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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 3, 1998
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, 1998, there were 32,649,710 shares of Common
Stock outstanding, of which 7,595,967 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, 1998,
was $516,733,449.
Documents incorporated by reference: portions of the
Registrant's Proxy Statement for the 1998 Annual Meeting of
Stockholders are incorporated by reference in Part III hereof.
PART I
Item 1. Business
General
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Cerner Corporation ("Cerner" or the "Company") is a Delaware
corporation incorporated in 1980. 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
person/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, including in
the home, at physician's offices and at ambulatory, inpatient and
intensive care settings. Cerner's systems are designed and
developed using the Health Network Architecture (''HNA''), a
single information 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. Cerner is developing
its newest generation of HNA products known as "Millennium".
See "Cerner's HNA Approach and HNA Millennium" for a discussion
of Millennium.
Healthcare Industry
- -------------------
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
(''IDS's''), and IDS's are aligning with payer organizations to
form Integrated Health Organizations (''IHO's''), 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 IDS's and IHO's encompass
many of the same needs as hospitals, physicians and managed care
organizations. Many IDS's and IHO's 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 IDS's and IHO's
include integrated process-based systems for clinical domains,
data repositories and applications for physicians and management
teams. Cerner is responding to the changing and increasing
needs of the healthcare industry for better information systems
by developing HNA Millennium, its latest generation of products.
See "Cerner's HNA Approach and HNA Millennium" for a discussion of
Millennium.
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
(''IPA's'') and Preferred Provider Organizations (''PPO's''), and
are increasingly supported administratively through Management
Services Organizations ("MSO's") which offer management and
administrative services to physicians. In some cases, such
organizations align with IDS's and IHO's. 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 IDS's
and IHO's.
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 affiliated to service a community or
defined member population. 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 IHO's will emerge in the
United States in the next decade. These IHO's 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 IHO's 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 IHO's are automated using fully integrated
information systems, it becomes possible to extend automation to
the management processes of healthcare.
Cerner's HNA Approach and HNA Millennium
- ----------------------------------------
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, management, and business information
requirements of a healthcare delivery system across the continuum
of care from the physician practice to the IHO and to integrate
the information requirements of clinical operations and business
functions. 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 three-
tiered client/server technology to optimize distributed computing
performance and functionality advantages. Millennium's breadth
of focus and functionality are well suited for large-scale and
enterprise application technologies for healthcare organizations.
HNA Classic, Cerner's existing technology, was able to serve
eight clinical markets. Millennium will be able to address the
needs of approximately twenty major market segments.
Development of HNA Millennium began in the summer of 1993 and at
the end of 1997 approximately 440 engineering and engineering
support personnel were engaged in the project. Cerner intends,
over time, to reengineer all of its software products to the HNA
Millennium platform. Installation of Alpha and Beta versions
of certain HNA Millennium applications began during 1996 and
continued through 1997. At the end of 1997 forty systems,
including versions of Open Clinical Foundation Data Repository,
PathNet Laboratory Information System, RadNet Radiology
Information System, SurgiNet Surgery Information System, Open
Management Foundation Data Repository System, PowerChart and Open
Engine Application Gateway System were being used by Cerner
clients. Cerner expects to have more than one hundred fifty
Millennium systems in use by the end of 1998. Implementation of
Millennium at client sites is a much more complex process than
implementation of HNA Classic due to the greater range of
capability of the Millennium products and its complexity.
Substantial project management, process redesign, technology
integration and training are all required in order for clients to
achieve the full benefits offered by Millennium and require
Cerner to significantly increase its project related
capabilities. Continuing the Millennium development,
implementing Millennium at client sites and increasing Cerner's
project related capabilities will be significant challenges
during 1998.
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
- --------
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, clinical and management
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 IPA's and PPO's, and then participate
in MSO's, they require clinical and process-based systems to
manage the member/patient care processes within their own
practices. As such groups align with IDS's and IHO's, they
further require clinical and management information systems that
allow them to share clinical and management processes with these
community-wide systems. Healthcare organizations are developing
strategies for connecting community-based physicians to the
information resources of the health system using the internet.
Cerner's systems provide the member/patient data repositories,
clinical, management tools and connectivity 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
for specific markets such as PathNet, RadNet and PharmNet, as
institutional providers look to restructure and reengineer these
high cost centers within their IDS's and IHO's. 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 IDS's and IHO's, 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 IHO's 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. The substantial
project management process redesign, technology integration, and
training involved in healthcare systems taking advantage of the
opportunities provided by clinical and management information
technology represent a significant market for the Company's
consulting services.
Products
- --------
The Company's products include Enterprise Systems, which
automate processes across and throughout the health system
enterprise; Enterprise Repositories, which capture, sort, present
and analyze clinical and business information; Cinical Systems
for Direct Care, which automate the clinical processes within
hospitals and the physicians practice; Clinical Systems for Care
Centers, which automate the clinical processes within specific
departments or domains; Decision Support and Executable Knowledge
Systems, which enhance clinical and business processes with
information and actions; Financial and Operational Management
Systems, which automate the business operations; population
health management systems for managing health; Demand Management
Systems and services for managing the need for care; Personal
Health Systems for individuals to manage their own health; and
Interface Technologies for connecting other technologies to HNA
Millennium. 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.
Enterprise Systems
- ------------------
Cerner's Enterprise Systems automate processes across the
entire health system. Capstone automates the identification,
eligibility, registration and scheduling processes across
hospitals, clinics, physician practices and other care delivery
organizations, integrating the health system and incorporating
existing systems. Powerlink connects community-based physicians
to health systems for referrals, authorizations, claims,
eligibility, and reporting. PowerChart is the enterprise
clinician's desktop solution for viewing, ordering and
documenting the electronic medical record.
Enterprise Repositories
- -----------------------
Open Agreement Foundation Data Repository is a structured
repository for the storage and viewing of health plan
information, records, contracts, eligibility and coverage data.
Open Clinical Foundation Data Repository 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.
Open Management Foundation Data Repository 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.
Open Health Foundation Data Repository is a structured
repository for the storage and viewing of health information
related to populations, in support of applications and services
designed to manage the health status of those populations.
Open Outcome Foundation Data Repository is a structured
repository for the storage and viewing of the data that supports
the reporting and management of outcomes in the areas of
clinical, medical, process, economic and satisfaction.
Clinical Systems for Direct Care
- --------------------------------
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. It enables the entire care
team to plan and manage individual activities and plans, as
well as measure outcomes and goals. CareNet consists of five major
solutions - patient registration, scheduling, orders,
documentation, care planning and diagnostic and therapeutic care.
The INet Intensive Care Management System is designed to
automate the entire care process in intensive care settings. It
supports patient management, chart review and browsing, order
management, documentation management, scheduling, and automatic
data acquisition. It automatically acquires patient data from
bedside medical devices, manages information flow and
presentation at the bedside, supports care management through
care planning and critical pathways, and encourages timely
decisions based on comprehensive data availability; information
tailored to the practitioner and the patient; and rule-based
decision support.
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.
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.
Clinical Systems for Care Centers
- ---------------------------------
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.
The RadNet Radiology Information System addresses the
operational and management requirements of diagnostic radiology
departments or services. It allows a department to replace its
manual, paper-based system of record-keeping with an efficient
computer-based system
The 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 fill lists,
intravenous fill lists and medication administration records are
produced automatically or on demand.
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.
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. 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 CVNet Cardiology Department Information System automates
the processes within the department of cardiology, supporting the
scheduling, ordering, documentation and data capture required by
professionals in the cardiology domain.
Decision Support and Executable Knowledge
- -----------------------------------------
Discern Structured Care Design is clinical pathways and
protocols that automate the specific plans of care for an
individual, and operates within Cerner's clinical systems.
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.
Discern Expert and Alerts are an event-driven, rule-based,
decision support software application that 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 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.
Health Facts is Cerner's comparative data warehouse for
benchmarking information and services for subscribers to support
their own improvement processes.
Financial and Operational Management Systems
- --------------------------------------------
ProFit is Cerner's application for revenue accounting,
billing and accounts receivables for the entire health system as
well as each individual domain or organization.
ProRate is an application to automate the managed care
processes around membership, eligibility tracking, claims
processing and contract management.
The ProLogue Enterprise Management System includes a suite
of management applications specifically designed to assemble and
use the information to help an organization complete its
strategic plans, including clinical metrics, case profiling, and
performance profiling of individuals and organizations.
The ProFile Health Information Management System helps meet
the operations management needs of the health information
management (medical records) department and includes
functionality for the various chart tracking and completion tasks
commonly associated with maintaining medical records.
ProCure and ProTrack automates the business operations
around materials and equipment management for the organization.
Population Health Management
- ----------------------------
IQ Health produces personal health risk assessments and
analyzes those to create interventions that promote self care and
improve health.
Demand Management
- -----------------
Health Connections includes applications and services to
automate and manage the operations of telecare, including
protocol-based triage and person information.
Personal Health
- ---------------
Vitality 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. Vitality can store health and medical records for easy
access. By providing health appraisals and personalized health
plans, Vitality takes the first step toward improving health
education for members in a community.
Interface Technologies
- ----------------------
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.
Software Development
- --------------------
Cerner commits significant resources to developing new
health information system products. As of January 3, 1998, 837
employees were engaged full-time in product development
activities. Total expenditures for the development and
enhancement of the Company's products were approximately
$33,957,000, $43,133,000 and $54,524,00 during the 1995, 1996 and
1997 fiscal years respectively. These figures include both
capitalized and noncapitalized portions and exclude amounts
amortized for financial reporting purposes.
The Company expects to continue investment and development
efforts for its current and future product offerings. As new
clinical and management information needs emerge, Cerner intends
to enhance its current product lines with new versions released
to clients on a periodic basis. In addition, Cerner plans to
expand its current product lines by developing additional
information systems for 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.
See "Cerner's HNA Approach and HNA Millennium" for a
discussion of the development of Cerner's latest generation of
software products.
Sales and Marketing
- -------------------
The markets for Cerner's information system products include
IHO's, IDS's, physician groups and networks and their MSO's,
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 avail-
able 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 a nonexclusive distribution
agreement with Siemens Nixdorf by which its products are
marketed, implemented and supported in Europe and elsewhere.
Cerner's consolidated revenues include foreign sales of
$8,823,000, $15,874,000 and $16,272,000 for the 1995, 1996 and
1997 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.
Backlog
- -------
At January 3, 1998, Cerner had contract backlog of
$198,274,000. Such backlog represents system sales from signed
contracts which had not yet been recognized as revenue. The
Company recognizes revenue on a percent of completion basis,
based on certain milestone conditions, for its software products.
At January 3, 1998, the Company had $70,608,000 of contracts
receivable, which represents revenues recognized under the
percent of completion method but not yet billable under the terms
of the contract. At January 3, 1998, Cerner had a software
support and maintenance backlog of
$132,842,000. Such backlog represents contracted software support
and hardware maintenance services for a period of twelve months.
Competition
- -----------
The market for healthcare information systems is intensely
competitive and rapidly changing. The Company believes that the
principal competitive factors in this market include the breadth
and quality of system and product offerings, the stability of the
information systems provider, the features and capabilities of
the information systems, the ongoing support for the system, the
potential for enhancements and future compatible products, and
technical resources. Many of the Company's competitors have
greater financial, technical, product development and marketing
resources than the Company, and some of these competitors offer
products, such as financial, billing and collection systems, not
offered by the Company. The past several years have been marked
by consolidation among many of the Company's competitors. In
addition, other companies with significant technological and
other resources may enter the market in the Company competes.
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 effect of future legislation and regulation upon prospective
clients is impossible to predict. In addition, the United States
Food and Drug Administration (the "FDA") has declared that
software products that are intended for the maintenance of data
used in making decisions regarding the suitability of blood
donors and the release of blood or blood components for
transfusion are medical devices under the 1976. Medical Device
Amendments to the federal Food, Drug and Cosmetic Act and the
Safe Medical Devices Act of 1990. As a consequence, the Company
is subject to extensive regulation by the FDA with regard to its
blood bank software. To the extent that the other Company
products are deemed by the FDA to be medical devices, the Company
could be subject, depending on the product, to extensive
requirements governing pre- and post-marketing conditions, such
as device investigation, approval, labeling and manufacturing.
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 January 3, 1998, the
Company was using approximately 361,000 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
January 3, 1998.
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 30, 1998. Officers are elected annually and
serve at the discretion of the board of directors.
Name Age Positions
- ---- --- ----------
Neal L. Patterson 48 Chairman of the Board of Directors
and Chief Executive Officer
Clifford W. Illig 47 President and Chief Operating Officer
Jeffrey C. Reene 43 Executive Vice President
Jack A. Newman, Jr. 50 Executive Vice President
Thomas C. Tinstman, M.D. 52 Senior Vice President
Alan D. Dietrich 35 Senior Vice President
Marc G. Naughton 43 Vice President and Chief Financial Officer
Jeffrey A. Townsend 34 Vice President
Stephen M. Goodrich 46 Vice President
Francois W. Sauer, M.D. 53 Chief Executive Officer of Cerner
International
Neal L. Patterson has been Chairman of the Board of
Directors and Chief Executive Officer of the Company for more
than five years.
Clifford W. Illig has been a Director, President and Chief
Operating Officer of the Company for more than five years.
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.
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 Senior 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 Senior Vice President.
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.
Jeffrey A. Townsend joined the Company in June 1985. Since
that time he has held several positions in the product
organization and was promoted to Vice President in February 1997.
Stephen M. Goodrich joined the Company in October 1987 as a
project leader in the product organization. In 1992 he was
promoted to Vice President.
Francois W. Sauer, M.D., joined the Company as Chief
Executive Officer of Cerner International in July 1997. Prior to
joining the Company, he was Director of Strategic Growth at Transquest,
Inc. from April 1996 to April 1997. Prior to that he was a Managing
Partner of the Enterprise Development Group in the Global Information
Solution at AT&T, Inc. from October 1994 to April 1996. Prior April 1994
he was with Digital Equipment in several roles including Consultant and
Practice Director.
PART II
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters
The Company's common stock trades on The Nasdaq Stock
Market SM under the symbol CERN. The following table sets forth
the high, low, and last sales prices for the fiscal quarters of
1997 and 1996 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.
1997 1996
------------------------- ---------------------------
High Low Last High Low Last
----- --- ---- ---- --- -----
First quarter 16 1/4 13 1/4 13 1/4 26 1/8 18 1/8 23 1/4
Second quarter 22 1/8 11 7/8 21 3/8 25 1/4 19 3/4 21 3/8
Third quarter 32 7/8 20 3/4 25 21 11 3/4 15 5/8
Fourth quarter 30 1/2 20 1/4 22 15 1/2 10 3/4 15 31/64
At February 6, 1998, there were approximately 1,300 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
---------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands, except per
share data)
Statement of earnings data:
Revenues $ 245,057 189,107 186,901 155,917 120,572
Operating earnings 22,170 10,601 37,265 33,779 24,330
Earnings before income taxes 24,484 12,902 37,220 32,451 24,120
Net earnings 15,148 8,251 22,521 19,501 14,558
Earnings per share:
Basic .46 .25 .75 .71 .55
Diluted .45 .25 .72 .66 .50
Weighted average shares
outstanding:
Basic 32,881 32,729 29,845 27,651 26,287
Diluted 33,668 33,620 31,448 29,762 29,158
Balance sheet data:
Working capital $ 156,808 171,204 174,064 52,370 42,603
Total assets 331,781 314,753 303,945 156,410 104,910
Long-term debt, net 30,026 30,000 30,104 30,235 10,354
Stockholders' equity 233,747 230,735 221,374 85,777 64,230
In 1997, the Company retroactively adopted FAS No. 128,
"Earnings per Share", which revised the calculation and
presentation of earnings per share. Previously reported earnings
per share has been computed based upon the new accounting
standard
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 January 3, 1998, Compared to Year Ended December 28, 1996
Results of Operations - The Company's revenues increased 30% to
$245,057,000 in 1997 from $189,107,000 in 1996. Net earnings
increased 84% to $15,148,000 in 1997 from $8,251,000 in 1996.
Net earnings from the Company's foreign operations decreased to
$2,389,000 in 1997 from $2,897,000 in 1996.
Revenues - In 1997, revenues increased due to an increase in
system sales and support of installed systems. System sales
increased 39% to $170,906,000 in 1997 from $122,836,000 in 1996.
This increase in system sales resulted primarily from an increase
in installations under Health Network Architecture (HNA)
contracts. HNA contracts were 57% of total systems sales in
1997, compared to 43% in 1996. The sale of additional hardware
and software products to the installed client base decreased 8%
in 1997 as compared to 1996.
Total sales to the installed base in 1997, including new systems,
incremental hardware and software, support and maintenance
services, and discrete services, were 73% of total revenues in
1997 compared to 79% in 1996. The lower percentage was primarily
due to the increase in system sales to new clients.
At January 3, 1998, the Company had $198,274,000 in contract
backlog and $132,842,000 in support and maintenance backlog,
compared to $110,330,000 in contract backlog and $107,255,000 in
support and maintenance backlog at the end of 1996.
Support and maintenance revenues increased 20% in 1997 compared
to 16% in 1996. This increase was due primarily to the increase
in the Company's installed and converted client base. These
revenues represented 28% of 1997 total revenues and 30% of 1996
total revenues.
Other revenues decreased 38% to $5,438,000 in 1997 from
$8,841,000 in 1996. This decrease was due primarily to a
decrease in real estate lease revenues from the rental to outside
tenants, as the Company utilizes more office space, and the
reporting of certain services revenue as system sales in 1997.
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 29% of total revenues in 1997 and 31% of total
revenues in 1996. Such costs, as a percent of revenues,
typically have varied as the mix of revenue (software, hardware,
services and support) components carrying different margin rates
changes from period to period. The decrease in the cost of
revenue as a percent of total revenues resulted principally from
a decrease in the percent of revenue from computer hardware and
sublicensed software, which carry a higher cost of revenue
percentage.
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 1997 and 1996. The increase in total sales
and client service expenses is attributable to the cost of a
larger field sales and services organization and marketing of new
products.
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 1997 and 1996
were $54,524,000 and $43,133,000, respectively. These amounts
exclude amortization. Capitalized software costs were
$18,373,000 and $13,240,000 for 1997 and 1996, respectively. The
increase in aggregate expenditures for software development in
1997 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 9% in
1997 and 10% in 1996.
Interest Income, Net - Net interest income was $2,314,000 in
1997 compared to $2,301,000 in 1996.
Income Taxes - The Company's effective tax rates were 38% and 36%
for 1997 and 1996, respectively. The lower 1996 tax rate is due
to the utilization of foreign net operating losses.
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 is 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% and 39%
for 1996 and 1995, respectively. The decrease in effective tax
rates is due to the utilization of foreign net operating losses
during 1996.
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
$7,541,000 and short-term investments of $70,002,000 at the end
of 1997 and working capital of $156,808,000, compared to 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. The decrease in working capital resulted primarily
from the Company's purchase of 688,500 shares of its common stock
for $15,103,000 during 1997.
The Company generated cash of $18,692,000, $28,262,000, and
$15,359,000 from operations in 1997, 1996, and 1995,
respectively. Cash flow from operations decreased in 1997, due
primarily to an increase in receivables from record level-
revenues, 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 20%, 16%, and 19%, in 1997, 1996, and 1995,
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 investment
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.
New Accounting Pronouncements and Other - In 1997, the Financial
Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income". This statement expands disclosures and, accordingly,
will have no impact on the Company's reported financial position,
results of operations or cash flows. The Company will adopt SFAS
No. 130 during its first quarter of 1998. FASB also issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information" in 1997. This statement will have no impact on the
Company.
The Company has considered the impact of Year 2000 issues on its
internal computer systems and applications and developed a
remediation plan. Conversion activities are in process and the
Company expects conversion and testing to be completed by the end
of the first quarter of 1999. The Company currently believes
that the costs to address these issues will not be material to
the Company's consolidated financial statements. Such
expenditures will be charged to expense as incurred.
The Company has considered the impact of Year 2000 issues on its
clinical information system products. The current versions of
these products are Year 2000 compliant.
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 22,
1998, 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 22,
1998, 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 22,
1998, 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 22,
1998, 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 22,
1998, 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 -
January 3, 1998 and December 28, 1996
Consolidated Statements of Earnings -
Years Ended January 3, 1998, December 28, 1996 and
December 30, 1995
Consolidated Statements of Stockholders' Equity
Years Ended January 3, 1998, December 28, 1996,
and December 30, 1995
Consolidated Statements of Cash Flows
Years Ended January 3, 1998, December 28, 1996
and December 30, 1995
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
January 3, 1998 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 curren 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 Stock Option Plan D of Registrant.*
10(h) Stock Option Plan E of Registrant.*
10(i) Agreement for Cerner Corporation Consulting Services with
Gerald E. Bisbee, Ph.D.*
10(j) Cerner Performance Plan for Neal L. Patterson.*
10(k) Cerner Performance Plan for Clifford W. Illig.*
10(l) Cerner Performance Plan for Jeffrey C. Reene.*
10(m) Cerner Performance Plan for Jack A. Newman, Jr.*
10(n) Cerner Performance Plan for Thomas C. Tinstman, M.D.*
10(o) Cerner Performance Plan for Alan D. Dietrich.*
10(p) Cerner Performance Plan for Marc G. Naughton.*
10(q) Cerner Performance Plan for Jeffrey A. Townsend.*
10(r) Cerner Performance Plan for Stephen M. Goodrich.*
10(s) Cerner Performance Plan for Francois W. Sauer, M.D.*
11 Computation of Registrant's Earnings Per Share.
(Exhibit ommitted. Information contained in notes to
consolidated financial statements.)
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
None
(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: March 31, 1998 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 31, 1998
- ------------------------------
Neal L. Patterson, Chairman of the Board
and Chief Executive Officer (Principal Executive Officer)
/s/Clifford W. Illig March 31, 1998
- ------------------------------
Clifford W. Illig, President, Chief
Operating Officer and Director
/s/Marc G. Naughton March 31, 1998
- ------------------------------
Marc G. Naughton, Vice President and
Chief Financial Officer
/s/Michael E. Herman March 31, 1998
- ------------------------------
Michael E. Herman, Director
/s/Gerald E. Bisbee, Jr. March 31, 1998
- ------------------------------
Gerald E. Bisbee, Jr., Director
/s/Thomas C. Tinstman March 31, 1998
- ------------------------------
Thomas C. Tinstman, M.D., Director
/s/John C. Danforth March 31, 1998
- ------------------------------
John C. Danforth, Director
/s/Thomas A. McDonnell March 31, 1998
- ------------------------------
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 January 3, 1998 and
December 28, 1996 and the related consolidated statements of
earnings, stockholders' equity, and cash flows for each of the
years in the three-year period ended January 3, 1998. 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 January 3,
1998 and December 28, 1996 and the results of their operations
and their cash flows for each of the years in the three-year
period ended January 3, 1998 in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Kansas City, Missouri
February 6, 1998
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 Sheets
- -------------------------------------------------------------
January 3, 1998 and December 28, 1998
1997 1996
--------- -------
(Dollars in thousands)
Assets
Current Assets:
Cash and cash equivalents $ 7,541 6,905
Short-term investments 70,002 103,997
Receivables 125,516 96,238
Inventory 1,743 1,616
Prepaid expenses and other 3,553 3,660
--------- -------
Total current assets 208,355 212,416
Property and equipment, net 65,724 60,047
Software development costs, net 40,566 30,128
Intangible assets, net 6,402 3,973
Noncurrent receivables 2,290 3,637
Other assets 8,444 4,552
--------- -------
$ 331,781 314,753
========= =======
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 11,330 9,346
Current installments of long-term debt 35 104
Advanced billings 8,290 7,811
Deferred income taxes 18,245 13,654
Accrued payroll and tax withholdings 11,610 6,755
Other accrued expenses 2,037 3,542
---------- --------
Total current liabilities 51,547 41,212
Long-term debt, net 30,026 30,000
Deferred income taxes 16,461 12,806
Stockholders' Equity:
Common stock, $.01 par value,
150,000,000 shares authorized,
33,816,829 shares issued in 1997
and 33,403,727 shares in 1996 338 334
Additional paid-in capital 148,074 144,941
Retained earnings 106,273 91,125
Treasury stock, at cost (1,201,518
shares in 1997 and 513,018 shares
in 1996) (20,796) (5,693)
Foreign currency translation adjustment (142) 28
--------- --------
Total stockholders' equity 233,747 230,735
--------- --------
Commitments (Note 10)
$ 331,781 314,753
========= ========
See notes to consolidated financial statements.
Consolidated Statements of Earnings
- ----------------------------------------------------------------------------
For the years ended January 3, 1998, December 28, 1996 and Decmeber 30, 1995
1997 1996 1995
-------------------------------
(In thousands, except per share data)
Revenues
System sales $ 170,906 122,836 129,917
Support and maintenance 68,713 57,430 49,351
Other 5,438 8,841 7,633
---------- ------- -------
Total revenues 245,057 189,107 186,901
---------- ------- -------
Costs and expenses
Cost of revenues 71,943 58,892 52,270
Sales and client service 83,788 65,005 49,889
Software development 44,086 35,890 30,193
General and administrative 23,070 18,719 17,284
---------- ------- -------
Total costs and expenses 222,887 178,506 149,636
---------- ------- -------
Operating earnings 22,170 10,601 37,265
Interest income (expense), net 2,314 2,301 (45)
---------- ------- --------
Earnings before income taxes 24,484 12,902 37,220
Income taxes 9,336 4,651 14,699
---------- ------- --------
Net earnings $ 15,148 8,251 22,521
========== ======= ========
Basic earnings per share $ .46 .25 .75
========== ======= ========
Diluted earnings per share $ .45 .25 .72
========== ======= ========
See notes to consolidated financial statements.
Consolidated Statements of Stockholders' Equity
- ----------------------------------------------------------------------------
For the years ended January 3, 1998, December 28, 1996 and December 30, 1995
Addi- Foregin
tional Treasury currency
Common Stock paid-in Retained stock translation
Shares Amount capital earnings amount adjustment Total
-----------------------------------------------------------
(In thousands)
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 sold in public offering,
net of 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
----------------------------------------------------------
Exercise of options 311 3 978 - - - 981
Issuance of stock grants 2 - 48 - - - 48
Issuance of restricted common stock 100 1 1,586 - - - 1,587
Tax benefit from disqualifying
dispositions of stock options - - 521 - - - 521
Purchase of 688,500 shares of
treasury stock - - - - (15,103) - (15,103)
Foreign currency translation
adjustment - - - - - (170) (170)
Net earnings - - - 15,148 - - 15,148
----------------------------------------------------------
Balance at January 3, 1998 33,817 $ 338 148,074 106,273 (20,796) (142) 233,747
==========================================================
See notes to consolidated financial statements.
Consolidated Statements of Cash Flows
- -----------------------------------------------------------------------------
For the years ended January 3, 1998, December 28, 1996 and December 30, 1995
1997 1996 1995
----------------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 15,148 8,251 22,521
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 18,075 15,498 12,218
Issuance of stock as compensation 48 - 10
Equity in (income) losses of investee companies 864 (89) (40)
Provision for deferred income taxes 8,246 2,894 7,796
Tax benefit from disqualifying
dispositions of stock options 521 260 3,325
Loss on disposal of capital equipment 110 99 42
Changes in assets and liabilities:
Receivables (27,931) 2,376 (32,595)
Inventory (127) 630 (28)
Prepaid expenses and other (2,075) (340) (2,193)
Accounts payable 1,984 (5,586) 1,447
Other current liabilities 3,829 4,269 2,856
----------------------------
Total adjustments 3,544 20,011 (7,162)
----------------------------
Net cash provided by operating activities 18,692 28,262 15,359
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of capital equipment (14,896) (14,962) (10,620)
Purchase of land, buildings, and improvements (86) (379) (8,266)
Investment in investee companies (4,500) (1,650) (30)
Proceeds on disposal of capital equipment 212 33 -
Capitalized software development costs (18,373) (13,240) (9,210)
----------------------------
Net cash used in investing activities (37,643) (30,198) (28,126)
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt - - 6,745
Repayment of long-term debt (116) (130) (6,906)
Proceeds from public offering, net of expenses - - 108,287
Proceeds from exercise of options 981 809 1,492
Purchase of treasury stock (15,103) - -
-----------------------------
Net cash provided by (used in) financing activities (14,238) 679 109,618
-----------------------------
Foreign currency translation adjustment (170) 41 (38)
-----------------------------
Net increase (decrease) in cash, cash equivalents,
and short-term investments (33,359) (1,216) 96,813
Cash, cash equivalents, and short-term investments
at beginning of year 110,902 112,118 15,305
-----------------------------
Cash, cash equivalents, and short-term investments
at end of year $ 77,543 110,902 112,118
=============================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 2,473 2,517 2,607
Income taxes, net of refund 1,024 685 4,016
Noncash investing and financing activities:
Acquisition of equipment through capital leases $ 73 - -
Issuance of restricted common stock and grants 1,635 - 10
See notes to consolidated financial statements.
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. The Company also
provides project implementation and consulting services. In
addition, revenue is generated from servicing installed clinical
information systems, which generally includes support of software
and maintenance of hardware. The Company also derives revenue
from the sale of computer hardware.
Clinical information system sales contracts 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 97-2,
"Software Revenue Recognition".
Revenue associated with project implementation and consulting
services is recognized as the services are performed. Revenue
from the licensing of additional software is recognized upon
installation at the client's site. Revenue from the sale of
computer hardware is recognized upon shipment. Revenue from
ongoing software support and equipment maintenance is recognized
as the services are rendered.
(c) Fiscal Year - The Company's fiscal year ends on the Saturday
closest to December 31. Fiscal year 1997, ended January 3, 1998,
consisted of 53 weeks, and fiscal years 1996 and 1995 consisted
of 52 weeks each. 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 1997, 1996, and 1995, the Company
capitalized $18,373,000, $13,240,000, and $9,210,000,
respectively, of total software development costs of $54,524,000,
$43,133,000, and $33,957,000, respectively. Amortization
expense of capitalized software development costs in 1997, 1996,
and 1995 was $7,935,000, $5,997,000, and $5,109,000,
respectively, and accumulated amortization was $32,895,000,
$24,960,000, and $18,963,000, 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 Common Share - Prior to January 3, 1998 the
Company computed earnings per share (EPS) in accordance with the
provisions of Accounting Principles Board Opinion No. 15,
"Earnings per Share and related interpretations". As such,
primary earnings per common share was based
on the weighted average number of common shares outstanding,
giving effect to common stock equivalents (stock options),
if dilutive. On January 3, 1998 the Company retroactively adopted
Statement of Financial Accounting Standards No. 128, "Earnings per
Share," which replaces the presentation of primary and fully diluted
EPS with a presentation of basic and diluted EPS.
Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or
other contracts to issue stock were exercised or converted into
common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. A reconciliation of
the numerators and the denominators of the basic and diluted per-
share computations is as follows:
(in thousand, except per share data)
1997 1996 1995
---------------------------------------------------------------------------------------------------
Per- Per- Per-
Earnings Shares Share Earnings Shares Share Earnings Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
---------------------------------------------------------------------------------------------------
Basic earnings per share
Income available to
common stockholders $ 15,148 32,881 .46 8,251 32,729 .25 22,521 29,845 .75
===== ==== ====
Effect of dilutive securities
Stock options - 787 - 891 - 1,603
Diluted earnings per share
Income available to
common stockholders
------------------------------------------------------------------------------------------------
+assumed conversions $ 15,148 33,668 .45 8,251 33,620 .25 22,521 31,448 .72
================================================================================================
Options to purchase 1,149,000 shares of common stock at prices
ranging from $21.50 to $31.00 per share were outstanding at the
end of 1997 but were not included in the computation of diluted
earnings per share because the options' exercise price was
greater than the average market price of the common shares.
(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 ($762,000), ($274,000), and $33,000 in 1997,
1996, and 1995, 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 $2,733,000 and $1,862,000 at
the end of 1997 and 1996, 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:
1997 1996
------------------
(In thousands)
Cash and cash equivalents $ 7,541 6,905
Repurchase agreements 463 656
Variable rate securities 500 500
Fixed rate securities 69,039 101,991
Certificates of deposit - 850
-------- -------
Total cash, cash equivalents,
and short-term investmenst $ 77,543 110,902
======== =======
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 and are recorded at cost, adjusted
for the amortization or accretion of premiums or discounts.
All cash equivalents and short-term investments held at January
3, 1998 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:
(In thousands) 1997 1996
---------------------
Current receivables:
Accounts receivable $ 54,908 47,762
Contracts receivable 70,608 48,476
--------- --------
Total current receivables $ 125,516 96,238
========= ========
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 1997 and 1996 are amounts due from healthcare
providers located in foreign countries of $9,950,000 and
$9,682,000, respectively. Consolidated revenues include foreign
sales of $16,272,000, $15,874,000, and $8,823,000, during 1997,
1996, and 1995, respectively.
The Company provides an allowance for estimated uncollectible
accounts based upon historical experience and management's
judgment. At the end of 1997 and 1996 the estimated allowance
for uncollectible accounts was $1,490,000 and $1,121,000,
respectively.
The fair value of the Company's noncurrent receivables is
estimated to be $2,130,000, 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:
(In thousands) 1997 1996
---------------------
Furniture and fixtures $ 17,496 16,023
Computer and communications equipment 41,898 33,384
Marketing equipment 1,222 1,222
Leasehold improvements 10,803 8,630
Capital lease equipment 673 600
Land, buildings, and improvements 29,669 29,593
--------- --------
101,761 89,452
Less accumulated depreciation and amortization 36,037 29,405
--------- --------
Total property and equipment, net $ 65,724 60,047
========= ========
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 (8.5% at
January 3, 1998) or LIBOR plus 1.75% (7.72% at January 3, 1998).
The interest rate may be reduced by up to .5% if certain net
worth ratios are maintained. At January 3, 1998, 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 $61,000
($104,000 at December 28, 1996) with interest at 8.5%, payable in
monthly installments through September 1999.
The fair value of the Company's Senior Notes is estimated to be
$30,960,000 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:
(In thousands) 1997 1996 1995
---------------------------
Interest income $ 4,755 4,839 2,380
Interest expense (2,441) (2,538) (2,425)
--------- ------- -------
Interest income (expense), net $ 2,314 2,301 (45)
========= ======= =======
7 Stock Options
At January 3, 1998, 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. The Company has
committed not to issue any more stock options under Stock Option
Plan C.
Under Stock Option Plan D, the Company may grant to associates,
directors, consultants, or advisors to the Company 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 to the Company 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 has also granted 120,362 other non-qualified stock
options under separate agreements to certain third parties.
These options are exercisable at a price equal to or greater than
the fair market value on the date of grant. These options vest
over periods of up to six years and are exercisable for periods
of up to eight 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 and other stock options at the end of 1997,
1996, and 1995, and changes during these years ended is presented
below:
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 3,196,072 $ 16.50 2,730,786 $ 15.95 2,369,286 $ 4.26
Granted 1,592,363 18.22 941,130 15.97 1,198,616 28.00
Exercised (310,531) 3.12 (401,754) 2.02 (776,916) 1.98
Forfeited (298,646) 17.50 (74,090) 12.52 (60,200) 2.70
- -------------------------------------------------------------------------------------------------
Outstanding at end of year 4,179,258 $ 17.74 3,196,072 $ 16.50 2,730,786 $ 15.95
=========== ========== ==========
Options exercisable at year-end 876,376 838,143 909,178
The following table summarizes information about fixed and other
stock options outstanding at January 3, 1998.
Options outstanding Options exercisable
- ----------------------------------------------------------- ------------------------------
Weighted-
Range of Number average Weighted- Number
Exercise Outstanding Remaining average exercisable Weighted-average
Prices at 01/03/98 contractual life exercise price at 01/03/98 exercise price
- ----------------------------------------------------------- ------------------------------
$ 1.25-10.69 377,125 2.3 years $ 1.79 366,725 $ 1.74
11.13-15.00 1,860,462 21.7 14.55 202,825 13.68
15.25-23.00 992,180 20.3 19.63 162,100 19.00
23.19-31.00 949,491 21.4 28.34 144,726 28.62
---------- ---------
$ 1.25-31.00 4,179,258 19.6 $ 17.74 876,376 $ 12.14
========== =========
The per share weighted-average fair value of stock options
granted during 1997, 1996 and 1995 was $10.99, $7.89 and $17.75,
respectively, on the date of grant using the Black Scholes
option-pricing model with the following weighted average
assumptions:
1997 1996 1995
--------------------------
Expected years until exercise 8 8 8
Risk-free interest rate 6.2% 6.3% 6.3%
Expected stock volatility 56.9% 49.2% 49.2%
Expected dividend yield 0% 0% 0%
Since the Company applies APB Opinion No. 25 in accounting for
its plans, no compensation cost has been recognized for its stock
options issued to employees 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 on a diluted basis would have
been reduced by approximately $3,965,000 or $.12 per share in
1997, approximately $3,023,000 or $.09 per share in 1996 and
approximately $1,187,000 or $.04 per share in 1995.
Pro forma net earnings reflects only options granted since
January 1, 1995. Therefore, the full impact of calculating
compensation expense for stock options under FAS 123 is not
reflected in the pro forma net earnings amounts presented above,
because compensation cost is reflected over the options' vesting
period of ten years for these options. Compensation expense for
options granted prior to January 1, 1995 is not considered.
8 Income Taxes
Income taxes for the years ended 1997, 1996, and 1995, consist of
the following:
(In thousands) 1997 1996 1995
-------------------------
Current:
Federal $ 916 1,403 6,272
State 80 136 798
Foreign 94 218 (167)
----- ----- -------
Total current 1,090 1,757 6,903
----- ----- -------
Deferred:
Federal 7,338 2,553 6,850
State 908 341 946
----- ----- -------
Total deferred 8,246 2,894 7,796
----- ----- -------
Total income tax expense $ 9,336 4,651 14,699
===== ===== =======
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 1997
and 1996 relate to the following:
1997 1996
-----------------
(In thousands)
Deferred tax assets
Accrued expenses $ 2,028 1,649
Separate return net operating losses 1,577 1,200
Other 2,190 37
------- ------
Total deferred tax assets 5,795 2,886
------- ------
Deferred tax liabilities
Software development costs (15,205) (11,245)
Contract and service revenue and costs (23,316) (16,205)
Depreciation and amortization (1,577) (1,208)
Other (403) (688)
-------- --------
Total deferred tax liabilities (40,501) (29,346)
-------- --------
Net deferred tax liability $ (34,706) (26,460)
======== ========
The effective income tax rates for 1997, 1996, and 1995 were 38%,
36%, and 39%, respectively. These effective rates differ from
the federal statutory rate of 35% as follows:
1997 1996 1995
--------------------------
(In thousands)
Tax expense at statutory rates $ 8,569 4,516 13,027
State income tax, net of federal benefit 632 310 1,352
Other, net 135 (175) 320
------ ------ ------
Total income tax expense $ 9,336 4,651 14,699
====== ====== ======
Income taxes payable are reduced by the tax benefit resulting
from disqualifying dispositions of stock acquired under the
Company's stock option plans. The 1997, 1996, and 1995 benefits
of $521,000, $260,000, and $3,325,000, respectively, are treated
as increases to additional paid-in capital.
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 pretax 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 maximum of $600 per participant. The Company's expense for the
plan amounted to $761,000, $560,000, and $431,000 for 1997, 1996,
and 1995, respectively.
10 Commitments
The Company is committed under operating leases for office space
through December 2003. Rent expense for office and warehouse
space for the Company's regional and international offices for
1997, 1996, and 1995 was $1,759,000, $1,580,000, and $1,192,000,
respectively. Lease expense for computer equipment was $0,
$27,000, and $68,000 in 1997, 1996, and 1995, respectively.
Aggregate minimum future payments (in thousands) under these
noncancelable leases are as follows:
Years
---------------------
1998 $ 1,768
1999 1,067
2000 581
2001 264
2002 264
2003 66
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 $1,694,000,
$2,383,000, and $2,577,000 in 1997, 1996, and 1995, respectively.
Future minimum lease revenues (in thousands) under these
noncancelable operating leases expiring through 2001 are as
follows:
Years
-----------------------
1998 $ 1,549
1999 1,326
2000 1,092
2001 817
12 Stockholders' Equity
At the end of 1997 and 1996, 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 1997 and 1996 is set forth
below:
Earnings
before Basic Diluted
income Net earnings earnings
Revenues taxes earnings per share per share
-------------------------------------------------
(In thousands, except per share data)
1997 quarterly results:
March 29 $ 51,129 3,123 1,936 .06 .06
June 28 63,320 5,478 3,324 .10 .10
September 27 60,777 7,203 4,445 .13 .13
January 3 69,831 8,680 5,443 .17 .16
- ----------------------------------------------------------------------
Total $ 245,057 24,484 15,148 .46 .45
======== ====== ====== ======= =======
1996 quarterly results:
March 30 $ 52,582 6,956 4,222 .13 .13
June 29 46,709 2,828 1,689 .05 .05
September 28 43,401 914 770 .02 .02
December 28 46,415 2,204 1,570 .05 .05
- ----------------------------------------------------------------------
Total $ 189,107 12,902 8,251 .25 .25
======= ====== ===== ======= =======
In the fourth quarter of 1997, the Company retroactively adopted
FAS No.128, "Earnings per Share". Previously reported earnings
per share has been computed based upon the new accounting
standard.
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 28,1996
Doubtful Accounts $ 1,109,018 $ 11,982 $ 0 $ 1,121,000
Sales Allowances $ 0 $ 0 $ 0 $ 0
Additions
Balance at Charged to
Beginning Costs and Balance at
Description of Period Expense Deductions End of Period
- ----------------------------------------------------------------------------------
For Year Ended January 3, 1998
Doubtful Accounts $ 1,121,000 $ 369,000 $ 0 $ 1,490,000
Sales Allowances $ 0 $ 0 $ 0 $ 0
Independent Auditors' Report
on Financial Statement Schedule
The Board of Directors
Cerner Corporation:
Under date of February 6, 1998, we reported on the
consolidated balance sheets of Cerner Corporation and
subsidiaries as of January 3, 1998 and December 28, 1996 and
the related consolidated statements of earnings,
stockholders' equity and cash flows for each of the years in
the three-year period ended January 3, 1998. These
consolidated financial statements and our report thereon are
included in the Company's annual report on Form 10-K for the
year 1997. 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 6, 1998