 33,830 $ (.08) $ 260 33,615 $ .01 Effect of dilutive securities (stock options) - - - 296 Diluted earnings(loss)per share: Income available to common Stockholders including ----------------------------------------------------------------------------- Assumed conversions $ (2,613) 33,830 $ (.08) $ 260 33,911 $ .01 =============================================================================
4 Three months ended Three months ended July 1, 2000 July 3, 1999 -------------------------------------------------------------------------------- Earnings (loss) Shares Per-Share Earnings (loss) Shares Per-Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount -------------------------------------------------------------------------------- Net earnings(loss) per share - ------------------------------- Basic earnings(loss) per share: Income (loss) available to common stockholders $ (2,613) 33,830 $ (.08) $ (1,135) 33,615 $ (.03) Effect of dilutive securities (stock options) - - - 296 Diluted earnings(loss) per share: Income (loss)available to common stockholders including ---------------------------------------------------------------------------- assumed conversions $ (2,613) 33,830 $ (.08) $ (1,135) 33,911 $ (.03) ============================================================================
Options to purchase 2,184,000 and 3,286,000 shares of common stock at per share prices ranging from $25.00 to $33.38 and $18.13 to $31.00 were outstanding at the three months ended July 1, 2000 and July 3, 1999, but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares. Six months ended Six months ended July 1, 2000 July 3, 1999 ---------------------------------------------------------------------------------- Earnings (loss) Shares Per-Share Earnings Shares Per-Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ---------------------------------------------------------------------------------- Earnings (loss) per share before extraordinary item - --------------------------------------------------- Basic earnings(loss) per share: Income (loss)available to common stockholders $ (221) 33,804 $ (.01) $ 3,077 33,587 $ .09 Effect of dilutive securities (stock options) - - - 331 Diluted earnings (loss) per share: Income (loss)available to common stockholders including -------------------------------------------------------------------------------- assumed conversions $ (221) 33,804 $ (.01) $ 3,077 33,918 $ .09 ================================================================================
Six months ended Six months ended July 1, 2000 July 3, 1999 -------------------------------------------------------------------------------- Earnings (loss) Shares Per-Share Earnings Shares Per-Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount -------------------------------------------------------------------------------- Net earnings(loss) per share ---------------------------- Basic earnings(loss) per share: Income (loss) available to common stockholders $ (221) 33,804 $ (.01) $ 1,682 33,587 $ .05 Effect of dilutive securities (stock options) - - - 331 Diluted earnings(loss) per share: Income (loss) available to common stockholders including ------------------------------------------------------------------------------- assumed conversions $ (221) 33,804 $ (.01) $ 1,682 33,918 $ .05 ===============================================================================
5 Options to purchase 1,907,000 and 3,286,000 shares of common stock at per share prices ranging from $25.88 to $33.38, and $18.13 to $31.00 were outstanding at the six months ended of July 1, 2000 and July 3, 1999, but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares. (3) Business Acquisitions On April 2, 2000 the Company purchased the remaining 50% of the outstanding common stock of Health Network Ventures, Inc. (HNV) for $8.3 million. HNV develops software solutions that enable transaction processing between providers, and other health- related entities. Subsequent to the acquisition, the Company has determined that it will shut down the portion of the business focused on individual physician practice connectivity and transaction processing given that it is the Company's strategy to use CareInsite to process transactions. As a result of this decision, the Company's recorded a non-recurring charge in the second quarter of 2000 in the amount of $6,687,000 or $.20 per share on a diluted basis related to a write-down of intangible assets. The Company also purchased the assets of Mitch Cooper & Associates (MC&A) for $2 million on April 2, 2000. MC&A is a supply chain re-engineering consulting practice. The allocation of the purchase price to the estimated fair values of the identified tangible and intangible assets acquired and liabilities assumed, resulted in goodwill of $1,957,000. The goodwill is being amortized straight-line over five years. The acquisitions were accounted for using the purchase method of accounting with the operating results of HNV and MC&A included in the Company's consolidated statement of earnings since the date of acquisition. On May 15, 2000, the Company entered into an agreement to acquire CITATION Computer Systems, Inc, a market leader in laboratory systems for small to mid-sized hospitals. Under terms of the agreement, CITATION shareholders will receive 0.1695 shares of the Company's stock for 90% of CITATION stock and $5.10 in cash for 10% of CITATION stock, resulting in the issuance of approximately 598,000 shares of the Company's stock for 90% of CITATION and payment of approximately $2 million for the remaining 10% of CITATION. The transaction, which will be accounted for as a purchase, is expected to close in the third quarter this calendar year pending CITATION shareholder approval. (4) Receivables Receivables consist of accounts receivable and contracts receivable. Accounts receivable represent recorded revenues that have been billed. Contracts receivable represent recorded revenues that are billable by the Company at future dates under the terms of a contract with a client. Billings and other consideration received on contracts in excess of related revenues recognized under the percentage-of -completion method are recorded as deferred revenue. A summary of receivables is as follows: (In thousands) July 1, January 1, 2000 2000 ------------------------- Accounts receivable $ 65,878 85,814 Contracts receivable 80,975 75,360 ------------------------------------------------------- Total receivables $ 146,853 161,174 =========================
6 (5) Investments Included in the Company's investments is the ownership of 13,149,259 shares (17.5%) 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 $235,043,000 at July 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. On April 1, 2000, the Company marked to market all 13,149,259 shares of CareInsite common stock that are considered available- for-sale under SFAS No.115. The market value on July 1, 2000 was $235,043,000. 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 Company's 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 half 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. 7 Item 2. Management's Discussion and Analysis of Financial ------------------------------------------------------- Condition and Results of Operations ----------------------------------- Results of Operations - --------------------- Three Months Ended July 1, 2000 Compared to Three Months Ended July 3, 1999 The Company's revenues increased 13% to $93,502,000 for the three- month period ended July 1, 2000 from $82,782,000 for the three- month period ended July 3, 1999. Net earnings, before extraordinary item and non-recurring charge was $4,074,000 for the three-month period ended July 1, 2000, compared to $260,000 for the three-month period ended July 3, 1999. Revenues from non- monetary transactions were $1,815,000 for the three-month period ended July 1, 2000 and $5,600,000 for the three-month period ended July 3, 1999. The increase in net earnings, before extraordinary item and non-recurring charge, is due to an increase in new contract bookings in the three-month period ended July 1, 2000 compared to the three-month period ended July 3, 1999. After the write off of intangible assets, the Company incurred a loss of $2,613,000, net of tax, for the three-month period ended July 1, 2000. System sales revenues increased 9% to $58,833,000 for the three- month period ended July 1, 2000 from $54,206,000 for the corresponding period in 1999. This increase in system sales resulted primarily from an increase in new business signed in the three-month period ended July 1, 2000 compared to the three-month period ended July 3, 1999. At July 1, 2000, the Company had $393,480,000 in contract backlog and $171,749,000 in support and maintenance backlog, compared to $323,292,000 in contract backlog and $157,957,000 in support and maintenance backlog at July 3, 1999. Support and maintenance revenues increased 23% to $28,266,000 during the second quarter of 2000 from $22,918,000 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 13% to $6,403,000 in the second quarter of 2000 from $5,658,000 in the same period of 1999. This increase was due primarily to subscriptions to clients; this increase was $486,000. The cost of revenues includes the cost of third party consulting services, computer hardware and sublicensed software purchased from computer and software manufacturers for delivery to clients. It also includes the cost of hardware maintenance and sublicensed software support subcontracted to manufacturers. The cost of revenue was 21% of total revenues in the second quarter of 2000 compared to 26% 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 45% and 41% in the second quarter of 2000 and 1999, respectively. The increase in total sales and client service expenses to $41,750,000 in 2000 from $34,153,000 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 second quarter of 2000 and 1999 were $20,432,000 and $22,476,000, respectively. These amounts exclude amortization. Capitalized software costs were $7,000,000 and $7,651,000 for the second quarter of 2000 and 1999, respectively. The decrease in aggregate expenditures for software development in 2000 is due to a reduction in third party software development expenses. 8 General and administrative expenses include salaries for corporate, financial, and administrative staffs, utilities, communications expenses, and professional fees. These expenses as a percent of total revenues were 7% and 8% in the second quarter of 2000 and 1999, respectively. Total general and administrative expenses for the second quarter of 2000 and 1999 were $6,651,000 and $6,773,000, respectively. On April 2, 2000 the Company purchased the remaining 50% of the outstanding common stock of Health Network Ventures, Inc. (HNV) for $8.3 million. HNV develops software solutions that enable transaction processing between providers, and other health- related entities. Subsequent to the acquisition, the Company has determined that it will shut down the portion of the business focused on individual physician practice connectivity and transaction processing given that it is the Company's strategy to use CareInsite to process transactions. As a result of this decision, the Company recorded a non-recurring charge in the second quarter of 2000 in the amount of $6,687,000 or $.20 per share on a diluted basis related to a write-down of intangible assets. Net interest expense was $836,000 in the second quarter of 2000 compared to $976,000 in the second quarter of 1999. This decrease is due to an increase in invested cash, resulting from an increase in cash collections. After adjusting for the non-deductible write-down of intangibles, the Company's effective tax rate was 39% for the second quarter of 2000 and 1999, respectively. Six Months Ended July 1, 2000 Compared to Six Months Ended July 3, 1999 The Company's revenues increased 7% to $180,609,000 for the six- month period ended July 1, 2000 from $169,525,000 for the six- month period ended July 3, 1999. Net earnings before extraordinary item and non-recurring charge were $6,466,000 for the six-months ended July 1, 2000, compared to $3,077,000 for the six-months ended July 3, 1999. The increase in net earnings, before extraordinary item and non-recurring charge, is due to an increase in new contract bookings in the six-month period ended July 1, 2000 compared to the six-month period ended July 3, 1999. Revenues from non-monetary transactions were $5,128,000 for the six-month period ended July 1, 2000 and $10,200,000 for the six- month period ended July 3, 1999. After the non-recurring charge, which resulted from a write-off of intangible assets associated with the HNV purchase, and extraordinary item, which resulted from a prepayment penalty and write-off of deferred loan costs from the early extinguishment of debt, net earnings (loss) were ($221,000) and $1,682,000 for the first six-months of 2000 and 1999, respectively. System sales revenues decreased 2% to $112,910,000 for the six- month period ended July 1, 2000 from $115,019,000 for the corresponding period in 1999. At July 1, 2000, the Company had $393,480,000 in contract backlog and $171,749,000 in support and maintenance backlog, compared to $323,292,000 in contract backlog and $157,957,000 in support and maintenance backlog at July 3, 1999. Support and maintenance revenues increased 21% to $54,790,000 during the first six months of 2000 from $45,283,000 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 40% to $12,909,000 in the first six months of 2000 from $9,223,000 in the same period of 1999. This increase is due primarily to additional revenues derived from gains on investments received on previous license software arrangements and subscriptions to clients; these increases were $2,686,000 and $1,042,000, respectively. The cost of revenues includes the cost of third party consulting services, computer hardware and sublicensed software purchased from computer and software manufacturers for delivery to clients. It also 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 six months of 2000 compared to 27% in 1999. Such costs, as a percent of revenues, typically have varied as the mix of revenue 9 (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 44% and 40% in the first six months of 2000 and 1999, respectively. The increase in total sales and client service expenses to $79,074,000 in 2000 from $68,256,000 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 six months of 2000 and 1999 were $43,123,000 and $43,745,000 respectively. These amounts exclude amortization. Capitalized software costs were $14,706,000 and $14,967,000 for the first six months of 2000 and 1999, respectively. The decrease in aggregate expenditures for software development in 2000 is due to a reduction in third party software development expenses. General and administrative expenses include salaries for corporate, financial, and administrative staffs, utilities, communications expenses, and professional fees. These expenses as a percent of total revenues were 8% in the first six months of both 2000 and 1999. Total general and administrative expenses for the first six months of 2000 and 1999 were $13,586,000 and $13,445,000, respectively. On April 2, 2000 the Company purchased the remaining 50% of the outstanding common stock of Health Network Ventures, Inc. (HNV) for $8.3 million. HNV develops software solutions that enable transaction processing between providers, and other health- related entities. Subsequent to the acquisition, the Company has determined that it will shut down the portion of the business focused on individual physician practice connectivity and transaction processing given that it is the Company's strategy to use CareInsite to process transactions. As a result of this decision, the Company recorded a non-recurring charge in the second quarter of 2000 in the amount of $6,687,000 or $.20 per share on a diluted basis related to a write-down of intangible assets. Net interest expense was $1,785,000 in the first six months of 2000 compared to $1,307,000 in the first six months of 1999. This increase in expense is due to an increase in borrowings. On April 15, 1999, the Company completed a $100,000,000 private placement of debt pursuant to a Note Agreement dated April 1, 1999. The Series A Senior Notes, with a $60,000,000 principal amount at 7.14% are due on April 15, 2006 and the Series B Senior Notes, with a $40,000,000 principal amount at 7.66% are due April 15, 2009. The proceeds were used to retire the Company's existing $30,000,000 of debt, and the remaining funds will be used for proposed capital improvements and strengthen the Company's cash position. In connection with the early extinguishment of debt, the Company incurred a $1,395,000, net of taxes, extraordinary loss for a prepayment penalty and write-off of deferred loan costs. After adjusting for the non-deductible write-down of intangibles, the Company's effective tax rates were 40% and 38% for the first six months of 2000 and 1999, respectively. Capital Resources and Liquidity - ------------------------------- The Company's liquidity position remains strong with total cash and cash equivalents of $89,288,000 at July 1, 2000 and working capital of $154,707,000. The Company generated net cash from operations of $43,785,000 and $9,690,000 during the six-month periods ended July 1, 2000 and July 3, 1999, respectively. Cash flow from operations increased in the first six-months 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 are being used for capital improvements and to strengthen the Company's cash position. The Company has $18,000,000 of long-term, revolving credit from banks, all of which was available as of July 1, 2000. 10 Cash used in investing activities consisted primarily of capitalized software development costs of $14,706,000 and $14,967,000 and purchase of capital equipment of $6,126,000 and $6,414,000 in the first six months of 2000 and 1999, respectively. Also, included in investing activities in the second quarter of 2000 was $10,333,000 for the acquisition of two businesses, as previously discussed. Revenues provided under the Company's support and maintenance agreements represent recurring cash flows. Support and maintenance revenues increased 23% in the second quarter of 2000 over the second 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. Factors that may Affect Future Results of Operations, Financial - --------------------------------------------------------------- Condition or Business - --------------------- Statements made in this report, other reports and proxy statements filed with the Securities and Exchange Commission, communications to stockholders, press releases and oral statements made by representatives of the Company that are not historical in nature, or that state the Company's or management's intentions, hopes, beliefs, expectations, or predictions of the future, are "forward-looking statements" within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended, and involve risks and uncertainties. The words "should," "will be," "intended," "continue," "believe," "may," "expect," "hope," "anticipate," "goal," "forecast" and similar expressions are intended to identify such forward-looking statements. It is important to note that any such performance, and actual results, financial condition or business could differ materially from those expressed in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below as well as those discussed elsewhere in reports filed with the Securities and Exchange Commission. The Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results, financial condition or business over time. Quarterly Operating Results May Vary - The Company's quarterly - ------------------------------------- operating results have varied in the past and may continue to vary in future periods. Quarterly operating results may vary for a number of reasons including demand for the Company's products and services, the Company's long sales cycle, the long installation and implementation cycle for these larger, more complex and costlier systems and other factors described in this section and elsewhere in this report. As a result of healthcare industry trends and the market for the Company's HNA Millennium products, a large percentage of the Company's revenues are generated by the sale and installation of larger, more complex and costlier systems. The sales process for these systems is lengthy and involves a significant technical evaluation and commitment of capital and other resources by the customer. The sale may be subject to delays due to customers' internal budgets and procedures for approving large capital expenditures and by competing needs for other capital expenditures and deploying new technologies or personnel resources. Delays in the expected sale or installation of these large contracts may have a significant impact on the Company's anticipated quarterly revenues and consequently its earnings, since a significant percentage of the Company's expenses are relatively fixed. These larger, more complex and costlier systems are installed and implemented over time periods ranging from approximately nine months to three years and involve significant efforts both by the Company and the client. In addition, implementation of the Company's Millennium products is a new and evolving process. The Company recognizes revenue upon the completion of standard milestone conditions and the amount of revenue recognized in any quarter depends upon the Company's and the client's ability to meet these project milestones. Delays in meeting these milestone conditions or modification of the contract relating to one or more of these systems could result in a shift of revenue recognition from one 11 quarter to another and could have a material adverse effect on results of operations for a particular quarter. In addition, support payments by clients for the Company's products do not commence until the product is in use. The Company's revenues from system sales historically have been lower in the first quarter of the year and greater in the fourth quarter of the year. Stock Price May Be Volatile - The trading price of the - ------------------------------- Company's common stock may be volatile. The market for the Company's common stock may experience significant price and volume fluctuations in response to a number of factors including actual or anticipated quarterly variations in operating results, changes in expectations of future financial performance or changes in estimates of securities analysts, governmental regulatory action, healthcare reform measures, client relationship developments and other factors, many of which are beyond the Company's control. Furthermore, the stock market in general, and the market for software, healthcare and high technology companies in particular, has experienced extreme volatility that often has been unrelated to the operating performance of particular companies. These broad market and industry fluctuations may adversely affect the trading price of the Company's common stock, regardless of actual operating performance. Market Risk of Investments - The Company accounts for its - ----------------------------- investments in equity securities which have readily determinable fair values as available-for-sale. Available-for-sale securities are reported at fair value with unrealized gains and losses reported, net of tax, as a separate component of accumulated other comprehensive income. Investments in other equity securities are reported at cost. All equity securities are reviewed by the Company for declines in fair value. If such declines are considered to be other than temporary, the cost basis of the individual security is written down to fair value as a new cost basis, and the amount of the write-down is included in earnings. Included in the Company's investments is the ownership of 13,149,259 shares (17.5%) 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 $235,043,000 at July 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. On April 1, 2000, the Company marked to market all 13,149,259 shares of CareInsite common stock that are considered available- for-sale under SFAS No.115. The market value on July 1, 2000 was $235,043,000. 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 12 Health Information Network Connections, LLC ("THINC") exercised warrants granted to them by CareInsite at $4.00 per share. THINC was allowed to exercise their warrants 180 days after the initial public offering of CareInsite. On January 29, 2000 CareInsite completed an acquisition of THINC. As part of that agreement, 806,756 of the Company's 1,008,445 THINC Warrants became immediately exercisable, with the remaining amount forfeited. 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 half 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. The Company is exposed to market risk from changes in marketable securities (which consist of money market and commercial paper). At July 1, 2000, marketable securities of the Company were recorded at a fair value of approximately $89 million, with an overall average return of approximately 5% and an overall weighted maturity of less than 90 days. The marketable securities held by the Company are not subject to price risk as they are held to maturity. The Company is not exposed to material future earnings or cash flow exposures from changes in interest rates on long-term debt since 100% of its long-term debt is at a fixed rate. To date, the Company has not entered into any derivative financial instruments to manage interest rate risk and is currently not evaluating the future use of any such financial instruments. The Company conducts business in several foreign jurisdictions. However, the business transacted is in the local functional currency and the Company does not currently have any material exposure to foreign currency transaction gains or losses. All other business transactions are in U.S. dollars. To date, the Company has not entered into any derivative financial instrument to manage foreign currency risk and is currently not evaluating the future use of any such financial instruments. Changes in the Healthcare Industry - The healthcare industry is - ---------------------------------- highly regulated and is subject to changing political, economic and regulatory influences. For example, The Balanced Budget Act of 1997 (Public Law 105-32) contains significant changes to Medicare and Medicaid and began to have its initial impact in 1998 due to limitations on reimbursement, resulting cost containment initiatives, and effects on pricing and demand for capital intensive systems. These factors affect the purchasing practices and operation of healthcare organizations. Federal and state legislatures have periodically considered programs to reform or amend the U.S. healthcare system at both the federal and state level and to change healthcare financing and reimbursement systems. These programs may contain proposals to increase governmental involvement in healthcare, lower reimbursement rates or otherwise change the environment in which healthcare industry participants operate. Healthcare industry participants may respond by reducing their investments or postponing investment decisions, including investments in the Company's products and services. Many healthcare providers are consolidating to create integrated healthcare delivery systems with greater market power. These providers may try to use their market power to negotiate price reductions for the Company's products and services. As the healthcare industry consolidates, the Company's customer base could be eroded, competition for customers could become more intense and the importance of acquiring each customer becomes greater. 13 Significant Competition - The market for healthcare information - ----------------------- systems is intensely competitive, rapidly evolving and subject to rapid technological change. The Company believes that the principal competitive factors in this market include the breadth and quality of system and product offerings, the stability of the information systems provider, the features and capabilities of the information systems, the ongoing support for the system, and the potential for enhancements and future compatible products. Certain of the Company's competitors have greater financial, technical, product development, marketing and other resources than the Company and some of its competitors offer products that it does not offer. The Company's principle existing competitors include Shared Medical Systems Corporation, IDX Systems Corporation, McKesson HBOC, Inc. and Eclipsys Corporation, each of which offers a suite of products that compete with many of the Company's products. There are other competitors that offer a more limited number of competing products. In addition, the Company expects that major software information systems companies, large information technology consulting service providers and system integrators, Internet-based start-up companies and others specializing in the healthcare industry may offer competitive products or services. The pace of change in the healthcare information systems market is rapid and there are frequent new product introductions, product enhancements and evolving industry standards and requirements. As a result, the Company's success will depend upon its ability to keep pace with technological change and to introduce, on a timely and cost- effective basis, new and enhanced products that satisfy changing customer requirements and achieve market acceptance. Proprietary Technology May Be Subjected to Infringement Claims or - ----------------------------------------------------------------- May Be Infringed Upon - The Company relies upon a combination of - --------------------- trade secret, copyright and trademark laws, license agreements, confidentiality procedures, employee nondisclosure agreements and technical measures to maintain the trade secrecy of its proprietary information. The Company has not historically filed patent applications or copyrights covering its software technology. As a result, the Company may not be able to protect against misappropriation of its intellectual property. In addition, the Company could be subject to intellectual property infringement claims as the number of competitors grows and the functionality of its products overlaps with competitive offerings. These claims, even if not meritorious, could be expensive to defend. If the Company becomes liable to third parties for infringing their intellectual property rights, it could be required to pay a substantial damage award and to develop noninfringing technology, obtain a license or cease selling the products that contain the infringing intellectual property. Government Regulation - The United States Food and Drug - ---------------------- Administration (the "FDA") has declared that software products that are intended for the maintenance of data used in making decisions regarding the suitability of blood donors and the release of blood or blood components for transfusion are medical devices under the Federal Food, Drug and Cosmetic Act (the "Act") and amendments to the Act. As a consequence, the Company is subject to extensive regulation by the FDA with regard to its blood bank software. If other of the Company's products are deemed to be medical devices by the FDA, the Company could be subject to extensive requirements including premarket notification clearance prior to marketing. Complying with these FDA regulations would be time consuming, burdensome and expensive. It is possible that the FDA may become more active in regulating computer software that is used in healthcare. Following an inspection by the FDA in March of 1998, the Company received a two-item Form 483 (Notice of Inspectional Observations) containing observations of non-compliance with the Federal Food, Drug and Cosmetic Act (the "Act") with respect to the Company's PathNet HNA Blood Bank Transfusion and Donor products (the "Blood Bank Products"). The Company subsequently received a Warning Letter, dated April 29, 1998, as a result of the same inspection. The Company responded promptly to the FDA and undertook a number of actions in response to the Form 483 and Warning Letter, including an audit by a third party of the Company's Blood Bank Products and improvements to Cerner's Quality System. A copy 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. 14 There can be no assurance, however, that the Company's actions taken in response to the Form 483 and Warning Letter will be deemed adequate by the FDA or that additional actions on behalf of the Company will not be required. In addition, the Company remains subject to periodic inspections and there can be no assurances that the Company will not be required to undertake additional actions to comply with the Act and any other applicable regulatory requirements. Any failure by the Company to comply with the Act and any other applicable regulatory requirements could have a material adverse effect on the Company's ability to continue to manufacture and distribute its products, and in more serious cases, could result in seizure, recall, injunction and/or civil fines. Any of the foregoing would have a material adverse effect on the Company's business, results of operations or financial condition. Product Related Liabilities - Many of the Company's products - ----------------------------- provide data for use by healthcare providers in providing care to patients. Although no such claims have been brought against the Company to date regarding injuries related to the use of its products, such claims may be made in the future. Although the Company maintains product liability insurance coverage in an amount that it believes is sufficient for its business, there can be no assurance that such coverage will prove to be adequate or that such coverage will continue to remain available on acceptable terms, if at all. A successful claim brought against the Company which is uninsured or under-insured could materially harm its business, results of operations or financial condition. System Errors and Warranties - The Company's systems, - --------------------------------- particularly the HNA Millennium versions, are very complex. As with complex systems offered by others, the Company's systems may contain errors, especially when first introduced. Although the Company conducts extensive testing, it has discovered software errors in its products after their introduction. The Company's systems are intended for use in collecting and displaying clinical information used in the diagnosis and treatment of patients. Therefore, users of the Company products have a greater sensitivity to system errors than the market for software products generally. The Company's agreements with its clients typically provide warranties against material errors and other matters. Failure of a client's system to meet these criteria could constitute a material breach under such contracts allowing the client to cancel the contract, or could require the Company to incur additional expense in order to make the system meet these criteria. The Company's contract with its clients generally limit the Company's liability arising from such claims but such limits may not be enforceable in certain jurisdictions. Anti-Takeover Defenses - The Company's charter, bylaws, - ------------------------ shareholders' rights plan and certain provisions of Delaware law contain certain provisions that may have the effect of delaying or preventing an acquisition of the Company. Such provisions are intended to encourage any person interested in acquiring the Company to negotiate with and obtain the approval of the Board of Directors in connection with any such transaction. These provisions include (i) a Board of Directors that is staggered into three classes to serve staggered three-year terms, (ii) blank check preferred stock, (iii) supermajority voting provisions, (iv) inability of stockholders to act by written consent or call a special meeting, (v) limitations on the ability of stockholders to nominate directors or make proposals at stockholder meetings, and (vi) triggering the exercisability of stock purchase rights on a discriminatory basis, which may invoke extensive economic and voting dilution of a potential acquirer if its beneficial ownership of the Company's common stock exceeds a specified threshold. Certain of these provisions may discourage a future acquisition of the Company not approved by the Board of Directors in which shareholders might receive a premium value for their shares. 15 Item 3. Quantitative and Qualitative Disclosures about Market ------------------------------------------------------ Risk ---- Information contained under the caption "Factors the may Affect Future Results of Operations, Financial Condition or Business - Market Risk of Investments" set forth under Management's Discussion and Analysis of Financial Conditions and Results of Operations" in Item 2 is incorporated herein by reference. Part II. Other Information Item 4 Submission of Matters to a Vote of Security Holders. --------------------------------------------------- At the Company's annual shareholders meeting held on May 26, 2000, Clifford W. Illig was re-elected as a Class II Director, for a three-year term expiring at the 2003 annual meeting of shareholders. Neal L. Patterson, John C. Danforth, Jeff C. Goldsmith, Dr. Gerald E. Bisbee, Jr., and Michael E. Herman continued as directors after the meeting. Abstention and Broker For Withheld Non-Votes ---------- ---------- --------------------- Clifford W. Illig 30,799,936 - 426,871
The shareholders also ratified the selection by the Board of Directors of KPMG LLP as the Company's independent certified public accountants for the fiscal year ending December 30, 2000. Shares voted in favor were 30,913,390, shares against 271,427 and 41,990 shares abstained or were broker non-votes. Item 6. Exhibits and Reports on Form 8-K. --------------------------------- (a) Exhibits Exhibit 10 First Amendment to the Credit Agreement between Cerner Corporation and Mercantile Bank dated April 1, 1999 Exhibit 11 Computation of Earnings Per Share Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the quarter ended July 1, 2000. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CERNER CORPORATION ------------------ Registrant August 14, 2000 By:\s\Marc G. Naughton - ---------------- ------------------- Date Marc G. Naughton Chief Financial Officer 17 EX-10 2 0002.txt EXHIBIT 10 FIRST AMENDMENT TO CREDIT AGREEMENT This First Amendment to Credit Agreement (the "Amendment ---------") is made as of June 30, 2000, by and among CERNER CORPORATION, a Delaware corporation (the "Borrower --------"), and FIRSTAR BANK MIDWEST, N.A., successor to Mercantile Bank, as Agent and, as of the date hereof, the sole Bank under the Credit Agreement referred to below, and as Issuing Bank. Preliminary Statements (a) The Borrower, the Agent, the Issuing Bank and the Bank are parties to a Credit Agreement dated as of April 1, 1999 (the "Credit Agreement -----------------"). Capitalized terms used and not defined in this Amendment have the meanings given to them in the Credit Agreement. (b) The Borrower has requested that (1) the maturity of the revolving credit facility be extended to June 30, 2003, (2) the commitment (non-usage) fee referred to in Section 3.1 of the Credit Agreement be amended, and (3) the definition of Tangible Net Worth and certain of the financial covenants in the Credit Agreement be modified in certain respects. (c) The Agent, on behalf of the Bank and the Issuing Bank, is willing to agree to the foregoing requests, subject, however, to the terms, conditions and agreements set forth below. NOW, THEREFORE, the parties agree as follows: 1. Termination Date. The definition of Revolving Credit Termination Date in Section 1.1 of the Credit Agreement is deleted and is replaced by the following: "Revolving Credit Termination Date --------------------------------------" shall mean June 30, 2003; provided, however, that if such date would otherwise fall on a date which is not a Business Day, the Revolving Credit Termination Date shall be the next preceding Business Day. 2. Tangible Net Worth. The definition of Tangible Net Worth in Section 1.1 of the Credit Agreement is deleted and is replaced by the following: "Tangible Net Worth ----------------------" shall mean Consolidated Net Worth, less the sum of all goodwill, trade names, trademarks, patents, organization expense, unamortized debt discount and expense and other similar intangibles properly classified as such in accordance with GAAP, which are incurred or booked subsequent to July 1, 2000, provided that there shall not be so excluded software development costs which are capitalized by the Borrower in accordance with GAAP on a basis consistent with that described in Note 1(d) of the Borrower's audited financial statements dated January 1, 2000. 3. Commitment (Non-Usage) Fee. (a) Section 3.1. Section 3.1 of the Credit Agreement is deleted and is replaced by the following: 3.1 Commitment Fees ----------------. The Borrower shall pay to the Agent, for the pro rata account of each Bank, a commitment fee at a rate per annum equal to the Applicable Commitment Fee Margin on the daily average unused amount of such Bank's Revolving Credit Commitment, for the period from and including the date of the First Amendment to but excluding the earlier of the date Revolving Credit Commitments are terminated or the Revolving Credit Termination Date. Accrued commitment fees shall be payable on each Quarterly Date and on the dates referred to in the immediately preceding sentence. (b) Conforming Definitions. Section 1.1 of the Credit Agreement is amended to add the following definitions in the appropriate alphabetical order: "Applicable Commitment Fee Margin --------------------------------" means as follows: if at the end of any fiscal quarter the Tangible Net Worth Ratio is within the respective ranges set forth below, then the Applicable Commitment Fee Margin at all times during the second succeeding fiscal quarter shall be the percentage set forth opposite such ratio: Tangible Net Worth Ratio Margin ------------------------ ------ Greater than 1.25 to 1 0.32% Less than or equal to 1.25 to 1, but greater than .80 to 1 0.25% Less than or equal to .80 to 1 0.18% provided, however, that during any period that the Borrower has failed to deliver the financial statements or the Borrowing Base and Compliance Certificate as required by Section 6.1 hereof, the Applicable Commitment Fee Margin shall be 0.32%. "First Amendment -----------------" means the First Amendment to Credit Agreement, dated as of June 30, 2000, among the parties to the Credit Agreement. 4. Tangible Net Worth Ratio. Section 6.6 of the Credit Agreement is deleted and is replaced by the following: 6.6 Minimum Tangible Net Worth ---------------------------. The Borrower shall not permit its Tangible Net Worth on any date to be less than the sum of (i) $300,000,000, plus (ii) an amount equal to 50% of its Consolidated Net Income (without reduction for any deficit in its Consolidated Net Income) for the period from the date of the First Amendment to and including the date of determination thereof, computed on a cumulative basis for such entire period. 5. Fixed Charge Ratio. Section 6.8 of the Credit Agreement is deleted and is replaced by the following: 6.8 Fixed Charge Coverage Ratio ---------------------------. The Borrower will not at any time permit the ratio of Consolidated Income Available for Fixed Charges to Fixed Charges for the Borrower's most recently completed four fiscal quarters to be less than 2 to 1. For purposes of this Section 6.8 only, the following terms shall have the following meanings: Capitalized Lease ----------------- - Any lease the obligation for Rentals with respect to which, in accordance with GAAP, would be required to be capitalized on a balance sheet of the lessee. Consolidated Income Available for ----------------------------------- Fixed Charges ------------- - For any period, the sum of (i) Consolidated Net Income, plus (to the extent deducted in determining Consolidated Net Income), (ii) all provisions for any federal, state, or other income taxes made by the Borrower and the Subsidiary Guarantors during such period plus (iii) Fixed Charges. Consolidated Net Income ----------------------- - For any period, the consolidated net income (or deficit) of the Borrower and the Subsidiary Guarantors after deducting, without duplication, all operating expenses, provisions for all taxes and reserves (including reserves for deferred income taxes) and all other proper deductions, all determined in accordance with GAAP and after deducting portions of income properly attributable to outstanding minority interests, if any, in Subsidiary Guarantors; provided, however, that there shall be excluded (i) any income (or deficit) of any Person accrued prior to the date it becomes a Subsidiary Guarantor or merges into or consolidates with the Borrower or a Subsidiary Guarantor; (ii) the income (or deficit) of any Person (other than a Subsidiary Guarantor) in which the Borrower or any Subsidiary Guarantor has any ownership interest (except that any such income actually received by the Borrower or such Subsidiary Guarantor in the form of cash dividends shall be included without limitation); (iii) any gains or losses, or other income, properly classified as extraordinary in accordance with GAAP; (iv) any gains or losses, or other income, characterized as non-recurring in the financial statements delivered pursuant to Section 6.1; (v) any gain or loss resulting from the sale of fixed or capital assets other than in the ordinary course of business; (vi) any portion of the net income of a Subsidiary Guarantor which for any reason (other than solely as a result of any restrictions contained in Section 6.12 of this Agreement) cannot be distributed as a cash dividend; (vii) any gain or loss resulting from the sale or other disposition of any Investment; (viii) any gains resulting from the reappraisal, revaluation or write-up of assets and any gains or losses resulting from the reappraisal, revaluation or write-up of the Borrower's original $70,000,000 Investment in CareInsite, Inc.; (ix) proceeds of any life insurance policy; (x) any gain or loss resulting from the acquisition of any securities of the Borrower or any Subsidiary Guarantor; and (xi) any reversal of any reserve, except to the extent that provision for such reserve shall have been made from income arising during the fiscal period in which such reversal occurs. Fixed Charges ------------- - For any period, the sum of (i) interest expense (including the interest component of Rentals under Capitalized Leases), amortization of debt discount and expense on Indebtedness of the Borrower and the Subsidiary Guarantors during such period and (ii) Rentals under all leases other than Capitalized Leases of the Borrower and the Subsidiary Guarantors, determined on a consolidated basis in accordance with GAAP. Investments ----------- - All investments made in cash or by delivery of property, directly or indirectly, in any Person, whether by acquisition of shares of capital stock, indebtedness or other obligations or securities or by loan, advance, capital contribution or otherwise; provided, however, that "Investments" shall not mean or include investments in property to be used, held for use or consumed in the ordinary course of business. Rentals ------- - As of the date of any determination thereof, all fixed payments (including all payments which the lessee is obligated to make to the lessor on termination of the lease or surrender of the property) payable by the Borrower or a Subsidiary Guarantor, as lessee or sublessee under a lease of real or personal property, but exclusive of any amounts required to be paid by the Borrower or a Subsidiary Guarantor (whether or not designated as rents or additional rents) on account of maintenance, repairs, insurance, taxes, assessments, amortization and similar charges. Fixed rents under any so- called "percentage leases" shall be computed on the basis of the minimum rents, if any, required to be paid by the lessee, regardless of sales volume or gross revenues. Voting Stock ------------ - Capital stock of any class of a corporation having power to vote for the election of members of the board of directors of such corporation, or persons performing similar functions. 6. Financial Covenants to Apply to Borrower and Subsidiary Guarantors. The following definitions in Section 1.1 of the Credit Agreement are amended to read as follows: "Consolidated Net Income ------------------------" shall mean, for any period, the net income and net losses of the Borrower and the Subsidiary Guarantors on a consolidated basis as defined according to GAAP. "Consolidated Net Worth ----------------------" shall mean, at any date, the amount shown as "total shareholders' equity" (or any like caption) on a consolidated balance sheet of the Borrower and the Subsidiary Guarantors in accordance with GAAP. "Current Assets ---------------" shall mean, at any date, the current assets of the Borrower and the Subsidiary Guarantors determined on a consolidated basis as of such date in accordance with GAAP. "Current Liabilities -------------------" shall mean, at any date, the current liabilities of the Borrower and the Subsidiary Guarantors determined on a consolidated basis as of such date in accordance with GAAP. "EBITDA ------" shall mean, for any period, Consolidated Net Income for the period in question plus ---- (a) the sum of (i) all amounts deducted in arriving at such Consolidated Net Income in respect to Interest Expense for such period; federal, state and local income taxes for such period; depreciation and amortization and other noncash nonoperating charges for such period; and to the extent not included in the above, miscellaneous expenses from nonoperating transactions which do not relate to any extraordinary items for such period and (ii) extraordinary losses for such period, minus (b) the sum of (i) all amounts included in arriving at such Consolidated Net Income in respect of miscellaneous income from nonoperating transactions and which do not relate to any extraordinary items for such period; and (ii) all extraordinary profits for the period, determined on a consolidated basis for the Borrower and the Subsidiary Guarantors. "Interest Expense ----------------" shall mean, for any period, all cash and noncash interest on Indebtedness (including imputed interest on Capital Lease Obligations) of the Borrower and the Subsidiary Guarantors during such period; provided --------, however -------, that there shall be added to "Interest Expense" any fees or commissions or net losses amortized during such period under any Interest Rate Protection Agreement and any fees or commissions payable in connection with any letters of credit during such period and there shall be subtracted from "Interest Expense" any net gains under any Interest Rate Protection Agreement during such period. "Tangible Net Worth Ratio -------------------------" shall mean, at any date, the ratio of (i) the total liabilities of the Borrower and the Subsidiary Guarantors determined on a consolidated basis on such date, to (ii) Tangible Net Worth on such date. 7. Release of Cerner Belgium from Guaranty. The Bank hereby releases Cerner Belgium, Inc., a Delaware corporation formerly known as Cerner Healthwise, Inc., from all liabilities and other obligations Cerner Belgium, Inc. has under the Guaranty, dated April 1, 1999, from Cerner Healthwise, Inc. and certain other Subsidiary Guarantors in favor of the Bank (the "Subsidiary Guaranty"). The foregoing release shall not release or limit the liability of, or impose any duty on the Bank now or hereafter to release or limit the liability of, any other existing or future Subsidiary Guarantor under the Subsidiary Guaranty or any other Person now or hereafter liable in whole or in part for the payment or performance of any of the Obligations, whether pursuant to a Guarantee, any of the Credit Documents, or otherwise. 8. Conditions Precedent to Amendment. Notwithstanding anything in this Amendment to the contrary, unless and to the extent the Bank waives the benefits of this sentence by giving written notice thereof to the Borrower, the Bank shall have no duties under this Amendment, nor shall any waivers, releases or other concessions, if any, made or given by the Bank under this Amendment be effective, in each case until the Bank has received fully executed originals of each of the following, each in form and substance satisfactory to the Bank: (a) Amendment. This Amendment; (b) Assumption Agreement. An Assumption Agreement in favor of the Bank, dated on or about the date hereof, from Cerner Investment Corp., Cerner Campus Redevelopment Corporation and Health Network Ventures, Inc. whereby such Persons agree to become Subsidiary Guarantors and be bound by the Subsidiary Guaranty, together with the related Secretary's Certificates signed by each such Person in favor of the Bank; and (c) Other. Such other documents as the Bank may reasonably request in connection with the transactions contemplated hereby. 9. Firstar. Firstar Bank Midwest, N.A. is the successor to Mercantile Bank. Accordingly, unless the context clearly requires otherwise, all references in the Credit Agreement and the other Credit Documents to Mercantile Bank (whether in its capacity as Agent, the Issuing Bank or as a Bank) are amended to refer instead to "Firstar Bank Midwest, N.A., and its successors and assigns". 10. Representations and Warranties. The Borrower represents and warrants to the Agent. the Bank and the Issuing Bank as follows: (a) it is a duly organized and validly existing corporation and has full corporate power and authority to enter into this Amendment and any documents or transactions contemplated hereby and to pay and perform its obligations in respect of each of the foregoing; (b) the execution, delivery and performance by the Borrower of this Amendment and any documents contemplated hereby or any transactions contemplated hereby do not violate or conflict with, or require any consent under, (i) the Borrower's certificate of incorporation, by-laws, or any other agreement or document relating to the Borrower's existence or authority to act, (ii) any agreement or instrument to which the Borrower is a party or by which the Borrower or any of its properties is bound, (iii) any court order, judicial proceeding or any administrative or arbitral order or decree, or (iv) any applicable law, rule or regulation; and (c) no authorization, approval or consent of or by, and no notice to or filing or registration with, any governmental authority or any other Person is necessary for the Borrower to enter into this Amendment or any document contemplated hereby or any transaction contemplated hereby or to perform its obligations with respect to each of the foregoing. 11. Reaffirmation of Credit Documents. The Borrower reaffirms its obligations under the Credit Agreement and the other Credit Documents to which it is a party or by which it is bound, and represents, warrants and covenants to the Agent, the Issuing Bank and the Bank, as a material inducement to the Agent, the Issuing Bank and the Bank to enter into this Amendment and the transactions contemplated hereby, that: (a) the Borrower has no (and, in any event, hereby waives any) defense, claim or right of setoff in respect of the Credit Agreement, any of the other Credit Documents or the actions or inactions of the Agent, the Issuing Bank or the Bank; and (b) all representations and warranties made by the Borrower in the Credit Agreement and the other Credit Documents are true and complete on the date hereof as if made on the date hereof. 12. No Other Amendments. Except as amended hereby, the Credit Agreement and the other Credit Documents shall remain in full force and effect and be binding on the Borrower in accordance with their respective terms. 13. Counterparts; Fax Signatures. This Amendment and any document contemplated hereby may be executed in one or more counterparts and by different parties thereto, all of which counterparts, when taken together, shall constitute but one agreement. This Amendment and any document contemplated hereby may be executed and delivered by facsimile or other electronic transmission, and any such execution or delivery shall be fully effective as if executed and delivered in person. 14. Legal Fees. The Borrower shall pay all legal fees and expenses incurred by the Agent in connection with the preparation and closing of this Amendment and any other documents referred to herein and the consummation of any transactions referred to herein, such legal fees not to exceed $2,000. 15. Mo.Rev.Stat. ' 432.045 Required Notice. The following statement is given pursuant to Mo.Rev.Stat. ' 432.045: "ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT INCLUDING PROMISES TO EXTEND OR RENEW SUCH DEBT ARE NOT ENFORCEABLE. TO PROTECT YOU (BORROWER(S)) AND US (CREDITOR) FROM MISUNDERSTANDING OR DISAPPOINTMENT, ANY AGREEMENTS WE REACH COVERING SUCH MATTERS ARE CONTAINED IN THIS WRITING, WHICH IS THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN US, EXCEPT AS WE MAY LATER AGREE IN WRITING TO MODIFY IT." All other Credit Documents are incorporated into this Amendment; provided, however, that, to the extent of any direct conflict between the terms and conditions of the other Credit Documents and this Amendment, the terms and conditions of this Amendment shall prevail and govern. 16. Governing Law. This Amendment shall be governed by the laws of the State of Missouri without regard to any choice of law rule thereof giving effect to the laws of any other jurisdiction. IN WITNESS WHEREOF, the parties have entered into this Amendment as of the date first above written. CERNER CORPORATION, a Delaware corporation By:_______________________________________ Name: Title: FIRSTAR BANK MIDWEST, N.A., successor to Mercantile Bank,as Agent, as Issuing Bank and as a Bank By:_______________________________________ Name: Title: Consent of Guarantors Reference is made to the Guaranty dated as of April 1, 1999, in favor of the Agent, on behalf of the Banks and the Issuing Bank, to which the undersigned are parties, either as an original signatory thereto or pursuant to any subsequent assumption, joinder or other agreements (each a "Guarantor ---------"), and any other guaranty executed by any Guarantor in favor of the Agent or any Bank or the Issuing Bank relating to any indebtedness of the Borrower to any Bank or the Issuing Bank (collectively, with respect to each Guarantor, such Guarantor's "Guaranty --------"). Capitalized terms used and not defined in this Consent of Guarantors have the meanings given to them in the Credit Agreement referred to in the above Amendment. To induce the Agent, the Issuing Bank and the Bank to enter into the above Amendment, each Guarantor: (a) consents to the Borrower, the Agent, the Issuing Bank and the Bank entering into the above Amendment; (b) agrees that the execution, delivery and performance of the above Amendment and any documents or transactions contemplated thereby shall not discharge, limit or otherwise impair the obligations of such Guarantor under such Guarantor's Guaranty; (c) agrees that such Guarantor's Guaranty is and remains in full force and effect and is enforceable against such Guarantor in accordance with its terms; (d) waives any defense, claim or right of setoff such Guarantor may have in respect of such Guarantor's Guaranty, the Credit Agreement, the other Credit Documents or the actions or inactions of the Agent, the Issuing Bank or the Bank; and (e) agrees that neither the Agent, the Issuing Bank or the Bank has any duty to give such Guarantor notice of or obtain such Guarantor's consent to the transactions described in the above Amendment, and that the Agent, the Issuing Bank and the Bank's giving of notice to such Guarantor and obtainment of such Guarantor's consent in this instance shall not impose any similar or other duty upon the Agent, the Issuing Bank or the Bank in any future matter or transaction. This Consent of Guarantors may be validly executed and delivered by fax or other electronic transmission and in multiple counterparts and by different parties thereto. CERNER INTERNATIONAL, INC., CERNER MULTUM, INC., a Delaware corporation a Delaware corporation, formerly known as Multum Information Services, Inc. By:________________________ By:_______________________ Name: Name: Title: Title: CERNER PROPERTIES, INC., CERNER HEALTH FACTS, INC., a Delaware corporation a Delaware corporation By:________________________ By:_______________________ Name: Name: Title: Title: CERNER HEALTH CONNECTIONS, CERNER PERFORMANCE INC. LOGISTICS, INC., a Delaware corporation a Delaware corporation By:________________________ By:_______________________ Name: Name: Title: Title: CERNER INVESTMENT CORP., CERNER CAMPUS A Nevada corporation REDEVELOPMENT CORPORATION, a Missouri corporation By:________________________ By:_______________________ Name: Name: Title: Title: HEALTH NETWORK VENTURES, INC., a Delaware corporation By:________________________ Name: Title: EX-11 3 0003.txt Exhibit 11 CERNER CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE
Three Months Ended Six Months Ended July 1, July 3, July 1, July 3, 2000 1999 2000 1999 ---------------------------- ---------------------------- Net Earnings (Loss) before Extraordinary Item: $ (2,613,000) $ 260,000 $ (221,000) $ 3,077,000 ============ =========== ============ =========== Weighted average number of common and common stock equivalent shares: Basic weighted average number of outstanding common shares 33,830,000 33,615,000 33,804,000 33,587,000 ------------ ----------- ------------ ----------- Basic earnings (loss) per common shares: $ (0.08) $ 0.01 $ (0.01) $ 0.09 ------------ ----------- ------------ ----------- 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) - 296,000 - 331,000 ------------ ----------- ----------- ----------- 33,830,000 33,911,000 33,804,000 33,918,000 ------------ ----------- ----------- ----------- Diluted earnings (loss)per common and common stock equivalent shares: $ (0.08) $ 0.01 $ (0.01) $ 0.09 ------------ ----------- ------------ ----------- Net Earnings (Loss) after Extraordinary Item: $ (2,613,000) $ (1,135,000) $ (221,000) $ 1,682,000 ============ ============ ============ =========== Weighted average number of common and common stock equivalent shares: Basic weighted average number of Outstanding common shares 33,830,000 33,615,000 33,804,000 33,587,000 ------------ ----------- ------------ ----------- Basic earnings (loss) per common shares: $ (0.08) $ (0.03) $ (0.01) $ 0.05 ------------ ----------- ------------ ----------- 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) - 296,000 - 331,000 ------------ ----------- ----------- ----------- 33,830,000 33,911,000 33,804,000 33,918,000 ------------ ----------- ------------ ----------- Diluted earnings (loss) per common and common stock equivalent shares: $ (0.08) $ (0.03) $ (0.01) $ 0.05 ============ =========== ============ ===========
EX-27 4 0004.txt
5 6-MOS DEC-30-2000 JUL-01-2000 89,288,000 0 151,624,000 4,771,000 830,000 242,204,000 145,986,000 68,906,000 660,069,000 87,497,000 0 0 0 351,000 0 660,069,000 180,609,000 180,609,000 37,861,000 136,933,000 0 0 1,785,000 4,030,000 4,251,000 (221,000) 0 0 0 (221,000) (.01) (.01)
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