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UNITED STATES
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 28, 1996
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, Suite 601
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
(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 1, 1997, there were 32,895,273 shares of Common
Stock outstanding, of which 7,457,741 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 1, 1997,
was $383,152,826.
Documents incorporated by reference: portions of the
Registrant's Proxy Statement for the 1997 Annual Meeting of
Stockholders are incorporated by reference in Part III hereof.
PART I
Item 1. Business
General
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Cerner Corporation was incorporated in Missouri in
1980. Through a merger into a wholly-owned Delaware subsidiary
effected in June 1987, Cerner Corporation ("Cerner" or the
"Company") became a Delaware corporation. The Company's
principal offices are located at 2800 Rockcreek Parkway, Kansas
City, Missouri 64117, and its telephone number is (816) 221-1024.
Cerner designs, develops, markets, installs and
supports member/patient-focused clinical and management
information systems that are capable of being implemented on an
individual, combined or enterprise-wide basis. Cerner systems
are designed to automate the process of healthcare by
accumulating data on care provided to members/patients,
maintaining such data in a database repository and providing
access to such data for users of clinical information across a
healthcare system. Cerner's systems are designed and developed
using the Health Network Architecture (''HNA''), a single
architecture. HNA is a unified system for combining clinical and
management information applications. HNA allows each
participating facility within an integrated healthcare enterprise
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 the efficiency and productivity of the location and the
entire enterprise.
Healthcare Industry
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The dramatic increase in healthcare costs in the United
States, which historically were based on a fee-for-service model,
has caused significant changes in the healthcare industry.
Managed care organizations and other payers have developed
alternative payment models to control costs, including procedure-
based cost limits, contractually approved providers and
capitation (a fixed monthly fee per member in payment for all
required services). The result has been a continuing shift of
financial risk from the payer to both the physician provider and
the institutional provider (hospitals, clinics, long-term care,
subacute providers and rehabilitative care centers). In
response, institutional providers are aligning with one another
and with physician groups to form Integrated Delivery Systems
(''IDSs''), and IDSs are aligning with payer organizations to
form Integrated Health Organizations (''IHOs''), in each case to
reduce costs in an effort to compete more effectively in the
changing healthcare environment.
The changes occurring in the healthcare industry have
resulted in changes in the needs for clinical and management
information systems by hospitals, physicians, managed care
organizations and Integrated Delivery Systems. Hospitals'
information requirements have become more complex as cost
containment pressures have driven the needs for efficiency and
process automation while the increasing number of relationships
they have with other providers requires additional
sophistication. As physicians combine into a variety of provider
configurations, management structures and incentive plans, they
are increasingly utilizing member/patient focused information
systems to improve quality and efficiency for their growing
practices and physician networks, to develop the data necessary
to compete for contracts with payers and to be able to share the
financial risks of healthcare delivery. Managed care
organizations are increasingly recognizing the value of process-
oriented and clinically-driven information as it relates to
understanding and improving the health of their members.
Information system requirements for IDSs and IHOs encompass many
of the same needs as hospitals, physicians and managed care
organizations. Many IDSs and IHOs are becoming aggressively
involved with institutional providers and physicians in various
relationships where information sharing and process automation
are paramount. Many of these larger, more complex organizations
are seeking closer relationships with suppliers that can provide
comprehensive information systems solutions. Information system
requirements for IDSs and IHOs include integrated process-based
systems for clinical domains, data repositories and applications
for physicians and management teams.
Healthcare Information Systems Industry
- ---------------------------------------
Healthcare information systems are evolving to meet the
needs of a changing marketplace. Initially, computer systems
developed for use in healthcare were financially oriented, with a
focus on the ability to capture charges and generate patient
bills. Beginning in the mid-1960s, institutional provider
organizations began to use clinical information systems, which
automate the activities within clinical departments, such as
laboratory, pharmacy, radiology and surgery departments, to
improve the productivity of resources and automate the production
and use of significant amounts of clinical information.
Individual departments selected systems based upon specific
features on a ''best of breed'' basis resulting in disparate
information systems within the institutional provider.
More recently, there has been a shift from the purchase
of disparate clinical systems on a ''best of breed'' basis to
systems which are able to integrate communication effectively
throughout the healthcare enterprise. The two principal
approaches to meet this need are a common architecture, in which
systems communicate through inherent design, and point-to-point
interfaces, in which systems with different architectures
communicate through interface linkages. This infrastructure
trend also affects the relationship between the health system and
the suppliers of information technology. The approach of
interfacing disparate systems typically involves multiple system
suppliers and the health system must act as the intermediary and
integrator. The common architecture approach relies more on a
strategic relationship with one or very few suppliers dedicated
to implementing a shared vision for the role of information in
the operation of the health system.
The same forces that are causing other healthcare
providers to join together are causing physicians to combine into
larger organizations, including Independent Practice Associations
(''IPAs'') and Preferred Provider Organizations (''PPOs''), and
are increasingly supported administratively through Management
Services Organizations ("MSOs") which offer management and
administrative services to physicians. In some cases, such
organizations align with IDSs and IHOs. Cerner believes that
such physician groups require clinical and management information
systems that allow them to participate in the community-wide
clinical and management information systems employed by the IDSs
and IHOs.
The Cerner Vision
- -----------------
As a result of the rapid transformation of the
healthcare industry, Cerner believes that a new center of
healthcare will emerge-the IHO, which is a combination of payers,
physicians and institutional providers, into a single
organization to service a community or defined member population.
IHOs have the capacity to contract with both the government and
employers to provide healthcare services to member/patients. The
focus of the IHO is to be accountable for the health status of a
defined population, with strong financial incentives to manage
health on a preventive or wellness basis and reduce costs.
Cerner believes that many large IHOs will emerge in the
United States in the next decade. The creation of IHOs results
from the combination of existing payers, physicians and
institutional providers. These IHOs will need to implement
information systems that manage the delivery of care across an
entire community while simultaneously managing the business side
of health management. Only through automating the core process
of healthcare delivery from member enrollment through the
ordering and delivery of care will IHOs be able to actually
manage and measure care. Process automation will enable
healthcare systems interactively to affect the care that is
delivered throughout the entire system at each point of delivery.
Cerner believes that managing these integrated healthcare systems
will require the accumulation and refining of enormous amounts of
process-related data in order to monitor performance against
plans and to make informed business decisions. This process-
oriented approach will also provide the information basis to
measure health system performance, in values known as outcomes,
from clinical, functional, process, member satisfaction and
economic perspectives.
When all of the complex clinical processes that comprise care
delivery in IHOs are automated using fully integrated information
systems, it becomes possible to extend automation to the
management processes of healthcare.
Cerner's HNA Approach
- ---------------------
The cornerstone of Cerner's information systems
strategy is HNA, the single architecture around which each of
Cerner's products is developed. This highly scaleable
architecture allows Cerner to meet the clinical and management
information requirements of a healthcare delivery system across
the continuum of care from the physician practice to the IHO.
The value of HNA is the creation of systems that ''intrarelate''
as opposed to being integrated. Most healthcare organizations
are using some form of information technology to manage their
clinical, financial and administrative operations. Typically, a
multitude of systems, operating on differing technology platforms
from various suppliers, are used within a single organization.
These systems rely on a series of interfaces to transmit
information to one another which may inhibit real-time access to
comprehensive patient information. In addition, the data
collected by disparate systems is usually maintained in a variety
of formats, and is indexed or codified using different
approaches, which dilutes the data's usefulness.
Cerner's newest HNA platform, HNA Millennium, utilizes
innovative three-tiered client/server technology to optimize
distributed computing performance and functionality advantages.
Development of HNA Millennium began in the summer of 1993 and at
the end of 1996 approximately 400 engineering and engineering
support personnel were engaged in the project. Installation of
Alpha and Beta versions of certain HNA Millennium applications
began during 1996. Installation of Alpha and Beta versions of
additional applications will continue through 1997.
Cerner's approach to system design is to first
understand the intricate processes of providing care and then to
design systems that support and streamline those processes.
Cerner's system architecture allows its applications to work
together as one system. Cerner's systems are ''intrarelated'',
which means that they are designed around a single architecture
that automatically organizes and presents information in a manner
relevant to a clinician's decision process. With
''intrarelated'' systems, all caregivers are kept apprised of
each patient's condition, allowing the activities of the care
team to be more carefully and efficiently orchestrated in an
effort to deliver the highest possible quality of care.
Cerner's systems also allow the use of other vendors products in
conjunction with Cerner's system through the use of Cerner's Open
Engine Gateway System that allows the exchange of data with the
foreign system.
Strategy
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Key elements of the Company's business strategy include:
To penetrate the integrated healthcare market. The
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transformation of healthcare delivery must deal with the changing
financial model from fee-for-service to fixed or controlled fee
payments for services provided. In order to accomplish the
transition, integrated healthcare systems must decrease costs
generally, utilize fewer resources per patient or member
encounter, decrease the amount of care required by focusing on
preventative measures and increase member populations by
attracting additional members through better quality healthcare
and services. Cerner's process-based, repository and clinical
systems provide the technology to enable an integrated system to
manage healthcare to significantly reduce costs, improve the
efficiency of healthcare delivery and maintain and improve the
quality of healthcare.
To penetrate the physician market. As physicians
----------------------------------
combine to form organizations such as IPAs and PPOs, and then
participate in MSOs, they require clinical and process-based
systems to manage the member/patient care processes within their
own practices. As such groups align with IDSs and IHOs, they
further require clinical and management information systems that
allow them to share clinical and management processes with these
community-wide systems. Cerner's systems provide the
member/patient data repositories and clinical and management
tools required by physicians in order for them to participate
effectively in the changing healthcare marketplace.
To expand its core business. Cerner expects continued
----------------------------
growth in core business areas, including clinical domain systems
such as PathNet, RadNet and PharmNet, as institutional providers
look to restructure and reengineer these high cost centers within
their IDSs and IHOs. The Company also intends to market
aggressively Cerner clinical and management information systems
and services to its existing client base.
To remain committed to a unified 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 ''intrarelated'' health
information and management systems. This platform enables
Cerner's process-based HNA system to be scaleable on a linear
basis, using either Cerner compatible modules for process-
oriented applications or competitive systems interfaced using
open system protocols. In addition, the HNA system can be
accessed throughout the enterprise at the point of care, which
improves data integrity, allows for coordination of procedures at
multiple locations and enables reliable communication without
delay.
To expand its products and services. Using its HNA
------------------------------------
platform, Cerner intends to expand the range of products and
services offered to providers, including IDSs and IHOs, either
through internal development or by acquisitions or joint
ventures. 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 IHOs begin to include service
organizations and on-line services to the home, particularly
because the member/patient focus of Cerner's architecture
provides the basis for individual electronic medical records
which can be used throughout a member-focused health system. 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.
Products
- --------
The Company's products include: (i) process-based
systems, which automate clinical care processes throughout and
between entities; (ii) repository systems, which capture, sort,
present and analyze clinical and process related data; and (iii)
clinical domain systems, which automate complex clinical
processes within specific departments or domains. These systems
can be acquired individually or as a fully intrarelated health
information system. The individual systems perform together even
if installed at different times. Cerner also markets over 200
product options that complement Cerner's major information
systems.
Process-based Systems
Cerner's CareNet Acute Care Management System is
designed to automate the entire care process in acute or
institutional settings. It collects, refines, organizes, and
evaluates detailed clinical and management data. CareNet enables
the data and information to be used as executable knowledge.
CareNet also supports point-of-care (POC) automation, which
enables real-time documentation, simplifies information
management, and drives enhancements to the delivery of care. It
enables the entire care team to plan and manage individual
activities and plans, as well as measure outcomes and goals. All
care team members have immediate access to clinical and
management information and can customize plans of care for each
patient. CareNet heightens communication, optimizes use of time,
and eliminates redundant data entry.
CareNet consists of five major components - Patient
Management, Order Management, Scheduling Management, Diagnostic
Care, and Therapeutic Care, plus the optional products Care
Documentation and Care Coordination.
Patient Management is the hub of patient communications
within the acute care organization and the link between a
lifetime of care episodes across a spectrum of care providers.
It enables care providers to transfer and discharge patients
electronically as they are actually moving or leaving. Order
Management simplifies and streamlines the process of order
entry, whether from ad hoc orders or order sets, by
communicating orders electronically. The system warns of
contradictions and eliminates duplicate orders - all from a
single screen. Charges also can be automatically generated at
various stages within the order communication process.
Scheduling Management supports referrals and schedules
procedures and appointments for all providers within the acute
care entity. Diagnostic Care supports patient entry, order
entry, scheduling, work management, care documentation,
transcription/case sign-out, and result viewing for clinicians
in diagnostic departments, such as pulmonary function lab or
diagnostic cardiology. Therapeutic Care supports patient entry,
order entry, work management, care documentation, and results
viewing for clinicians in therapeutic departments, such as
respiratory therapy, rehabilitation, or physical therapy. Care
Documentation is designed to automate the information gathering,
recording, and reporting activities of the care team. It
eliminates redundant charting and streamlines documentation by
allowing care team members to enter information once and have it
automatically updated throughout the system. Care Coordination
facilitates the planning and organization of care team
activities for acute inpatient and procedure-based patient care.
It provides the tools to define a clinical plan, including
associating problems, outcomes, variance thresholds, orders,
tasks, and so on with the plan. It accommodates the full
spectrum of the plans used in patient care, including pathways
used to audit care, nursing care plans, multidisciplinary care
plans, single-discipline pathways, and multidisciplinary
pathways.
The FirstNet Emergency Department Information System
offers patient and provider tracking and an intuitive
presentation of patient diagnoses and clinical events for the
emergency department. It gives access to information in the form
of tracking, assessments, status data, and documents from both
interfaced foreign systems and other Cerner systems. 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 ProVide Physician Office Management System supports
the broad range of clinical and business activities that occur
within a physician office, clinic, or large physician
organization (such as a multi-site clinic or management service
organization) and ties the office together with others in the
community. It automates key activities of the care team in both
primary and specialty care settings. ProVide offers clinicians
and staff a variety of functional capabilities, including
patient/member tracking, clinical records access and navigation,
eligibility checking, order and referral processing, and
reference library access and navigation. Information is
organized and presented with clinicians and clinician practice
managers in mind.
The ProCall Home Care Management System automates the
clinical and business processes of home health organizations,
such as visiting nurse associations and hospices. It is
appropriate for Medicare-certified or noncertified agencies
providing skilled nursing, specialized care, supervisory
activities, assessments, and unskilled attendant or medical
delivery services. ProCall facilitates the documentation of care
activities in the home and provides access to the electronic
medical record. It automates the referral, scheduling, and
management reporting processes performed by office personnel in
home care agencies, and supports their business and
administrative processes. Financial and management reporting
capabilities provide needed information to directors and managers
in home care agencies to allow them to compete in a prospective-
pay environment.
Your Health is Cerner's home software product designed
to extend medical care to the consumer's home. It provides a way
for the consumer to interact on a regular basis with a healthcare
provider. Your Health can be licensed for use by itself, though
connecting it to a community's integrated health organization
(IHO) provides enhanced features and functionality. It can store
health and medical records for easy access. By providing health
appraisals and personalized health plans, Your Health takes the
first step toward improving health education for members in a
community.
The ProFile Health Information Management System
(formerly MRNet) 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 commonly associated with maintaining medical
records. ProFile uniquely automates workflow process management,
with the ability to anticipate and flex workload based on patient
and order parameters, and captures workload performance
statistics. It also supports the medical staff statistical
reporting for health information management departments.
Discern Expert is an event-driven, rule-based, decision
support software application integrated with other Cerner HNA
clinical and management information systems. This tool allows
users to define clinical and management rules that are applied to
events accessing data that is captured or generated by other HNA
applications. Discern Expert accomplishes a variety of tasks,
including cost reduction, resource utilization, quality-assurance
and risk management. The users can define the action to be taken
by the system ranging broadly from sending an alert to the
appropriate caregiver to creation, cancellation or suspension of
an active clinical order.
Discern Explorer is a decision support software
application integrated with other Cerner HNA 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 HNA applications.
Discern Dialogue is a real-time decision support
software application that incorporates executable knowledge and
provides order advice to clinicians. It manages the display of
clinical alerts through Discern Insights, which are licensed
separately. Discern Dialogue provides specific recommendations
to change, cancel, or create orders. The provider can easily
select these orders for automatic entry into the Cerner system.
Discern Dialogue tracks the response of providers to specific
order recommendations.
Repository Systems
Open Clinical Foundation Data Repository (OCF) is a
structured repository for the storage of member/patient orders;
discrete results; clinical reports and other documents; indexes
to document images from foreign document imaging systems; and
indexes to third-party dictation systems. OCF is Cerner's
structured relational repository of clinical information, and it
forms the foundation of Cerner's electronic medical record
functionality. This information can originate from numerous
sources and is maintained in an easily accessible, standardized
format. OCF can be used on a stand-alone basis, but is
significantly more effective when used as part of the
comprehensive HNA solution. For most enterprises, in which the
various laboratories and ancillaries cooperatively share data
over the entire health system, OCF provides an invaluable common
structure for storing data. The amount of on-line clinical data
that must be stored in departmental systems can be significantly
reduced. The interface specifications to OCF are available to be
used by suppliers that comply with the interface requirements.
PowerChart is a PC-workstation-based product that
enables care providers to electronically view, organize, annotate
and amend a patient record so that it is presented in a manner
that allows them to navigate through the chart using patient-
provider and encounter relationships. PowerChart gives
healthcare providers structured access to the clinical
information contained electronically in OCF. The format of the
on-line patient chart consists of pages displayed from a
patient's computer-based patient record and information
electronically transmitted from connected systems. clinicians
are able to browse through pages much the same as with printed
documents. Clinicians can access documents through tables of
contents or search for terms in the document text. The scope of
documents available is limited only by the system interfaces to
OCF.
Open Management Foundation Data Repository (OMF) is a
structured repository for process- and activity-related
information useful for management of a healthcare organization.
Information can originate from numerous sources and can be
maintained in an easily accessible, standardized format. OMF can
be integrated into an architecture containing products from
different suppliers.
PowerVision is a comprehensive, PC-workstation-based
product used to view information in OMF in much the same manner
as PowerChart is used with OCF. This management access tool
presents summary information through a graphical user interface,
making key information available to all levels of management.
PowerVision is equipped with features that allow the user to
pursue "what if" and other investigatory information paths. This
enables an executive to determine the status of the organization
in many critical areas, as well as provides managers with a
quick, up-to-the-minute view of leading business management
indicators regarding the performance of a care area or facility.
The ProLogue Medical Management System includes a
variety of software applications that assemble and use the
information captured in OMF and other Cerner repositories to help
an organization complete its strategic plans. The ProLogue
applications provide a variety of reports to give management
insight into the effectiveness and efficiency of health
management across member encounters within the health system.
The Open Person Foundation (OPF) is a structured
repository of demographic information populated from foreign
systems. OPF creates a single person record by coordinating and
reconciling incoming demographic data created in legacy
registration systems. The reconciliation of data from external
sources into one person record requires logic to accommodate
identifiers that vary based upon the system they originate from.
Unique identifiers such as medical record numbers and common
identifiers such as name, social security number, date of birth,
or sex aid in assuring the information can safely be assigned to
the community member. In addition to reconciling and storing
demographic data from multiple registration systems, OPF provides
updates to registration systems through an HL7 interface. Remote
sites can view stored data, solicit through OPF, or automatically
update existing MPI data at the site.
The Open Engine Application Gateway System facilitates
the exchange of data and assists in the management of point-to-
point interfaces between foreign systems. It serves as a toolkit
to help write interface code.
Clinical Domain Systems
The PathNet 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 HLA. PathNet
automates the ordering and reporting of procedures, the
production of accurate and timely reports, and the maintenance of
accessible clinical records. PathNet can be interfaced with
automated instruments and databases, allowing for efficient and
accurate transfer of information. It communicates laboratory
information to patient care areas and other information systems.
Cerner attributes PathNet's acceptance to its functional
capability, ease of use, and event-level cost accounting, which
allows healthcare managers to better control costs and assess
profitability.
RadNet Radiology Information System addresses the
operational and management requirements of diagnostic radiation
oncology departments. It allows a department to replace its
manual, paper-based system of record-keeping with an efficient
computer-based system. RadNet is designed to adapt easily to the
department's existing operations. In addition, the system
addresses such tasks as scheduling patients, modifying orders,
tracking patients, locating films, transcribing reports,
upgrading the quality and content of reports and reporting on
productivity.
PharmNet Pharmacy Information System provides
intrarelation in an HNA environment for rapid pharmacy order
entry and support of the clinical pharmacy in either an inpatient
or outpatient setting. PharmNet streamlines medication order
entry, enabling the pharmacist or technician to place all types
of pharmaceutical orders on one easy-to-use screen. Dispensing
functions also are fully automated. Medication, intravenous fill
lists and medication administration records are produced
automatically or on demand. Charges are automatically captured
at the time the fill list is generated. Patient profiles and
pharmaceutical inventories are maintained without the
intervention of the pharmacist, saving significant time and
resources. Features are designed to address the special needs of
the clinical pharmacy, including on-line order entry screening
for drug-drug interactions, drug-food and drug-lab interferences,
drug-disease states, intravenous incompatibilities, doses range
and therapeutic treatment duplication. clinical notes can be
recorded on-line and sent to other clinicians for comment of
follow-up.
The SurgiNet Surgery Information System is designed to
address the needs of the surgical department, including
automating the functions of resource and equipment scheduling,
inventory management, and operating room management. SurgiNet
offers a variety of reports that track costs, waste management,
and utilization. It provides support for the complete surgical
cycle, with extensive documentation capture, full inventory
control, and case tracking that monitors case progress through
all stages of surgery.
Software Development
- --------------------
Cerner commits significant resources to developing new
health information system products. As of December 28, 1996, 663
employees were engaged full-time in product development
activities. Total expenditures for the development and
enhancement of the Company's products were approximately
$26,897,000, $33,957,000 and $43,133,000 during the 1994, 1995
and 1996 fiscal years respectively. These figures include the
amounts capitalized 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 use in clinical departments
and to continue to support simultaneous use of Cerner's products
across multiple facilities. All Cerner systems are developed
under HNA using a proprietary systems development methodology.
This methodology defines and controls each task throughout the
product development cycle and ensures that current and future
products can be fully intrarelated.
The Company is committed to maintaining open attributes
in its system architecture through operability in a diverse set
of technical and application environments. The Company strives
to design its systems to co-exist with disparate applications
developed and supported by other suppliers. This effort is
exemplified by Cerner's Open Engine, OCF and OMF product lines.
Cerner continues development of its new HNA Millennium
version of its software (formerly referred to as V500), which
incorporates a client-server architecture, a comprehensive
graphical user interface and open systems concepts for relational
databases, operating systems, networks and hardware platforms.
HNA Millennium, utilizes innovative three-tiered client/server
technology to optimize distributed computing performance and
functionality advantages. HNA Millennium applications run on
multiple operating systems, networks, databases and hardware
platforms and co-exists with disparate applications developed and
supported by other companies. Installation of HNA Millennium
applications began during 1996. Development of HNA Millennium
began in the summer of 1993 and at the end of 1996 approximately
400 engineering and engineering support personnel were engaged in
the project. Installation of Alpha and Beta versions of certain
HNA Millennium applications began during 1996. Installation of
Alpha and Beta versions of additional applications will continue
through 1997.
Sales and Marketing
- -------------------
The markets for Cerner's information system products
include IHOs, IDSs, physician groups and networks and their MSOs,
managed care organizations, hospitals, medical centers, free-
standing reference laboratories, blood banks, imaging centers,
pharmacies, 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
Cerner systems are designed to operate on computers manufactured
by Digital Equipment Corporation (''Digital''). In addition,
many Cerner applications are available on IBM's RISC System/6000
AIX (UNIX) platform. All HNA Millennium applications are
designed to operate on either Digital or IBM platforms, 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's executive marketing management is located
in its Kansas City, Missouri, headquarters, while its account
representatives are deployed through regional offices across the
United States. The Company, through subsidiaries, and joint
ventures has offices and sales staff in Australia, Singapore and
Saudi Arabia. The Company has an exclusive distribution
agreement with Siemens Nixdorf by which its products are
marketed, implemented and supported in Europe. Cerner's
consolidated revenues include foreign sales of
$13,274,000, $8,823,000 and $15,874,000 for the 1994, 1995 and
1996 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 has developed
a demonstration and presentation facility at its headquarters in
Kansas City, Missouri, called the Cerner Vision Center. This
facility enables the Company to actually demonstrate the
processes automated through HNA and adapt the presentations to
the clients' environments. 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
- ---------------
Cerner uses a regional strategy to provide the full
range of product and service capabilities to its clients from
eight locations throughout the United States. Each regional
center reflects Cerner's corporate culture and interfaces with
the Company's clients on a regular and highly accessible basis.
In this way, Cerner can provide on-site personnel for the
development and management of systems projects, learn the
evolving information needs of clients based on geographical
trends in the healthcare industry, work with clients in the
development of new products and services and share with clients
Cerner's vision of the changing healthcare delivery market and
the role of information systems in that transformation. The
Company has regional offices in Atlanta, Boston, Dallas, Detroit,
Kansas City, Los Angeles, Seattle and Washington, D.C. Each
regional office is focused on long-term marketplace development,
product marketing, client project management, long-term client
service and client satisfaction for a group of clients within a
specific geographical region.
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.
Government Regulation. The healthcare industry is
subject to extensive federal and state regulation governing,
among other things, the addition of new services, certain capital
expenditures and reimbursement. The efffect of future
legislation and regulation upon prospective clients may,
in certain circumstances, have an adverse effect upon Cerner's
business, financial condition or results of operations. In
addition, the United State Food and Drug Administration
(the "FDA") has declared that software products that are
intended for the maintenance of data used in making decisions
regarding the suitability of blood donors and the release of
blood or blood components for transfusion are medical devices under
the 1976 Medical Device Amendments to the federal Food, Drug
and Cosmetic Act and the Safe Medical Devices Act of 1990. As a
consequence, Cerner is subject to extensive regulation by the
FDA with regard to its blood bank software. To the extent that
other Cerner products are deemed by the FDA to be medical devices,
Cerner could be subject, depending on the product, to extensive
requirements governing pre- and post-marketing conditions, such
as device investigation, approval, labeling and manufacturing.
Backlog
- -------
At December 28, 1996, Cerner had contract backlog of
$110,330,000. Such backlog represents system sales from signed
contracts which have 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 28, 1996, the Company had $48,476,000 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 28, 1996, Cerner had a software
support and maintenance backlog of $107,255,000. Such backlog
represents contracted software support and hardware maintenance
services for a period of twelve months.
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 28, 1996, the Company was using approximately 355,000
square feet and substantially all of the remainder was leased to
tenants. The Company also leases office space for its branch
offices in Atlanta, Boston, Dallas, Detroit, Los Angeles, Seattle
and Washington D.C.
Item 3. Legal Proceedings
The Company is not involved in any 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 28, 1996.
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 1, 1997. Officers are elected
annually and serve at the discretion of the board of directors.
Name Age Positions
- ---- --- ---------
Neal L. Patterson 47 Chairman of the Board of Directors
and Chief Executive Officer
Clifford W. Illig 46 President and Chief Operating Officer
Jeffrey C. Reene 42 Executive Vice President
Jack A. Newman, Jr. 49 Executive Vice President
Thomas C. Tinstman, M.D. 51 Senior Vice President
Alan D. Dietrich 34 Senior Vice President
Charles O. Whitcraft 48 Senior Vice President
Marc G. Naughton 42 Vice President and Chief Financial Officer
Neal L. Patterson was President, Chairman of the Board
of Directors and Chief Executive Officer of the Company from its
incorporation to May 1987. Since May 1987 he has been Chairman
of the Board of Directors and Chief Executive Officer of the
Company. Mr. Patterson has served as a director of Home Office
Reference Laboratory since August 1988.
Clifford W. Illig was Executive Vice President,
Secretary, Treasurer and Chief Financial Officer and a Director
of the Company from its incorporation to May 1987. From May 1987
to May 1993, he was a Director, President, Chief Operating
Officer and Chief Financial Officer of the Company. Since May
1993, he has been a Director, President and Chief Operating
Officer.
Jeffrey C. Reene joined the Company in September 1991
as Group Vice President of Client Services. He was promoted to
Executive Vice President in June of 1994. Prior to joining the
Company, he was with Andersen Consulting.
Jack A. Newman, Jr. joined the Company in January 1996
as Executive Vice President. Prior to joining the Company, he
was with KPMG Peat Marwick LLP for 22 years. Most recently he
was National Partner-in-Charge of KPMG's Health Care Strategy
Practice, leading more than 200 professional and administrative
staff members who provided strategy consulting services to
healthcare clients nationwide, including healthcare systems,
physician groups, managed care plans, and other provider and
payor organizations.
Thomas C. Tinstman, M.D. joined the Company in November
1995 as Vice President and has been a Director of the Company since
May 1989. Prior to joining the Company, Dr. Tinstman was Director of
Medical Informatics with University of Texas Medical Branch in
Galveston, Texas. Prior to that he was a physician in private
practice with Internal Medicine Associates, P.C. in Omaha,
Nebraska. From 1977 to January, 1994, Dr. Tinstman served as
Associate Medical Director of Pulmonary Medical Services at
Bishop Clarkson Memorial Hospital and as Medical Director of the
Respiratory Therapy Department of Midland Hospital, both in
Omaha, Nebraska. Dr. Tinstman has served as a director of Smith-
Haynes Trust, Inc. since 1988.
Alan D. Dietrich joined the Company in 1990 as Director
of Business, Planning and Development. In January 1994 he was
promoted to Vice President. Prior to joining the Company, he
spent seven years with IBM Corporation.
Charles O. Whitcraft joined the Company as Vice
President of Technology in January 1984. Since that time he has
served in several executive positions dealing with technology and
engineering.
Marc G. Naughton joined the Company in November 1992 as
Manager of Taxes. In November 1995 he was elected Chief
Financial Officer and in February 1996 he was promoted to Vice
President. Prior to joining the Company, he spent nine years
with The Marley Company, a multinational manufacturing company,
in a variety of financial management positions.
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 National Market
tier of the Nasdaq Stock Market under the symbol CERN. The
following table sets forth the high, low, and last sales prices
for the fiscal quarters of 1996 and 1995 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.
1996 1995
------------------------------ ---------------------------
High Low Last High Low Last
First quarter 26 1/8 18 1/8 23 1/4 24 5/8 20 7/8 24 1/4
Second quarter 25 1/4 19 3/4 21 3/8 32 7/8 21 30 5/8
Third quarter 21 11 3/4 15 5/8 35 3/4 29 3/4 34 1/4
Fourth quarter 15 1/2 10 3/4 15 31/64 34 1/4 20 20 1/2
At February 7, 1997, there were approximately 1,400 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
1996 1995 1994 1993 1992
-----------------------------------------------
(In thousands, except per share data)
Statement of earnings data:
Revenues $ 189,107 186,901 155,917 120,572 101,145
Operating earnings 10,601 37,265 33,779 24,330 16,587
Earnings before income taxes 12,902 37,220 32,451 24,120 16,293
Net earnings 8,251 22,521 19,501 14,558 9,932
Primary earnings per share .25 .72 .66 .50 .35
Primary weighted average shares
outstanding 33,620 31,448 29,762 29,158 28,680
Balance sheet data:
Working capital $ 171,204 174,064 52,370 42,603 30,522
Total assets 314,753 303,945 156,410 104,910 66,667
Long-term debt, net 30,000 30,104 30,235 10,354 8,310
Stockholders' equity 230,735 221,374 85,777 64,230 38,643
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
For a more thorough understanding of management's analysis of
results of operations and financial conditions, the following
discussion should be read in conjunction with the Letter to
Shareholders and the discussion of the Company's business
operations.
Year Ended December 28, 1996, Compared to Year Ended December 30,
1995.
Results of Operations - The Company's revenues increased 1% to
$189,107,000 in 1996 from $186,901,000 in 1995. Net earnings
decreased 63% to $8,251,000 in 1996 from $22,521,000 in 1995.
Net earnings from the Company's foreign operations increased to
$2,897,000 in 1996 from a loss of $1,867,000 in 1995.
Revenues - In 1996, revenues increased due to an increase in
support of installed systems. System sales decreased 5% to
$122,836,000 in 1996 from $129,917,000 in 1995. This decrease
was primarily due to the Company's failure to achieve planned
levels of new system bookings. New system bookings were
adversely impacted by an overall lengthening of the time required
by clients to finalize clinical information system acquisition
decisions and increased competition exacerbated by the Company's
transition to HNA Millennium (formerly known as HNA 500), its
next-generation, three-tiered client-server application
architecture. HNA contracts were 43% of total system sales in
1996, compared to 42% in 1995. The sale of additional hardware
and software products to the installed client base increased 10%
in 1996 as compared to 1995.
Total sales to the installed base in 1996, including new systems,
incremental hardware and software, support and maintenance
services, and discrete services, were 79% of total revenues in
1996 compared to 71% in 1995. The higher percentage was
primarily due to the decrease in system sales.
At December 28, 1996, the Company had $110,330,000 in contract
backlog and $107,255,000 in support and maintenance backlog,
compared to $77,495,000 in contract backlog and $94,538,000 in
support and maintenance backlog at the end of 1995.
Support and maintenance revenues increased 16% in 1996 compared
to 19% in 1995. These revenues represented 30% of 1996 total
revenues and 26% of 1995 total revenues. This increase was
primarily due to the decrease in system sales.
Other revenues increased 16% to $8,841,000 in 1996 from
$7,633,000 in 1995. This increase was due primarily to services
performed above contracted requirements for existing clients.
Cost of Revenues - The cost of revenues includes the cost of
computer hardware and sublicensed software purchased from
computer and software manufacturers for delivery to clients. It
also includes the cost of hardware maintenance and sublicensed
software support subcontracted to the manufacturers. The cost of
revenues was 31% of total revenues in 1996 and 28% of total
revenues in 1995. Such costs, as a percent of revenues,
typically have varied as the mix of revenue (software, hardware,
and support) components carrying different margin rates changes
from period to period. The increase in the cost of revenue as a
percent of total revenues resulted principally from an increase
in the percent of revenue from computer hardware and sublicensed
software, which carry a higher cost of revenue percentage.
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, trade show costs,
and advertising costs. These expenses as a percent of total
revenues were 34% in 1996 compared to 27% in 1995. The increase
in total sales and client service expenses are attributable to
the cost of a larger field sales and services organization and
marketing of new products.
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 1996 and 1995
were $43,133,000 and $33,957,000, respectively. These amounts
exclude amortization. Capitalized software costs were
$13,240,000 and $9,210,000 for 1996 and 1995, respectively. The
increase in aggregate expenditures for software development in
1996 is due to development of HNA Millennium products and
development of community care products.
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 10% in
1996 and 9% in 1995.
Interest Income, Net - Net interest income (expense) was
$2,301,000 in 1996 compared to ($45,000) in 1995. This increase
was due primarily to interest income from investment of the
proceeds from the sale of 3,716,000 shares of common stock from
the August 1995 public offering.
Income Taxes - The Company's effective tax rates were 36.0% and
39.4% for 1996 and 1995, respectively. The decrease in effective
tax rates is due to the utilization of foreign net operating
losses during 1996.
Year Ended December 30, 1995, Compared to Year Ended December 31,
1994.
Results of Operations - The Company's revenues increased 20% to
$186,901,000 in 1995, from $155,917,000 in 1994. Net earnings
increased 15% to $22,521,000 in 1995 from $19,501,000 in 1994.
Net earnings from the Company's foreign operations decreased 195%
to a loss of $1,867,000 in 1995 from earnings of $1,973,000 in
1994.
Revenues - In 1995, revenues increased due to an increase in
system sales and support of installed systems. System sales
increased 20% to $129,917,000 in 1995, from $108,322,000 in
1994. This increase in system sales resulted principally from an
increase in installations under HNA contracts and additional
hardware and software sales to the Company's existing client
base. HNA contracts were 42% of total system sales in 1995,
compared to 37% in 1994. The sale of additional hardware and
software products to the installed client base increased 36% in
1995 and 40% in 1994.
There was a significant increase in 1995 as compared to 1994 in
the number of clients who purchased two or more clinical system
units on their initial contract, or clients from the installed
base who purchased one or more system units subsequent to their
initial contract. Total sales to the installed base in 1995,
including new systems, incremental hardware and software, and
recurring and discrete services, were 71% of total revenues in
1995 compared to 73% in 1994.
At December 30, 1995, the Company had $77,495,000 in contract
backlog and $94,538,000 in support and maintenance backlog,
compared to $57,547,000 in contract backlog and $77,222,000 in
support and maintenance backlog at the end of 1994.
Support and maintenance revenues increased 19% in 1995 compared
to 24% in 1994. These revenues represented 26% of 1995 total
revenues and 27% of 1994 total revenues. This increase was due
primarily to the increase in the Company's installed and
converted client base.
Other revenues increased 22% to $7,633,000 in 1995, from
$6,273,000 in 1994. This increase was due primarily to twelve
months of real estate lease revenues from the rental to outside
tenants as compared to eight months of lease revenues in 1994;
space in the Company's headquarters complex not currently being
utilized by the Company is leased to outside tenants.
Cost of Revenues - The cost of revenues includes the cost of
computer hardware and sublicensed software purchased from
computer and software manufacturers for delivery to clients. It
also includes the cost of hardware maintenance and sublicensed
software support subcontracted to the manufacturers. The cost of
revenues was 28% of total revenues in 1995 and 30% of total
revenues in 1994. Such costs, as a percent of revenues,
typically have varied as the mix of revenue (software, hardware,
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 an increase
in multiproduct projects, which carry a lower cost of revenue
percentage.
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, trade show costs,
and advertising costs. These expenses as a percent of total
revenues were 27% in 1995 compared to 26% in 1994. The increase
in total sales and client service expenses are attributable to
the cost of a larger field sales and services organization and
marketing of new products.
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 1995 and 1994
were $33,957,000 and $26,897,000, respectively. These amounts
exclude amortization. Capitalized software costs were $9,210,000
and $8,131,000 for 1995 and 1994, respectively. The increase in
aggregate expenditures for software development in 1995 is due to
development of more clinical information system products to
complement the existing product line. The percentage of costs
capitalized is expected to remain fairly constant as the Company
continues to develop new products.
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 9% in
1995 and 8% in 1994.
Interest Income, Net - Net interest expense was considerably
lower in 1995 than in 1994. This decrease was due primarily to
interest income from investment of the proceeds from the sale of
3,716,000 new shares of common stock from the August 1995 public
offering.
Income Taxes - The Company's effective tax rates were 39.4% and
39.9% for 1995 and 1994, respectively, which were not
significantly different from the combined federal and state
statutory rates.
Quarterly Results
Quarterly Results - The Company's quarterly revenues and net
earnings historically have been variable and cyclical. The
variability is attributable primarily to the number and size of
project milestone events in any fiscal quarter. The Company
expects the fluctuation in quarterly financial results to
continue.
Liquidity and Capital Resources
Liquidity and Capital Resources - The Company's liquidity
position remains strong, with total cash and cash equivalents of
$6,905,000 and short-term investments of $103,997,000 at the end
of 1996 and working capital of $171,204,000, compared to cash and
cash equivalents of $8,640,000 and short-term investments of
$103,478,000 at the end of 1995, and working capital of
$174,064,000. During August 1995, the Company sold 3,716,000
shares of common stock in a public offering. The proceeds of
this sale, net of underwriting discounts and commissions and
expenses, were $108,287,000. Prior to the public offering the
Company financed its operations, capital expenditures (other than
the purchase of the Kansas City headquarters complex and its
related capital improvements), and working capital from
internally generated funds and bank borrowings. The Company has
$18,000,000 of long-term, revolving credit from banks, all of
which was available as of December 28, 1996.
The Company generated cash of $26,612,000, $15,329,000, and
$18,949,000 from operations in 1996, 1995, and 1994,
respectively. Cash flow from operations decreased in 1995, due
primarily to an increase in receivables, and increased in 1996
due primarily to improved collection of receivables.
Revenues provided under support and maintenance agreements of the
Company represent recurring cash flows. Support and maintenance
revenues increased 16%, 19%, and 24%, in 1996, 1995, and 1994,
respectively, and the Company expects these revenues to continue
to grow as the base of installed systems grows.
The Company believes its present cash and short-term investments
position, together with cash generated from operations and the
current bank borrowing facility, will be sufficient to meet
anticipated cash requirements.
Inflation - The effects of inflation were minimal on the
Company's business.
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.
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 Stockholders to be held on
May 20, 1997, 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 Stockholders to be held on
May 20, 1997, 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 Stockholders to be held on
May 20, 1997, 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 (except that
the information set forth under the following sub captions is
expressly excluded from such incorporation: "Executive
Compensation and Stock Option Committee Report" and "Company
Performance").
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 Stockholders to be held on
May 20, 1997, 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 Stockholders to be held on
May 20, 1997, 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.
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 28, 1996 and December 30, 1995
Consolidated Statements of Earnings -
Years Ended December 28, 1996, December 30, 1995
and December 31, 1994
Consolidated Statements of Stockholders' Equity -
Years Ended December 28, 1996, December 30, 1995
and December 31, 1994
Consolidated Statements of Cash Flows -
Years Ended December 28, 1996, December 30, 1995
and December 31, 1994
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 28, 1996 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) Bylaws, as amended (filed as Exhibit 3 to the Registrant's
Quarterly Report on Form 10-Q for the six months ended
June 30, 1995, and hereby incorporated by reference).
4(a) Rights Agreement, dated as of November 21, 1996, between
Cerner Corporation ad 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, the Form of Rights Certificate, as Exhibit B,
and the Summary of Rights to Purchase Preferred Stock, as
Exhibit C (filed as Exhibit 4.1 to Registrant's current
report on Form 8-K dated November 21, 1996 and incorporated
herein by reference.
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) Note Agreement between Cerner Corporation, Principal Mutual Life
Insurance Company, and Principal National Life Insurance Company
dated July 1, 1994, (filed as Exhibit 10(a) to Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1994, and hereby incorporated by reference.)
4(d) Credit Agreement between Cerner Corporation, Cerner Properties,
Inc. Mark Twain Kansas Bank, and Harris Trust & Savings Bank
dated April 18, 1994, (filed as Exhibit 10(b) to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1994, and hereby incorporated by reference).
10(a) Standard Volume Agreement, dated July 6, 1989, between Digital
Equipment Corporation and Registrant (filed as Exhibit 10(g) to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1989, and hereby incorporated herein by reference).
10(b) 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(c) Indemnification Agreements between the Registrant and Neal L.
Patterson, Clifford W. Illig, Gerald E. Bisbee, Jr. and Thomas
C. Tinstman, (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(d) 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(e) 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(f) Indemnification Agreement between Thomas A. McDonnell and
Registrant (filed as Exhibit 10(i)(c) to Registrant's
Quarterly Report on Form 10-Q for the year ended June 29, 1996
and hereby incorporated by reference).
10(g) Amended Non-Qualified Stock Option Plan D of Registrant.*
10(h) Cerner Performance Plan for 1996.*
11 Computation of Registrant's Earnings Per Share.
22 Subsidiaries of Registrant.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
* Management contracts or compensatory plans or arrangements
required to be identified by Item 14(a)(3).
(b) Reports on Form 8-K.
A report on Form 8-K was filed on November 21, 1996,
reporting the adoption by the Board of Directors on November 21,
1996 of a Stock Repurchase Plan and the declaration of a dividend
distribution of one Right for each outstanding share of Company
common stock payable to holders of record as of the close of
business on December 2, 1996. The description and terms of the
Rights are set forth in the Rights Agreement filed as Exhibit
4(a) to this form 10-K.
(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.
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: ________________ 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 27, 1997
Neal L. Patterson, Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
/s/Clifford W. Illig
___________________________________ March 27, 1997
Clifford W. Illig, President, Chief
Operating Officer and Director
/s/Marc G. Naughton
___________________________________ March 27, 1997
Marc G. Naughton, Principal Financial
and Accounting Officer
/s/Michael E. Herman
___________________________________ March 27, 1997
Michael E. Herman, Director
/s/Gerald E. Bisbee
___________________________________ March 27, 1997
Gerald E. Bisbee, Jr., Director
/s/Thomas C. Tinstman
___________________________________ March 27, 1997
Thomas C. Tinstman, M.D., Director
/s/John C. Danforth
___________________________________ March 27, 1997
John C. Danforth, Director
/s/Thomas A. McDonnell
___________________________________ March 27, 1997
Thomas A. McDonnell, Director
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 28, 1996 and
December 30, 1995, and the related consolidated statements of
earnings, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 28, 1996. 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 generally accepted
auditing standards. 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
28, 1996, and December 30, 1995, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 28, 1996, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Kansas City, Missouri
February 7, 1997
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 generally accepted accounting
principles 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.
CONSOLIDATED BALANCE SHEET
- ----------------------------------------------------------------
DECEMBER 28, 1996 AND DECEMBER 30, 1995
1996 1995
--------- --------
(Dollars in thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 6,905 8,640
Short-term investments 103,997 103,478
Receivables 96,238 98,154
Inventory 1,616 2,246
Prepaid expenses and other 3,660 4,393
--------- ---------
Total current assets 212,416 216,911
Property and equipment, net 60,047 53,693
Software development costs, net 30,128 22,885
Intangible assets, net 3,973 4,414
Noncurrent receivables 3,637 4,097
Other assets 4,552 1,945
--------- ---------
$ 314,753 303,945
========= =========
LIABILITIES AND STOCHHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 9,346 14,932
Current installments of long-term debt 104 130
Advanced billings 7,811 6,162
Deferred income taxes 13,654 13,946
Accrued payroll and tax withholdings 6,755 5,112
Other accrued expenses 3,542 2,565
--------- ---------
Total current liabilities 41,212 42,847
Long-term debt, net 30,000 30,104
Deferred income taxes 12,806 9,620
Stockholders' Equity:
Common stock, $.01 par value,150,000,000
shares authorized, 33,403,727 shares
issued in 1996 and 33,001,973 shares
in 1995 334 330
Additional paid-in capital 144,941 143,876
Retained earnings 91,125 82,874
Treasury stock, at cost
(513,018 shares in 1996 and 1995) (5,693) (5,693)
Foreign currency translation adjustment 28 (13)
--------- ---------
Total stockholders' equity 230,735 221,374
--------- ---------
Commitments (Note 10)
$ 314,753 303,945
========= =========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF EARNINGS
- -------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 28, 1996, DECEMBER 30, 1995 AND DECEMBER 31, 1994
1996 1995 1994
-------------------------------
(In thousands, except per share data)
REVENUES
System sales $ 122,836 129,917 108,322
Support and maintenance 57,430 49,351 41,322
Other 8,841 7,633 6,273
--------- --------- ---------
Total revenues 189,107 186,901 155,917
--------- --------- ---------
COSTS AND EXPENSES
Cost of revenues 58,892 52,270 46,426
Sales and client service 65,005 49,889 39,857
Software development 35,890 30,193 22,688
General and administrative 18,719 17,284 13,167
--------- --------- ---------
Total costs and expenses 178,506 149,636 122,138
--------- --------- ---------
OPERATING EARNINGS 10,601 37,265 33,779
Interest income (expense), net 2,301 (45) (1,328)
--------- --------- ---------
EARNINGS BEFORE INCOME TAXES 12,902 37,220 32,451
Income taxes 4,651 14,699 12,950
--------- --------- ---------
NET EARNINGS $ 8,251 22,521 19,501
========= ========= =========
PRIMARY EARNINGS PER SHARE $ .25 .72 .66
========= ========= =========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 28, 1996, DECEMBER 30, 1995 AND DECEMBER 31, 1994
Foreign
Additional Treasury currency
Common Stock paid-in Retained stock translation
Shares Amount capital earnings amount adjustment Total
-----------------------------------------------------------------
(In thousands)
Balance at December 31, 1996 27,729 $ 277 28,803 40,852 (5,693) (9) 64,230
Exercise of options 778 6 981 - - - 987
Issuance of stock grants 2 2 23 - - - 25
Tax benefit from disqualifying
dispositions of stock options - - 1,000 - - - 1,000
Foreign currency translation
adjustment - - - - - 34 34
Net earnings - - - 19,501 - - 19,501
------------------------------------------------------------------
Balance at December 31, 1994 28,509 285 30,807 60,353 (5,693) 25 85,777
-------------------------------------------------------------------
Exercise of options 777 8 1,484 - - - 1,492
Issuance of stock grants - - 10 - - - 10
Common shares
Common shares sold in public
offering, net issuance costs 3,716 37 108,250 - - - 108,287
Tax benefit from disqualifying
dispositions of stock options - - 3,325 - - - 3,325
Foreign currency
translation adjustment - - - - - (38) (38)
Net earnings - - - 22,521 - - 22,521
------------------------------------------------------------------
Balance at December 30, 1995 33,002 330 143,876 82,874 (5,693) (13) 221,374
------------------------------------------------------------------
Exercise of options 402 4 805 - - - 809
Tax benefit from disqualifying
dispositions of stock options - - 260 - - - 260
Foreign currency
translation adjustment - - - - - 41 41
Net earnings - - - 8,251 - - 8,251
------------------------------------------------------------------
Balance at December 28, 1996 33,404 $ 334 144,941 91,125 (5,693) 28 230,735
==================================================================
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 28, 1996, DECEMBER 30, 1995 AND DECEMBER 31, 1994
1996 1995 1994
---- ---- ----
(In thousands)
Cash flows from operating activities:
Net earnings $ 8,251 22,521 19,501
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 15,498 12,218 10,062
Issuance of stock as compensation -- 10 25
Provision for deferred income taxes 2,894 7,796 8,017
Tax benefit from disqualifying
dispositions of stock options 260 3,325 1,000
Loss on disposal of capital equipment 99 42 165
Changes in assets and liabilities:
Receivables 2,376 (32,595) (23,221)
Inventory 630 (28) (1,194)
Prepaid expenses and other (2,079) (2,263) 1,213
Accounts payable (5,586) 1,447 1,969
Other current liabilities 4,269 2,856 1,412
----------------------------------
Total adjustments 18,361 (7,192) (552)
----------------------------------
Net cash provided by operating
activities 26,612 15,329 18,949
----------------------------------
Cash flows from investing activities:
Purchase of capital equipment (14,962) (10,620) (11,291)
Purchase of land, buildings,
and improvements (379) (8,266) (20,939)
Proceeds on disposal of capital
equipment 33 - 21
Capitalized software development
costs (13,240) (9,210) (8,131)
----------------------------------
Net cash used in investing
activities (28,548) (28,096) (40,340)
----------------------------------
Cash flows from financing activities:
Net payments under short-term
notes payable - - (639)
Proceeds from issuance of long-
term debt - 6,745 50,273
Repayment of long-term debt (130) (6,906) (30,743)
Proceeds from public offering,
net of expenses - 108,287 -
Proceeds from exercise of options 809 1,492 987
----------------------------------
Net cash provided by financing
activities 679 109,618 19,878
----------------------------------
Foreign currency translation adjustment 41 (38) 34
----------------------------------
Net increase (decrease) in cash,
cash equivalents, and short-term
investments (1,216) 96,813 (1,479)
Cash, cash equivalents, and short-term
investments at beginning of year 112,118 15,305 16,784
----------------------------------
Cash, cash equivalents, and short-term
investments at end of year $110,902 112,118 15,305
==================================
Supplemental disclosures of cash
flow information:
Cash paid during the year for:
Interest $ 2,517 2,607 1,110
Income taxes, net of refund $ 685 4,016 3,574
Noncash investing and financing
activities:
Acquisition of equipment
through capital leases - - 386
See 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) Revenue Recognition - Revenues are derived primarily from
the sale of clinical information systems. 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 are negotiated
separately and 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 performance criteria set forth
in the contracts. 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 91-1,
"Software Revenue Recognition".
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.
The Company also provides project implementation and consulting
services. Revenue associated with these services is recognized
as the services are performed.
(c) Fiscal Year - The Company's fiscal year ends on the Saturday
closest to December 31. All references to years in these notes
to consolidated financial statements represent fiscal years
unless otherwise noted.
(d) 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 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 1996, 1995, and 1994, the Company
capitalized $13,240,000, $9,210,000, and $8,131,000,
respectively, of total software development costs of $43,133,000,
$33,957,000, and $26,897,000, respectively. Amortization
expense of capitalized software development costs in 1996, 1995,
and 1994 was $5,997,000, $5,109,000, and $3,918,000,
respectively, and accumulated amortization was $24,960,000,
$18,963,000, and $13,854,000, respectively.
(e) Inventory - Inventory consists primarily of computer
hardware held for resale and is recorded at the lower of cost
(first-in, first-out) or market.
(f) 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 five years.
(g) Earnings Per Share - Earnings per share is based on the
weighted average number of common shares and common share
equivalents outstanding. Common share equivalents consist of
shares issuable upon exercise of stock options using the treasury
stock method. The computation of fully diluted earnings per
share reflects additional dilution under the treasury stock
method when the Company's stock price at the end of a reporting
period exceeds the average price. Fully diluted earnings per
share is not materially different from primary earnings per
share. Weighted average shares outstanding utilized in the
computation of primary earnings per share were 33,619,508,
31,448,053, and 29,762,208, and fully diluted earnings per share
were 33,619,508, 31,448,053, and 29,807,504, during 1996, 1995,
and 1994, respectively.
(h) 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 stockholders'
equity. 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 ($274,000), $33,000, and $107,000 in 1996, 1995,
and 1994, respectively.
(i) 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.
(j) Goodwill - Excess of cost over net assets acquired
(goodwill) is being amortized on a straight-line basis over eight
years. Accumulated amortization was $1,862,000 and $1,355,000 at
the end of 1996 and 1995, respectively. The Company assesses the
recoverability of goodwill based on forecasted undiscounted
future operating cash flows.
(k) Use of Estimates - The preparation of financial statements
in conformity with generally accepted accounting principles
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 Cash and Investments
Cash, cash equivalents, and short-term investments consist of the following:
1996 1995
---------------
(In thousands)
Cash and cash equivalents $ 6,905 8,640
Repurchase agreements 656 916
Variable rate securities 500 500
Fixed rate securities 101,991 101,212
Certificates of deposit 850 850
------- -------
Total cash, cash equivalents, and
short-term investments $110,902 112,118
======== =======
In accordance with Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", debt and marketable equity securities are classified
in one of three categories: trading, available-for-sale, or held-
to-maturity. The Company classifies all of its debt investment
securities as held-to-maturity. Held-to-maturity securities are
those securities in which the Company has the positive intent and
ability to hold until maturity. Held-to-maturity securities are
recorded at cost, adjusted for the amortization or accretion of
premiums or discounts. Included in other assets at December 28,
1996 are equity investments with a cost and fair value of
$500,000, which are categorized as available-for-sale.
All cash equivalents and short-term investments held at December
28, 1996 mature within 90 days. The amortized cost of cash
equivalents and short-term investments approximates fair value.
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. Contract receivables that
are not expected to be collected within one year are classified
as noncurrent. Billings on contracts in excess of related
revenues recognized under the percentage-of-completion method are
recorded as advanced billings. A summary of current receivables
is as follows:
1996 1995
----------------
(In thousands)
Current receivables:
Accounts receivable $ 47,762 49,529
Contracts receivable 48,476 48,625
-------- ------
Total current receivables $ 96,238 98,154
======== ======
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 1996 and 1995, are amounts due from healthcare
providers located in foreign countries of $9,682,000 and
$3,821,000, respectively. Consolidated revenues include foreign
sales of $15,874,000, $8,823,000, and $13,274,000, for the years
ended 1996, 1995, and 1994, respectively.
The Company provides an allowance for estimated uncollectible
accounts based upon historical experience and management's
judgment. At the end of 1996 and 1995 the estimated allowance
for uncollectible accounts was $1,121,000 and $1,109,000,
respectively.
The fair value of the Company's noncurrent receivables is
estimated to be $3,380,000, based on current interest rates
offered to the Company for debt of the same maturities.
4 Property and Equipment
A summary of property, equipment, and leasehold improvements
stated at cost, less accumulated depreciation and amortization,
is as follows:
1996 1995
(In thousands)
----------------
Furniture and fixtures $ 16,023 13,661
Computer and communications 33,384 24,232
Marketing equipment 1,222 1,240
Leasehold improvements 8,630 6,105
Capital lease equipment 600 600
Land, buildings, and improvements 29,593 29,213
-------- ------
89,452 75,051
Less accumulated depreciation
and amortization 29,405 21,358
-------- ------
Total property and equipment, net $ 60,047 53,693
======== ======
5 Indebtedness
The Company has a loan agreement with two banks 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 (8.25%
at December 28, 1996) or LIBOR plus 1.75% (7.47% at December 28,
1996). The interest rate may be reduced by up to .5% if certain
net worth ratios are maintained. At December 28, 1996, 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 3/16% is payable quarterly on
the unused portion of the revolving line of credit.
The Company has $30,000,000 of Senior Notes. The Senior Notes
are payable in five equal annual installments beginning in August
2000. Interest is payable on February 1 and August 1 at a rate
of 8.3%. 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 also has an obligation under a capital lease
agreement, which is secured by the related equipment, for
$104,000 ($234,000 at December 30, 1995) with interest at 7.75%,
payable in monthly installments through August 1997.
The fair value of the Company's Senior Notes is estimated to be
$31,092,000 based on the quoted market prices for similar issues
offered to the Company for debt of the same remaining maturities.
6 Interest Income and Expense
A summary of interest income and expense is as follows:
1996 1995 1994
---------------------
(In thousands)
Interest income $ 4,839 2,380 542
Interest expense (2,538) (2,425) (1,870)
------- ------- -------
Interest income (expense), net $ 2,301 (45) (1,328)
======= ======= =======
7 Stock Options
At December 28, 1996, 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 may grant to associates
options to purchase up to 95,000 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.
Under Stock Option Plan D, the Company may grant to associates,
consultants, or advisors options to purchase up to 2,600,000
shares of common stock through January 1, 2000. The options are
exercisable at a price 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
up to 25 years.
Under Stock Option Plan E, the Company may grant to associates
who are not officers subject to the provisions of Section 16(a)
of the Securities and Exchange Act of 1934, consultants, or
advisors options to purchase up to 2,000,000 shares of common
stock through January 1, 2005. The options are exercisable at a
price 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.
The Company accounts for 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 at the end of 1996, 1995, and 1994, and
changes during these years ended is presented below:
1996 1995 1994
-----------------------------------------------------------
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
beginning of year 2,730,786 $15.95 2,369,286 $ 4.26 2,773,414 $ 1.98
Granted 941,130 15.97 1,198,616 28.00 410,832 14.72
Exercised (401,754) 2.02 (776,916) 1.98 (777,560) 1.27
Forfeited (74,090) 12.52 (60,200) 2.70 (37,400) 1.55
- -----------------------------------------------------------------------------
Outstanding at end of
year 3,196,072 $16.50 2,730,786 $15.95 2,369,286 $ 4.26
========= ========= =========
Options exercisable
at year-end 838,143 909,178 1,373,454
The following table summarizes information about fixed stock
options outstanding at December 28, 1996.
Options Outstanding Options exercisable
- --------------------------------------------------- ------------------------
Weighted-
average Weighted- Weighted-
Range of Number remaining average Number average
exercise outstanding contractual exercise exercisable exercise
prices at 12/28/96 life price at 12/28/96 price
- -------------------------------------------------- ------------------------
$ 1.13- 8.63 646,034 2.8 years $ 1.64 623,634 $ 1.56
11.13-19.44 1,353,038 22.4 15.29 122,534 15.08
20.50-29.63 1,197,000 23.7 25.90 91,975 26.93
--------- -------
$ 1.13-29.63 3,196,072 18.9 $ 16.50 838,143 6.32
========= =======
The per share weighted-average fair value of stock options
granted during 1996 and 1995 was $10.22 and $16.52, respectively,
on the date of grant using the Black Scholes option-pricing model
with the following assumptions: expected dividend yield of zero
percent, weighted-average risk-free interest rate of 6.3%,
expected volatility factor of 49.2%, and a weighted-average
expected life of eight years.
Since the Company applies APB Opinion No. 25 in accounting for
its plans, no compensation expense has been recognized for its
stock options in the financial statements. 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 would have been reduced by
approximately $896,000 or $.03 per share in 1996 and
approximately $647,000 or $.02 per share in 1995.
Pro forma net earnings reflects only options granted in 1996 and
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 expense is reflected over the options' vesting
period of ten years for the 1996 and 1995 options. Compensation
expense for options granted prior to January 1, 1995 is not
considered.
8 Income Taxes
Income taxes for the years ended 1996, 1995, and 1994 consist of
the following:
1996 1995 1994
------------------------
(In thousands)
Current:
Federal $ 1,403 6,272 3,740
State 136 798 692
Foreign 218 (167) 501
------- ------- ------
Total current 1,757 6,903 4,933
Deferred:
Federal 2,553 6,850 7,043
State 341 946 919
Foreign -- -- 55
------- ------ ------
Total deferred 2,894 7,796 8,017
------- ------ ------
Total income tax expense $ 4,651 14,699 12,950
======= ====== ======
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 1996
and 1995 relate to the following:
1996 1995
---------------
(In thousands)
Deferred tax assets
Separate return net operating losses $1,200 2,389
Other 1,686 1,465
Total deferred tax assets 2,886 3,854
Less valuation allowance -- (1,189)
------ -------
Net deferred tax assets 2,886 2,665
------ -------
Deferred tax liabilities
Software development costs (11,245) (8,090)
Contract and service revenues and costs (16,205) (16,791)
Depreciation and amortization (1,208) (1,187)
Other (688) (163)
-------- -------
Total deferred tax liabilities (29,346) (26,231)
-------- -------
Net deferred tax liability $(26,460) (23,566)
========= ========
The valuation allowance for 1996 and 1995 was $0 and $1,189,000,
respectively. The valuation allowance in 1995 was attributable
to the uncertainty of the future realization of deferred tax
assets generated mainly from losses recorded by certain foreign
operations.
The effective income tax rates for 1996, 1995, and 1994 were
36.0%, 39.4%, and 39.9%, respectively. These effective rates
differ from the federal statutory rate of 35% as follows:
1996 1995 1994
--------------------------
(In thousands)
Tax expense at statutory rates $ 4,516 13,027 11,358
State income tax, net of federal benefit 310 1,352 1,047
Other, net (175) 320 545
------- ------ ------
Total income tax expense $ 4,651 14,699 12,950
======= ====== ======
Income taxes payable are reduced by the tax benefit resulting
from disqualifying dispositions of stock acquired under the
Company's stock option plans. The 1996, 1995, and 1994 benefits
of $260,000, $3,325,000, and $1,000,000, respectively, are
treated as increases to additional paid-in capital. Income taxes
payable at December 30, 1995 were reduced by the use of separate
return net operating losses. The 1995 tax benefit of $431,000
was treated as a reduction in goodwill.
9 Associate Stock Purchase Retirement Plan
The Cerner Corporation Associate Stock Purchase 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 pre-tax
contributions from 1% to 15% 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 20% of the participant's contribution, limited to
a yearly maximum of $600 per participant. The Company's expense
for the plan amounted to $560,000, $431,000, and $316,000 for
1996, 1995, and 1994, respectively.
10 Commitments
The Company is committed under operating leases for office space
through December 2000. Rent expense for office and warehouse
space for the Company's regional and international offices for
1996, 1995, and 1994 was $1,580,000, $1,192,000, and $1,721,000,
respectively. Lease expense for computer equipment was $27,000,
$68,000, and $328,000, in 1996, 1995, and 1994, respectively.
Aggregate minimum future payments (in thousands) under these
noncancelable leases are as follows:
Years
--------------------
1997 $ 1,697
1998 1,491
1999 786
2000 289
11 Real Estate Lease Revenue
The Company leases space to unrelated parties in its Kansas City
headquarters complex under noncancelable operating leases.
Included in other revenues is rental income of $2,383,000 and
$2,577,000 in 1996 and 1995, respectively. Future minimum lease
revenues (in thousands) under these noncancelable operating
leases expiring through 2000 are as follows:
Years
---------------------
1997 $ 1,754
1998 1,456
1999 1,151
2000 723
12 Stockholders' Equity
At the end of 1996 and 1995, the Company had 1,000,000 shares of
authorized but unissued preferred stock, $.01 par value.
13 Quarterly Results (unaudited)
Selected quarterly financial data for 1996 and 1995 is set forth
below:
Earnings
before Primary
income Net earnings
Revenues taxes earnings per share
---------------------------------------------
(In thousands, except per
share data)
1996 quarterly results:
March 30 $ 52,582 6,956 4,222 .13
June 29 46,709 2,828 1,689 .05
September 28 43,401 914 770 .02
December 28 46,415 2,204 1,570 .05
- ----------------------------------------------------------------------
Total $ 189,107 12,902 8,251 .25
========== ====== ===== ===
1995 quarterly results:
April 1 $ 43,192 7,817 4,541 .15
July 1 48,967 10,271 6,184 .21
September 30 41,724 5,775 3,491 .11
December 30 53,018 13,357 8,305 .25
- ----------------------------------------------------------------------
Total $ 186,901 37,220 22,521 .72
========== ====== ====== ===
Schedule II
Cerner Corporation
Valuation and Qualifying Accounts
Additions
Balance at Charged to
Beginning Costs and Balance at
Description of Period Expenses Deductions End of Period
- ----------------------------------------------------------------------------------------
For Year Ended December 30, 1995
Doubtful Accounts $ 434,268 $ 674,750 $ 0 $ 1,109,018
Sales Allowances $ 300,000 $ 0 $ 300,000 $ 0
Additions
Balance at Charged to
Beginning Costs and Balance
Description of Period Expense Deductions End of Period
- ----------------------------------------------------------------------------------------
For Year Ended December 28, 1996
Doubtful Accounts $ 1,109,018 $ 11,982 $ 0 $ 1,121,000
Sales Allowances $ 0 $ 0 $ 0 $ 0
INDEPENDENT AUDITORS' REPORT
ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors
Cerner Corporation:
Under date of February 7, 1997, we reported on the
consolidated balance sheets of Cerner Corporation and
subsidiaries as of December 28, 1996 and December 30, 1995
and the related consolidated statements of earnings,
stockholders' equity and cash flows for each of the years in
the three-year period ended December 28, 1996. These
consolidated financial statements and our report thereon are
included in the Company's annual report on Form 10-K for the
year 1996. 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 Peat Marwick LLP
Kansas City, Missouri
February 7, 1997