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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 30, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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
North Kansas City, Missouri 64117
(816) 221-1024
(Address of principal executive offices, including zip code;
Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Preferred Stock Purchase Rights
(Title of Class)
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), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
At March 15, 2001, there were 34,813,821 shares of Common
Stock outstanding, of which 7,559,789 shares were owned by
affiliates. The aggregate market value of the outstanding Common
Stock of the Registrant held by non-affiliates, based on the
average of bid and asked prices of such stock on March 15, 2001,
was $1,089,309,592.
Documents incorporated by reference: portions of the
Registrant's Proxy Statement for the 2001 Annual Meeting of
Stockholders are incorporated by reference in Part III hereof.
PART I
Item 1. Business
Overview
- - - - --------
Cerner Corporation ("Cerner" or the "Company") is a Delaware
corporation incorporated in 1980. The Company's principal
offices are located at 2800 Rockcreek Parkway, North Kansas
City, Missouri 64117, and its telephone number is (816) 221-1024.
Cerner designs, develops, markets, installs, hosts and supports
software information technology and content solutions for
healthcare organizations and consumers. Cerner implements these
solutions as individual, combined or enterprise-wide systems.
Cerner's integrated suite of solutions enable healthcare
providers to improve operating effectiveness, reduce costs,
reduce medical errors, reduce variances and improve the quality
of care as measured by clinical outcomes. Cerner solutions are
designed to provide the appropriate health information and
knowledge to caregivers, clinicians and consumers and the
appropriate management information to healthcare administration
on a real-time basis. Cerner solutions allow secure access to
data by clinical, administrative and financial users in
organized settings of care and by consumers from their home.
These solutions can be implemented as a part of an enterprise-
wide solution or individually, leveraging the client's existing
investment in information technology. Cerner solutions are
available as integrated applications managed by its clients or as
a service option under the hosted solutions model. Hosted
solutions are applications that are provided to clients from
Cerner's solutions center in Lee's Summit, Missouri.
Cerner solutions are designed and developed using the Health
Network Architecture (Registered)("HNA"), a single information
architecture. HNA (Registered) is a unified technology
infrastructure for combining clinical and management information
applications. HNA allows each participating healthcare
organization to access an individual's clinical record at the
point of care, to organize it for the specific needs of the
physician, nurse, laboratory technician or other care provider
on a real-time basis, and to use the information in
management decisions to improve theefficiency and productivity
of the entire enterprise.
Cerner has developed and is licensing and installing its newest
generation of HNA solutions known as "Millennium (Trademark)".
See "Cerner's Technology - Health Network Architecture (HNA)
and HNA Millennium" for a discussion of HNA Millennium
(Registered).
Healthcare Industry
- - - - -------------------
The healthcare delivery industry in the United States is highly
fragmented, very complex and remarkably inefficient. While
science and medical technology continue to make significant
breakthrough progress in dealing with human disease and injury,
the management and clinical processes of these complex delivery
organizations have made little progress in the past twenty years.
Even today, the major clinical workflow depends on manual, paper-
based medical record systems augmented by spotty automation. This
has resulted in an industry which is economically inefficient and
produces significant variances in medical outcomes. In November
1999, the Institute of Medicine released a report called "To Err
is Human" indicating that medical error is one of the top ten
causes of death in the United States, with up to 96,000 lives
lost each year. The industry must address these issues by
identifying ways to enhance efficiencies and improve the quality
of care.
The healthcare industry has also been buffeted by significant
external forces during the 1990's. Managed Care Organizations
defined themselves as an intermediary in the flow of funds and
exerted pressure on healthcare spending. In 1997, Congress
enacted the Balanced Budget Act which reduced Medicare
reimbursements to healthcare providers by over $250 billion
dollars over a five-year period. The full impact of this
legislation hit in 1999, significantly reducing the operating
margins of hospitals and physician groups. The healthcare
industry has also seen the impact of legislative and employer-led
initiatives, such
as the Leapfrog Group, an organization of large businesses which
recommends that its members not send any of their employees to
hospitals that do not use a computerized, physician order-entry
system. These pressures have forced healthcare providers to
focus on improving their systems and processes.
In order to be competitive in this dynamic marketplace,
healthcare enterprises will need to deploy information technology
solutions that internally automate the paper-based medical record
systems and externally create smart connections between the major
participants in healthcare: the consumer, the physician, the
hospital and the managed care organization. The emergence of near
ubiquitous Internet connectivity will facilitate consumer
participation in the healthcare management process.
The complexity of healthcare's information requirements will
continue to increase with provider consolidations and the
challenging cost containment pressures created by the Balanced
Budget Act. The Health Insurance Portability and Accountability
Act of 1996 (HIPAA) adds an additional element of uncertainty for
healthcare organizations around security and patient
confidentiality. The final health data privacy regulations were
published in December 2000, and require compliance by April 2003.
While many of the rules under HIPAA have not been finalized as
yet, the provisions are focused on a centralized and systematic
method of access control that Cerner thinks is best met by a
single integrated architecture.
Cerner is responding to the changing and increasing needs of the
healthcare industry for better information systems by developing
HNA Millennium, its latest generation of solutions. See "Cerner's
Technology - Health Network Architecture (HNA) and HNA
Millennium" for a discussion of HNA Millennium.
The Cerner Vision
- - - - -----------------
Cerner's business and products are organized around a central
vision of how healthcare can and should operate. This vision is
founded on four steps:
* Automate the core processes of healthcare: eliminate the
paper medical record
* Connect the person: create the personal health system
* Structure the knowledge: position every clinical decision as
a learning event
* Close the loop: implement evidence-based medicine
These steps describe Cerner's business today and plans for
Cerner's business both in 2001 and beyond.
Automate the Process
- - - - --------------------
Cerner is dedicated to the elimination of the paper medical
record.
Medical care cannot make significant steps forward in quality and
consistency without leveraging the power and advantages
of information technology. As long as medical information is
locked and isolated in a paper record, a physician is cut off
from rapid, contextual reference to the vast knowledge available
in today's medicine. The elimination of the paper record will
lead to improved quality and safety of care, dramatic
productivity increases and enhanced documentation.
The electronic recording of medical information will lead to
improvements in the quality of care, the safety of patients and
reduced costs. By allowing care providers to access a patient's
single, longitudinal medical record in real-time, clinicians can
view demographic information, medical history, lab results and
current conditions and treatment plans along with notes from
attending and consulting physicians. Guidelines and pathways
sensitive to the person's medical condition and problems will
assist the physician in making the "appropriate" decisions on how
to diagnose and treat medical conditions. This comprehensive
view of a patient's health status allows for better medical
decision-making at the point of
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care. Online
documentation and physician order entry helps to prevent the
errors in and misinterpretation of documentation and orders,
reducing the costs of duplication and medical error. This
automation also will reduce the time for care delivery and lower
costs.
Once all the steps of care are captured electronically, the
enhanced documentation will lead to more efficient healthcare,
both in terms of treatment and finance, and will set the stage
for data collection that will be the backbone of structuring the
knowledge of healthcare. Electronic medical records reduce some
of the duplication caused by poor record-keeping. Wasteful
duplication is eliminated, redundant tests are not ordered.
Also, documentation required for health plan reimbursement is
maintained efficiently, reducing claim denials. Finally,
electronic record-keeping lays the groundwork of data collection
necessary to make dramatic changes in care delivery.
Connect the Person
- - - - ------------------
Cerner is dedicated to helping its clients build a personal
health system; creating a "new medium" between the person and
physician; empowering the individual; and creating a new center
to healthcare.
The healthcare system is undergoing fundamental change as the
person moves to the center of care delivery. Increasing access
to expert knowledge over the Internet and a cultural shift toward
more self-direction are combining to move the center of power and
control to the person.
With the electronic medical record, persons can access their
medical records securely anytime and anywhere
they have Internet access. When combined with personalized
health content, the consumer gains a better sense of the care
they are receiving and the options available to them. They will
have better communications with their providers, and can take
more ownership of their own health and work to manage it to their
satisfaction.
Structure the Knowledge
- - - - -----------------------
Cerner is dedicated to building systems that treat every clinical
decision as a learning event by structuring, storing and studying
the content of medicine.
Medicine must have a structure that allows physicians to record
treatment and outcomes in such a way as to permit comparability.
The basis of this structure is a common nomenclature that can
exactly capture the meaning of input from physicians and
clinicians. By storing this data and then providing a framework
for comparability, physicians can make sense and glean value from
the information that is gathered both through automated processes
and connected persons. Without a knowledge framework, data
collected will provide no real benefit. By building this
structure, every encounter with a patient, every piece of new
knowledge and information, can be catalogued, measured and
analyzed to improve care. This knowledge framework will deliver
better standards of care and an improved understanding of
medicine.
Close the Loop
- - - - --------------
Cerner is dedicated to building systems that implement evidence-
based medicine, dramatically reducing the current average time
from the discovery of an improved method to the change in
"standard of care" medical practice.
Advances in technology offer great opportunities to healthcare
and must be used to practical effect. The knowledge gained must
be used to deliver better care faster. The information learned
must be applied. Today, patients may wait as long as ten years
before new knowledge reaches widespread use. With systems
designed to embed evidence-based medicine inside the clinicians'
workflow using pathways, guidelines and alerts, physicians can
ensure that every medical decision is optimal, based on the best
and most recent knowledge available. The results will be better
outcomes and reduced variance.
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The Cerner Strategy
- - - - -------------------
Key elements of the Company's business strategy include the
following:
Penetrate the integrated healthcare provider market.
- - - - ---------------------------------------------------- Large
health systems represent a significant component of the
healthcare information technology market. These organizations
are focused on improving safety and reducing costs through
operating efficiencies. Cerner's enterprise-wide process-based,
clinical and management systems provide the technology to enable
an integrated system to manage healthcare across the system,
significantly reduce costs, improve the efficiency of healthcare
delivery and maintain and improve the quality of healthcare.
Expand market share in individual domains and further penetrate
- - - - -----------------------------------------------------------------
existing client base.
- - - - --------------------- Cerner expects continued
growth in clinical domain systems for specific markets such as
nursing, physician office, laboratory, pharmacy, radiology,
surgery, emergency medicine and cardiology, as institutional
providers look to restructure and reengineer these high cost
centers. The Company anticipates growth in sales of new products,
such as its new patient accounting product introduced in 2000.
This product addresses a large new market previously not covered
by the existing product suite. The Company also intends to
market aggressively Cerner clinical and management information
systems and services to its existing client base.
Remain committed to a common architecture.
- - - - ------------------------------------------ Because Cerner
believes that the constituents in health management need to work
together to benefit defined populations in a community, the
Company has made a commitment to a single unified architecture as
the platform for "fully integrated" health information and
management systems. This platform enables Cerner's process-based
HNA systems to be scaleable on a linear basis, using either
Cerner compatible modules for process-oriented applications or
competitive systems interfaced using open system protocols.
Expand products and services.
- - - - ---------------------------- Using HNA Millennium,
Cerner intends to continue expanding the range of products and
services offered to providers. These new products and services
will complement the systems currently offered, address the
emerging information needs of clients or employ technological
advances. Cerner believes that major opportunities exist as
providers and managed care organizations reach into new markets
and offer more alternative services to remain competitive. The
Company believes these organizations will find value in having
personal health records and trusted health information accessible
to the individual in the home. In addition, Cerner recognizes the
value of the aggregate database being developed by its broad
client base as a potential means to enable comparative or
normative procedure evaluations as a powerful new tool in the
healthcare industry. The substantial project management, process
redesign, technology integration and training involved in
healthcare systems taking advantage of the opportunities provided
by clinical and management information technology represent a
significant market for the Company's consulting services.
Offer products on a hosted solution basis.
- - - - ----------------------------------------- The Company
now offers its HNA Millennium applications through its new hosted
solutions delivery option. This option offers information
technology services to clients that include software, computer
hardware, implementation, technical support, wide-area network
(WAN) services and automatic software upgrades. Unlike
traditional software implementations, software delivered through
the hosted solutions delivery option is not installed at the
user's location, but is delivered, operated and maintained in
Cerner's solutions center in a rapidly accelerated implementation
timeframe. Using Cerner hosted solutions, any size organization
can access the same robust clinical applications, architecture
and user-interface advantages that were previously only available
to larger institutions.
Cerner's Technology - Health Network Architecture (HNA) and HNA
- - - - ---------------------------------------------------------------
Millennium
- - - - ----------
The cornerstone of Cerner's technology strategy is HNA, the
single architecture around which each of Cerner's information
products is developed. This person-centric, single data model,
open and highly scaleable architecture allows Cerner to meet the
clinical, financial, management and business information
5
requirements of a healthcare delivery system across the continuum
of care. Cerner's newest version of its HNA computing platform
is Millennium, the core of which was developed between 1994 and
1999. Millennium uses n-tier client/server technology to
optimize distributed computing performance and scalability across
multiple client and server platforms. The HNA Millennium
architecture and applications were designed and developed to
accommodate healthcare specific requirements for mission critical
computing and secure access, whether the user is inside the
healthcare enterprise or at home via the Internet. HNA
Millennium's breadth of focus and functionality are well suited
for large-scale and enterprise application technologies for
healthcare organizations, including the ability to leverage the
Internet for ehealth-related self-service and business-to-
business functions.
The value of HNA Millennium to a client organization is the use
across a healthcare organization of a single system based on a
fully integrated common architecture and database. With its
single data model, HNA Millennium provides secure, real-time
access to all information across multiple applications, domains,
organizations and physical locations, including physician,
hospital, nursing, laboratory, pharmacy and consumers, to all of
those needing such access, wherever they are located. Given its
integrated and open design, HNA Millennium can also provide a
centralized repository of clinical and financial transactions to
help standardize access and messaging of disparate applications
across a health system.
The alternative to a single architectural approach is to use
disparate systems based on differing architectures and data
structures to automate the care processes across the continuum of
care. These disparate systems must be interfaced together and
rely on these interfaces to transmit, modify and arrange data
exchanged between them, which limits the data's usefulness across
multiple systems and inhibits real-time access. In addition,
many of these systems lack functional scalability and cannot
operate across multiple provider settings or locations within a
healthcare organization.
Two overarching capabilities are embedded into the HNA Millennium
architecture. First is the person-centric transactions and secure
messaging, which consider the breadth of requirements not only of
a patient, but also of healthy consumers. Second is healthcare
community dynamics, which take into account the flexibility
required by the constantly changing relationships between
healthcare organizations, physicians and consumers, and the need
to maintain complex security and end user preferences based on
the context and business attributes of the transaction in a
community setting.
CernerObjects
- - - - -------------
Cerner is extending HNA Millennium's reach and scope with the
goal of becoming the de facto standard for healthcare information
technology. A key element in that effort by Cerner is
CernerObjects. Cerner will use CernerObjects to extend HNA
Millennium to suppliers, supporting their development efforts and
increasing Millennium's market penetration. CernerObjects is a
collection of reusable programming elements from Cerner's HNA
Millennium architecture. These segments of code, or objects,
enable third-party developers to create front-end applications,
like Palm or Web browser solutions, that draw upon the data model
and proven functionality of HNA Millennium. With CernerObjects,
programmers can quickly and efficiently build applications that
integrate with Cerner's architecture, reusing existing objects
that achieve the tasks they are seeking to replicate. Third-
party programmers can avoid the time- and cost-intensive process
of writing new code to perform functions Cerner engineers have
already developed.
CernerObjects is the mechanism Cerner uses to extend its own
applications to the Internet. By licensing the objects library to
third parties, Cerner has an excellent opportunity to proliferate
the HNA Millennium architecture - as well as the brand, clinical
expertise and technical excellence upon which it was built.
Products
- - - - --------
Cerner's HNA Millennium platform of products is the only
healthcare information system on the market today capable of both
retrieving and disseminating clinical and financial information
across an entire health system. HNA Millennium includes seven
product families dedicated to meeting the automation needs of
virtually every segment of the care continuum.
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Cerner solutions can be acquired individually or as a fully
integrated health information system. Cerner also markets more
than 200 product options that complement Cerner's major
information systems. In addition, Cerner sells computers and
related hardware manufactured by third parties and consulting
services to its software licensees.
Cerner's product categories include:
* Enterprise Systems, which automate processes across and
throughout the health system enterprise;
* Financial and Operational Management Systems, which automate
business operations;
* Decision Support Systems and Knowledge Solutions, which
enhance clinical and business processes with information and
actions;
* Point of Care Clinical Systems, which automate the care
processes within specific domains of health systems;
* Systems for Clinical Centers, which automate the clinical
processes within specific departments;
* Personal Health Systems for individuals to manage their own
health and connect to the health system; and
* Interface Technologies for connecting other technologies and
systems to HNA Millennium.
Enterprise-wide Solutions
-------------------------
Cerner's CapStone (Registered) Enterprise Access Management
System creates the enterprise-wide master person identifier
(EMPI) and automates the identification, eligibility,
registration and scheduling processe across hospitals, clinics,
physician practices and other care delivery organizations,
integrating the health system and incorporating existing systems.
PowerChart (Registered) Electronic Medical Record System is the
enterprise clinician's desktop solution for viewing, ordering,
documenting and managing care delivery.
The Open Clinical Foundation (Registered) manages clinical
information, providing the foundation for the electronic medical
record.
The Open Management Foundation (Trademark) stores management
information of enterprise financial, operational and process
results, creating the foundation for the enterprise-wide
management and executive information system.
The Open Agreement Foundation (Trademark) manages health plan
contracts and agreements, and member information.
The Open Research Foundation (Trademark) provides open repository
storage of clinical and medical information to support medical
research.
Financial and Operational
-------------------------
The ProFit (Trademark) Enterprise Billing and Accounts Receivable
System is Cerner's system for revenue accounting, billing and
accounts receivable for the entire health system as well as each
individual domain or organization. ProFit integrates clinical
and financial data and creates a single bill.
PowerVision (Registered) Enterprise Decision Support links
comprehensive clinical and financial data and makes it available
at the point of care - allowing care to be better managed as it
occurs.
7
The ProFile (Trademark) Health Information Management System
helps meet the operations management needs of the health
information management (medical records) department and includes
functionality for the various chart tracking and completion
tasks.
The ProCure (Trademark) Materials Management System automates the
business operations around supply chain, materials acquisition
and equipment management for the organization.
The ProCare (Trademark) Medical Management System automates
medical management for the health system, addressing the
areas of utilization, case and risk management, as well as
infection control.
The RadNet (Trademark) Radiology Information System addresses the
operational and management requirements of radiology departments
or services. It allows a department to replace its manual, paper-
based system of record-keeping with an efficient computer-based
system that integrates with its imaging systems. Cerner also
provides image management systems with picture archival and
communications systems (PACS) that are fully integrated with
Cerner's radiology information systems. Using Cerner's end-to-
end, fully integrated radiology information and image management
systems, radiologists can improve operational efficiencies and
reduce medical error.
Decision Support Systems and Knowledge Solutions
------------------------------------------------
Discern Expert (Registered) is an event-driven, rule-based
decision support software application that allows users to define
clinical and management rules (Alerts (Trademark)) that are
applied to event data captured or generated by other
applications. It supports both synchronous (real-time,
interactive) processing and asynchronous (noninteractive)
processing of events. Discern Expert manages the evaluation
and display of executable clinical knowledge through either
Cerner-developed Alerts, which are licensed separately, or
client-developed Alerts.
Discern Explorer (Registered) is a decision support software
application integrated with other Cerner HNA Millennium
clinical and management information systems that allows users
to execute predetermined or ad hoc queries and reports regarding
process-related data that is generated by the other applications.
Care Designs (Trademarks) are clinical pathways and protocols
that automate the specific plans of care for an individual and
operate within Cerner's clinical systems.
Point of Care Clinical Solutions
--------------------------------
The INet (Registered) Intensive Care Management System is
designed to automate the entire care process in intensive care
settings. It supports chart review and browsing, order
management, documentation management and automatic data
acquisition.
Cerner's CareNet (Registered) Acute Care Management System is
designed to automate the entire care process in acute or
institutional settings. The application collects, refines,
organizes and evaluates detailed clinical and management data.
It enables the entire care team to plan and manage individual
activities and plans, as well as measure outcomes and goals.
The CVNet (Registered) Cardiology Information System automates
the processes within the cardiology department, supporting the
scheduling, ordering, documentation and data capture required by
professionals in the cardiology domain.
The SurgiNet (Registered) Surgery Information System is designed
to address the needs of the surgical department, including
automating the functions of resource and equipment
scheduling, inventory management, anesthesia management and
operating room management.
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The FirstNet(Registered) Emergency Medicine Information System
offers patient and provider tracking and an intuitive
presentation of patient diagnoses and clinical events for
the emergency department. FirstNet provides basic emergency
department functionality, including quick admits, tracking,
triage and patient history, as well as a graphical reference
to patient location and order status.
The PowerChart Office (Trademark) Management System supports the
broad range of clinical and business activities that occur within
a physician office, clinic or large physician organization. This
system ties the office together with other medical entities and
automates key care team activities in both primary and specialty
care settings.
The ProCall (Registered) Home Care Management System automates
the clinical and business processes of home care organizations,
such as home health agencies, visiting nurse associations and
hospices.
Clinical Centers
----------------
The PathNet (Registered) Laboratory Information System addresses
the information management needs of six clinical areas: general
laboratory, microbiology, blood bank transfusion services, blood
bank donor services, anatomic pathology and Human Leukocyte
Antigen. PathNet automates the ordering and reporting of
procedures, the production of accurate and timely reports and the
maintenance of accessible clinical records.
The RadNet (Registered) Radiology Information System addresses
the operational and management requirements of radiology
departments or services. It allows a department to replace its
manual, paper-based system of record-keeping with an efficient
computer-based system that integrates with their imaging systems.
The PharmNet (Registered) Pharmacy Information System provides
full integration for rapid pharmacy order entry and support
of the clinical pharmacy in either an inpatient or retail
setting. PharmNet streamlines medication order entry, enabling
the pharmacist or technician to place all types of pharmaceutical
orders, and automates dispensing functions.
Consumer/Personal Health
------------------------
Cerner's IQHealth (Trademark) facilitates powerful business-to-
consumer and business-to-business connections via the Internet.
With IQHealth, healthcare organizations can create and brand a
"health exchange" in the community to directly connect
hospitals, physicians, payers, consumers and others. IQHealth
provides the tools to create such local connections as well
as health information to improve the quality and safety of care.
IQHealth's Personal Health Record (PHR) is a personal health
management tool that gives consumers the ability to build a
permanent electronic record in which health information can be
securely stored as it accrues over time.
Cerner Multum (Registered) drug database provides caregivers and
consumers alike with access to drug information and the ability
to perform drug interaction checking to prevent adverse events.
IQHealth's Health Risk Assessments allow organizations to create
Web-based surveys to assess individual and community health
risks.
Health Connections (Trademark), a 24x7 call center staffed by
nurses, provides ready access to accurate health information so
that consumers can better manage their health and participate in
care decisions.
Health Facts (Registered) is Cerner's comparative data warehouse
for benchmarking information and services for subscribers to
support their own improvement processes.
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Interface Technologies
----------------------
The Open Engine Application Gateway System (Trademark)
facilitates the exchange of data and assists in the management
of interfaces between foreign systems in a network environment.
It serves as a toolkit to help write interface code.
The Open Port Interface System (Trademark) represents Cerner's
standardized technology for providing reliable foreign system,
medical device and other standard interfaces in a timely
manner. Message translation and data mapping are done with
point-and-click tools and a scripting environment.
Communications protocols are configured via table driven
parameters. These sophisticated methodologies result in
decreased implementation times and greater client satisfaction.
Software Development
- - - - --------------------
Cerner commits significant resources to developing new health
information system products. As of December 30, 2000,
approximately 1,100 employees were engaged full-time in product
development activities. Total expenditures for the development
and enhancement of the Company's products were approximately
$90,694,000, $88,699,000 and $74,159,000 during the 2000, 1999
and 1998 fiscal years, respectively. These figures include both
capitalized and noncapitalized portions and exclude amounts
amortized for financial reporting purposes.
The Company expects to continue investment and development
efforts for its current and future product offerings. As new
clinical and management information needs emerge, Cerner intends
to enhance its current product lines with new versions released
to clients on a periodic basis. In addition, Cerner plans to
expand its current product lines by developing additional
information systems for clinical, financial, operational and/or
consumer use and to continue to support simultaneous use of
Cerner's products across multiple facilities, and plans to
continue to expand in the global marketplace.
See "Cerner's Technology - Health Network Architecture (HNA) and
HNA Millennium" for a discussion of the development of Cerner's
latest generation of software products.
Sales and Marketing
- - - - -------------------
The markets for Cerner's information system products include
integrated delivery networks, physician groups and networks and
their management service organizations, managed care
organizations, hospitals, medical centers, free-standing
reference laboratories, blood banks, imaging centers, pharmacies,
pharmaceutical manufacturers, employer coalitions and public
health organizations. To date, a substantial portion of system
sales have been in clinical applications in hospital-based
provider organizations. Cerner's HNA architecture is highly
scaleable, with applications being used in hospitals ranging from
under 50 beds to over 2,000 beds and managed care settings with
over 2,000,000 members. All HNA Millennium applications are
designed to operate on either computers manufactured by Compaq
Computer Corporation or IBM's RISC System/6000 AIX (UNIX)
platform, thereby allowing Cerner to be price competitive across
the full range of size and organizational structure of healthcare
providers. The sale of a health information system usually takes
approximately nine to eighteen months, from the time of initial
contact to the signing of a contract.
The Company is in the process of expanding its sales force in
anticipation of increased market demands expected to be created
by its HNA Millennium solutions. See "Cerner's Technology -
Health Network
10
Architecture (HNA) and HNA Millennium" for a discussion of
the development of Cerner's latest generation of software
products.
The Company's executive marketing management is located in its
North Kansas City, Missouri, headquarters, while its client
representatives are deployed across the United States and
globally. In addition to the United States, the Company, through
subsidiaries and joint ventures, has sales staff and/or offices
in Australia, Belgium, Canada, Germany, Singapore, Malaysia,
Saudi Arabia and the United Kingdom. Cerner's consolidated
revenues include foreign sales of $25,815,000, $24,001,000 and
$17,545,000 for the 2000, 1999 and 1998 fiscal years,
respectively. The Company supports its sales force with
technical personnel who perform demonstrations of Cerner's
products and assist clients in determining the proper hardware
and software configurations. The Company's primary direct
marketing strategy is to generate sales contacts from its
existing client base and through presentations at industry
seminars and tradeshows. Cerner attends a number of major
tradeshows each year and has begun to sponsor executive
conferences, which feature industry experts who address the
information system needs of large healthcare organizations.
Client Services
- - - - ---------------
All of Cerner's clients enter into software maintenance
agreements with Cerner for support of their Cerner systems. In
addition to immediate software support in the event of problems,
these agreements allow these clients the use of new releases of
the Cerner products covered by these agreements. Each client has
24-hour access to the client support staff located at Cerner's
corporate headquarters. Most of Cerner's clients also enter into
hardware maintenance agreements with Cerner. These arrangements
normally provide for a fixed monthly fee for specified services.
In the majority of cases, Cerner subcontracts hardware
maintenance to the hardware manufacturer.
In 1999, Cerner modified its strategy of using regional business
centers to provide support for its clients. Due to the increase
in the number of Cerner associates working at client sites and
the resulting decrease in utilization and cost effectiveness of
its regional branch offices, Cerner decided to close or reduce
the size of many of its facilities in the United States. Cerner
closed its offices in Atlanta, Georgia; Boston, Massachusetts;
Irvine, California; and Washington, D.C. in the second quarter of
2000. The expenses for such closings were charged to the fourth
quarter of 1999. Additional leased office space was acquired
during 2000 as a result of acquisition of businesses in
Chesapeake, Virginia; Dallas, Texas; St. Louis, Missouri; and
Houston, Texas, and new office space was opened in Washington,
D.C. Cerner's offices in Detroit, Michigan and Denver,
Colorado remain open.
Backlog
- - - - -------
At December 30, 2000, Cerner had a contract backlog of
approximately $439,943,000. Such backlog represents system sales
from signed contracts, which had not yet been recognized as
revenue. The Company recognizes revenue on a percent of
completion basis, based on certain milestone conditions, for its
software products. At December 30, 2000, the Company had
approximately $91,090,000 of contracts receivable, which
represents revenues recognized under the percent of completion
method but not yet billable under the terms of the contract. At
December 30, 2000, Cerner had a software support and maintenance
backlog of approximately $184,360,000. Such backlog represents
contracted software support and hardware maintenance services for
a period of twelve months. The Company estimates that
approximately 55% of the aggregate backlog of $624,303,000 will
be recognized as revenue during 2001.
Number of Employees ("Associates")
- - - - ----------------------------------
As of March 1, 2001, the Company employed 3,104 associates.
Other Factors Affecting the Company's Business
- - - - ----------------------------------------------
Information under the caption "Factors That May Affect Future
Results of Operations, Financial Condition of Business"
included in "Management's Discussion and Analysis of
Financial Condition and Results of
11
Operations" in Item 7 is incorporated herein by
reference. Such information includes a discussion of various
factors that could, among other things, affect the Company's
business in the future, including (a) variations in the Company's
quarterly operating results; (b) volatility of the Company's
stock price; (c) market risk of investments; (d) changes in the
healthcare industry; (e) significant competition; (f) the
Company's proprietary technology may be subjected to infringement
claims or may be infringed upon; (g) possible regulation of the
Company's software by the U.S. Food and Drug Administration or
other government regulation; (h) the possibility of product-
related liabilities; (i) possible failures or defects in the
performance of the Company's software; (j) the possibility that
the Company's anti-takeover defenses could delay or prevent an
acquisition of the Company; and (k) risks and uncertainties
related to the Year 2000 transition.
Item 2. Properties
The Company's offices are located in a Company-owned office park
in North Kansas City, Missouri, containing approximately 500,000
square feet of useable space. As of December 30, 2000, the
Company was using approximately 455,000 square feet and
substantially all of the remainder was leased to tenants. The
Company also leases office space for its branch offices in
Detroit, Michigan; Denver, Colorado; St. Louis, Missouri; Dallas,
Texas; Washington, D.C.; Chesapeake, Virginia; Houston, Texas;
Sydney, Australia; and Brussels, Belgium.
Item 3. Legal Proceedings
The Company has no material pending litigation.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the stockholders of the
Company during the fourth quarter of the fiscal year ended
December 30, 2000.
Item 4A. Executive Officers of the Company
The following table sets forth the names, ages, positions and
certain other information regarding the Company's executive
officers as of March 27, 2001. Officers are elected annually and
serve at the discretion of the board of directors.
Name Age Positions
- - - - ---- --- ---------
Neal L. Patterson 51 Chairman of the Board of Directors and
Chief Executive Officer
Clifford W. Illig 50 Vice Chairman of the Board of Directors
Earl H. Devanny, III 49 President
Glenn P. Tobin, Ph.D. 39 Executive Vice President and Chief Operating
Officer
Paul M. Black 42 Executive Vice President and Chief Sales
Officer
Jack A. Newman, Jr. 53 Executive Vice President
Douglas M. Krebs 43 Senior Vice President and President of
Cerner International
Stephen M. Goodrich 49 Senior Vice President and Chief Quality
Officer
Richard J. Flanigan, Jr. 41 Senior Vice President and General Manager
12
Stephen D. Garver 40 Senior Vice President and Managing Partner
Marc G. Naughton 46 Vice President and Chief Financial Officer
Stanley M. Sword 39 Vice President and Chief People Officer
Jeffrey A. Townsend 37 Vice President and Chief Engineering
Officer
Randy D. Sims 40 Vice President, Chief Legal Officer and
Secretary
Neal L. Patterson has been Chairman of the Board of Directors and
Chief Executive Officer of the Company for more than five years.
Mr. Patterson also served as President of the Company from March
of 1999 until August of 1999.
Clifford W. Illig has been a Director of the Company for more
than five years. He also served as Chief Operating Officer of
the Company for more than five years until October 1998 and as
President of the Company for more than five years until March of
1999. Mr. Illig was appointed Vice Chairman of the Board of
Directors in March of 1999.
Earl H. Devanny, III joined the Company in August of 1999 as
President. Prior to joining the Company, Mr. Devanny served as
president of the ADAC Healthcare Information Systems, Inc. Prior
to joining ADAC, Mr. Devanny served as a Vice President of the
Company from 1994 to 1997. Prior to that he spent seventeen
years with IBM Corporation.
Glenn P. Tobin, Ph.D. joined the Company in April of 1998 as
General Manager and Senior Vice President. On October 29, 1998,
Dr. Tobin was appointed Executive Vice President and Chief
Operating Officer. Prior to joining the Company, Dr. Tobin
served as a senior consultant with McKinsey and Co., Inc. for
more than five years.
Paul M. Black joined the Company in March of 1994 as a Regional
Vice President. He was promoted in June 1998 to Senior Vice
President and Chief Sales Officer and to Executive Vice President
in September of 2000. Prior to joining Cerner, he spent twelve
years with IBM Corporation.
Jack A. Newman, Jr. joined the Company in January of 1996 as
Executive Vice President. Prior to joining the Company, he was
with KPMG LLP for twenty-two years. Immediately prior to joining
Cerner he was National Partner-in-Charge of KPMG's Healthcare
Strategy Practice.
Douglas M. Krebs joined the Company in June 1994 as a Regional
Vice President. He was promoted to Senior Vice President and
Area Manager in April 1999. On February 1, 2000, Mr. Krebs was
appointed as President of Cerner International, Inc, a wholly
owned subsidiary of the Company. Prior to joining Cerner, he
spent fifteen years with IBM Corporation.
Stephen M. Goodrich joined the Company in October 1987 as a
project leader in the product organization. In 1992 he was
promoted to Vice President and was promoted to Senior Vice
President in April 1999. He was named Chief Quality Officer in
January of 2000.
Richard J. Flanigan Jr. joined the Company in November 1994 as a
Regional Vice President. In 1997, his responsibilities were
extended and he was named as General Manager. He was promoted to
Senior Vice President in April 2000. Prior to joining Cerner,
Mr. Flanigan spent more than thirteen years in sales and
management positions at IBM Corporation.
Stephen D. Garver joined the Company in March 1992 as part of
Cerner Consulting. In March of 1999 he was named Vice President
and Managing Partner and was promoted to Senior Vice President in
April
13
2000. Prior to joining the Company, Mr. Garver spent ten
years with Andersen Consulting in a variety of roles within the
systems integration practice.
Marc G. Naughton joined the Company in November 1992 as Manager
of Taxes. In November 1995 he was named Chief Financial Officer
and in February 1996 he was promoted to Vice President.
Stanley M. Sword joined the Company in August 1998 in his current
role. Prior to joining Cerner, he served as a client partner in
the outsourcing practice of AT&T Solutions and as the Vice
President of Organization Development for NCR Corporation. Prior
to joining AT&T, Mr. Sword spent ten years with Anderson
Consulting in a variety of roles within the systems integration
practice.
Jeffrey A. Townsend joined the Company in June 1985. Since that
time he has held several positions in the product organization
and was promoted to Vice President in February 1997. He was
appointed Chief Engineering Officer in March 1998.
Randy D. Sims joined the Company in March 1997 as Vice President
and Chief Legal Officer. Prior to joining the Company, Mr. Sims
worked at Farmland Industries, Inc. for three years where he
served most recently as Associate General Counsel. Prior to
Farmland, Mr. Sims was in-house legal counsel at The Marley
Company (now a division of United Dominion Industries) for seven
years, holding the position of Assistant General Counsel when he
left to join Farmland.
14
PART II
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters
The Company's common stock trades on The NASDAQ Stock Market
(Service Mark) under the symbol CERN. The following table sets
forth the high, low and last sales prices for the fiscal quarters
of 2000 and 1999 as reported by The NASDAQ National Market
System. These quotations represent prices between dealers and do
not include retail mark-up, mark-down or commissions, and do not
necessarily represent actual transactions.
2000 1999
--------------------------------- --------------------------------
High Low Last High Low Last
---- --- ---- ---- --- ----
First quarter 40 7/8 17 7/8 27 27 1/4 12 7/8 15 5/8
Second quarter 32 9/64 19 3/4 27 1/4 23 1/2 12 1/2 19 33/64
Third quarter 48 26 5/16 46 7/16 19 15/16 14 1/4 14 31/32
Fourth quarter 64 7/8 40 1/2 46 1/4 20 3/4 12 15/16 19 11/16
At January 31, 2001, there were approximately 1,200 owners of
record. To date, the Company has paid no dividends and it does
not intend to pay dividends in the foreseeable future.
Management believes it is in the stockholders' best interest to
reinvest funds in the operation of the business.
Item 6. Selected Financial Data
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(1)(2)(3)(4)(5) (6)(7) (8)
(In thousands, except per
share data)
Statements of Earnings Data:
Revenues $ 404,504 340,197 330,902 245,057 189,107
Operating earnings 25,602 3,698 33,530 22,170 10,601
Earnings before income taxes
and extraordinary item 172,123 302 33,268 24,484 12,902
Extraordinary item - early
extinguishment of debt - (1,395) - - -
Net earnings (loss) 105,265 (1,211) 20,589 15,148 8,251
Earnings per share before
extraordinary item:
Basic 3.08 .01 .63 .46 .25
Diluted 2.96 .01 .61 .45 .25
Earnings (loss) per share:
Basic 3.08 (.04) .63 .46 .25
Diluted 2.96 (.04) .61 .45 .25
Weighted average shares
outstanding:
Basic 34,123 33,623 32,825 32,881 32,729
Diluted 35,603 33,916 33,667 33,668 33,620
Balance Sheet Data:
Working capital $ 186,181 170,053 118,681 156,808 171,204
Total assets 616,411 660,891 436,485 331,781 314,753
Long-term debt, net 102,299 100,000 25,000 30,026 30,000
Stockholders' equity 343,717 378,937 271,143 233,747 230,735
(1) Includes a non-recurring investment gain of $120.4 million,
net of $68.3 million tax expense, related to the conversion
of shares of CareInsite common stock to shares of WebMD
common stock. The impact of this non-recurring investment
gain on diluted earnings per share was $3.38 for 2000.
(2) Includes a non-recurring investment loss of $24.5 million,
net of $13.9 million tax benefit, related to the sale of
shares of WebMD common stock. The impact of this
non-recurring investment loss on diluted earnings per share
was ($.69) for 2000.
15
(3) Includes a non-recurring charge of $6.7 million related to
the write-down of intangible assets associated with the
acquisition of Health Network Ventures, Inc. The impact
of this non-recurring charge on diluted earnings per share
was ($.19) for 2000.
(4) Includes a non-recurring charge of $3.2 million related to
the acquisition of CITATION Computer Systems, Inc. The
impact of this non-recurring charge on diluted earnings
per share was ($.09) for 2000.
(5) Includes a non-recurring charge of $1.0 million, net of
$.7 million tax benefit, related to the acquisition of
ADAC Healthcare Information Systems, Inc. The impact of
this non-recurring charge on diluted earnings per share
was ($.03) for 2000.
(6) Includes a non-recurring charge of $5.8 million, net of
$3.6 million tax benefit, related to the cost in excess of
revenues of completing fixed fee implementation contracts.
The impact of this non-recurring charge on diluted
earnings per share was ($.17) for 1999.
(7) Includes a non-recurring charge of $.9 million, net of $.5
million tax benefit, related to the accrual of branch
restructuring costs. The impact of this non-recurring
charge on diluted earnings per share was ($.03) for 1999.
(8) Includes a non-recurring charge of $3.1 million, net of
$1.9 million tax benefit, related to the acquisition of
Multum Information Services, Inc. The impact of this
non-recurring charge on diluted earnings per share was
($.09) for 1998.
Summary Pro-Forma Financial Data
(Statements of Earnings Data Excluding Non-Recurring Gains,
Losses and Charges)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(1)(2)(3)(4)(5) (6)(7) (8)
(In thousands, except per
share data)
Statements of Earnings Data,
Before Non-recurring Gains,
Losses and Charges:
Revenues $ 404,504 340,197 330,902 245,057 189,107
Operating earnings 37,189 14,505 38,568 22,170 10,601
Earnings before income taxes
and extraordinary item 33,518 11,109 38,306 24,484 12,902
Extraordinary item - early
extinguishment of debt - (1,395) - - -
Net earnings 20,366 5,462 23,687 15,148 8,251
Earnings per share before
extraordinary item:
Basic .60 .20 .72 .46 .25
Diluted .57 .20 .70 .45 .25
Earnings per share:
Basic .60 .16 .72 .46 .25
Diluted .57 .16 .70 .45 .25
Weighted average shares
outstanding:
Basic 34,123 33,623 32,825 32,881 32,729
Diluted 35,603 33,916 33,667 33,668 33,620
Balance Sheet Data:
Working capital $ 186,181 170,053 118,681 156,808 171,204
Total assets 616,411 660,891 436,485 331,781 314,753
Long-term debt, net 102,299 100,000 25,000 30,026 30,000
Stockholders' equity 343,717 378,937 271,143 233,747 230,735
(1) Statement of Earnings Data excludes a non-recurring
investment gain of $120.4 million, net of $68.3 million
tax expense, related to the conversion of shares of
CareInsite common stock to shares of WebMD common stock.
The impact of this non-recurring investment gain on diluted
earnings per share was $3.38 for 2000.
(2) Statement of Earnings Data excludes a non-recurring
investment loss of $24.5 million, net of $13.9 million tax
benefit, related to the sale of shares of WebMD common
stock. The impact of this non-recurring investment loss
on diluted earnings per share was ($.69) for 2000.
16
(3) Statement of Earnings Data excludes a non-recurring charge
of $6.7 million related to the write-down of intangible
assets associated with the acquisition of Health Network
Ventures, Inc. The impact of this non-recurring charge on
diluted earnings per share was ($.19) for 2000.
(4) Statement of Earnings Data excludes a non-recurring charge
of $3.2 million related to the acquisition of CITATION
Computer Systems, Inc. The impact of this non-recurring
charge on diluted earnings per share was ($.09) for 2000.
(5) Statement of Earnings Data excludes a non-recurring charge
of $1.0 million, net of $.7 million tax benefit, related to
the acquisition of ADAC Healthcare Information Systems,
Inc. The impact of this non-recurring charge on diluted
earnings per share was ($.03) for 2000.
(6) Statement of Earnings Data excludes a non-recurring charge
of $5.8 million, net of $3.6 million tax benefit, related
to the cost in excess of revenues of completing fixed fee
implementation contracts. The impact of this non-recurring
charge on diluted earnings per share was ($.17) for 1999.
(7) Statement of Earnings Data excludes a non-recurring charge
of $.9 million, net of $.5 million tax benefit, related to
the accrual of branch restructuring costs. The impact of
this non-recurring charge on diluted earnings per share was
($.03) for 1999.
(8) Statement of Earnings Data excludes a non-recurring charge
of $3.1 million, net of $1.9 million tax benefit, related
to the acquisition of Multum Information Services, Inc.
The impact of this non-recurring charge on diluted earnings
per share was ($.09) for 1998.
17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Introduction
- - - - ------------
Last year, the Company indicated that 2000 would be a more
stable, predictable and successful year than 1999. In 2000, the
Company set record levels of bookings, revenues and cash flow.
The Company continued to expand its product line to more than 37
products at the end of 2000. Over the last 18 months, the
Company more than doubled its direct sales force. The Company
also created a strategic presence in Europe. Between the new
client relationships created through the Company's direct sales
efforts and the acquisitions the Company completed in 2000, the
Company grew its install base of client relationships by 40%,
adding 430 new client relationships, and created 330 HNA
Millennium footprints during the year. The Company also signed
licensing agreements with over 80 other healthcare information
technology companies to use HNA components as key elements of
their architecture.
The Company's success reached into new market opportunities, as
well. The Company's hosting services became the delivery
platform of choice for over $50 million of new bookings in its
first year. Many of these clients are community hospitals and
represent an expanded market for the Company's products.
PowerChart Office, the Company's physician clinical practice
solution, is having a significant impact on the way many of the
Company's clients practice medicine. ProFit, the Company's new
patient accounting solution, completed alpha testing, opening up
a market estimated at $3 billion.
The promulgation of new HIPAA (Health Insurance Portability and
Accountability Act) regulations and the recent release of the
Institute of Medicine's second report on patient safety could
combine to create significant pressures to expand the use of
information technology in healthcare organizations. While the
budgetary pressures created by the Balanced Budget Act of 1997
have subsided, they should continue to stimulate interest in the
use of healthcare information technology to improve operational
performance. The Company believes that its investment in the HNA
Millennium architecture affords a significant competitive
advantage. HNA Millennium is the only fully integrated, large
scale, enterprise-wide architecture in the industry. It is this
integration that the Company expects will be a significant factor
in meeting the challenges posed by forces such as HIPAA, patient
safety and operational performance.
Results of Operations
- - - - ---------------------
Year Ended December 30, 2000, Compared to Year Ended January 1,
2000
The Company's revenues increased 19% to $404,504,000 in 2000 from
$340,197,000 in 1999. Net earnings, before extraordinary item
and non-recurring charges and credits was $20,366,000 in 2000
compared to $6,857,000 in 1999. Non-recurring charges and
credits in 2000, as described below, included a realized
investment gain and loss, write-off of acquired in-process
research and development and a write-down of intangible assets.
Non-recurring charges in 1999, as described below, include
contract reserves and branch restructuring charges. Including
the extraordinary item and non-recurring charges, the Company had
earnings of $105,265,000 in 2000 compared to a loss of $1,211,000
in 1999.
Revenues - In 2000, revenues increased due to an increase in
system sales and support of installed systems. System sales
increased 17% to $263,109,000 in 2000 from $224,510,000 in 1999.
The increase in system sales is due to an increase in new
contract bookings in 2000 compared to 1999.
Total sales to the installed base in 2000, including new systems,
incremental hardware and software, support and maintenance
services and discrete services, were 77% of total revenues in
2000 compared to 75% in 1999.
At December 30, 2000, the Company had $439,943,000 in contract
backlog and $184,360,000 in support and maintenance backlog,
compared to $338,614,000 in contract backlog and $162,798,000 in
support and maintenance backlog at the end of 1999.
18
Support and maintenance revenues increased 22% in 2000 as
compared to 1999. These revenues represented 28% of 2000 and
1999 total revenues.
Other revenues increased 23% to $26,497,000 in 2000 from
$21,489,000 in 1999. This increase was due primarily to
additional revenues derived from subscriptions and services to
clients; these increases were $1,765,000 and $2,324,000,
respectively. The Company anticipates that other revenues will
continue to increase in 2001.
Cost of Revenues - 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 the manufacturers. The cost of revenues was 22%
of total revenues in 2000, and 25% of total revenues in 1999,
excluding a non-recurring charge relating to fixed fee
implementation contracts, as described below. Such costs, as a
percent of revenues, typically have varied as the mix of revenue
(software, hardware, services and support) components carrying
different margin rates changes from period to period. The
decrease in the cost of revenue as a percent of total revenues
resulted principally from a decrease in the percent of revenue
from computer hardware and sublicensed software, which carry a
higher cost of revenue percentage.
Included in the 1999 cost of revenues is a charge of $9,449,000,
which represents the remaining additional costs in excess of
revenues required to complete certain remaining HNA Millennium
fixed fee implementation contracts. The Company switched to an
hourly fee-for-service implementation model in 1997. Delays in
some of the older projects, primarily caused by delays in
development of the Company's HNA Millennium products, increased
the time required to complete these installations. While the
Company originally anticipated these fixed fee implementations
would be completed in 1999, in some instances the focus by
clients on their internal Y2K projects created a further delay.
As a result of the significant implementation work completed in
the last half of 1999 and the agreement between the Company and
these clients in the fourth quarter as to the scope of work
remaining, the Company estimated that the costs to complete
certain fixed fee implementation contracts would exceed the
remaining revenue by $9,449,000. The Company recognized the
impact of these excess costs in the fourth quarter income
statement as a non-recurring cost of revenues. $7,148,000 of
these additional costs were incurred in 2000, with the remaining
costs to be completed in 2001. There were no significant changes
in the estimates of the costs to complete in 2000.
Sales and Client Service - Sales and client service expenses
include salaries of client service personnel, communications
expenses and unreimbursed travel expenses. Also included are
sales and marketing salaries, travel expenses, tradeshow costs
and advertising costs. These expenses as a percent of total
revenues were 42% in 2000 and 41% in 1999, excluding a non-
recurring charge related to the closing of five branch offices,
as described below. The increase in total sales and client
service expenses is attributable to the cost of a larger field
sales and services organization and marketing of new products.
Included in 1999 sales and client service expenses is a non-
recurring charge related to the closing of five branch offices.
In December, 1999, the Company made a decision to close five of
its branch offices. The Company created a regional branch
structure in 1994 in order to bring associates closer to its
clients. The natural evolution of that strategy and the ability
to leverage internal information technology infrastructure to
create a more virtual workplace has resulted in a significant
decrease in utilization of certain regional offices. This led to
the decision to close these physical locations. The Company
recorded a charge of $1.4 million in the 1999 fourth quarter to
provide for the costs of closing these locations, primarily based
on estimated lease cancellation fees. All of these costs were
paid in 2000. The Company will continue to maintain offices in
Denver, Colorado; Detroit, Michigan; St. Louis, Missouri; Dallas,
Texas; Washington, D.C.; Chesapeake, Virginia; Houston, Texas;
Brussels, Belgium and Sydney, Australia, in addition to the world
headquarters in North Kansas City, Missouri.
Software Development - Software development expenses include
salaries, documentation and other direct expenses incurred in
product development and amortization of software development
costs. Total
19
expenditures for software development, including both capitalized
and noncapitalized portions, for 2000 and 1999 were $90,694,000
and $88,699,000, respectively. These amounts exclude
amortization. Capitalized software costs were $30,982,000
and $30,192,000 for 2000 and 1999, respectively.
General and Administrative - 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 2000 and
8% in 1999.
Write-off of In-Process Research and Development - Write-off of
in-process research and development includes one-time expenses
resulting from the acquisitions of CITATION Computer Systems,
Inc. and ADAC Healthcare Information Systems, Inc., in 2000.
Write-down of Intangible Assets - Write-down of intangible assets
is a one-time expense resulting from the decision to discontinue
a portion of the Health Network Ventures, Inc. business as more
fully described in Note 2 to the Consolidated Financial
Statements.
Interest Expense, Net - Net interest expense was $3,671,000 in
2000 compared to $3,396,000 in 1999. The increase 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 payable in five equal
annual installments beginning in April 2002. The Series B Senior
Notes, with a $40,000,000 principal amount at 7.66% are payable
in six equal annual installments beginning April 2004. 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. In
connection with the early extinguishment of debt, the Company
incurred a $1,395,000, net of taxes, extraordinary loss for a
prepayment penalty and write-off of deferred loan costs. The Note
Agreement contains certain net worth, current ratio, and fixed
charge coverage covenants and provides certain restrictions on
the Company's ability to borrow, incur liens, sell assets and pay
dividends. The Company was in compliance with all covenants at
December 30, 2000.
Realized Gain on Exchange of Stock - The Realized gain on
exchange of stock is a non-recurring investment gain related to
the exchange of CareInsite shares for WebMD shares in 2000.
Realized Loss on Sale of Stock - The realized loss on sale of
stock is a non-recurring investment loss related to the sale of a
portion of the WebMD shares in 2000.
Income Taxes - The Company's effective tax rate was 39% in 2000
and 1999.
Year Ended January 1, 2000, Compared to Year Ended January 2,
1999
The Company's revenues increased 3% to $340,197,000 in 1999 from
$330,902,000 in 1998. Net earnings, before extraordinary item and
non-recurring charges were $6,857,000 in 1999 compared to
$23,687,000 in 1998. Non-recurring charges in 1999, as described
below, included contract reserves and branch restructuring
charges. Non-recurring charges in 1998 include acquisition
related charges. Including the extraordinary item and non-
recurring charges, the Company incurred a loss of $1,211,000 in
1999 compared to earnings of $20,589,000 in 1998.
Revenues - In 1999, revenues increased due to an increase in
support of installed systems and other revenues. System sales
decreased 9% to $224,510,000 in 1999 from $245,490,000 in 1998.
The decrease in system sales was due to a decrease in new
contract bookings in 1999 compared to 1998. The Company believes
that this decrease was due primarily to delays in purchasing
decisions related to Y2K and the Balanced Budget Act of
1997. The sale of additional hardware and software products to
the installed client base increased 27% in 1999 as compared to
1998.
20
Total sales to the installed base in 1999, including new systems,
incremental hardware and software, support and maintenance
services, and discrete services, were 75% of total revenues in
1999 compared to 69% in 1998. The higher percentage was
primarily due to the decrease in system sales to new clients.
At January 1, 2000, the Company had $338,614,000 in contract
backlog and $162,798,000 in support and maintenance backlog,
compared to $314,965,000 in contract backlog and $153,453,000 in
support and maintenance backlog at the end of 1998.
Support and maintenance revenues increased 23% in 1999 as
compared to 1998. These revenues represented 28% of 1999 total
revenues and 23% of 1998 total revenues. The higher percentage
was primarily attributable to the decrease in system sales and an
increase in installed systems.
Other revenues increased 148% to $21,489,000 in 1999 from
$8,657,000 in 1998. This increase was due primarily to services
performed beyond contracted requirements for existing clients.
Cost of Revenues - 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 the manufacturers. The cost of revenues was 25%
of total revenues in 1999, excluding a non-recurring charge
related to fixed fee implementation contracts, as described
below, and 27% of total revenues in 1998. Such costs, as a
percent of revenues, typically have varied as the mix of revenue
(software, hardware, services and support) components carrying
different margin rates changes from period to period. The
decrease in the cost of revenue as a percent of total revenues
resulted principally from a decrease in the percent of revenue
from computer hardware and sublicensed software, which carry a
higher cost of revenue percentage.
Included in the 1999 cost of revenues is a charge of $9,449,000,
which represents the remaining additional costs in excess of
revenues required to complete certain remaining HNA Millennium
fixed fee implementation contracts, as further described above.
Sales and Client Service - Sales and client service expenses
include salaries of client service personnel, communications
expenses, and unreimbursed travel expenses. Also included are
sales and marketing salaries, travel expenses, tradeshow costs
and advertising costs. These expenses as a percent of total
revenues were 41% in 1999, excluding a non-recurring charge
related to the closing of five branch offices, as described
below, and 35% in 1998. The increase in total sales and client
service expenses is attributable to the cost of a larger field
sales and services organization and marketing of new products.
Included in 1999 sales and client service expenses is a non-
recurring charge related to the closing of five branch offices.
In December, 1999, the Company made a decision to close five of
its branch offices. The Company created a regional branch
structure in 1994 in order to bring associates closer to its
clients. The natural evolution of that strategy and the ability
to leverage internal information technology infrastructure to
create a more virtual workplace has resulted in a significant
decrease in utilization of certain regional offices. This led to
the decision to close these physical locations. The Company
recorded a charge of $1.4 million in the 1999 fourth quarter to
provide for the costs of closing these locations, primarily based
on estimated lease cancellation fees.
Software Development - 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 1999 and 1998
were $88,699,000 and $74,159,000, respectively. These amounts
exclude amortization. Capitalized software costs were
$30,192,000 and $25,052,000 for 1999 and 1998, respectively. The
increase in aggregate expenditures for software development in
1999 is due to development of HNA Millennium products and
development of community care products.
21
General and Administrative - 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 1999 and
1998.
Interest Expense, Net - Net interest expense was $3,396,000 in
1999 compared to $262,000 in 1998. The increase 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 date April 1, 1999. The Series A Senior Notes, with a
$60,000,000 principal amount at 7.14% are payable in five equal
annual installments beginning in April 2002. The Series B Senior
Notes, with a $40,000,000 principal amount at 7.66% are payable
in six equal annual installments beginning April 2004. 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.
Income Taxes - The Company's effective tax rate was 39% in 1999
and 38% in 1998.
Liquidity and Capital Resources
- - - - -------------------------------
The Company had total cash and cash equivalents of $90,893,000 at
the end of 2000 and working capital of $186,181,000, compared to
cash and cash equivalents of $75,677,000 at the end of 1999, and
working capital of $170,053,000.
The Company generated cash of $53,313,000, $27,389,000 and
$5,893,000 from operations in 2000, 1999 and 1998, respectively.
Cash flow from operations increased in 2000, due primarily to the
increase in net earnings, increased collection of receivables,
improved payment terms and record level of conversions. Cash
flow from operations increased in 1999, due primarily to
increased collection of receivables, improved payment terms and
record level of conversions.
Cash used in investing activities consisted primarily of
capitalized software development costs of $30,982,000 and
$30,192,000 and purchases of capital equipment of $16,154,000 and
$14,345,000 in 2000 and 1999, respectively. The Company also
made additional investments in affiliates in 2000 of $7,370,000
and completed acquisitions of businesses for $16,829,000. Cash
provided from investing activities came primarily from the
proceeds of $26,152,000 from the sale of WebMD shares. The major
source of cash from financing activities in 2000 was provided by
the exercise of common stock options. The major source of cash
from financing activities in 1999 was provided by the Company's
refinancing of its long-term debt, more fully described in Note 6
to the Consolidated Financial Statements.
Revenues provided under support and maintenance agreements
represent recurring cash flows. Support and maintenance revenues
increased 22%, 23% and 12%, in 2000, 1999 and 1998, respectively,
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 expects to
have an increase in its cash position for 2001. The Company
believes that its present cash position, together with cash
generated from operations, will be sufficient to meet anticipated
cash requirements during 2001. The Company has an $18,000,000
line of credit available.
The effects of inflation on the Company's business during 1999
and 2000 were not significant.
Recent Accounting Pronouncements
- - - - --------------------------------
During the second quarter of 1998, the Financial Accounting
Standards Board issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (Statement 133).
Statement 133 will be adopted by the Company in the first quarter
of 2001. The Company does not anticipate Statement 133 will
have a significant impact on its reported earnings per share.
22
In December of 1999, the Securities and Exchange Commission staff
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" (SAB 101). SAB 101 had no impact on the
Company's reported earnings per share.
Factors That May Affect Future Results of Operations, Financial
- - - - -----------------------------------------------------------------
Condition or Business
- - - - ---------------------
Statements made in this report, the Annual Report to Shareholders
in which this report is made a part, 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 "could,"
"should," "will be," "will lead," "will assist," "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 client. The
sale may be subject to delays due to clients' internal budgets
and procedures for approving large capital expenditures and by
competing needs for other capital expenditures and deploying new
technologies or personnel resources. Delays in the expected sale
or installation of these large contracts may have a significant
impact on the Company's anticipated quarterly revenues and
consequently its earnings, since a significant percentage of the
Company's expenses are relatively fixed.
These larger, more complex and costlier systems are installed and
implemented over time periods ranging from approximately six
months to three years and involve significant efforts both by the
Company and the client. In addition, implementation of the
Company's HNA Millennium products is a new and evolving process.
The Company recognizes revenue upon the completion of standard
milestone conditions and the amount of revenue recognized in any
quarter depends upon the Company's and the client's ability to
meet these project milestones. Delays in meeting these milestone
conditions or modification of the contract relating to one or
more of these systems could result in a shift of revenue
recognition from one quarter to another and could have a material
adverse effect on results of operations for a particular quarter.
In addition, support payments by clients for the Company's
products generally 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,
23
governmental regulatory action, healthcare reform measures,
client relationship developments and other factors, many of
which are beyond the Company's control.
Furthermore, the stock market in general, and the market for
software, healthcare and high technology companies in particular,
has experienced extreme volatility that often has been unrelated
to the operating performance of particular companies. These
broad market and industry fluctuations may adversely affect the
trading price of the Company's common stock, regardless of actual
operating performance.
Market Risk of Investments
- - - - ----------------------------- - The Company accounts for its
investments in equity securities which have readily determinable
fair values as available-for-sale. Available-for-sale securities
are reported at fair value with unrealized gains and losses
reported, net of tax, as a separate component of accumulated
other comprehensive income. Investments in the common stock of
certain affiliates over which the Company exerts significant
influence are accounted for by the equity method. Investments in
other equity securities are reported at cost. All equity
securities are reviewed by the Company for declines in fair
value. If such declines are considered to be other than
temporary, the cost basis of the individual security is written
down to fair value as a new cost basis, and the amount of the
write-down is included in earnings.
In 1998 and 1999 the Company acquired a 17.5% interest
(13,149,259 shares of common stock) in CareInsite, Inc. with a
cost basis of $81,804,000. 12,437,500 of these shares were
received in 1998 as consideration for the sale of license
software, and an additional 711,759 shares were purchased in
1999. The value assigned to the shares acquired in 1998 was
$70,000,000 and was based on a methodology which utilized both a
comparable company and the expected underlying discounted future
cash flows. The Company was also granted, by CareInsite,
1,008,445 common stock warrants with an exercise price of $4.00
per share ("THINC Warrants"). The THINC Warrants were
exercisable only in the event that The Health Information Network
Connections, LLC ("THINC") exercised warrants granted to them by
CareInsite at $4.00 per share. THINC was allowed to exercise
their warrants 180 days after the initial public offering of
CareInsite. On January 29, 2000 CareInsite completed an
acquisition of THINC. As part of that agreement, 806,756 of the
Company's 1,008,445 THINC Warrants became immediately
exercisable, with the remaining amount forfeited.
On February 13, 2000, CareInsite entered into an agreement to
merge with Healtheon/WebMD Corporation ("Merger Agreement"). As
part of the Merger Agreement, the Company received 1.3 shares of
Healtheon/WebMD Corporation (WebMD) in exchange for each common
share of CareInsite held by the Company. The warrants were also
converted at the same exchange ratio. The merger of CareInsite
and WebMD ("Merger") closed on September 12, 2000. Accordingly,
the Company recorded a non-recurring investment gain of
$120,362,000, net of tax, as a result of the exchange.
On December 12, 2000, the Company sold 4,273,509 shares of WebMD
for $25,641,000. Accordingly, the Company recorded a non-
recurring investment loss of $24,539,000, net of tax, as a result
of the sale.
At December 30, 2000, the Company owned 12,820,527 shares of
common stock of WebMD, which have a cost basis of $192,308,000
and a carrying value of $101,795,000, as these shares are
accounted for as available-for-sale. The stock of WebMD held by
the Company is registered but is subject to certain lock-up
provisions. At December 30, 2000, the Company also holds
1,048,783 warrants of WebMD with an exercise price of $3.08 and a
cost basis and carrying value of $13,685,000. The warrants are
carried at cost, as they do not have a fair value that is
currently available on a securities exchange.
If the Company realizes certain performance metrics related to
specified levels of physician usage, WebMD will issue to the
Company 3,254,063 shares of common stock at a price of $0.01 per
share ("Performance Shares"). The Performance Shares were
adjusted at a rate of 1.3 shares of WebMD for each share of
CareInsite. The contracted measurement date was February 15,
2001. The Company and WebMD are in discussions regarding the
attainment of the Performance Shares. No amounts have been
recognized in the consolidated financial statements for the
Performance Shares pending completion of the discussions. All
physician users of systems of WebMD Corporation or its affiliates
shall be included for purposes of determining the specified
levels of physician usage.
24
The Company's policy is to review declines in fair value of its
marketable equity securities for declines that may be other than
temporary. If the market price of the WebMD common shares does
not recover to near the Company's $15.00 per share carrying value
in the near term, the Company will record a write-down, through a
charge to earnings, to establish a new cost basis in the security
reflecting the then current market value.
At December 30, 2000, marketable securities (which consist of
money market and commercial paper) of the Company were recorded
at cost, which approximates fair value of approximately $91
million, with an overall average return of approximately 5% and
an overall weighted maturity of less than 90 days. The
marketable securities held by the Company are not subject to
price risk as a result of the short-term nature of the
investments.
The Company is not exposed to material future earnings or cash
flow exposures from changes in interest rates on long-term debt
since 100% of its long-term debt is at a fixed rate. To date,
the Company has not entered into any derivative financial
instruments to manage interest rate risk.
The Company conducts business in several foreign jurisdictions.
However, the business transacted is in the local functional
currency and the Company does not currently have any material
exposure to foreign currency transaction gains or losses. All
other business transactions are in U.S. dollars. To date, the
Company has not entered into any derivative financial instruments
to manage foreign currency risk.
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. In addition, the issued and pending
rules under the Health Information Portability and Accountability
Act of 1996 (HIPAA), will have a direct impact on the
healthcare industry by requiring identifiers and standardized
transactions/code sets and necessary security and privacy
measures in order to ensure the protection of patient health
information. 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 client base could
be eroded, competition for clients could become more intense and
the importance of acquiring each client becomes greater.
Significant Competition
- - - - ----------------------- - The market for healthcare information
systems is intensely competitive, rapidly evolving and subject to
rapid technological change. The Company believes that the
principal competitive factors in this market include the breadth
and quality of system and product offerings, the stability of the
information systems provider, the features and capabilities of
the information systems, the ongoing support for the system and
the potential for enhancements and future compatible products.
Certain of the Company's competitors have greater financial,
technical, product development, marketing and other resources
than the Company and some of its competitors offer products that
it does not offer. The Company's principal existing competitors
include Siemens Medical Solutions Health Services 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.
25
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
client 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 recently initiated a patent
program but currently has a very limited patent portfolio. As a
result, the Company may not be able to protect against
misappropriation of its intellectual property.
In addition, the Company could be subject to intellectual
property infringement claims as the number of competitors grows
and the functionality of its products overlaps with competitive
offerings. These claims, even if not meritorious, could be
expensive to defend. If the Company becomes liable to third
parties for infringing their intellectual property rights, it
could be required to pay a substantial damage award and to
develop noninfringing technology, obtain a license or cease
selling the products that contain the infringing intellectual
property.
Government Regulation
- - - - ---------------------- - The United States Food and Drug
Administration (the "FDA") has declared that software products
intended for the maintenance of data used in making decisions
regarding the suitability of blood donors and the release of
blood or blood components for transfusion are medical devices
under the Federal Food, Drug and Cosmetic Act ("Act") and
amendments to the Act. As a consequence, the Company is subject
to extensive regulation by the FDA with regard to its blood bank
software. If other of the Company's products are deemed to be
actively regulated medical devices by the FDA, the Company could
be subject to extensive requirements governing pre- and post-
marketing requirements including premarket notification clearance
prior to marketing. Complying with these FDA regulations would
be time consuming and expensive. It is possible that the FDA may
become more active in regulating computer software that is used
in healthcare.
Following an inspection by the FDA in March of 1998, the Company
received a Form FDA 483 (Notice of Inspectional Observations)
alleging non-compliance with certain aspects of FDA's Quality
System Regulation with respect to the Company's PathNet HNAC
Blood Bank Transfusion and Donor products (the "Blood Bank
Products"). The Company subsequently received a Warning Letter,
dated April 29, 1998, as a result of the same inspection. The
Company responded promptly to the FDA and undertook a number of
actions in response to the Form 483 and Warning Letter including
an audit by a third party of the Company's Blood Bank Products
and improvements to Cerner's Quality System. A copy of the third
party audit was submitted to the FDA in October of 1998 and, at
the request of the FDA, additional information and clarification
were submitted to the FDA in January of 1999.
There can be no assurance, however, that the Company's actions
taken in response to the Form 483 and Warning Letter will be
deemed adequate by the FDA or that additional actions on behalf
of the Company will not be required. In addition, the Company
remains subject to periodic FDA inspections and there can be no
assurances that the Company will not be required to undertake
additional actions to comply with the Act and any other
applicable regulatory requirements. Any failure by the Company
to comply with the Act and any other applicable regulatory
requirements could have a material adverse effect on the
Company's ability to continue to manufacture and distribute its
products. FDA has many enforcement tools including recalls,
seizures, injunctions, civil fines and/or criminal
prosecutions. Any of the foregoing could 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
26
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 contracts with its clients
generally limit the Company's liability arising from such claims
but such limits may not be enforceable in certain jurisdictions.
Anti-Takeover Defenses
- - - - ------------------------ - The Company's charter, bylaws,
shareholders' rights plan and certain provisions of Delaware law
contain certain provisions that may have the effect of delaying
or preventing an acquisition of the Company. Such provisions are
intended to encourage any person interested in acquiring the
Company to negotiate with and obtain the approval of the Board of
Directors in connection with any such transaction. These
provisions include (a) a Board of Directors that is staggered
into three classes to serve staggered three-year terms, (b) blank
check preferred stock, (c) supermajority voting provisions, (d)
inability of shareholders to act by written consent or call a
special meeting, (e) limitations on the ability of shareholders
to nominate directors or make proposals at shareholder meetings
and (f) 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.
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk
Information contained under the caption "Factors That May Affect
Future Results of Operations, Financial Condition or Business --
Market Risk of Investments" set forth under "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The Financial Statements and Notes required by this Item are
submitted as a separate part of this report.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
27
PART III
Item 10. Directors and Executive Officers of the Registrant
The Registrant's Proxy Statement to be used in connection with
the Annual Meeting of Shareholders to be held on May 25, 2001,
contains under the caption "Election of Directors" certain
information required by Item 10 of Form 10-K and such information
is incorporated herein by this reference. The information
required by Item 10 of Form 10-K as to executive officers is set
forth in Item 4A of Part I hereof.
The Registrant's Proxy Statement to be used in connection with
the Annual Meeting of Shareholders to be held on May 25, 2001,
contains under the caption "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" certain information required by
Item 10 of Form 10-K and such information is incorporated herein
by this reference.
Item 11. Executive Compensation
The Registrant's Proxy Statement to be used in connection with
the Annual Meeting of Shareholders to be held on May 25, 2001,
contains under the caption "Executive Compensation" the
information required by Item 11 of Form 10-K and such information
is incorporated herein by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The Registrant's Proxy Statement to be used in connection with
the Annual Meeting of Shareholders to be held on May 25, 2001,
contains under the caption "Voting Securities and Principal
Holders Thereof" the information required by Item 12 of Form 10-K
and such information is incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions
The Registrant's Proxy Statement to be used in connection with
the Annual Meeting of Shareholders to be held on May 25, 2001,
contains under the caption "Certain Transactions" the information
required by Item 13 of Form 10-K and such information is
incorporated herein by this reference.
28
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K
(a) Financial Statements.
(1) Consolidated Financial Statements:
Independent Auditors' Report on Consolidated
Financial Statements
Consolidated Balance Sheets -
December 30, 2000 and January 1, 2000
Consolidated Statements of Operations -
Years Ended December 30, 2000, January 1, 2000 and
January 2, 1999
Consolidated Statements of Changes In Equity
Years Ended December 30, 2000, January 1, 2000 and
January 2, 1999
Consolidated Statements of Cash Flows
Years Ended December 30, 2000, January 1, 2000 and
January 2, 1999
Notes to Consolidated Financial Statements
(2) The following financial statement,
schedule and independent auditors' report
on financial statement schedule of the
Registrant for the three-year period ended
December 30, 2000 are included herein:
Schedule II - Valuation and Qualifying Accounts,
Independent Auditors' Report on Consolidated
Financial Statement Schedule.
All other schedules are omitted, as the required information is
inapplicable or the information is presented in the consolidated
financial statements or related notes.
(3) The exhibits required to be filed by this item are
set forth below:
Number Description
- - - - ------ -----------
3(a) Restated Certificate of Incorporation of the
Registrant, (filed as Exhibit 3(i) to Registrant's
Quarterly Report on Form 10-Q for the year ended June
29, 1996 and hereby incorporated by reference).
3(b) Amended and Restated Bylaws, dated March 9, 2001.
4(a) Amended and Restated Rights Agreement, dated as of
March 12, 1999, between Cerner Corporation and UMB
Bank, n.a., as Rights Agents, which includes the Form
of Certificate of Designation, Preferences and Rights
of Series A Preferred Stock of Cerner Corporation, as
Exhibit A, and the Form of Rights Certificate, as
Exhibit B (filed as an Exhibit to Registrant's current
report on Form 8-A/A dated March 31, 1999 and
incorporated herein by reference).
29
4(b) Specimen stock certificate (filed as Exhibit 4(a)
to Registrant's Registration Statement on Form S-8
(File No. 33-15156) and hereby incorporated herein by
reference).
4(c) Credit Agreement between Cerner Corporation and
Mercantile Bank dated April 1, 1999 (filed as Exhibit
4(d) to Registrant's Annual Report on Form 10-K for the
year ended January 2, 1999, and hereby incorporated
herein by reference).
10(a) Incentive Stock Option Plan C of Registrant (filed
as Exhibit 10(f) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1993, and hereby
incorporated herein by reference).*
10(b) Indemnification Agreements between the Registrant
and Neal L. Patterson, Clifford W. Illig, Gerald E.
Bisbee, Jr., Ph.D. and Thomas C. Tinstman, M.D., (filed
as Exhibit 10(i) to Registrant's Annual report on Form
10-K for the year ended December 31, 1992, and
incorporated herein by reference).*
10(c) Indemnification Agreement between Michael E.
Herman and Registrant (filed as Exhibit 10(i)(a) to
Registrant's Quarterly Report on Form 10-Q for the year
ended June 29, 1996 and hereby incorporated by
reference).*
10(d) Indemnification Agreement between John C.
Danforth, and Registrant (filed as Exhibit 10(i)(b) to
Registrant's Quarterly Report on Form 10-Q for the year
ended June 29, 1996 and hereby incorporated by
reference).*
10(e) Indemnification Agreement between Jeff C.
Goldsmith, Ph.D. and Registrant (filed as Exhibit 10(e)
to Registrant's Annual Report on Form 10-K for the year
ended January 1, 2000, and hereby incorporated by
reference).*
10(f) Amended Stock Option Plan D of Registrant as of
December 8, 2000.*
10(g) Amended Stock Option Plan E of Registrant as of
December 8, 2000.*
10(h) Cerner Performance Plan for 2000 (filed as Exhibit
10(i) to Registrant's Annual Report on Form 10-K for
the year ended January 1, 2000, and hereby incorporated
herein by reference).*
10(i) Long-Term Incentive Plan for 1999 (filed as
Exhibit 10(l) to Registrant's Annual Report on Form 10-
K for the year ended January 2, 1999, and hereby
incorporated herein by reference).*
10(j) Promissory Note of Jack A. Newman, Jr. (filed as
Exhibit 10(m) to Registrant's Annual Report on Form 10-
K for the year ended January 2, 1999, and hereby
incorporated herein by reference).*
10(k) Promissory Notes of Earl H. Devanny, III (filed as
Exhibit 10(l) to Registrant's Annual Report on Form 10-
K for the year ended January 1, 2000, and hereby
incorporated herein by reference).*
10(l) Promissory Note of Glenn P. Tobin, Ph.D. (filed as
Exhibit 10(o) to Registrant's Annual Report on Form 10-
K for the year ended January 2, 1999, and hereby
incorporated herein by reference).*
10(m) Cerner Corporation Executive Stock Purchase Plan
(filed as Exhibit 4(g) to Registrant's Registration
Statement on Form S-8 (File No. 333-77029) and hereby
incorporated herein by reference).*
30
10(n) Form of Stock Pledge Agreement for Cerner
Corporation Executive Stock Purchase Plan (filed as
Exhibit 4(h) to Registrant's Registration Statement on
Form S-8 (File No. 333-77029) and hereby incorporated
herein by reference).*
10(o) Form of Promissory Note for Cerner Corporation
Executive Stock Purchase Plan (filed as Exhibit 4(i) to
Registrant's Registration Statement on Form S-8 (File
No. 333-77029) and hereby incorporated herein by
reference).*
10(p) Employment Agreement of Earl H. Devanny, III
(filed as Exhibit 10(q) to Registrant's Annual Report
on Form 10-K for the year ended January 1, 2000, and
hereby incorporated herein by reference).*
10(q) Employment Agreement of Glenn P. Tobin, Ph.D.
(filed as Exhibit 10(r) to Registrant's Annual Report
on Form 10-K for the year ended January 1, 2000, and
hereby incorporated herein by reference).*
10(r) Employment Agreement of Stanley M. Sword (filed as
Exhibit 10(s) to Registrant's Annual Report on Form 10-
K for the year ended January 1, 2000, and hereby
incorporated herein by reference).*
10(s) Employment Agreement of Jack A. Newman, Jr.*
10(t) Cerner Corporation 2001 Long-Term Incentive Plan F
(filed as Annex I to Registrant's 2001 Proxy Statement
and hereby incorporated by reference).*
10(u) Cerner Corporation 2001 Associate Stock Purchase
Plan (filed as Annex II to Registrant's 2001 Proxy
Statement and hereby incorporated by reference).*
10(v) Qualified Performance-Based Compensation Plan.*
11 Computation of Registrant's Earnings Per Share.
(Exhibit omitted. Information contained in notes to
consolidated financial statements.)
22 Subsidiaries of Registrant.
23 Consent of Independent Auditors.
* Management contracts or compensatory plans or arrangements
required to be identified by Item 14(a)(3).
(b) Reports on Form 8-K.
Report on Form 8-K was filed on November 22, 2000.
(c) Exhibits.
The response to this portion of Item 14 is submitted as a
separate section of this report.
(d) Financial Statement Schedules.
The response to this portion of Item 14 is submitted as a
separate section of this report.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Dated: March 30, 2001 By:/s/ Neal L. Patterson
------------------------------
Neal L. Patterson
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated:
Signature and Title Date
------------------- ----
/s/Neal L. Patterson March 30, 2001
- - - - -------------------------------
Neal L. Patterson, Chairman of the Board and
Chief Executive Officer (Principal Executive
Officer)
/s/Clifford W. Illig March 30, 2001
- - - - -------------------------------
Clifford W. Illig, Vice Chairman and Director
/s/Marc G. Naughton March 30, 2001
- - - - -------------------------------
Marc G. Naughton, Vice President and
Chief Financial Officer (Principal Financial
and Accounting Officer)
/s/Michael E. Herman March 30, 2001
- - - - -------------------------------
Michael E. Herman, Director
/s/Gerald E. Bisbee March 30, 2001
- - - - -------------------------------
Gerald E. Bisbee, Jr., Ph.D., Director
/s/John C. Danforth March 30, 2001
- - - - -------------------------------
John C. Danforth, Director
/s/Jeff C. Goldsmith March 30, 2001
- - - - -------------------------------
Jeff C. Goldsmith, Ph.D., Director
/s/William B. Neaves March 30, 2001
- - - - -------------------------------
William B. Neaves, Ph.D., Director
32
Independent Auditors' Report
- - - - -----------------------------------------------------------------
The Board of Directors and Stockholders
Cerner Corporation:
We have audited the accompanying consolidated balance sheets of
Cerner Corporation and subsidiaries as of December 30, 2000 and
January 1, 2000, and the related consolidated statements of
operations, changes in equity, and cash flows for each of the
years in the three-year period ended December 30, 2000. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Cerner Corporation and subsidiaries as of December
30, 2000 and January 1, 2000, and the results of their operations
and their cash flows for each of the years in the three-year
period ended December 30, 2000, in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Kansas City, Missouri
January 31, 2001
Management's Report
- - - - -----------------------------------------------------------------
The management of Cerner Corporation is responsible for the
consolidated financial statements and all other information
presented in this report. The financial statements have been
prepared in conformity with accounting principles generally
accepted in the United States of America appropriate to the
circumstances, and, therefore, included in the financial
statements are certain amounts based on management's informed
estimates and judgments. Other financial information in this
report is consistent with that in the consolidated financial
statements. The consolidated financial statements have been
audited by Cerner Corporation's independent certified public
accountants and have been reviewed by the audit committee of the
Board of Directors.
33
Consolidated Balance Sheets
- - - - -----------------------------------------------------------------
December 30, 2000 and January 1, 2000
2000 1999
--------------------------
(Dollars in thousands)
Assets
Current Assets:
Cash and cash equivalents $ 90,893 75,677
Receivables 188,036 161,174
Inventory 2,174 1,262
Prepaid expenses and other 7,393 4,316
---------- ----------
Total current assets 288,496 242,429
Property and equipment, net 82,234 77,938
Software development costs, net 83,276 71,007
Intangible assets 22,227 7,511
Investments 130,626 252,123
Other assets 9,552 9,883
---------- ----------
$ 616,411 660,891
========== ==========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 20,532 20,261
Current installments of long-term
debt 72 -
Deferred revenue 40,212 21,245
Income taxes 9,718 10,987
Accrued payroll and tax
withholdings 27,338 17,241
Other accrued expenses 4,443 2,642
---------- ----------
Total current liabilities 102,315 72,376
Long-term debt, net 102,299 100,000
Deferred income taxes 57,430 93,578
Deferred revenue 10,650 16,000
Stockholders' Equity:
Common stock, $.01 par value,
150,000,000 shares authorized,
35,967,618 shares issued in 2000
and 34,932,703 shares in 1999 360 349
Additional paid-in capital 192,715 166,735
Retained earnings 230,916 125,651
Treasury stock, at cost (1,201,625
shares in 2000 and 1,201,518 in 1999) (20,799) (20,796)
Accumulated other comprehensive
income:
Foreign currency translation
adjustment (743) 23
Unrealized gain (loss) on
available-for-sale equity securities
(net of deferred tax asset of
$33,036 in 2000 and deferred tax
liability of $59,806 in 1999) (58,732) 106,975
---------- ----------
Total stockholders' equity 343,717 378,937
---------- ----------
Commitments (Note 12)
$ 616,411 660,891
========== ==========
See notes to consolidated financial statements.
34
Consolidated Statements of Operations
- - - - -----------------------------------------------------------------
For the years ended December 30, 2000, January 1, 2000 and
January 2, 1999
2000 1999 1998
--------------------------------
(In thousands, except per share data)
Revenues
System sales $ 263,109 224,510 245,490
Support and maintenance 114,898 94,198 76,755
Other 26,497 21,489 8,657
--------------------------------
Total revenues 404,504 340,197 330,902
--------------------------------
Costs and expenses
Cost of revenues 90,118 95,038 89,544
Sales and client service 169,289 141,234 117,107
Software development 78,425 72,663 59,754
General and administrative 29,483 27,564 25,929
Write-off of acquired in-
process research and
development 4,900 - 5,038
Write-down of intangible
assets 6,687 - -
--------------------------------
Total costs and expenses 378,902 336,499 297,372
--------------------------------
Operating earnings 25,602 3,698 33,530
Interest expense, net (3,671) (3,396) (262)
Realized gain on exchange
of stock 188,654 - -
Realized loss on sale of
stock (38,462) - -
--------------------------------
Earnings before income taxes
and extraordinary item 172,123 302 33,268
Income taxes (66,858) (118) (12,679)
--------------------------------
Earnings before extraordinary
item 105,265 184 20,589
Extraordinary item, net of tax - (1,395) -
--------------------------------
Net earnings (loss) $ 105,265 (1,211) 20,589
================================
Basic earnings per share before
extraordinary item $ 3.08 .01 .63
================================
Basic earnings (loss) per share $ 3.08 (.04) .63
================================
Diluted earnings per common
share before extraordinary
item $ 2.96 .01 .61
================================
Diluted earnings (loss) per
common share $ 2.96 (.04) .61
================================
See notes to consolidated financial statements.
35
Consolidated Statements of Changes in Equity
- - - - -----------------------------------------------------------------
For the years ended December 30, 2000, January 1, 2000 and
January 2, 1999
Accumulated
Additional Treasury other
Common Stock paid-in Retained stock Comprehensive Comprehensive
Shares Amount capital earnings amount income income
------------------------------------------------------------------------------------------
(In thousands)
Balance at January 3, 1998 33,817 $ 338 $ 148,074 106,273 (20,796) (142)
-------------------------------------------------------------------------
Exercise of options 185 2 1,248 - - -
Issuance of common stock
grants as compensation 2 - 44 - - -
Issuance of common stock 670 7 14,867 - - -
Non-employee stock option
compensation expense - - 385 - - -
Tax benefit from
disqualifying
disposition of stock
options - - 621 - - -
Foreign currency
translation adjustment - - - - - (101) (101)
Unrealized loss on
available-for-sale
equity security,
net of deferred tax
benefit of $165 - - - - - (266) (266)
Net earnings - - - 20,589 - - 20,589
------------------------------------------------------------------------------------------
Comprehensive income 20,222
========
Balance at January 2, 1999 34,674 $ 347 165,239 126,862 (20,796) (509)
========================================================================
Exercise of options 257 2 623 - - -
Issuance of common stocks
grants as compensation 2 - 40 - - -
Non-employee stock option
compensation expense - - 239 - - -
Tax benefit from
disqualifying
disposition of stock
options - - 594 - - -
Foreign currency
translation adjustment - - - - - 266 266
Unrealized gain on
available-for-sale
equity securities, net
of deferred tax expense
of $59,971 - - - - - 107,241 107,241
Net loss - - - (1,211) - - (1,211)
------------------------------------------------------------------------------------------
Comprehensive income 106,296
========
Balance at January 1, 2000 34,933 $ 349 166,735 125,651 (20,796) 106,998
========================================================================
Exercise of options 439 5 7,050 - (3) -
Issuance of common stock
grants as compensation 2 - 31 - - -
Acquisition of business 594 6 14,056 - - -
Non-employee stock option
compensation expense - - 229 - - -
Fair value of employee
stock options exchanged in
acquisition of business - - 1,089 - - -
Tax benefit from
disqualifying
disposition of stock
options - - 3,525 - - -
Foreign currency
translation adjustment - - - - - (766) (766)
Unrealized loss on
available-for-sale
equity securities, net
of deferred tax benefit
of $92,842 - - - - - (165,707) (165,707)
Net earnings - - - 105,265 - - 105,265
------------------------------------------------------------------------------------------
Comprehensive income (61,208)
=========
Balance at December 30, 2000 35,968 $ 360 192,715 230,916 (20,799) (59,475)
========================================================================
See notes to consolidated financial statements.
36
Consolidated Statements of Cash Flows
- - - - -----------------------------------------------------------------
For the years ended December 30, 2000, January 1, 2000 and
January 2, 1999
2000 1999 1998
------------------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ 105,265 (1,211) 20,589
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization 37,988 31,388 25,411
Common stock received as consideration for
sale of license software (6,150) - (70,000)
Realized gain on exchange of stock (188,654) - -
Realized loss on sale of stock 38,462 - -
Write-down of intangible assets 6,687 - -
Non-recurring fixed fee implementation cost - 9,449 -
Non-recurring branch restructure charge - 1,358 -
Extraordinary item, net of tax - 1,395 -
Write-off of acquired in-process research and
development 4,900 - 5,038
Issuance of common stock grants as compensation 31 40 44
Non-employee stock option compensation expense 229 239 385
Equity in losses of affiliates 1,095 423 1,601
Provision for deferred income taxes 67,640 (3,165) 15,816
Tax benefit from disqualifying dispositions of
stock options 3,525 594 621
Loss on disposal of capital equipment 33 478 223
Changes in operating assets and liabilities (net
businesses acquired):
Receivables, net (14,994) 6,200 (39,481)
Inventory 595 1,389 (908)
Prepaid expenses and other (7,025) 844 (3,970)
Accounts payable (3,389) (5,207) 2,620
Accrued income taxes (5,329) 461 (2,334)
Deferred revenue 5,280 (16,676) 45,410
Other current liabilities 7,124 (610) 4,828
------------------------------
Total adjustments (51,952) 28,600 (14,696)
------------------------------
Net cash provided by operating 53,313 27,389 5,893
------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of capital equipment (16,154) (14,345) (20,846)
Purchase of land, buildings, and improvements - - (2,767)
Acquisition of businesses (16,829) - (6,874)
Investment in affiliates (7,370) (13,615) (1,217)
Proceeds from sale of stock of available for
sale securities 26,152 - -
Advances to affiliates 1,000 (1,000) -
Issuance of notes receivable (385) (3,628) -
Repayment of notes receivable 1,152 - -
Capitalized software development costs (30,982) (30,192) (25,052)
------------------------------
Net cash used in investing activities (43,416) (62,662) (56,756)
------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt - 99,568 -
Repayment of long-term debt 967) (32,167) (45)
Proceeds from sale of common stock - - 14,874
Proceeds from exercise of options 7,052 625 1,250
------------------------------
Net cash provided by financing activities 6,085 68,026 16,079
------------------------------
Foreign currency translation adjustment (766) 266 (101)
------------------------------
Net increase (decrease) in cash and cash
equivalents 15,216 33,019 (34,885)
Cash and cash equivalents at beginning of year 75,677 42,658 77,543
------------------------------
Cash and cash equivalents at end of year $ 90,893 75,677 42,658
==============================
Supplemental disclosures of cash flow information
Cash paid (received) during the year for:
Interest $ 7,348 5,448 2,504
Income taxes, net of refund 930 1,647 (2,112)
Noncash investing and financing activities
Issuance of common stock for acquisition of
business 14,062 - -
Issuance of notes payable for acquisition of
business 1,385 - -
Addition to paid-in capital for the fair value
of employee stock options exchanged in the
acquisition of business 1,089 - -
See notes to consolidated financial statements.
37
Notes to Consolidated Financial Statements
- - - - -----------------------------------------------------------------
1 Summary of Significant Accounting Policies
(a) Principles of Consolidation - The consolidated financial
statements include the accounts of Cerner Corporation and its
wholly owned subsidiaries (the Company). All significant
intercompany transactions and balances have been eliminated in
consolidation.
(b) Nature of Operations - The Company designs, develops,
markets, installs, hosts and supports software information
technology and content solutions for healthcare organizations and
consumers. The Company also implements these solutions as
individual, combined or enterprise-wide systems.
(c) Revenue Recognition - Revenues are derived primarily from
the sale of clinical information systems. The Company also
provides project implementation and consulting services. In
addition, revenue is generated from servicing installed clinical
information systems, which generally includes support of software
and maintenance of hardware. The Company also derives revenue
from the sale of computer hardware.
Clinical information system sales contracts generally include the
licensing of the Company's clinical information system software,
project-related services associated with the installation of the
systems, and the sale of computer hardware. Clinical information
system sales contracts are noncancelable and provide for a right
of return only in the event the system fails to meet the
published specifications of the software. The Company recognizes
revenue from sales of clinical information systems using a
percentage-of-completion method based on meeting key milestone
events over the term of the contracts in accordance with
Statement of Position 97-2, "Software Revenue Recognition".
Revenue associated with project implementation and consulting
services is recognized as the services are performed. Revenue
from the licensing of additional software is recognized upon
installation at the client's site. Revenue from the sale of
computer hardware is recognized upon shipment. Revenue from
ongoing software support and equipment maintenance is recognized
as the services are rendered.
(d) Fiscal Year - The Company's fiscal year ends on the Saturday
closest to December 31. Fiscal years 2000, 1999 and 1998
consisted of 52 weeks each. All references to years in these
notes to consolidated financial statements represent fiscal years
unless otherwise noted.
(e) Software Development Costs - Costs incurred internally in
creating computer software products are expensed until
technological feasibility has been established upon completion of
a detail program design. Thereafter, all software development
costs are capitalized and subsequently reported at the lower of
amortized cost or net realizable value. Capitalized costs are
amortized based on current and expected future revenue for each
product with minimum annual amortization equal to the straight-
line amortization over the estimated economic life of the
product. The Company is amortizing capitalized costs on a
straight-line basis over five years. During 2000, 1999 and 1998,
the Company capitalized $30,982,000, $30,192,000 and $25,052,000,
respectively, of total software development costs of $90,694,000,
$88,699,000 and $74,159,000, respectively. Amortization
expense of capitalized software development costs in 2000, 1999
and 1998 was $18,713,000, $14,156,000 and $10,647,000,
respectively, and accumulated amortization was $76,411,000,
$57,698,000 and $43,542,000, respectively.
(f) Cash Equivalents - Cash equivalents consist of short-term
marketable securities with original maturities less than ninety
days.
(g) 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. For realized gains and losses on available-for-sale
investments, the Company utilizes the specific identification
method as the basis to determine cost. Investments in the common
stock of certain affiliates over which the Company exerts
significant influence are accounted for by the equity
38
Notes to Consolidated Financial Statements
- - - - -----------------------------------------------------------------
method. 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.
(h) Inventory - Inventory consists primarily of computer
hardware held for resale and is recorded at the lower of cost
(first-in, first-out) or market.
(i) Property and Equipment - Property, equipment and leasehold
improvements are stated at cost. Depreciation of property and
equipment is computed using the straight-line method over periods
of 5 to 39 years. Amortization of leasehold improvements is
computed using a straight-line method over the lease terms, which
range from periods of two to twelve years.
(j) Earnings per Common 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 the denominators of the basic and diluted per-
share computations is as follows:
(In thousands, except per share data)
2000 1999 1998
-----------------------------------------------------------------------------------------------------------
Per- Per- Per-
Earnings Shares Share Earnings Shares Share Earnings Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-----------------------------------------------------------------------------------------------------------
Earnings per share before extraordinary item
- - - - --------------------------------------------
Basic earnings
per share
Income available
to common stock
holders
$105,265 34,123 $ 3.08 184 33,623 $ .01 20,589 32,825 $ .63
======= ====== =====
Effect of dilutive
securities
Stock options
- 1,480 - 293 - 842
Diluted earnings per share
Income available to common
stockholders including
assumed
conversions
----------------------------------------------------------------------------------------------------
$105,265 35,603 $ 2.96 184 33,916 $ .01 20,589 33,667 $ .61
====================================================================================================
Net earnings (loss) per share
- - - - -----------------------------
Basic earnings (loss)
per share
Income available to
common stockholders
$105,265 34,123 $ 3.08 (1,211) 33,623 $ (.04) 20,589 32,825 $ .63
======= ====== =====
Effect of dilutive
securities
Stock options
- 1,480 - 293 - 842
Diluted earnings (loss)
per share
Income available
to common stock
holders including
assumed conversions
------------------------------------------------------------------------------------------------------
$105,265 35,603 $ 2.96 (1,211) 33,916 $ (.04) 20,589 33,667 $ .61
======================================================================================================
Options to purchase 521,000, 3,185,000 and 1,652,000 shares of
common stock at per share prices ranging from $35.88 to $84.07,
$17.50 to $31.00, and $25.00 to $31.00 were outstanding at the
end of 2000, 1999 and 1998, 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.
39
Notes to Consolidated Financial Statements
- - - - -----------------------------------------------------------------
(k) Foreign Currency - Assets and liabilities in foreign
currencies are translated into dollars at rates prevailing at the
balance sheet date. Revenues and expenses are translated at
average rates for the year. The net exchange differences
resulting from these translations are reported in accumulated
other comprehensive income. Gains and losses resulting from
foreign currency transactions are included in the consolidated
statements of earnings. The net gain (loss) resulting from
foreign currency transactions was ($518,000), $95,000 and
($673,000) in 2000, 1999 and 1998, respectively.
(l) Income Taxes - Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled.
(m) Goodwill - Excess of cost over net assets acquired
(goodwill) is being amortized on a straight-line basis over four
to eight years. Accumulated amortization was $5,964,000 and
$5,387,000 at the end of 2000 and 1999, respectively. The
Company assesses the recoverability of goodwill based on
forecasted undiscounted future operating cash flows.
(n) Comprehensive Income - Included in comprehensive income for
2000 are reclassification adjustments for the net realized after-
tax gain of $95,900,000 related to the exchange for and sale of
WebMD stock.
(o) Use of Estimates - The preparation of financial statements
in conformity with accounting principles generally accepted in
the United States of America requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
2 Business Acquisitions
During the three years ended December 30, 2000, the Company
completed five acquisitions, which were accounted for under the
purchase method of accounting. Pro forma results of operations
have not been presented for any of the acquisitions because the
effects of these acquisitions were not material to the Company on
either an individual or an aggregate basis. Had the acquisitions
occurred at the beginning of 1999, pro-forma revenues would have
increased by $30,386,000 and $49,797,000 in 2000
and 1999, respectively. The results of operations of each
acquisition are included in the Company's consolidated statement
of operations from the date of each acquisition.
The amounts allocated to purchased in-process research and
development (IPRD) were determined through established valuation
techniques in the high-technology computer industry and were
expensed upon acquisition because technological feasibility had
not been established and no future alternative uses existed.
Research and development costs to bring the products from the
acquired companies to technological feasibility, individually or
in the aggregate, are not expected to have a material impact on
the Company's future results of operations or cash flows. Amounts
allocated to goodwill and other intangibles are amortized on a
straight-line basis over five to seven years. The IPRD amounts
in the table below are reflected as one-time charges to earnings
at the date of acquisition.
Subsequent to the acquisition of Health Network Ventures, Inc.,
the Company determined that it would discontinue the portion of
the business focused on individual physician practice
connectivity and transaction processing. 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 related to a
write-down of intangible assets.
40
Notes to Consolidated Financial Statements
- - - - -----------------------------------------------------------------
A summary of the Company's purchase acquisitions for the three
years ended December 30, 2000, is included in the following table
(in millions, except share amounts):
Entity Name and
Description of Business Developed Customer Form of
Acquired Date Consideration Goodwill Technology Workforce Base IPRD Consideration
- - - - ---------------------------------------------------------------------------------------------------------------------
Fiscal 2000 Acquisitions
- - - - ---------------------------------------------------------------------------------------------------------------------
ADAC Healthcare Information 11/00 $5.3 $1.4 $3.0 $.4 $1.7 $1.7 $3.9 cash
Systems, Inc. (a) $1.4 note payable
Image management solutions
for radiology departments
- - - - ---------------------------------------------------------------------------------------------------------------------
CITATION Computer 8/00 $17.8 $8.3 $2.7 $1.2 $2.0 $3.2 $2.6 cash
Computer Systems, Inc. $14.1 594,000
Systems, Inc. (b) shares of common
Market leader in laboratory stock issued
systems for small to mid-sized $1.1 vested
hospitals options assumed
- - - - ---------------------------------------------------------------------------------------------------------------------
Mitch Cooper & Associates 4/00 $2.0 $2.0 --- --- --- --- $2.0 cash
Supply chain re-engineering
consulting practice
- - - - ---------------------------------------------------------------------------------------------------------------------
Health Network Ventures, Inc. 4/00 $8.3 $4.2 --- --- --- --- $8.3 cash
Provides software solutions
that enable transaction
processing between providers
and other health-related
entities
- - - - ---------------------------------------------------------------------------------------------------------------------
Fiscal 1998 Acquisition
- - - - ---------------------------------------------------------------------------------------------------------------------
Multum Information 3/98 $6.9 $1.6 $.5 $.5 --- $5.0 $6.9 cash
Systems, Inc.
Healthcare industry
supplier of drug knowledge
databases and intelligent
software components designed
to improve the quality and
cost-effectiveness of medical
care
- - - - ---------------------------------------------------------------------------------------------------------------------
(a) The acquired in-process research and development is related
to HCIS's PACS (Picture Archiving and Communications Systems)
product. The PACS product, when integrated with the Company's
radiology information system, provides a comprehensive radiology
solution, from automating and streamlining the information
workflow to complete image management. PACS was approximately
86% complete at the time of the acquisition. When ADAC HCIS was
acquired, management projected that PACS would be completed in 3
months at an estimated cost of $150,000. The risks associated
with PACS are like any other software development project and
include changes in technology and competition. The PACS project
was valued using the income approach with the following
assumptions: material net cash inflows are expected to commence
in 2001; no material changes from historical pricing, margins, or
expense levels are anticipated; and, a 20% risk adjusted discount
rate was applied to the estimated net cash flows. PACS was
approximately 95% complete at the end of 2000.
(b) The acquired in-process research and development is related
to CITATION's enhanced versions of the C-LAB and C-COM products.
C-LAB addresses the complex information needs of the laboratory's
general lab, microbiology, anatomical pathology and blood bank
departments with a Windows NT client server solution. C-LAB was
approximately 68% complete at the time of the acquisition. When
CITATION was acquired, management projected that C-LAB would be
completed in 6-9 months at an estimated cost of $700,000. The
risks associated with C-LAB are like any other software
development project and include changes in technology and
competition. The C-LAB project was valued using the income
approach with the following assumptions: material net cash
inflows are expected to commence in 2001; no
41
Notes to Consolidated Financial Statements
- - - - -----------------------------------------------------------------
material changes from historical pricing, margins, or expense
levels are anticipated; and, a 20% risk adjusted discount rate
was applied to the estimated net cash flows. C-LAB was
approximately 75% complete at the end of 2000. C-COM is also
designed for a Windows NT client server user and works with
other information systems in healthcare facilities by providing
a central data repository for clinical orders and results. It
then allows for routing of the patient information to all
care-providing centers throughout the healthcare enterprise.
C-COM was approximately 75% complete at the time of the
acquisition. When CITATION was acquired, management projected
that C-COM would be completed in 3-6 months at an estimated cost
of $500,000. The risks associated with C-COM are like any other
software development project and include changes in technology
and competition. The C-COM project was valued using the income
approach with the following assumptions: material net cash
inflows are expected to commence in 2001; no material changes
from historical pricing, margins, or expense levels are
anticipated; and, a 20% risk adjusted discount rate was applied
to the estimated net cash flows. C-COM was approximately 85%
complete at the end of 2000.
3 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) 2000 1999
-------------------------
Accounts receivable $ 96,946 85,814
Contracts receivable 91,090 75,360
--------- ---------
Total receivables $ 188,036 161,174
========= =========
Substantially all receivables are derived from sales and related
support and maintenance of the Company's clinical information
systems to healthcare providers located throughout the United
States and in certain foreign countries. Included in receivables
at the end of 2000 and 1999 are amounts due from healthcare
providers located in foreign countries of $23,600,000 and
$17,704,000, respectively. Consolidated revenues include foreign
sales of $25,815,000, $24,001,000 and $17,545,000, during 2000,
1999 and 1998, respectively. Consolidated long-lived assets at
the end of 2000 and 1999, include foreign long-lived assets of
$649,000 and $638,000, respectively. Revenues and long-lived
assets from any one foreign country are not material.
The Company provides an allowance for estimated uncollectible
accounts based upon historical experience and management's
judgment. At the end of 2000 and 1999 the allowance for
estimated uncollectible accounts was $5,999,000 and $4,759,000,
respectively.
42
Notes to Consolidated Financial Statements
- - - - -----------------------------------------------------------------
4 Property and Equipment
A summary of property, equipment, and leasehold improvements
stated at cost, less accumulated depreciation and amortization,
is as follows:
(In thousands) 2000 1999
------------------------
Furniture and fixtures $ 24,004 21,623
Computer and communications equipment 82,769 67,462
Marketing equipment 2,045 1,984
Shop equipment 2,902 -
Leasehold improvements 21,533 16,905
Capital lease equipment 1,104 713
Land, buildings, and improvements 32,437 32,437
------- -------
166,794 141,124
Less accumulated depreciation and
amortization 84,560 63,186
------- -------
Total property and equipment, net $ 82,234 77,938
======= =======
5 Investments
Investments consist of the following:
(In thousands) 2000 1999
---------- ----------
Investments in available-for-sale
equity securities $ 194,268 13,057
Plus unrealized holding gain (loss) (91,768) 166,781
--------- ---------
Investment in available-for-sale
equity securities, at fair value 102,500 179,838
Investments in equity securities,
at cost 25,285 69,822
Investments accounted for under
the equity method 2,841 2,463
--------- ---------
Total investments, net $ 130,626 252,123
========= =========
In 1998 and 1999 the Company acquired a 17.5% interest
(13,149,259 shares of common stock) in CareInsite with a cost
basis of $81,804,000. 12,437,500 of these shares were received in
1998 as consideration for the sale of license software, and an
additional 711,759 shares were purchased in 1999. The value
assigned to the shares acquired in 1998 was $70,000,000 and was
based on a methodology which utilized both a comparable company
and the expected underlying discounted future cash flows. The
Company was also granted, by CareInsite, 1,008,445 common stock
warrants with an exercise price of $4.00 per share ("THINC
Warrants"). The THINC Warrants were exercisable only in the
event that The Health Information Network Connections, LLC
("THINC") exercised warrants granted to them by CareInsite at
$4.00 per share. THINC was allowed to exercise their warrants
180 days after the initial public offering of CareInsite. On
January 29, 2000 CareInsite completed an acquisition of THINC.
As part of that agreement, 806,756 of the Company's 1,008,445
THINC Warrants became immediately exercisable, with the remaining
amount forfeited.
On February 13, 2000 CareInsite entered into an agreement to
merge with Healtheon/WebMD Corporation ("Merger Agreement"). As
part of the Merger Agreement, the Company received 1.3 shares of
Healtheon/WebMD Corporation (Web MD) in exchange for each common
share of CareInsite held by the Company. The warrants were also
converted at the same exchange ratio. The merger of CareInsite
and WebMD ("Merger") closed on September 12, 2000. Accordingly,
the Company recorded a non-recurring investment gain of
$120,362,000, net of tax, as a result of the exchange.
43
Notes to Consolidated Financial Statements
- - - - ----------------------------------------------------------------
On December 12, 2000, the Company sold 4,273,509 shares of WebMD
for $25,641,000. Accordingly, the Company recorded a non-
recurring investment loss of $24,539,000, net of tax, as a result
of the sale.
At December 30, 2000, the Company owned 12,820,527 shares of
common stock of WebMD, which have a cost basis of $192,308,000
and a carrying value of $101,795,000, as these shares are
accounted for as available-for-sale. The stock of WebMD held by
the Company is registered but is subject to certain lock-up
provisions. At December 30, 2000 the Company also holds
1,048,783 warrants of WebMD with an exercise price of $3.08 and a
cost basis and carrying value of $13,685,000. The warrants are
carried at cost, as they do not have a fair value that is
currently available on a securities exchange.
If the Company realizes certain performance metrics related to
specified levels of physician usage, WebMD will issue to the
Company 3,254,063 shares of common stock at a price of $0.01 per
share ("Performance Shares"). The Performance Shares were
adjusted at a rate of 1.3 shares of WebMD for each share of
CareInsite. The contracted measurement date was February 15,
2001. The Company and WebMD are in discussions regarding the
attainment of the Performance Shares. No amounts have been
recognized in the consolidated financial statements for the
Performance Shares pending completion of the discussions.
6 Indebtedness
The Company has a loan agreement with a bank that provides for a
long-term revolving line of credit for working capital purposes.
The long-term revolving line of credit is unsecured and requires
monthly payments of interest only. Interest is payable at the
Company's option at a rate based on prime (9.5% at December 30,
2000) or LIBOR (6.4% at December 30, 2000) plus 1.5%. The
interest rate may be reduced by up to .4% if certain net worth
ratios are maintained. At December 30, 2000, the Company had no
outstanding borrowings under this agreement and had $18,000,000
available for working capital purposes. The agreement contains
certain net worth, current ratio, and fixed charge coverage
covenants and provides certain restrictions on the Company's
ability to borrow, incur liens, sell assets, and pay dividends.
A commitment fee of 3/10% is payable quarterly on the unused
portion of the revolving line of credit.
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 payable in five equal annual installments
beginning in April 2002. The Series B Senior Notes, with a
$40,000,000 principal amount at 7.66% are payable in six equal
annual installments beginning April 2004. The proceeds were used
to retire the Company's existing $30,000,000 of debt, and the
remaining funds are being used for proposed capital improvements
and to strengthen the Company's cash position. In connection
with the early extinguishment of debt, the Company incurred an
extraordinary loss for a prepayment penalty and write-off of
deferred loan costs of $1,395,000 net of taxes. The note
agreement contains certain net worth, current ratio, and fixed
charge coverage covenants and provides certain restrictions on
the Company's ability to borrow, incur liens, sell assets, and
pay dividends. The Company was in compliance with all covenants
at December 30, 2000.
The Company also has capital lease obligations and other notes
payable amounting to $2,400,000, payable over the next four
years.
44
Notes to Consolidated Financial Statements
- - - - -----------------------------------------------------------------
The aggregate maturities for the Company's long-term debt is as
follows (in thousands):
2001 $ 72
2002 14,243
2003 12,042
2004 18,682
2005 18,666
2006 and thereafter 38,666
-------
$ 102,371
=======
The Company estimates the fair value of its long-term, fixed-rate
debt using discounted cash flow analysis based on the Company's
current borrowing rates for debt with similar maturities. The
fair value of the Company's long-term debt is $101,271,000 at
December 30, 2000.
7 Interest Income and Expense
A summary of interest income and expense is as follows:
(In thousands) 2000 1999 1998
------------------------------------
Interest income $ 3,645 2,582 2,242
Interest expense (7,316) (5,978) (2,504)
---------- ---------- -----------
Interest expense, net $(3,671) (3,396) (262)
========== ========== ===========
8 Stock Options and Warrants
At December 30, 2000, the Company had four fixed stock option
plans. Under Stock Option Plan B, the Company could grant to
associates options to purchase up to 5,600,000 shares of common
stock through November 30, 1993. The options are exercisable at
the fair market value on the date of grant for a period
determined by the Board of Directors (not more than ten years
from the date granted). The options contain restrictions as to
transferability and exercisability after termination of
employment.
Under Stock Option Plan C, the Company is authorized to grant to
associates options to purchase up to 645,000 shares of common
stock through May 18, 2003. The options are exercisable at the
fair market value on the date of grant for a period determined by
the Board of Directors (not more than ten years from the date
granted). The options contain restrictions as to transferability
and exercisability after termination of employment. The Company
has committed not to issue any more stock options under Stock
Option Plan C.
Initially under Stock Option Plan D, the Company was authorized
to grant to associates, directors, consultants or advisors to
the Company options to purchase up to 50,000 shares of common
stock through January 1, 2005. Additional shares were approved
by the Company's shareholders on May 17, 1994, May 16, 1995 and
May 22, 1998, increasing the total authorized to grant to
4,600,000 shares. The options are exercisable at a price (not
less than fair market value on the date of grant) and during a
period determined by the Stock Option Committee. Options under
this plan currently vest over periods of up to ten years and are
exercisable for periods of up to 25 years.
Initially, under Stock Option Plan E, the Company was authorized
to grant to associates (other than officers subject to the
provisions of Section 16(a) of the Securities and Exchange Act of
1934), consultants, or advisors to the Company options to
purchase up to 2,000,000 shares of common stock through January
1, 2005. There was a 1,100,000 share increase approved by the
Company's Board of Directors on December 8, 2000, increasing
the total authorized to grant to 3,100,000 shares. The options
are exercisable at a price (not less than fair market value
on the date of grant) and during a period determined
45
Notes to Consolidated Financial Statements
- - - - -----------------------------------------------------------------
by the Stock Option Committee. Options under this
plan currently vest over periods of up to ten years and are
exercisable for periods of up to 25 years.
The Company has also granted 454,542 other non-qualified stock
options under separate agreements to employees and certain third
parties. These options are exercisable at a price equal to or
greater than the fair market value on the date of grant. These
options vest over periods of up to six years and are exercisable
for periods of up to ten years. In 2000, the Company granted an
additional 350,000 stock options to a third party at an exercise
price equal to the fair market value on the date of grant. The
options are vested and become exercisable at the earlier of five
years or when certain conditions are met.
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.
A combined summary of the status of the Company's four fixed
stock option plans and other stock options at the end of 2000,
1999, and 1998, and changes during these years ended is presented
below:
2000 1999 1998
----------------------------------------------------------------------
Weighted- Weighted- Weighted-
Number average Number average Number average
of exercise of exercise of exercise
Fixed Options shares price shares price shares price
- - - - ----------------------------------------------------------------------------------------
Outstanding at 5,529,995 $ 19.79 5,488,191 $ 20.38 4,179,258 $ 17.74
beginning of
year
Granted 1,684,144 31.50 1,447,246 16.69 1,932,710 24.15
Exercised (455,706) 17.23 (255,747) 4.91 (185,335) 6.88
Forfeited (458,168) 21.13 (1,149,695) 22.40 (438,442) 17.57
- - - - ----------------------------------------------------------------------------------------
Outstanding at
end of year 6,300,265 $ 22.50 5,529,995 $ 19.79 5,488,191 $ 20.38
========== ========== ==========
Options
exercisable at
year-end 1,458,001 $ 20.97 1,297,147 $ 19.49 1,111,943 $ 15.52
The following table summarizes information about fixed and other
stock options outstanding at December 30, 2000.
Options outstanding Options exercisable
- - - - ---------------------------------------------------------------------------- -----------------------------------
Range of Number Weighted-average Number
exercise Outstanding Remaining Weighted-average exercisable Weighted-average
prices At 12/30/00 contractual life exercise price at 12/30/00 exercise price
- - - - ---------------------------------------------------------------------------- ------------------------------------
$ 1.34-15.00 1,519,018 17.4 years $ 14.20 483,906 $ 17.74
15.13-22.00 1,705,561 12.8 18.83 450,879 19.16
22.06-27.50 1,534,954 10.8 24.75 200,664 24.52
28.00-84.07 1,540,732 12.5 35.44 322,552 32.08
--------- ---------
1.34-84.07 6,300,265 13.4 22.50 1,458,001 20.97
========= =========
46
Notes to Consolidated Financial Statements
- - - - -----------------------------------------------------------------
The per share weighted-average fair value of stock options
granted during 2000, 1999 and 1998 was $18.96, $10.88 and $14.97,
respectively, on the date of grant using the Black Scholes option-
pricing model with the following weighted-average assumptions:
2000 1999 1998
-------------------------------
Expected years until exercise 4.7 8 8
Risk-free interest rate 5.0% 6.9% 5.0%
Expected stock volatility 72.1% 61.3% 58.5%
Expected dividend yield 0% 0% 0%
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 $7,527,000 or $.21 per share in 2000,
approximately $3,922,000 or $.12 per share in 1999 and
approximately $5,929,000 or $.18 per share in 1998.
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.
9 Income Taxes
Income tax expense (benefit) before extraordinary item for the
years ended 2000, 1999, and 1998, consists of the following:
(In thousands) 2000 1999 1998
----------------------------
Current:
Federal $ 175 3,514 (1,929)
State (70) 573 (1,061)
Foreign (887) (804) (147)
-------- ------ -------
Total current (782) 3,283 (3,137)
-------- ------ -------
Deferred:
Federal 63,524 (2,891) 13,634
State 4,482 (288) 1,565
Foreign (366) 14 617
-------- ------- ------
Total deferred 67,640 (3,165) 15,816
-------- ------- ------
Total income tax expense $ 66,858 118 12,679
======== ======= ======
Income tax benefit attributable to the extraordinary item (early
retirement of debt) was $865,000 in 1999. Income tax expense
(benefit) allocated to stockholders' equity for unrealized
holding gain (losses) on available-for-sale equity securities was
($92,842,000) and $59,971,000 for the years ended 2000 and 1999,
respectively.
47
Notes to Consolidated Financial Statements
- - - - -----------------------------------------------------------------
Temporary differences between the financial statement carrying
amounts and tax bases of assets and liabilities that give rise to
significant portions of deferred income taxes at the end of 2000
and 1999 relate to the following:
(In thousands) 2000 1999
------------------------
Deferred Tax Assets
Contract reserves $ - 3,615
Acquisition accrual - 1,779
Accrued expenses 6,395 4,669
Separate return net operating losses 12,281 -
Other 1,718 1,637
--------- ----------
Total deferred tax assets 20,394 11,700
--------- ----------
Deferred Tax Liabilities
Unrealized gain on investments (21,975) (59,806)
Software development costs (32,143) (26,812)
Contract and service revenues
and costs (37,930) (23,591)
Depreciation and amortization (2,764) (4,480)
Other (1,446) (5,581)
---------- ---------
Total deferred tax liabilities (96,258) (120,270)
---------- ---------
Net deferred tax liability $ (75,864) (108,570)
========== =========
The effective income tax rates for 2000, 1999, and 1998 were 39%,
39%, and 38%, respectively. These effective rates differ from
the federal statutory rate of 35% as follows:
(In thousands) 2000 1999 1998
Tax expense at statutory rates $ 60,243 106 11,644
State income tax, net of
federal benefit 2,972 10 1,280
Goodwill 4,225 259 259
Other, net (582) (257) (504)
------- ------- -------
Total income tax expense $ 66,858 118 12,679
======= ======= =======
Income taxes payable are reduced by the tax benefit resulting
from disqualifying dispositions of stock acquired under the
Company's stock option plans. The 2000, 1999, and 1998 benefits
of $3,525,000, $594,000, and $621,000, respectively, are treated
as increases to additional paid-in capital.
10 Foundations Retirement Plan
The Cerner Corporation Foundations Retirement Plan (the Plan) is
established under Section 401(k) of the Internal Revenue Code.
All full-time associates are eligible to participate.
Participants may elect to make pretax contributions from 1% to
20% of compensation to the Plan, subject to annual limitations
determined by the Internal Revenue Service. Participants may
direct contributions into mutual funds, a money market fund, or a
Company stock fund. The Company makes matching contributions to
the Plan, on behalf of participants, in an amount equal to 33% of
the first 6% of the participant's contribution. The Company's
expense for the plan amounted to $2,532,000, $1,187,000 and
$1,005,000 for 2000, 1999 and 1998, respectively.
The Company added a discretionary profit sharing distribution to
the Plan in 2000. Distributions are based on attainment of
established earnings per share goals for the year. Only
participants in the Plan are eligible to receive the profit
sharing distribution. For the year ended December 30, 2000, the
Company expensed $1,100,000 for discretionary distributions.
48
Notes to Consolidated Financial Statements
- - - - -----------------------------------------------------------------
11 Related Party Transactions
The Company loaned $160,000 in 2000 and $3,628,000 in 1999, to
the Company's senior management under the terms of the Executive
Stock Purchase Program ("Program"). The purpose of the Program
is to advance the interests of the Company, the Company's senior
management, and the Company's shareholders by offering the
Company's senior management an incentive to purchase shares of
the Company's stock on the open market. Pursuant to the Program,
the Company provided Program loans to executives to help finance
up to 50% of the total purchase price of the stock purchased.
All Program loans have a term of five (5) years, at an interest
rate of 5.5%. Principal and interest is not due until the end of
the five-year loan term, unless the executive terminates
employment. Executives may also elect to pay interest annually.
If interest is not paid annually, it will compound annually. All
Program loans are secured by the purchased shares and any pledged
shares. The balance of these loans at December 30, 2000 was
$2,764,000.
12 Commitments
The Company leases space to unrelated parties in its North Kansas
City headquarters complex under noncancelable operating leases.
Included in other revenues is rental income of $624,000,
$1,005,000, and $1,795,000 in 2000, 1999, and 1998, respectively.
The Company is committed under operating leases for office space
through September 2005. Rent expense for office and warehouse
space for the Company's regional and global offices for 2000,
1999, and 1998 was $1,735,000, $2,226,000, and $1,847,000,
respectively. Future minimum lease revenues (in thousands) and
aggregate minimum future payments (in thousands) under these
noncancelable operating leases are as follows:
Future Future
Minimum Minimum
lease lease
Years revenues commitments
------------------------------------
2001 $ 247 4,407
2002 40 3,449
2003 23 1,829
2004 - 1,316
2005 - 642
In December, 1999, the Company made a decision to close five of
its branch offices. The Company created a regional branch
structure in 1994 in order to bring associates closer to its
clients. The natural evolution of that strategy and the ability
to leverage internal information technology infrastructure to
create a more virtual workplace has resulted in a significant
decrease in utilization of certain regional offices. This led to
the decision to close these physical locations. The Company
recorded a charge of $1.4 million in sales and client service
expenses in the 1999 fourth quarter to provide for the costs of
closing these locations, primarily based on estimated lease
cancellation fees. All of these costs were paid in 2000.
13 Stockholders' Equity
At the end of 2000 and 1999, the Company had 1,000,000 shares of
authorized but unissued preferred stock, $.01 par value.
49
Notes to Consolidated Financial Statements
- - - - -----------------------------------------------------------------
14 Quarterly Results (unaudited)
Selected quarterly financial data for 2000 and 1999 is set forth
below:
(In thousands, except per share data)
Earnings (loss) Basic
before Net earnings Diluted
income taxes and earnings (loss) earnings (loss)
Revenues extraordinary item (loss) per share per share
------------------------------------------------------------------------
1999 quarterly results:
April 1 $ 87,107 3,986 2,392 .07 .07
July 1 (1) 93,502 44 (2,613) (.08) (.08)
September 30 (2)(3) 104,325 195,588 123,336 3.61 3.45
December 30 (4)(5) 119,570 (27,495) (17,850) (.51) (.51)
- - - - ----------------------------------------------------------------------------------------------------
Total 404,504 172,123 105,265
======= ======= =======
1999 quarterly results:
April 3 86,743 4,543 2,817 .08 .08
July 3 (6) 82,782 428 (1,135) (.03) (.03)
October 2 80,929 1,146 680 .02 .02
January 1 (7) 89,743 (5,815) (3,573) (.11) (.11)
- - - - ----------------------------------------------------------------------------------------------------
Total 340,197 302 (1,211)
======= ====== =======
- - - - -----------------------------------------------------------------
(1) Includes a non-recurring charge of $6.7 million related to
the write-down of intangible assets associated with the
acquisition of Health Network Ventures, Inc. The impact of
this non-recurring charge on diluted earnings per share was
($.19) for second quarter and for 2000.
(2) Includes a non-recurring charge of $3.2 million related to
the acquisition of CITATION Computer Systems, Inc. The
impact of this non-recurring charge on diluted earnings per
share was ($.09) for the third quarter and for 2000.
(3) Includes a non-recurring investment gain of $120.4 million,
net of $68.3 million tax expense, related to the conversion
of shares of CareInsite common stock to shares of WebMD
common stock. The impact of this non-recurring investment
gain on diluted earnings per share was $3.37 for the third
quarter and $3.38 for 2000.
(4) Includes a non-recurring charge of $1.0 million, net of $.7
million tax benefit, related to the acquisition of ADAC
Healthcare Information Systems, Inc. The impact of this non-
recurring charge on diluted earnings per share was ($.03)
for the fourth quarter and for 2000.
(5) Includes a non-recurring investment loss of $24.5 million,
net of $13.9 million tax benefit, related to the sale of
shares of WebMD common stock. The impact of this
non-recurring investment loss on diluted earnings per share
was ($.67) for the fourth quarter and ($.69) for 2000.
(6) Includes an extraordinary loss on the early extinguishment
of debt of $1,395,000, net of taxes of $865,000. The
impact of this extraordinary item on diluted earnings per
share was ($.01) for the second quarter and for 1999.
(7) See Note 12 regarding a non-recurring charge in the fourth
quarter of 1999. The fourth quarter of 1999 also includes
an additional non-recurring charge of $5.8 million, net of
$3.6 million tax benefit, for contract reserves.
50
Cerner Corporation
Valuation and Qualifying Accounts Schedule II
Additions
Balance of Charged to Additions
Beginning Costs and Through Balance of
Description of Period Expenses Acquisitions Deductions End of Period
- - - - -------------------------------------------------------------------------------------------
For Year Ended
January 2, 1999
Doubtful Accounts
and Sale Allowances $ 1,490,000 $ 1,915,000 $ 0 $ 0 $ 3,405,000
Additions
Balance of Charged to Additions
Beginning Costs and Through Balance of
Description of Period Expenses Acquisitions Deductions End of Period
- - - - -------------------------------------------------------------------------------------------
For Year Ended
January 1, 2000
Doubtful Accounts
and Sale Allowances $ 3,405,000 $ 1,354,000 $ 0 $ 0 $ 4,759,000
Additions
Balance of Charged to Additions
Beginning Costs and Through Balance of
Description of Period Expenses Acquisitions Deductions End of Period
- - - - -------------------------------------------------------------------------------------------
For Year Ended
December 30, 2000
Doubtful Accounts
and Sale Allowances $ 4,759,000 $ 0 $ 1,341,000 $ (101,000) $ 5,999,000
Independent Auditors' Report
on Financial Statement Schedule
The Board of Directors
Cerner Corporation:
Under date of January 31, 2001, we reported on the
consolidated balance sheets of Cerner Corporation and
subsidiaries as of December 30, 2000 and January 1, 2000 and
the related consolidated statements of operations, changes in
equity, and cash flows for each of the years in the three-
year period ended December 30, 2000. These consolidated
financial statements and our report thereon are included in
the Company's annual report on Form 10-K for the year 2000.
In connection with our audits of the aforementioned
consolidated financial statements, we also have audited the
related financial statement schedule as listed under Item
14(a)(2). This financial statement schedule is the
responsibility of the Company's management. Our
responsibility is to express an opinion on this financial
statement schedule based on our audits.
In our opinion, this financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG LLP
Kansas City, Missouri
January 31, 2001