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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission File Number 0-15386

CERNER CORPORATION

     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 35,476,097 shares of Common Stock, $.01 par value, outstanding at June 29, 2002.

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CERNER CORPORATION AND SUBSIDIARIES

INDEX

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Part I. Financial Information

Item 1. Financial Statements

CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

See notes to condensed consolidated financial statements.

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CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)

See notes to condensed consolidated financial statements.

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CERNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

See notes to condensed consolidated financial statements.

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CERNER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED 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 accounting principles generally accepted in the United States of America 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 and six-month periods are not necessarily indicative of the operating results for the entire year. Certain prior year amounts have been reclassified to conform with current year presentation.

Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” establishes requirements for reporting and display of comprehensive income and its components. For the six months ended June 29, 2002 and June 30, 2001, total Comprehensive Income, which includes net earnings, foreign currency translation adjustments and unrealized gain and losses on available-for-sale equity security adjustments, amounted to $13,004,000 and $7,140,000, respectively.

The Company incurs out-of-pocket expenses in connection with its client service activities, which are reimbursed by its clients. The amounts of “out-of-pocket” expenses and equal amounts of related reimbursements were $6,251,000 and $4,634,000 for the three months and $12,393,000 and $8,380,000 for the six months ended June 29, 2002 and June 30, 2001, respectively. These amounts have been reclassified from sales and client service expense to revenue and cost of revenues. The Company then reclassified these amounts from revenue and cost of revenues to other income and expense.

(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:

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Options to purchase 546,000 and 720,000 shares of common stock at per share prices ranging from $51.70 to $574.82 and $42.01 to $84.07 were outstanding at the three-months ended June 29, 2002 and June 30, 2001, respectively, 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 during the period. Additionally, options to purchase 1,683,000 shares of common stock at per share prices ranging from $5.09 to $41.00 were outstanding at the three-months ended June 30, 2001, but were not included in the computation of diluted earnings per share because there was a net loss for the period.

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Options to purchase 632,000 and 587,000 shares of common stock at per share prices ranging from $49.63 to $574.82 and $45.19 to $84.07 were outstanding at the six-months ended June 29, 2002 and June 30, 2001, respectively, 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 during the period. Additionally, options to purchase 1,831,000 share of common stock at per share prices ranging from $1.34 to $43.62 were outstanding at the six-months ended June 30, 2001 but were not included in the computation of diluted earnings per share because there was a net loss for the period.

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(3) Business Acquisitions

On April 30, 2002, the Company purchased Zynx Health, Incorporated (Zynx) for $15 million in cash and $8.5 million in software credits. The Company will not recognize revenues related to the utilization of these software credits as the Company considered the exchange of software credits for Zynx content as an exchange of similar productive assets, which will be accounted for at book value. In the event the software credits are not utilized over the next five years, the Company will make additional cash payments of up to $7.5 million depending on the level of the credits used. Those additional payments, if made, will result in additional goodwill. Zynx is widely recognized for advancing evidence-based medicine through solutions and services that deliver the latest scientific knowledge and best practices. Cerner intends to integrate the evidence-based content from Zynx into the Cerner Millennium ™ technology platform. 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 $10.7 million and $3.3 million in intangible assets that will be amortized over five years. The Company is in the process of obtaining additional information regarding the valuation of certain working capital components and intangible assets in making the final determination in the allocation of the purchase price to the net assets acquired. Any adjustment to the valuation of these working capital components and intangible assets would result in a corresponding adjustment to the amount assigned to goodwill.

On, July 3, 2001, the Company purchased certain assets and certain liabilities of APACHE Medical Systems, Inc. (APACHE) for approximately $3.5 million. APACHE when combined with Cerner will integrate knowledge directly into care decisions, which promote patient safety and operational efficiencies. We believe the market will recognize this value proposition. 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 $4,766,000.

(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)

(5)  Investments

In the second quarter of 2002, the Company sold its remaining 14,820,527 shares of WebMD for $90,119,000. Accordingly, the Company recorded a non-recurring investment gain of $2,736,000, net of $1,572,000 in tax, as a result of the sale.

At June 29, 2002 the Company held 1,048,783 warrants of WebMD with an exercise price of $3.08 and a cost basis and carrying value of $4,146,000. The warrants are carried at cost, as they do not have a fair value that is currently available on a securities exchange. The warrants expire on January 26, 2003.

On June 18, 2001 the Company reached an agreement with WebMD Corporation regarding certain performance metrics related to specified levels of physician usage arising out of the original license transaction between the Company and WebMD. Under the agreement, the Company received 2,000,000 shares of WebMD stock, valued at $11,580,000, in exchange for $432,000 in cash and the cancellation of various obligations due to the Company by WebMD. As a result of this agreement, the Company recognized a non-recurring gain of $4,836,000, net of $2,744,000 in tax. The Company’s policy is to review declines in fair value of its marketable equity securities for declines that may be other than

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temporary. As a result of this policy, during the second quarter of 2001, the Company recorded a write-down of its investment in WebMD from $15.00 to $5.79. Accordingly, the Company recognized a charge to earnings of $81,419,000, net of $46,197,000 in tax.

(6)  Goodwill and Other Intangible Assets

Effective December 30, 2001, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” As a result, goodwill and intangible assets with indefinite lives are no longer amortized but are evaluated for impairment annually or whenever there is an impairment indicator. All goodwill is assigned to a reporting unit, where it is subject to an impairment test based on fair value. The Company completed its review of the Company’s goodwill values in the second quarter of 2002. As a result of this review, the Company determined that goodwill arising from the acquisition of Mitch Cooper and Associates was impaired due to declining demand and margins in this business. Mitch Cooper and Associates was a supply chain re-engineering consulting practice. The impairment charge to reflect this goodwill at fair value was $786,000, net of tax and is reflected as a cumulative effect of a change in accounting principle as of the beginning of 2002. The Company used a discounted cash flow analysis to determine the fair value of the reporting units.

The Company’s intangible assets, other than goodwill, are all subject to amortization and are summarized as follows:

(In thousands)

Aggregate amortization expense for the three months and six months ended June 29, 2002 was $914,000 and $1,825,000, respectively. Estimated aggregate amortization expense for each of the next five years is as follows:

The changes in the carrying amount of goodwill for the six months ended June 29, 2002 are as follows:

The following is a reconciliation of reported net earnings (loss) to adjusted net earnings (loss) to exclude the effect of amortization expense in the three-month and six-month periods of 2001 for goodwill that is no longer being amortized.

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(In thousands, except per share data)

(7)  Stock Options

The Company accounts for associate stock options in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. On December 31, 1995, the Company adopted Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (FAS 123), which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, FAS 123 allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net earnings and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in FAS 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of FAS 123.

Since the Company applies APB Opinion No. 25 in accounting for its plans, no compensation cost has been recognized for its stock options issued to employees. Had the Company recorded compensation expense based on the fair value at the grant date for its stock options under FAS 123, the Company’s net earnings and earnings per share on a diluted basis would have been reduced by approximately $4,755,000 or $.13 per share for the second quarter of 2002 and $2,080,000 or $.06 per share in the second quarter 2001, and approximately $8,531,000 or $.23 per share in the first six months of 2002 and $4,221,000 or $.12 in the first six months of 2001.

Pro forma net earnings reflect only options granted since January 1, 1995. Therefore, the full impact of calculating compensation expense for stock options under FAS 123 is not reflected in the pro forma net earnings amounts presented above, because compensation cost is reflected over the options’ vesting period of ten years for these options. Compensation expense for options granted prior to January 1, 1995 is not considered.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Three Months Ended June 29, 2002 Compared to Three Months Ended June 30, 2001

The Company’s revenues increased to $180,573,000 for the three-month period ended June 29, 2002 from $129,891,000 for the three-month period ended June 30, 2001. Net earnings, before non-recurring items, increased 57% to $11,956,000 in the 2002 period from $7,600,000 for the 2001 period. After non-recurring items, the company had net earnings of $14,692,000 and a net loss of ($68,983,000) for the three months ended June 29, 2002 and June 30, 2001, respectively. For the three months ended June 29, 2002, the Company recorded a non-recurring gain of $4,308,000 from the sale of 14,820,527 shares of WebMD common stock. For the three months ended June 30, 2001, the Company recorded a non-recurring charge of $127,616,000 from the other-than-temporary write-down of the WebMD shares and a non-recurring gain of $7,580,000 from the software license settlement with WebMD.

System sales revenues increased 33% to $75,291,000 for the three-month period ended June 29, 2002 from $56,489,000 for the corresponding period in 2001. Included in system sales are revenues primarily from the sale of software, hardware, sublicensed software and for the services required to install them. The increase in system sales is due to an increase in new contract bookings in the quarter ended June 29, 2002 compared to the prior year quarter.

Support, maintenance and service revenues increased 43% to $105,282,000 during the second quarter of 2002 from $73,402,000 during the same period in 2001. Support and maintenance revenues were $42,109,000 and $34,588,000 for the second quarter of 2002 and 2001, respectively. Services revenues were $63,173,000 and $38,814,000 for the second quarter of 2002 and 2001, respectively. Included in support, maintenance and service revenues are support and maintenance of software and hardware, and professional services excluding installation. This increase was due primarily to the increase in professional services, resulting from an increase in services related to and services provided into the Company’s installed and converted client base.

At June 29, 2002, the Company had $656,345,000 in contract backlog and $261,267,000 in support and maintenance backlog, compared to $506,171,000 in contract backlog and $204,433,000 in support and maintenance backlog at June 30, 2001.

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 and commissions. It also includes the cost of hardware maintenance and sublicensed software support subcontracted to manufacturers. The cost of revenue was 22% of total revenues in the second quarter of 2002 and 23% for the second quarter of 2001. Such costs, as a percent of revenues, typically have varied as the mix of revenue (software, hardware, maintenance, and support) components carrying different margin rates changes from period to period.

Sales and client service expenses include salaries of client service personnel, communications expenses and unreimbursed travel expenses. Also included are sales and marketing salaries, trade show costs and advertising costs. These expenses as a percent of total revenues were 43% and 41% in the second quarter of 2002 and 2001, respectively. The increase in total sales and client service expenses to $76,837,000 in 2002 from $53,202,000 in 2001 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 2002 and 2001 were $35,938,000 and $27,493,000, respectively. These amounts exclude amortization. Capitalized software costs were $11,799,000 and $9,173,000 for the second quarter of 2002 and 2001, respectively. The increase in aggregate expenditures for software development in 2002 is due to development of Cerner Millennium ™ products and development of community care products.

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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% in the second quarter of 2002 and 2001. Total general and administrative expenses for the second quarter of 2002 and 2001 were $12,300,000 and $8,982,000, respectively. The increase is due to the growth of the Company’s core business and as a result of acquisitions.

Net interest expense was $1,373,000 in the second quarter of 2002 compared to $1,023,000 in the second quarter of 2001. This increase is primarily due to an increase in borrowings and a decrease in interest earned on invested cash.

In the second quarter of 2002, the Company sold 14,820,527 shares of WebMD for $90,119,000. Accordingly, the Company recorded a non-recurring investment gain of $2,736,000, net of $1,572,000 in tax, as a result of the sale.

On June 18, 2001 the Company reached an agreement with WebMD Corporation regarding certain performance metrics related to specified levels of physician usage arising out of the original license transaction between the Company and WebMD. Under the agreement, the Company received 2,000,000 shares of WebMD stock, valued at $11,580,000, in exchange for $432,000 in cash and the cancellation of various obligations due to the Company by WebMD. As a result of this agreement, the Company recognized a non-recurring gain of $4,836,000, net of $2,744,000 in tax. The Company’s policy is to review declines in fair value of its marketable equity securities for declines that may be other than temporary. As a result of this policy, during the second quarter of 2001, the Company recorded a write-down of its investment in WebMD from $15.00 to $5.79. Accordingly, the Company recognized a charge to earnings of $81,419,000, net of $46,197,000 in tax.

After adjusting for non-recurring items, the Company’s effective tax rates were 38.7% and 39.5% for the second quarter of 2002 and 2001, respectively.

Six Months Ended June 29, 2002 Compared to Six Months Ended June 30, 2001

The Company’s revenues increased to $355,853,000 for the six-month period ended June 29, 2002 from $250,790,000 for the six-month period ended June 30, 2001. Net earnings, before non-recurring items, increased 61% to $22,360,000 in the 2002 period from $13,928,000 for the 2001 period. After non-recurring items, the company had net earnings of $24,310,000 and a net loss of ($62,655,000) for the six months ended June 29, 2002 and June 30, 2001, respectively. For the six months ended June 29, 2002, the Company recorded a non-recurring gain of $4,308,000 from the sale of 14,820,527 shares of WebMD common stock. The Company also recorded non-recurring charge of $786,000, due to the cumulative effect of a change in accounting for goodwill. For the six months ended June 30, 2001, the Company recorded a non-recurring charge of $127,616,000 from the other-than-temporary write-down of the WebMD shares and a non-recurring gain of $7,580,000 from the gain on the software license settlement with WebMD.

System sales revenues increased 41% to $154,535,000 for the six-month period ended June 29, 2002 from $109,878,000 for the corresponding period in 2001. Included in system sales are revenues primarily from the sale of software, hardware, sublicensed software and for the services required to install them. The increase in system sales is due to an increase in new contract bookings in the first six months ended June 29, 2002 compared to the prior year quarter.

Support, maintenance and service revenues increased 43% to $201,318,000 during the first six months of 2002 from $140,912,000 during the same period in 2001. Support and maintenance revenues were $84,113,000 and $68,812,000 for the first six months of 2002 and 2001, respectively. Services revenues were $117,205,000 and $72,100,000 for the first six months of 2002 and 2001, respectively. Included in support, maintenance and service revenues are support and maintenance of software and hardware, and professional services excluding installation. This increase was due primarily to the increase in professional services, resulting from an increase in services related to and services provided into the Company’s installed and converted client base.

At June 29, 2002, the Company had $656,345,000 in contract backlog and $261,267,000 in support and maintenance backlog, compared to $506,171,000 in contract backlog and $204,433,000 in support and maintenance backlog at June 30, 2001.

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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 and commissions. It also includes the cost of hardware maintenance and sublicensed software support subcontracted to manufacturers. The cost of revenue was 22% of total revenues in the first six months of 2002 and 2001, respectively. Such costs, as a percent of revenues, typically have varied as the mix of revenue (software, hardware, maintenance, and support) components carrying different margin rates changes from period to period.

Sales and client service expenses include salaries of client service personnel, communications expenses and unreimbursed travel expenses. Also included are sales and marketing salaries, trade show costs and advertising costs. These expenses as a percent of total revenues were 43% and 41% in the first six months of 2002 and 2001, respectively. The increase in total sales and client service expenses to $151,255,000 in 2002 from $103,357,000 in 2001 was attributable to the cost of a larger field sales and services organization and marketing of new products.