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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 29, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________ to ___________
Commission File Number 0-15386
CERNER CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 43-1196944
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
2800 Rockcreek Parkway
North Kansas City, Missouri 64117
(816) 221-1024
(Address of principal executive offices, including zip code;
Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Preferred Stock Purchase Rights
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
At March 15, 2002, there were 35,390,736 shares of Common Stock
outstanding, of which 7,611,087 shares were owned by affiliates. The aggregate
market value of the outstanding Common Stock of the Registrant held by
non-affiliates, based on the closing sale price of such stock on March 15, 2002,
was $1,216,470,846.
Documents incorporated by reference: portions of the Registrant's Proxy
Statement for the 2002 Annual Meeting of Stockholders are incorporated by
reference in Part III hereof.
PART I
ITEM 1. BUSINESS
OVERVIEW
- --------
Cerner Corporation ("Cerner" or the "Company") is a Delaware corporation
incorporated in 1980. The Company's principal offices are located at 2800
Rockcreek Parkway, North Kansas City, Missouri 64117, and its telephone number
is (816) 221-1024.
Cerner designs, develops, markets, installs, hosts and supports software
information technology and content solutions for healthcare organizations and
consumers. Cerner implements these solutions as individual, combined or
enterprise-wide systems.
Cerner's integrated suite of solutions enable healthcare providers to improve
operating effectiveness, reduce costs, reduce medical errors, reduce variances
and improve the quality of care as measured by clinical outcomes. Cerner(R)
solutions are designed to provide the appropriate health information and
knowledge to care givers, clinicians and consumers and the appropriate
management information to healthcare administration on a real-time basis. Cerner
solutions allow secure access to data by clinical, administrative and financial
users in organized settings of care and by consumers from their home. These
solutions can be implemented as a part of an enterprise-wide solution or
individually, using the client's existing investment in information technology.
Cerner solutions are available as integrated applications managed by its clients
or as a service option under the application outsourcing (hosting) model. Hosted
solutions are applications that are provided to clients from Cerner's solutions
center in Lee's Summit, Missouri.
Cerner solutions are designed and developed using the Cerner Millennium(TM)
Architecture, a single information architecture. Millennium(TM) is a unified
technology infrastructure for combining clinical and management information
applications. Millennium allows each participating healthcare organization to
access an individual's clinical record at the point of care, to organize it for
the specific needs of the physician, nurse, laboratory technician or other care
provider on a real-time basis, and to use the information in management
decisions to improve the efficiency and productivity of the entire enterprise.
HEALTHCARE INDUSTRY
- -------------------
The healthcare delivery industry in the United States remains highly fragmented,
very complex and remarkably inefficient. While science and medical technology
continue to make significant breakthrough progress in dealing with human disease
and injury, the management and clinical processes of these complex delivery
organizations have made little progress in the past twenty years. Even today,
the major clinical workflow depends on manual, paper-based medical record
systems augmented by spotty automation. This has resulted in an industry which
is economically inefficient and produces significant variances in medical
outcomes.
In November 1999, the Institute of Medicine (IOM) released a report called "To
Err is Human" indicating that medical error is one of the top ten causes of
death in the United States, with up to 98,000 lives lost each year. In March
2001, the IOM released a report titled "Crossing the Quality Chasm: A New Health
System for the 21st Century" indicating the use of information technology is
critical to improving the quality and safety of healthcare. The Leapfrog Group,
a subgroup of large employers from the Business Roundtable, is also becoming a
forceful proponent for systemic change to healthcare organizations. Leapfrog
recommends that employers select health plans with hospitals that, among other
recommendations, use a computerized physician-order-entry system as a primary
method of eliminating medical errors in hospitals.
Another threat to the healthcare system is the growing shortage of hospital
personnel. According to a 2001 American Hospital Association Workforce Study,
there are approximately 126,000 unfilled nursing
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positions. Many hospitals are beginning to turn to information technology to
help reduce the impact of the nursing shortage. The use of information
technology can significantly reduce the amount of paperwork a nurse performs,
resulting in greater efficiency, improved quality of care, and increased job
satisfaction.
While addressing staffing issues, healthcare providers must prepare for the very
large increase in demand for healthcare services that will be caused by the
aging of the baby boomers. By 2010, the average baby boomer will be
approximately 65 years old. This upcoming increase in demand for services
underscores the importance of improving the efficiency and quality of
healthcare.
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) adds an
additional element of complexity for healthcare organizations around security
and patient confidentiality. While some of the rules under HIPAA have not been
finalized, the provisions are focused on a centralized and systematic method of
access control that Cerner thinks is best met by a single integrated
architecture.
After several periods of declines in the financial condition of hospitals and
health systems, they are beginning to show improved economic health, resulting
in an increased ability to invest in information technology. A 2001 report by
Solucient showed a 100 basis point improvement in hospital operating margins in
the first half of 2001. This economic strength reflects higher utilization of
facilities whose capacity was reduced in the Balanced Budget Act era and by rate
increases from the managed care intermediaries to well-positioned providers.
In order to be competitive in this dynamic marketplace, healthcare enterprises
will need to deploy information technology solutions that internally automate
the paper-based medical record systems and externally create smart connections
between the major participants in healthcare: the consumer, the physician, the
hospital and the managed care organization. The emergence of near ubiquitous
Internet connectivity will facilitate consumer participation in the healthcare
management process.
Cerner is responding to the changing and increasing needs of the healthcare
industry for better information systems by developing Millennium, its latest
generation of solutions. See "Cerner's Technology - Cerner Millennium
Architecture" for a discussion of Millennium.
THE CERNER VISION
- -----------------
Cerner's business and products are organized around a central vision of how
healthcare can and should operate. This vision is founded on four steps:
o Automate the core processes of healthcare: eliminate the paper medical
record
o Connect the person: create the personal health system
o Structure the knowledge: position every clinical decision as a learning
event
o Close the loop: implement evidence-based medicine
These steps describe Cerner's business today and plans for Cerner's business
both in 2002 and beyond.
Automate the Process
- --------------------
Cerner is dedicated to the elimination of the paper medical record.
Medical care cannot make significant steps forward in quality and consistency
without using the power and advantages of information technology. As long as
medical information is locked and isolated in a paper record, a physician is cut
off from rapid, contextual reference to the vast knowledge available in today's
medicine. The elimination of the paper record will lead to improved quality and
safety of care, dramatic productivity increases and enhanced documentation.
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The electronic recording of medical information will lead to improvements in the
quality of care and the safety of patients and reduce costs. By allowing care
providers to access a patient's single, longitudinal medical record in
real-time, clinicians can view demographic information, medical history, lab
results and current conditions and treatment plans, along with notes from
attending and consulting physicians. Guidelines and pathways sensitive to the
person's medical condition and problems will assist the physician in making the
"appropriate" decisions on how to diagnose and treat medical conditions. This
comprehensive view of a patient's health status allows for better medical
decision-making at the point of care. Online documentation and physician order
entry helps to prevent the errors in and misinterpretation of documentation and
orders, reducing the costs of duplication and medical error. This automation
also will reduce the time for care delivery and lower costs.
Once all the steps of care are captured electronically, the enhanced
documentation will lead to more efficient healthcare, both in terms of treatment
and finance, and will set the stage for data collection that will be the
backbone of structuring the knowledge of healthcare. Electronic medical records
reduce some of the duplication caused by poor record-keeping. Wasteful
duplication is eliminated, redundant tests are not ordered. Also, documentation
required for health plan reimbursement is maintained efficiently, reducing claim
denials. Finally, electronic record-keeping lays the groundwork of data
collection necessary to make dramatic changes in care delivery.
Connect the Person
- ------------------
Cerner is dedicated to helping its clients build a personal health system;
creating a "new medium" between the person and physician; empowering the
individual; and creating a new center to healthcare.
The healthcare system is undergoing fundamental change as the person moves to
the center of care delivery. Increasing access to expert knowledge over the
Internet and a cultural shift toward more self-direction are combining to move
the center of power and control to the person. With the electronic medical
record, persons can access their medical records securely anytime and anywhere
they have Internet access. When combined with personalized health content, the
consumer gains a better sense of the care they are receiving and the options
available to them. They will have better communications with their providers,
and can take more ownership of their own health and work to manage it to their
satisfaction.
Structure the Knowledge
- -----------------------
Cerner is dedicated to building systems that treat every clinical decision as a
learning event by structuring, storing and studying the content of medicine.
Medicine must have a structure that allows physicians to record treatment and
outcomes in such a way as to permit comparability. The basis of this structure
is a common nomenclature that can exactly capture the meaning of input from
physicians and clinicians. By storing this data and then providing a framework
for comparability, physicians can make sense and glean value from the
information that is gathered both through automated processes and connected
persons. Without a knowledge framework, data collected will provide no real
benefit. By building this structure, every encounter with a patient, and every
piece of new knowledge and information, can be catalogued, measured and analyzed
to improve care. This knowledge framework will deliver better standards of care
and an improved understanding of medicine.
Close the Loop
- --------------
Cerner is dedicated to building systems that implement evidence-based medicine,
dramatically reducing the current average time from the discovery of an improved
method to the change in "standard of care" medical practice.
Advances in technology offer great opportunities to healthcare and must be used
to practical effect. The knowledge gained must be used to deliver better care
faster. The information learned must be applied. Today, patients may wait as
long as ten years before new knowledge reaches widespread use. With systems
designed to embed evidence-based medicine inside the clinicians' workflow using
pathways,
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guidelines and alerts, physicians can ensure that every medical decision is
optimal, based on the best and most recent knowledge available. The results will
be better outcomes and reduced variance.
THE CERNER STRATEGY
- -------------------
Key elements of the Company's business strategy include the following:
Penetrate the integrated healthcare provider market. Large health systems
represent a significant component of the healthcare information technology
market. These organizations are focused on improving safety and reducing costs
through operating efficiencies. Cerner's enterprise-wide process-based, clinical
and management systems provide the technology to enable an integrated system to
manage healthcare across the system, significantly reduce costs, improve the
efficiency of healthcare delivery and maintain and improve the quality of
healthcare.
Expand market share in individual domains and further penetrate existing client
base. Cerner expects continued growth in clinical domain systems for specific
markets such as nursing, physician office, laboratory, pharmacy, radiology,
surgery, emergency medicine and cardiology, as institutional providers look to
restructure and reengineer these high cost centers. The Company anticipates
growth in sales of new products, such as its new patient accounting product that
launched in 2001. This product addresses a large new market previously not
covered by the existing product suite. The Company also intends to aggressively
market Cerner clinical and management information systems and services to its
existing client base.
Remain committed to a common architecture. Because Cerner believes that the
constituents in health management need to work together to benefit defined
populations in a community, the Company has made a commitment to a single
unified architecture as the platform for "fully integrated" health information
and management systems. This platform enables Cerner's process-based Millennium
systems to be scaleable on a linear basis, using either Cerner compatible
modules for process-oriented applications or competitive systems interfaced
using open system protocols.
Expand products and services. Using the Millennium architecture, Cerner intends
to continue expanding the range of products and services offered to providers.
These new products and services will complement the systems currently offered,
address the emerging information needs of clients or employ technological
advances. Cerner believes that major opportunities exist as providers and
managed care organizations reach into new markets and offer more alternative
services to remain competitive. The Company believes these organizations will
find value in having personal health records and trusted health information
accessible to the individual in the home. In addition, Cerner recognizes the
value of the aggregate database being developed by its broad client base as a
potential means to enable comparative or normative procedure evaluations as a
powerful new tool in the healthcare industry. The substantial project
management, process redesign, technology integration and training involved in
healthcare systems taking advantage of the opportunities provided by clinical
and management information technology represent a significant market for the
Company's consulting services.
Offer its products on a hosted solution basis. The Company offers its Millennium
applications through its application outsourcing option. This option offers
information technology services to clients that include software, computer
hardware, implementation, technical support, wide-area network (WAN) services
and automatic software upgrades. Unlike traditional software implementations,
software delivered through the application outsourcing option is not installed
at the user's location, but is delivered, operated and maintained in Cerner's
solutions center in a rapidly accelerated implementation timeframe. Using Cerner
hosted solutions, any size organization can access the same robust clinical
applications, architecture and user-interface advantages that were previously
only available to larger institutions.
CERNER'S TECHNOLOGY -- CERNER MILLENNIUM ARCHITECTURE
- -----------------------------------------------------
The cornerstone of Cerner's technology strategy is Cerner Millennium, the single
architecture around which each of Cerner's information products is developed.
This person-centric, single data model, open and highly scaleable architecture
allows Cerner to meet the clinical, financial, management and business
information requirements of a healthcare delivery system across the continuum of
care. Cerner
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Millennium, the core of which was developed between 1994 and 1999, is Cerner's
newest version of computing software. Millennium uses n-tier client/server
technology to optimize distributed computing performance and scalability across
multiple client and server platforms. The Millennium architecture and
applications were designed and developed to accommodate healthcare specific
requirements for mission critical computing and secure access, whether the user
is inside the healthcare enterprise or at home via the Internet. Millennium's
breadth of focus and functionality are well suited for large-scale and
enterprise application technologies for healthcare organizations, including the
ability to leverage the Internet for ehealth-related self-service and
business-to-business functions.
The value of Millennium to a client organization is the use across a healthcare
organization of a single system based on a fully integrated common architecture
and database. With its single data model, Millennium provides secure, real-time
access to all information across multiple applications, domains, organizations
and physical locations, including physician, hospital, nursing, laboratory,
pharmacy and consumers, to all of those needing such access, wherever they are
located. Given its integrated and open design, Millennium can also provide a
centralized repository of clinical and financial transactions to help
standardize access and messaging of disparate applications across a health
system.
The alternative to a single architectural approach is to use disparate systems
based on differing architectures and data structures to automate the care
processes across the continuum of care. These disparate systems must be
interfaced together and rely on these interfaces to transmit, modify and arrange
data exchanged between them, which limits the data's usefulness across multiple
systems and inhibits real-time access. In addition, many of these systems lack
functional scalability and cannot operate across multiple provider settings or
locations within a healthcare organization.
Two overarching capabilities are embedded into the Millennium architecture.
First is the person-centric transactions and secure messaging, which consider
the breadth of requirements not only of a patient, but also of healthy
consumers. Second is healthcare community dynamics, which take into account the
flexibility required by the constantly changing relationships between healthcare
organizations, physicians and consumers, and the need to maintain complex
security and end user preferences based on the context and business attributes
of the transaction in a community setting.
MillenniumObjects(TM)
- ---------------------
Cerner is extending Millennium's reach and scope with the goal of becoming the
de facto standard for healthcare information technology. A key element in that
effort by Cerner is MillenniumObjects. Cerner uses MillenniumObjects to extend
Millennium to third party suppliers of healthcare information technology,
supporting their development efforts and increasing Millennium's market
penetration. MillenniumObjects is a collection of reusable programming elements
from Cerner's Millennium architecture. These segments of code, or objects,
enable third-party developers to create front-end applications, like Palm or Web
browser solutions, that draw upon the data model and proven functionality of
Millennium. With MillenniumObjects, programmers can quickly and efficiently
build applications that integrate with Cerner's architecture, reusing existing
objects that achieve the tasks they are seeking to replicate. Third-party
programmers can avoid the time- and cost-intensive process of writing new code
to perform functions Cerner engineers have already developed.
MillenniumObjects is the mechanism Cerner uses to extend its own applications to
the Internet. By licensing the objects library to third parties, Cerner has an
excellent opportunity to proliferate the Millennium architecture - as well as
the brand, clinical expertise and technical excellence upon which it was built.
PRODUCTS
- --------
The Cerner Millennium family of products is the only fully-integrated,
large-scale, contemporary, enterprise-wide healthcare information system on the
market today capable of both retrieving and disseminating clinical and financial
information across an entire health system. Cerner Millennium product families
are dedicated to meeting the automation needs of virtually every segment of the
care continuum.
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Cerner solutions can be acquired individually or as a fully integrated health
information system. Cerner also markets more than 200 product options that
complement Cerner's major information systems. In addition, Cerner sells
computers and related hardware manufactured by third parties and consulting
services to its clients.
Cerner's solution categories include:
o Enterprise-wide Systems, which automate processes across and
throughout the health system enterprise, including:
o Access Management
o Care Management
o Enterprise Repositories, and
o Financial and Operational Management Systems, which automate
business operations.
o Clinical Systems, which automate critical processes across the
healthcare continuum.
o Decision Support Systems and Knowledge Solutions, which enhance
clinical and business processes with information and actions.
o Consumer Systems, which support Internet-based healthcare communities
that effectively connect individuals, providers and health systems.
o Technologies for developing applications or connecting other
technologies and systems to Cerner Millennium.
o Solution Suites, which address key processes and segments in
healthcare.
Enterprise-Wide Systems
-----------------------
Access Management
Cerner CapStone(R) Enterprise Access Management System creates the
enterprise-wide master person identifier (EMPI) and automates the
identification, eligibility, registration and scheduling processes across
hospitals, clinics, physician practices and other care delivery organizations.
Care Management
PowerChart(R) Electronic Medical Record System is the enterprise clinician's
desktop solution for viewing, ordering, documenting and managing care delivery,
including PowerOrders(TM) for physician ordering.
PowerOrders is Cerner's industry-leading physician order entry solution that
goes beyond a mere data communication system by giving appropriate access to
real-time, relevant clinical information at any point in the care process.
Enterprise Repositories
The Open Clinical Foundation(R) manages clinical information, providing the
foundation for the electronic medical record.
The Open Management Foundation(TM) stores management information of enterprise
financial, operational and process results, creating the foundation for the
enterprise-wide management and executive information system.
The Open Agreement Foundation(TM) manages health plan contracts and agreements,
and member information.
The Open Research Foundation(TM) provides open repository storage of clinical
and medical information to support medical research.
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The Open Image Foundation(TM) provides the clinical and document imaging
foundation for the electronic medical record.
Financial and Operational
The ProFit(TM) Enterprise Billing and Accounts Receivable System is Cerner's
system for revenue accounting, billing and accounts receivable for the entire
health system as well as each individual domain or organization. ProFit
integrates clinical and financial data to ensure accurate charge capture and
billing.
Cerner ProVision(TM) Enterprise Image Management System is the only integrated
solution that manages clinical and document imaging across the entire healthcare
organization.
The ProFile(TM) 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.
PowerVision(R) Enterprise Decision Support links comprehensive clinical and
financial data and makes it available at the point of care - allowing care to be
better managed as it occurs.
The ProCure(TM) Materials Management System automates the business operations
around supply chain, materials acquisition and equipment management for the
organization.
The ProCare(TM) Medical Management System automates medical management for the
health system, addressing the areas of utilization, case and risk management, as
well as infection control.
Clinical Systems
----------------
Points of Care
The INet(R) Intensive Care Management System is designed to automate the entire
care process in intensive care settings. It supports chart review and browsing,
order management, documentation management and automatic data acquisition.
Cerner's CareNet(R) Acute Care Management System is designed to automate the
entire care process in acute or institutional settings. The application
collects, refines, organizes and evaluates detailed clinical and management
data. It enables the entire care team to manage individual activities and plans,
as well as measure outcomes and goals.
The CVNet(R) Cardiology Information System automates the processes within the
cardiology department, supporting the scheduling, ordering, documentation and
data capture required by professionals in the cardiology domain.
The SurgiNet(R) Surgery Information System is designed to address the needs of
the surgical department, including automating the functions of resource and
equipment scheduling, inventory management, anesthesia management and operating
room management.
The FirstNet(R) Emergency Medicine Information System offers patient and
provider tracking and an intuitive presentation of patient diagnoses and
clinical events for the emergency department. FirstNet provides basic emergency
department functionality, including quick admits, tracking, triage and patient
history, as well as a graphical reference to patient location and order status.
The PowerChart Office(TM) Management System supports the broad range of clinical
and business activities that occur within a physician office, clinic or large
physician organization. This system ties the office together with other medical
entities and automates key care team activities in both primary and specialty
care settings.
The ProCall(R) Home Care Management System automates the clinical and business
processes of home care organizations, such as home health agencies, visiting
nurse associations and hospices.
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Clinical Centers
The PathNet(R) Laboratory Information System addresses the information
management needs of six clinical areas: general laboratory, microbiology, blood
bank transfusion services, blood bank donor services, anatomic pathology and
Human Leukocyte Antigen. PathNet automates the ordering and reporting of
procedures, the production of accurate and timely reports and the maintenance of
accessible clinical records.
The RadNet(R) Radiology Information System addresses the operational and
management requirements of radiology departments or services. It allows a
department to replace its manual, paper-based system of record-keeping with an
efficient computer-based system.
Cerner ProVision PACS (picture archiving and communications system) is fully
integrated with Cerner's radiology information system. Using Cerner's
end-to-end, fully integrated radiology information and image management systems,
radiologists can improve operational efficiencies and reduce medical error.
The PharmNet(R) Pharmacy Information System provides full integration for rapid
pharmacy order entry and support of the clinical pharmacy in either an inpatient
or retail setting. PharmNet streamlines medication order entry, enabling the
pharmacist or technician to place all types of pharmaceutical orders, and
automates dispensing functions.
Decision Support Systems and Knowledge Solutions
------------------------------------------------
Discern Expert(R) is an event-driven, rules-based decision support software
application that allows users to define clinical and management rules
(Alerts(TM)) that are applied to event data captured or generated by other
applications. It supports both synchronous (real-time, interactive) processing
and asynchronous (noninteractive) processing of events.
Discern Explorer(R) is a decision support software application integrated with
other Cerner Millennium clinical and management information systems that allows
users to execute predetermined or ad hoc queries and reports regarding
process-related data that is generated by the other applications.
Care Designs(TM) are clinical pathways and protocols that automate the specific
plans of care for an individual and operate within Cerner's clinical systems.
Cerner Multum(TM) drug database provides caregivers and consumers alike with
access to drug information and the ability to perform drug interaction checking
to prevent adverse events.
Cerner APACHE(TM) clinical decision support and outcomes management systems
manage the clinical and financial outcomes of high-risk patients in critical and
acute care.
Health Facts(R) is Cerner's comparative data warehouse for benchmarking
information and services for subscribers to support their own improvement
processes.
Consumer Systems
----------------
Cerner IQHealth(TM) creates an Internet-based healthcare community that connects
persons and healthcare providers. It also stores consumer health information,
ultimately helping individuals better manage their own health. With IQHealth,
sponsoring organizations can create and brand a "health exchange" in the
community to directly connect hospitals, physicians, payers, consumers and
employers.
IQHealth's Web Portal Services develop, deploy and support clients' Internet
strategies.
IQHealth's Health Content enables an organization to become a trusted source for
valuable consumer health and drug information.
IQHealth's Survey and Assessment Tools allow organizations to create Web-based
surveys to assess individual and community health risks and promote healthy
activities.
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IQHealth's Personal Health Record (PHR) is a personal health management solution
that gives consumers the ability to store personal health information and
monitor conditions over time.
IQHealth's Physician and Consumer Messaging allows physicians to conveniently
and securely receive test results from the hospital, confer with colleagues and
share information with consumers. Consumers can also use this tool to schedule
appointments and request prescription refills.
Health Connections, a 24x7 call center staffed by nurses, provides ready access
to accurate health information so that consumers can better manage their health
and participate in care decisions.
Technologies
------------
MillenniumObjects is a collection of reusable programming elements from the
revolutionary Cerner Millennium architecture. These segments of code, or
objects, allow third-party developers to create front-end applications that draw
upon the data model and proven functionality of Cerner Millennium.
The Open Engine Application Gateway System(TM) facilitates the exchange of data
and assists in the management of interfaces between foreign systems in a network
environment. It serves as a solution kit to help write interface code.
The Open Port Interface System(TM) represents Cerner's standardized technology
for providing reliable foreign system, medical device and other standard
interfaces in a timely manner. Message translation and data mapping are done
with point-and-click solutions and a scripting environment. Communications
protocols are configured via table-driven parameters. These sophisticated
methodologies result in decreased implementation times and greater client
satisfaction.
Solution Suites
---------------
Computerized Physician Order Entry (CPOE)
Cerner offers a step-by-step total CPOE solution ranging from basic automation
to complete medication integration.
Cerner HealthSmart(TM) CPOE is a stand-alone approach to CPOE for organizations
that are taking initial steps in streamlining the orders process. This level of
automation leverages the industry's most robust CPOE application, PowerOrders,
and includes key functionality, like clinical documentation, order sets, starter
content, rules packages and basic reporting tools, to deliver immediate
benefits.
Cerner HealthSmart CPOE Connect takes clients to the next level by leveraging
existing information systems. This intermediate level of Cerner's solution
extends a stand-alone CPOE system into two other critical areas of the orders
process, pharmacy and nursing. By supporting interfaces with foreign systems,
this solution allows the communication infrastructure to begin leveraging an
organization's legacy systems.
Cerner HealthSmart Medication Integration is the first comprehensive clinical
information solution to support the complete orders process and connect each
care team member - physician, pharmacist and nurse. Clients achieve maximum
safety, workflow efficiency and operational performance with Cerner's fully
integrated orders solution.
Revenue Cycle Management
Cerner HealthSmart Revenue Cycle Integration draws upon the powerful
capabilities of CapStone and ProFit to help health organizations streamline and
automate processes from registration through billing, realizing substantial
savings and speeding the revenue collection process. Cerner's revolutionary
Clinically Driven Revenue Cycle(TM) approach proactively manages the revenue
cycle as an outcome of the clinical automation process.
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Community Hospitals
Community Hospital Solutions(TM) automate clinical and business processes in the
community hospital. Community Hospital Solutions suites include administrative,
clinical, patient care, hospital integration, and community. These integrated
solutions based on Cerner Millennium offer to community hospitals much of the
power previously accessible only by larger integrated delivery networks.
SOFTWARE DEVELOPMENT
- --------------------
Cerner commits significant resources to developing new health information system
products. As of December 29, 2001, approximately 1,311 associates were engaged
full-time in product development activities. Total expenditures for the
development and enhancement of the Company's products were approximately
$113,872,000, $90,694,000, and $88,699,000 during the 2001, 2000 and 1999 fiscal
years respectively. These figures include both capitalized and non-capitalized
portions and exclude amounts amortized for financial reporting purposes.
The Company expects to continue investment and development efforts for its
current and future product offerings. As new clinical and management information
needs emerge, Cerner intends to enhance its current product lines with new
versions released to clients on a periodic basis. In addition, Cerner plans to
expand its current product lines by developing additional information systems
for clinical, financial, operational and/or consumer use and to continue to
support simultaneous use of Cerner's products across multiple facilities, and
plans to continue to expand in the global marketplace.
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, Open Port and MillenniumObjects product
lines.
See "Cerner's Technology - Cerner Millennium Architecture" for a discussion of
the development of Cerner's latest generation of software products.
SALES AND MARKETING
- -------------------
The markets for Cerner's information system products include integrated delivery
networks, physician groups and networks and their management service
organizations, managed care organizations, hospitals, medical centers,
free-standing reference laboratories, blood banks, imaging centers, pharmacies,
pharmaceutical manufacturers, employer coalitions and public health
organizations. To date, a substantial portion of system sales have been in
clinical applications in hospital-based provider organizations. Cerner's
Millennium 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 Millennium applications are designed
to operate on either computers manufactured by Compaq Computer Corporation or
IBM's RISC System/6000 AIX (UNIX) platform, thereby allowing Cerner to be price
competitive across the full range of size and organizational structure of
healthcare providers. The sale of a health information system usually takes
approximately nine to eighteen months, from the time of initial contact to the
signing of a contract.
The Company's executive marketing management is located in its North Kansas
City, Missouri, headquarters, while its client representatives are deployed
across the United States and globally. In addition to the United States, the
Company, through subsidiaries and joint ventures, has sales staff and/or offices
in Australia, Belgium, Canada, Germany, Singapore, Malaysia, Saudi Arabia and
the United Kingdom. Cerner's consolidated revenues include foreign sales of
$22,350,000, 25,815,000 and $24,001,000 for the 2001, 2000 and 1999 fiscal
years, respectively. The Company supports its sales force with technical
personnel who perform demonstrations of Cerner's products and assist clients in
determining the proper hardware and software configurations. The Company's
primary direct marketing strategy is to generate sales contacts from its
existing client base and through presentations at industry seminars and
tradeshows. Cerner attends a number of major tradeshows each year and sponsors
executive conferences, which feature industry experts who address the
information system needs of large healthcare organizations.
11
CLIENT SERVICES
- ---------------
All of Cerner's clients enter into software maintenance agreements with Cerner
for support of their Cerner systems. In addition to immediate software support
in the event of problems, these agreements allow these clients the use of new
releases of the Cerner products covered by these agreements. Each client has
24-hour access to the client support staff located at Cerner's corporate
headquarters and the Company's global support organization in Brussels, Belgium.
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 December 29, 2001, Cerner had a contract backlog of approximately
$566,280,000. Such backlog represents system sales from signed contracts which
had not yet been recognized as revenue. The Company recognizes revenue on a
percent of completion basis, based on certain milestone conditions, for its
software products. At December 29, 2001, the Company had approximately
$80,714,000 of contracts receivable, which represents revenues recognized under
the percent of completion method but not yet billable under the terms of the
contract. At December 29, 2001, Cerner had a software support and maintenance
backlog of approximately $221,393,000. Such backlog represents contracted
software support and hardware maintenance services for a period of twelve
months. The Company estimates that approximately 51 percent of the aggregate
backlog of $787,673,000 will be recognized as revenue during 2002.
NUMBER OF EMPLOYEES ("ASSOCIATES")
- ----------------------------------
As of March 1, 2002, the Company employed 4,173 associates.
OTHER FACTORS AFFECTING THE COMPANY'S BUSINESS
- ----------------------------------------------
Information under the caption "Factors That May Affect Future Results of
Operations, Financial Condition of Business" included in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7 is incorporated herein by reference. Such information includes a
discussion of various factors that could, among other things, affect the
Company's business in the future, including (a) variations in the Company's
quarterly operating results; (b) volatility of the Company's stock price; (c)
market risk of investments; (d) potential impairment of goodwill; (e) changes in
the healthcare industry; (f) significant competition; (g) the Company's
proprietary technology may be subjected to infringement claims or may be
infringed upon; (h) possible regulation of the Company's software by the U.S.
Food and Drug Administration or other government regulation; (i) the possibility
of product-related liabilities; (j) possible failures or defects in the
performance of the Company's software; and (k) the possibility that the
Company's anti-takeover defenses could delay or prevent an acquisition of the
Company.
Item 2. Properties
The Company's world headquarter offices are located in a Company-owned office
park in North Kansas City, Missouri, containing approximately 500,000 square
feet of useable space (the "Campus"). As of December 29, 2001, the Company was
using approximately 467,035 square feet and substantially all of the remainder
was leased to tenants. In the first quarter of 2001, Cerner Properties began
construction of a new facility situated between the buildings located at 2800
and 2900 Rockcreek Parkway on the Campus. This facility, when completed, will be
approximately 134,000 square feet in size and will house office, cafeteria and
meeting space for the Company. Planned occupancy date of this new facility is
the first quarter of 2003.
In the spring of 2001, the Company acquired property formally owned by Harrah's
Operating Company, Inc., located along the north riverbank of the Missouri
River, approximately 2 miles from the Company's Campus. This property consists
of an 80,000 square foot building and a 1,300 car parking garage. The
12
building has been renovated for use as a corporate training, meeting and event
center for the Company. Use of the parking garage began on February 18, 2002 to
meet overflow parking demands on the Company's Campus.
The Company also leases office space in San Jose, California; Denver, Colorado;
Lake Mary Florida; Waltham, Massachusetts; Detroit, Michigan; St. Louis,
Missouri; Dallas, Texas; Houston, Texas; Washington, D.C.; Chesapeake, Virginia
and Vienna, Virginia. The Company operates its primary solutions center (or data
center) in leased space in Lee's Summit, Missouri. The Company also leases
office space in Sydney, Australia and Brussels, Belgium. Cerner Arabia, a joint
venture in which the Company maintains a 40% equity interest, leases space in
Riyadh, Saudi Arabia.
13
Item 3. Legal Proceedings
The Company has no material pending litigation.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the stockholders of the Company during
the fourth quarter of the fiscal year ended December 29, 2001.
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 29, 2002.
Officers are elected annually and serve at the discretion of the board of
directors.
Name Age Positions
- ---- --- ---------
Neal L. Patterson 52 Chairman of the Board of Directors and Chief Executive Officer
Clifford W. Illig 51 Vice Chairman of the Board of Directors
Earl H. Devanny, III 50 President
Glenn P. Tobin, Ph.D. 40 Executive Vice President and Chief Operating Officer
Paul M. Black 43 Executive Vice President and Chief Sales Officer
Rick M. Smith 50 Executive Vice President
Jack A. Newman, Jr. 54 Executive Vice President
Douglas M. Krebs 44 Senior Vice President and President of Cerner International, Inc.
Stephen M. Goodrich 50 Senior Vice President and Chief Quality Officer
Richard J. Flanigan, Jr. 42 Senior Vice President and General Manager
Stephen D. Garver 41 Senior Vice President and Managing Partner
Marc G. Naughton 47 Senior Vice President and Chief Financial Officer
Jeffrey A. Townsend 38 Senior Vice President and Chief Engineering Officer
Stanley M. Sword 40 Senior Vice President and Chief People Officer
Randy D. Sims 41 Vice President, Chief Legal Officer and Secretary
Neal L. Patterson has been Chairman of the Board of Directors and Chief
Executive Officer of the Company for more than five years. Mr. Patterson also
served as President of the Company from March of 1999 until August of 1999.
Clifford W. Illig has been a Director of the Company for more than five years.
He also served as Chief Operating Officer of the Company for more than five
years until October 1998 and as President of the Company for more than five
years until March of 1999. Mr. Illig was appointed Vice Chairman of the Board of
Directors in March of 1999.
14
Earl H. Devanny, III joined the Company in August of 1999 as President. Prior to
joining the Company, Mr. Devanny served as president of the ADAC Healthcare
Information Systems, Inc. Prior to joining ADAC, Mr. Devanny served as a Vice
President of the Company from 1994 to 1997. Prior to that he spent seventeen
years with IBM Corporation.
Glenn P. Tobin, Ph.D. joined the Company in April of 1998 as General Manager and
Senior Vice President. On October 29, 1998, Dr. Tobin was appointed Executive
Vice President and Chief Operating Officer. Prior to joining the Company, Dr.
Tobin served as a senior consultant with McKinsey and Co., Inc. for more than
five years.
Paul M. Black joined the Company in March of 1994 as a Regional Vice President.
He was promoted in June 1998 to Senior Vice President and Chief Sales Officer
and to Executive Vice President in September of 2000. Prior to joining the
Company, he spent twelve years with IBM Corporation.
Rick M. Smith joined the Company in June of 2001 as Executive Vice President of
Cerner Consulting. Prior to joining the Company, he spent more than 27 years
with Deloitte Consulting.
Jack A. Newman, Jr. joined the Company in January of 1996 as Executive Vice
President. Prior to joining the Company, he was with KPMG LLP for twenty-two
years. Immediately prior to joining Cerner he was National Partner-in-Charge of
KPMG's Healthcare Strategy Practice.
Douglas M. Krebs joined the Company in June 1994 as a Regional Vice President.
He was promoted to Senior Vice President and Area Manager in April 1999. On
February 1, 2000, Mr. Krebs was appointed as President of Cerner International,
Inc., a wholly owned subsidiary of the Company. Prior to joining Cerner, he
spent fifteen years with IBM Corporation.
Stephen M. Goodrich joined the Company in October 1987 as a project leader in
the product organization. In 1992 he was promoted to Vice President and was
promoted to Senior Vice President in April 1999. He was named Chief Quality
Officer in January of 2000.
Richard J. Flanigan, Jr. joined the Company in November 1994 as a Regional Vice
President. In 1997, his responsibilities were extended and he was named as
General Manager. He was promoted to Senior Vice President in April 2000. Prior
to joining Cerner, Mr. Flanigan spent more than thirteen years in sales and
management positions at IBM Corporation.
Stephen D. Garver joined the Company in March 1992 as part of Cerner Consulting.
In March of 1999 he was named Vice President and Managing Partner and was
promoted to Senior Vice President in April 2000. Prior to joining the Company,
Mr. Garver spent ten years with Andersen Consulting in a variety of roles within
the systems integration practice.
Marc G. Naughton joined the Company in November 1992 as Manager of Taxes. In
November 1995 he was named Chief Financial Officer and in February 1996 he was
promoted to Vice President. He was promoted to Senior Vice President in March
2002
Jeffrey A. Townsend joined the Company in June 1985. Since that time he has held
several positions in the product organization and was promoted to Vice President
in February 1997. He was appointed Chief Engineering Officer in March 1998. He
was promoted to Senior Vice President in March 2001.
Stanley M. Sword joined the Company in August 1998 as Vice President. He was
promoted to Senior Vice President in March 2002. Prior to joining Cerner, he
served as a client partner in the outsourcing practice of AT&T Solutions and as
the Vice President of Organization Development for NCR Corporation. Prior to
joining AT&T, Mr. Sword spent ten years with Anderson Consulting in a variety of
roles within the systems integration practice.
Randy D. Sims joined the Company in March 1997 as Vice President and Chief Legal
Officer. Prior to joining the Company, Mr. Sims worked at Farmland Industries,
Inc. for three years where he served most recently as Associate General Counsel.
Prior to Farmland, Mr. Sims was in-house legal counsel at The
15
Marley Company for seven years, holding the position of Assistant General
Counsel when he left to join Farmland.
16
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 MarketSM under the symbol
CERN. The following table sets forth the high, low and last sales prices for the
fiscal quarters of 2001 and 2000 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.
2001 2000
------------------------------------- ----------------------------------------
High Low Last High Low Last
---- --- ---- ---- --- ----
First quarter 61.50 30.81 34.25 40.88 17.88 27.00
Second quarter 49.50 28.00 42.00 32.14 19.75 27.25
Third quarter 57.35 37.57 49.50 48.00 26.31 46.44
Fourth quarter 60.00 45.06 50.69 64.88 40.50 46.25
At January 31, 2002, there were approximately 1,200 owners of record. To date,
the Company has paid no dividends and it does not intend to pay dividends in the
foreseeable future. Management believes it is in the stockholders' best interest
to reinvest funds in the operation of the business.
Item 6. Selected Financial Data
2001(1)(2) 2000(3)(4)(5)(6)(7) 1999(8)(9) 1998(10) 1997
---- ----- ---- ---- ----
(In thousands, except per share data)
Statements of Earnings Data:
Revenues $ 542,605 404,504 340,197 330,902 245,057
Operating earnings 61,532 25,602 3,698 33,530 22,170
Earnings (loss) before income taxes and extraordinary
item (63,314) 172,123 302 33,268 24,484
Extraordinary item - early extinguishment of debt - - (1,395) - -
Net earnings (loss) (42,366) 105,265 (1,211) 20,589 15,148
Earnings (loss) per share before extraordinary item:
Basic (1.21) 3.08 .01 .63 .46
Diluted (1.21) 2.96 .01 .61 .45
Earnings (loss) per share:
Basic (1.21) 3.08 (.04) .63 .46
Diluted (1.21) 2.96 (.04) .61 .45
Weighted average shares outstanding:
Basic 34,907 34,123 33,623 32,825 32,881
Diluted 34,907 35,603 33,916 33,667 33,668
Balance Sheet Data:
Working capital $ 189,488 186,181 170,053 118,681 156,808
Total assets 712,302 616,411 660,891 436,485 331,781
Long-term debt, net 92,132 102,299 100,000 25,000 30,026
Stockholders' equity 394,839 343,717 378,937 271,143 233,747
(1) Includes a non-recurring gain on the settlement of the WebMD
performance warrants. The impact of this gain is a $4.8 million (net of
tax) increase in net earnings and an increase to diluted earnings per
share of $.13 for 2001.
(2) Includes a non-recurring charge on the adjustment of the carrying value
of the WebMD shares. The impact of this charge is an $81.4 million (net
of tax) decrease in net earnings and a decrease to diluted earnings per
share of ($2.21) for 2001.
(3) Includes a non-recurring investment gain of $120.4 million, net of
$68.3 million tax expense, related to the conversion of shares of
CareInsite common stock to shares of WebMD common
17
stock. The impact of this non-recurring investment gain on diluted
earnings per share was $3.38 for 2000.
(4) Includes a non-recurring investment loss of $24.5 million, net of $13.9
million tax benefit, related to the sale of shares of WebMD common
stock. The impact of this non-recurring investment loss on diluted
earnings per share was ($.69) for 2000.
(5) Includes a non-recurring charge of $6.7 million related to the
write-down of intangible assets associated with the acquisition of
Health Network Ventures, Inc. The impact of this non-recurring charge
on diluted earnings per share was ($.19) for 2000.
(6) Includes a non-recurring charge of $3.2 million related to the
acquisition of CITATION Computer Systems, Inc. The impact of this
non-recurring charge on diluted earnings per share was ($.09) for 2000.
(7) Includes a non-recurring charge of $1.0 million, net of $.7 million tax
benefit, related to the acquisition of ADAC Healthcare Information
Systems, Inc. The impact of this non-recurring charge on diluted
earnings per share was ($.03) for 2000.
(8) Includes a non-recurring charge of $5.8 million, net of $3.6 million
tax benefit, related to the cost in excess of revenues of completing
fixed fee implementation contracts. The impact of this non-recurring
charge on diluted earnings per share was ($.17) for 1999.
(9) Includes a non-recurring charge of $.9 million, net of $.5 million tax
benefit, related to the accrual of branch restructuring costs. The
impact of this non-recurring charge on diluted earnings per share was
($.03) for 1999.
(10) Includes a non-recurring charge of $3.1 million, net of $1.9 million
tax benefit, related to the acquisition of Multum Information Services,
Inc. The impact of this non-recurring charge on diluted earnings per
share was ($.09) for 1998.
Summary Pro-forma Financial Data
(Statements of Earnings Data Excluding Non-Recurring Gains, Losses and Charges)
2001(1)(2) 2000(3)(4)(5)(6)(7) 1999 (8)(9) 1998(10) 1997
---- ----- ----- ---- ----
(In thousands, except per share data)
Statements of Earnings Data, Before
Non-recurring Gains, Losses and Charges:
Revenues $ 542,605 404,504 340,197 330,902 245,057
Operating earnings 61,532 37,189 14,505 38,568 22,170
Earnings before income taxes and extraordinary item 56,723 33,518 11,109 38,306 24,484
Extraordinary item - early extinguishment of debt - - (1,395) - -
Net earnings 34,217 20,366 5,462 23,687 15,148
Earnings per share before extraordinary item:
Basic .98 .60 .20 .72 .46
Diluted .93 .57 .20 .70 .45
Earnings per share:
Basic .98 .60 .16 .72 .46
Diluted .93 .57 .16 .70 .45
Weighted average shares outstanding:
Basic 34,907 34,123 33,623 32,825 32,881
Diluted 36,843 35,603 33,916 33,667 33,668
18
(1) Pro-Forma Statement of Earnings Data excludes a non-recurring gain on
the settlement of the WebMD performance warrants. The impact of this
gain is a $4.8 million (net of tax) increase in net earnings and an
increase to diluted earnings per share of $.13 for 2001.
(2) Pro-Forma Statement of Earnings Data excludes a non-recurring charge on
the adjustment of the carrying value of the WebMD shares. The impact of
this charge is an $81.4 million (net of tax) decrease in net earnings
and a decrease to diluted earnings per share of ($2.21) for 2001.
(3) Pro-Forma Statement of Earnings Data excludes a non-recurring
investment gain of $120.4 million, net of $68.3 million tax expense,
related to the conversion of shares of CareInsite common stock to
shares of WebMD common stock. The impact of this non-recurring
investment gain on diluted earnings per share was $3.38 for 2000.
(4) Pro-Forma Statement of Earnings Data excludes a non-recurring
investment loss of $24.5 million, net of $13.9 million tax benefit,
related to the sale of shares of WebMD common stock. The impact of this
non-recurring investment loss on diluted earnings per share was ($.69)
for 2000.
(5) Pro-Forma Statement of Earnings Data excludes a non-recurring charge of
$6.7 million related to the write-down of intangible assets associated
with the acquisition of Health Network Ventures, Inc. The impact of
this non-recurring charge on diluted earnings per share was ($.19) for
2000.
(6) Pro-Forma Statement of Earnings Data excludes a non-recurring charge of
$3.2 million related to the acquisition of CITATION Computer Systems,
Inc. The impact of this non-recurring charge on diluted earnings per
share was ($.09) for 2000.
(7) Pro-Forma Statement of Earnings Data excludes a non-recurring charge of
$1.0 million, net of $.7 million tax benefit, related to the
acquisition of ADAC Healthcare Information Systems, Inc. The impact of
this non-recurring charge on diluted earnings per share was ($.03) for
2000.
(8) Pro-Forma Statement of Earnings Data excludes a non-recurring charge of
$5.8 million, net of $3.6 million tax benefit, related to the cost in
excess of revenues of completing fixed fee implementation contracts.
The impact of this non-recurring charge on diluted earnings per share
was ($.17) for 1999.
(9) Pro-Forma Statement of Earnings Data excludes a non-recurring charge of
$.9 million, net of $.5 million tax benefit, related to the accrual of
branch restructuring costs. The impact of this non-recurring charge on
diluted earnings per share was ($.03) for 1999.
(10) Pro-Forma Statement of Earnings Data excludes a non-recurring charge of
$3.1 million, net of $1.9 million tax benefit, related to the
acquisition of Multum Information Services, Inc. The impact of this
non-recurring charge on diluted earnings per share was ($.09) for 1998.
19
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
- ------------
In 2001, the Company set records in bookings, revenues, pro-forma earnings and
cash flow. The Company continued to expand its product line to more than 40
products at the end of 2001, and the breadth of the Company's products was
evidenced by record bookings contributions from ten different application
categories. The Company continued to build new client relationships, with
approximately 40 percent of new business bookings coming from clients that had
no prior relationship with the Company. The Company also continued to strengthen
its strategic presence in Europe. Operationally, the Company brought 420
Millennium applications live in 2001, bringing the total number of live
applications to more than 1,200.
The Company continued to address new markets in 2001 with the launch of two
major new application suites, ProFit and Cerner ProVision. During 2001, the
Company completed a major implementation of ProFit, the Company's patient
accounting solution, improving its position to address an estimated $3 billion
market. ProVision, the Company's enterprise wide image management solution, was
also launched in 2001. ProVision allows the Company to be competitive in an
estimated $1 billion market.
Several industry forces continue to create significant pressures on health care
organizations to expand the use of information technology. The Leapfrog Group is
becoming an increasing force for driving systemic change in health care
organizations. Leapfrog recommends that employers select health plans with
hospitals that use a computerized physician-order-entry system as a primary
method of eliminating medical errors in hospitals. The Institute of Medicine
issued a report in 2001 indicating that the use of information technology is
critical to improving the quality and safety of health care. The industry is
also facing workforce shortages, with as many as 126,000 open nursing positions,
and this issue could be exacerbated in coming years by the very large increase
in demand for health care services that will be caused by the aging of the baby
boomers, the average of whom will be approximately 65 years old by 2010. The
Health Insurance Portability and Accountability Act of 1996 (HIPAA) adds an
additional element of complexity for healthcare organizations around security
and patient confidentiality.
The Company believes the wide range of issues health care organizations face can
be best addressed with information technology. The Company believes that its
investment in the Millennium architecture creates a major competitive advantage.
Millennium is the only fully integrated, large-scale, contemporary,
enterprise-wide architecture in the industry. This integration and the
comprehensiveness of the Company's solutions position the Company very well to
address the array of issues faced by health care organizations.
Results of Operations
- ---------------------
Year Ended December 29, 2001, Compared to Year Ended December 30, 2000
The Company's revenues increased 34% to $542,605,000 in 2001 from $404,504,000
in 2000. Net earnings, before non-recurring charges and credits were $34,217,000
in 2001 compared to $20,366,000 in 2000. Non-recurring charges and credits in
2001, as described below, included a gain on software license settlement and
investment losses. Non-recurring charges and credits in 2000, as described
below, included a realized investment gain and loss, write-offs of acquired
in-process research and development and a write-down of intangible assets.
Including the non-recurring charges and credits, the Company had a loss of
$42,366,000 in 2001 compared to net earnings of $105,265,000 in 2000.
Revenues - In 2001, revenues increased due to an increase in system sales and
support of installed systems. System sales increased 42% to $373,078,000 in 2001
from $263,109,000 in 2000. Included in system sale are revenues from the sale of
software, hardware, sublicensed software and professional services. The increase
in system sales is due to an increase in new contract bookings in 2001 compared
to 2000.
20
Total sales to the installed base in 2001, including new systems, incremental
hardware and software, support and maintenance services and discrete services,
were 73% of total revenues in 2001 compared to 77% in 2000.
At December 29, 2001, the Company had $566,280,000 in contract backlog and
$221,393,000 in support and maintenance backlog, compared to $439,943,000 in
contract backlog and $184,360,000 in support and maintenance backlog at the end
of 2000.
Support and maintenance revenues increased 22% in 2001 compared to 2000.
Included in support and maintenance are revenues from support and maintenance of
software, hardware and sublicensed software. These revenues represented 26% of
2001 and 28% of 2000 total revenues. This increase was due primarily to the
increase in the Company's installed and converted client base.
Other revenues increased 9% to $28,861,000 in 2001 from $26,497,000 in 2000.
Included in other revenues are revenues from subscriptions, services to clients
and education to clients. This increase was due primarily to additional revenues
derived from subscriptions and services to clients.
Cost of Revenues - The cost of revenues includes the cost of third party
consulting services, computer hardware and sublicensed software purchased from
computer and software manufacturers for delivery to clients. It also includes
the cost of hardware maintenance and sublicensed software support subcontracted
to the manufacturers. The cost of revenues was 21% of total revenues in 2001,
and 22% of total revenues in 2000. 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,
tradeshow costs and advertising costs. These expenses as a percent of total
revenues were 42% in both 2001 and 2000. 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 2001
and 2000 were $113,872,000 and $90,694,000, respectively. These amounts exclude
amortization. Capitalized software costs were $37,828,000 and $30,982,000 for
2001 and 2000, respectively.
General and Administrative - General and administrative expenses include
salaries for corporate, financial, and administrative staffs, utilities,
communications expenses and professional fees. These expenses as a percent of
total revenues were 7% in both 2001 and 2000.
Write-off of Acquired In-Process Research and Development - Write-off of
acquired in-process research and development includes one-time expenses
resulting from the acquisitions of CITATION Computer Systems, Inc. and ADAC
Healthcare Information Systems, Inc., in 2000.
Write-down of Intangible Assets - Write-down of intangible assets is a one-time
expense resulting from the decision to discontinue a portion of the Health
Network Ventures, Inc. business as more fully described in Note 2 to the
Consolidated Financial Statements.
Interest Expense, Net - Interest income was $2,896,000 in 2001 compared to
$3,645,000 in 2000. This decrease is due primarily to a decrease in invested
cash. Interest expense was $7,321,000 in 2001 compared to $7,316,000 in 2000.
Write-Down of Investment - The write-down of investment is a non-recurring
charge related to the adjustment of the carrying value of the WebMD shares in
2001.
21
Gain on Software License Settlement - The gain on software license settlement is
a non-recurring gain related to the settlement of the WebMD performance warrants
in 2001.
Realized Gain on Exchange of Stock - The realized gain on exchange of stock is a
non-recurring investment gain related to the exchange of CareInsite shares for
WebMD shares in 2000.
Realized Loss on Sale of Stock - The realized loss on sale of stock is a
non-recurring investment loss related to the sale of Cybercare shares in 2001
and a portion of the WebMD shares in 2000.
Income Taxes - The Company's effective tax rate was a benefit of 33% in 2001 and
an expense of 39% in 2000. The benefit is a result of the non-recurring loss on
the WebMD shares and other permanent differences.
Year Ended December 30, 2000, Compared to Year Ended January 1, 2000
The Company's revenues increased 19% to $404,504,000 in 2000 from $340,197,000
in 1999. Net earnings, before extraordinary item and non-recurring charges and
credits was $20,366,000 in 2000 compared to $6,857,000 in 1999. Non-recurring
charges and credits in 2000, as described below, included a realized investment
gain and loss, write-off of acquired in-process research and development and a
write-down of intangible assets. Non-recurring charges in 1999, as described
below, include contract reserves and branch restructuring charges. Including the
extraordinary item and non-recurring charges, the Company had earnings of
$105,265,000 in 2000 compared to a loss of $1,211,000 in 1999.
Revenues - In 2000, revenues increased due to an increase in system sales and
support of installed systems. System sales increased 17% to $263,109,000 in 2000
from $224,510,000 in 1999. Included in system sale are revenues from the sale of
software, hardware, sublicensed software and professional services. The increase
in system sales is due to an increase in new contract bookings in 2000 compared
to 1999.
Total sales to the installed base in 2000, including new systems, incremental
hardware and software, support and maintenance services and discrete services,
were 77% of total revenues in 2000 compared to 75% in 1999.
At December 30, 2000, the Company had $439,943,000 in contract backlog and
$184,360,000 in support and maintenance backlog, compared to $338,614,000 in
contract backlog and $162,798,000 in support and maintenance backlog at the end
of 1999.
Support and maintenance revenues increased 22% in 2000 as compared to 1999.
Included in support and maintenance are revenues from support and maintenance of
software, hardware and sublicensed software. These revenues represented 28% of
2000 and 1999 total revenues.
Other revenues increased 23% to $26,497,000 in 2000 from $21,489,000 in 1999.
Included in other revenues are revenues from subscriptions, services to clients
and education to clients. This increase was due primarily to additional revenues
derived from subscriptions and services to clients; these increases were
$1,765,000 and $2,324,000, respectively. The Company anticipates that other
revenues will continue to increase in 2001.
Cost of Revenues - The cost of revenues includes the cost of third party
consulting services, computer hardware and sublicensed software purchased from
computer and software manufacturers for delivery to clients. It also includes
the cost of hardware maintenance and sublicensed software support subcontracted
to the manufacturers. The cost of revenues was 22% of total revenues in 2000,
and 25% of total revenues in 1999, excluding a non-recurring charge relating to
fixed fee implementation contracts, as described below. Such costs, as a percent
of revenues, typically have varied as the mix of revenue (software, hardware,
services and support) components carrying different margin rates changes from
period to period. The decrease in the cost of revenue as a percent of total
revenues resulted principally from a decrease in the percent of revenue from
computer hardware and sublicensed software, which carry a higher cost of revenue
percentage.
22
Included in the 1999 cost of revenues is a charge of $9,449,000, which
represents the remaining additional costs in excess of revenues required to
complete certain remaining Cerner Millennium fixed fee implementation contracts.
The Company switched to an hourly fee-for-service implementation model in 1997.
Delays in some of the older projects, primarily caused by delays in development
of the Company's Cerner Millennium products, increased the time required to
complete these installations. While the Company originally anticipated these
fixed fee implementations would be completed in 1999, in some instances the
focus by clients on their internal Y2K projects created a further delay. As a
result of the significant implementation work completed in the last half of 1999
and the agreement between the Company and these clients in the fourth quarter as
to the scope of work remaining, the Company estimated that the costs to complete
certain fixed fee implementation contracts would exceed the remaining revenue by
$9,449,000. The Company recognized the impact of these excess costs in the
fourth quarter income statement as a non-recurring cost of revenues. $7,148,000
of these additional costs were incurred in 2000, with the remaining costs to be
completed in 2001. There were no significant changes in the estimates of the
costs to complete in 2000.
Sales and Client Service - Sales and client service expenses include salaries of
client service personnel, communications expenses and unreimbursed travel
expenses. Also included are sales and marketing salaries, travel expenses,
tradeshow costs and advertising costs. These expenses as a percent of total
revenues were 42% in 2000 and 41% in 1999, excluding a non-recurring charge
related to the closing of five branch offices, as described below. The increase
in total sales and client service expenses is attributable to the cost of a
larger field sales and services organization and marketing of new products.
Included in 1999 sales and client service expenses is a non-recurring charge
related to the closing of five branch offices. In December, 1999, the Company
made a decision to close five of its branch offices. The Company created a
regional branch structure in 1994 in order to bring associates closer to its
clients. The natural evolution of that strategy and the ability to leverage
internal information technology infrastructure to create a more virtual
workplace has resulted in a significant decrease in utilization of certain
regional offices. This led to the decision to close these physical locations.
The Company recorded a charge of $1.4 million in the 1999 fourth quarter to
provide for the costs of closing these locations, primarily based on estimated
lease cancellation fees. All of these costs were paid in 2000. The Company
continued to maintain offices in Denver, Colorado; Detroit, Michigan; St. Louis,
Missouri; Dallas, Texas; Washington, D.C.; Chesapeake, Virginia; Houston, Texas;
Brussels, Belgium and Sydney, Australia, in addition to the world headquarters
in North Kansas City, Missouri.
Software Development - Software development expenses include salaries,
documentation and other direct expenses incurred in product development and
amortization of software development costs. Total expenditures for software
development, including both capitalized and noncapitalized portions, for 2000
and 1999 were $90,694,000 and $88,699,000, respectively. These amounts exclude
amortization. Capitalized software costs were $30,982,000 and $30,192,000 for
2000 and 1999, respectively.
General and Administrative - General and administrative expenses include
salaries for corporate, financial, and administrative staffs, utilities,
communications expenses and professional fees. These expenses as a percent of
total revenues were 7% in 2000 and 8% in 1999.
Write-off of In-Process Research and Development - Write-off of in-process
research and development includes one-time expenses resulting from the
acquisitions of CITATION Computer Systems, Inc. and ADAC Healthcare Information
Systems, Inc., in 2000.
Write-down of Intangible Assets - Write-down of intangible assets is a one-time
expense resulting from the decision to discontinue a portion of the Health
Network Ventures, Inc. business as more fully described in Note 2 to the
Consolidated Financial Statements.
Interest Expense, Net - Net interest expense was $3,671,000 in 2000 compared to
$3,396,000 in 1999. The increase is due to an increase in borrowings.
Realized Gain on Exchange of Stock - The Realized gain on exchange of stock is a
non-recurring investment gain related to the exchange of CareInsite shares for
WebMD shares in 2000.
23
Realized Loss on Sale of Stock - The realized loss on sale of stock is a
non-recurring investment loss related to the sale of a portion of the WebMD
shares in 2000.
Income Taxes - The Company's effective tax rate was 39% in 2000 and 1999.
Liquidity and Capital Resources
- -------------------------------
The Company had total cash and cash equivalents of $107,536,000 at the end of
2001 and working capital of $189,488,000 compared to cash and cash equivalents
of $90,893,000 at the end of 2000 and working capital of $186,181,000.
The Company generated cash of $64,838,000, $53,313,000 and $27,389,000 from
operations in 2001, 2000 and 1999, respectively. Cash flow from operations
increased in 2001 and 2000, due primarily to the increase in net earnings before
noncash charges, increased collection of receivables, improved payment terms and
record level of conversions. Cash flow from operations increased in 1999, due
primarily to increased collection of receivables, improved payment terms and
record level of conversions.
Cash used in investing activities consisted primarily of capitalized software
development costs of $37,828,000 and $30,982,000 and purchases of capital
equipment, land and buildings of $25,722,000 and $16,154,000 in 2001 and 2000,
respectively. The Company also made additional investments in affiliates of
$1,664,000 and $7,370,000 and completed acquisitions of businesses for
$4,045,000 and $16,829,000 in 2001 and 2000, respectively.
Revenues provided under support and maintenance agreements represent recurring
cash flows. Support and maintenance revenues increased 22%, 22% and 23%, in
2001, 2000 and 1999, respectively, and the Company expects these revenues to
continue to grow as the base of installed systems grows.
On April 15, 1999, the Company completed a $100,000,000 private placement of
debt pursuant to a Note Agreement dated April 1, 1999. The Series A Senior
Notes, with a $60,000,000 principal amount at 7.14% are payable in five equal
annual installments beginning in April 2002. The Series B Senior Notes, with a
$40,000,000 principal amount at 7.66% are payable in six equal annual
installments beginning April 2004. The proceeds were used to retire the
Company's existing $30,000,000 of debt, and the remaining funds are being used
for capital improvements and to strengthen the Company's cash position. In
connection with the early extinguishment of debt, the Company incurred a
$1,395,000, net of taxes, extraordinary loss for a prepayment penalty and
write-off of deferred loan costs. The Note Agreement contains certain net worth,
current ratio, and fixed charge coverage covenants and provides certain
restrictions on the Company's ability to borrow, incur liens, sell assets and
pay dividends. The Company was in compliance with all covenants at December 29,
2001.
The Company's liquidity is influenced by many factors, including the amount and
timing of the Company's revenues, its cash collections from its clients and the
amounts the Company invests in software development, acquisitions and capital
expenditures. The Company has a loan agreement with a bank that provides for a
long-term revolving line of credit for working capital purposes. The long-term
revolving line of credit is unsecured and requires monthly payments of interest
only. Interest is payable at the Company's option at a rate based on prime
(4.75% at December 29, 2001) less .5% or LIBOR (1.87% at December 29, 2001) plus
1.35%. The interest rate may be reduced by up to .5% if certain net worth ratios
are maintained. At December 29, 2001, the Company had $15,000,000 in outstanding
borrowings under this agreement and had $30,000,000 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 1/4% is payable quarterly on the unused portion of the
revolving line of credit. The revolving line of credit matures on September 30,
2002. The Company believes that its present cash position, together with cash
generated from operations, will be sufficient to meet anticipated cash
requirements during 2002.
At December 29, 2001, the Company was committed to spending between $35,000,000
to $40,000,000 under a construction contract for a new building at its Kansas
City headquarters complex. The construction will be financed by the Company's
line of credit and cash generated from operations.
24
The effects of inflation on the Company's business during 2001 and 2000 were not
significant.
Critical Accounting Policies
- ----------------------------
The Company believes that there are several accounting policies that are
critical to understanding the Company's historical and future performance, as
these policies affect the reported amount of revenue and other significant areas
involving management's judgements and estimates. These significant accounting
policies relate to revenue recognition, software development, other than
temporary declines in the market value of investments, allowance for doubtful
accounts, and potential impairments of goodwill. These policies and the
Company's procedures related to these policies are described in detail below and
under specific areas within the discussion and analysis of the Company's
financial condition and results of operations. In addition, please refer to Note
1 to the accompanying financial statements for further discussion of the
Company's accounting policies.
Revenue Recognition
- -------------------
Revenues are derived primarily from the sale of clinical and financial
information systems and solutions. The components of these revenues are the
licensing of computer software, software support and hardware maintenance,
remote hosting and outsourcing, training, installation, consulting and
implementation services, subscription content, and the sale of computer hardware
and sublicensed software.
The Company recognizes revenue in accordance with the provisions of Statement of
Position (SOP) No. 97-2, "Software Revenue Recognition," as amended by SOP No.
98-4, SOP 98-9 and clarified by Staff Accounting Bulletin (SAB) 101 "Revenue
Recognition in Financial Statements". SOP No 97-2, as amended, generally
requires revenue earned on software arrangements involving multiple elements to
be allocated to each element based on the relative fair values of those
elements. Revenue from multiple-element software arrangements is recognized
using the residual method. Under the residual method, revenue is recognized in a
multiple element arrangement when Company-specific objective evidence of fair
value exists for all of the undelivered elements in the arrangement (i.e.
professional services, maintenance, hardware and sublicensed software), but does
not exist for one or more of the delivered elements in the arrangement (i.e.
software products). The Company allocates revenue to each element in a multiple
element arrangement based on the element's respective fair value, with the fair
value determined by the price charged when that element is sold separately.
Specifically, the Company determines the fair value of the maintenance portion
of the arrangement based on the renewal price of the maintenance charged to
clients, professional services portion of the arrangement, other than
installation services, based on hourly rates which the Company charges for these
services when sold apart from a software license, and the hardware and
sublicense software based on the prices for these elements when they are sold
separate from the software. If evidence of the fair value cannot be established
for the undelivered elements of a license agreement, the entire amount of
revenue under the arrangement is deferred until these elements have been
delivered or objective evidence can be established.
Inherent in the revenue recognition process are significant management estimates
and judgements which influence the timing and the amount of revenue recognition.
The Company provides several models for the procurement of its clinical and
financial information systems. The predominant method is a perpetual software
license agreement, project related installation services, implementation and
consulting services, computer hardware and sublicensed software, and software
support. For those arrangements involving the use of services, the Company uses
the percentage of completion method of accounting, following the guidance in the
AICPA Statement of Position No. 81-1 (SOP 81-1), Accounting for Performance of
Construction-Type and Certain Production-Type Contracts.
The Company provides installation services, which include project scoping
services, conducting pre-installation audit and creating initial environments.
Because installation services are deemed to be essential to the functionality of
the software, software license and installation services fees are recognized
over the software installation period using output measures which reflect direct
labor hours incurred,
25
beginning at software delivery and culminating at completion of installation,
typically a three to six month process.
The Company also provides implementation and consulting services, which include
consulting activities that fall outside of the scope of the standard
installation services. These services vary depending on the scope and complexity
requested by the client. Examples of such services may include additional
database consulting, system configuration, project management, testing
assistance, network consulting and post conversion review services.
Implementation and consulting services are generally not deemed to be essential
to the functionality of the software, and, thus, do not impact the timing of the
software license recognition, unless software license fees are tied to
implementation milestones. In those instances, the portion of the software
license fee tied to implementation milestones is deferred until the related
milestone is accomplished and related fees become billable and non-forfeitable.
Implementation fees are recognized over the service period, which may extend
from six months to three years.
Remote hosting and outsourcing services are marketed under long-term
arrangements generally over periods of 5 to 10 years. Revenues from these
arrangements are recognized as the services are performed.
Software maintenance fees are marketed under annual and multi-year arrangements
and are recognized as revenue ratably over the contracted maintenance term.
Hardware maintenance revenues are billed and recognized monthly over the
contracted maintenance term.
Subscription and content fees are generally marketed under annual and multi-year
agreements and are recognized ratably over the contracted terms.
Hardware and sublicensed software sales are generally recognized upon delivery
to the customer.
The Company also offers its products on an application service provider ("ASP")
or a term license basis, making available Company software functionality on a
remote processing basis from the Company's data centers. The data centers
provide system and administrative support as well as processing services.
Revenue on software and services provided on an ASP or term license basis is
recognized on a monthly basis over the term of the contract. The Company
capitalizes related direct costs consisting of third party costs and direct
software installation and implementation costs. These costs are amortized over
the term of the arrangement.
In the event the Company contractually agrees to develop new or customized
software code for a client, the Company will utilize percentage of completion
accounting in accordance with SOP 81-1.
Deferred revenue is comprised of deferrals for license fees, maintenance and
other services for which payment has been received and for which the service has
not yet been performed. Long-term deferred revenue, at December 29, 2001,
represents amounts received from license fees, maintenance and other services to
be earned or provided beginning in periods on or after December 29, 2002.
Software Development Costs
- --------------------------
Costs incurred internally in creating computer software products are expensed
until technological feasibility has been established upon completion of a
detailed program design. Thereafter, all software development costs are
capitalized and subsequently reported at the lower of amortized cost or net
realizable value. Capitalized costs are amortized based on current and expected
future revenue for each product with minimum annual amortization equal to the
straight-line amortization over the estimated economic life of the product. The
Company is amortizing capitalized costs over five years. During 2001, 2000 and
1999, the Company capitalized $37,828,000, $30,982,000 and $30,192,000,
respectively, of total software development costs of $113,872,000, $90,694,000,
and $88,699,000, respectively. Amortization expense of capitalized software
development costs in 2001, 2000, and 1999 was $24,142,000, $18,713,000, and
$14,156,000, respectively, and accumulated amortization was $100,553,000,
$76,411,000, and $57,698,000, respectively.
26
The Company expects that major software information systems companies, large
information technology consulting service providers and systems integrators,
internet-based start-up companies and others specializing in the healthcare
industry may offer competitive products or services. The pace of change in the
healthcare information systems market is rapid and there are frequent new
product introductions, product enhancements and evolving industry standards and
requirements. As a result, the capitalized software may become less valuable or
obsolete and could be subject to impairment.
Investments
- -----------
The Company accounts for its investments in equity securities which have readily
determinable fair values as available-for-sale. Available-for-sale securities
are reported at fair value with unrealized gains and losses reported, net of
tax, as a separate component of accumulated other comprehensive income. For
realized gains and losses on available-for-sale investments, the Company
utilizes the specific identification method as the basis to determine cost.
Investments in the common stock of certain affiliates over which the Company
exerts significant influence are accounted for by the equity method.
The Company also has certain other minority equity investments in non-publicly
traded securities. These investments are generally carried at cost as the
Company owns less than 20% of the voting equity and does not have the ability to
exercise significant influence over these companies. The balance of these
investments at December 29, 2001 and December 30, 2000 was $18,212,000 and
$26,601,000, respectively. These investments are inherently high risk as the
market for technologies and content by these companies are usually early stage
at the time of the investment by the Company and such markets may never be
significant. The Company could lose its entire investment in certain or all of
these companies. The Company monitors these investments for impairment and makes
appropriate reductions in carrying values when necessary.
All equity securities are reviewed by the Company for declines in fair value. If
such declines are considered to be other than temporary, the cost basis of the
individual security is written down to fair value as a new cost basis, and the
amount of the write-down is included in earnings.
Concentrations
- --------------
Substantially all of the Company's cash and cash equivalents and short-term
investments, are held at two major U.S. financial institutions. The majority of
the Company's cash equivalents consist of U.S. Government Federal Agency
Securities, short-term marketable securities, and overnight repurchase
agreements. Deposits held with banks may exceed the amount of insurance provided
on such deposits. Generally these deposits may be redeemed upon demand and,
therefore, bear minimal risk.
Substantially all of the Company's clients are integrated delivery networks,
hospitals, and other healthcare related organizations. If significant adverse
macro-economic factors were to impact these organizations it could materially
adversely affect the Company. The Company's access to certain software and
hardware components are dependent upon single and sole source suppliers. The
inability of any supplier to fulfill supply requirements of the Company could
affect future results.
Allowance for Doubtful Accounts
- -------------------------------
The Company performs ongoing credit evaluations of its clients and generally
does not require collateral from its clients. The Company maintains an allowance
for potential losses on a specific identification basis and based on historical
experience and management's judgements. The Company's allowance for doubtful
accounts as of December 29, 2001 and December 30, 2000 was $6,880,000 and
$5,999,000, respectively.
Goodwill
- --------
Excess of cost over net assets acquired (goodwill) is being amortized on a
straight-line basis over four to eight years. Accumulated amortization was
$8,727,000, and $5,964,000 at the end of 2001, and 2000, respectively. The
Company assesses the recoverability of goodwill based on forecasted undiscounted
27
future operating cash flows. Estimates of future operating cash flows inherently
involve substantial management judgement about the likely impacts of current and
future events and conditions.
On June 30, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 141, "Business
Combinations", and SFAS 142, "Goodwill and Intangible Assets". Major provisions
of these Statements are as follows: all business combinations initiated after
June 30, 2001 must use the purchase method of accounting; the pooling of
interests method of accounting is prohibited except for transactions initiated
before July 1, 2001; intangible assets acquired in a business combinations must
be recorded separately from goodwill if they arise from contractual or other
legal rights or are separable from the acquired entity and can be sold,
transferred, licensed, retired or exchanged, either individually or as part of a
related contract, asset or liability; goodwill and intangible assets with
indefinite lives are not amortized but are tested for impairment annually, and
whenever there is an impairment indicator; all acquired goodwill must be
assigned to reporting units for purposes of impairment testing and segment
reporting; and effective January 1, 2002, goodwill from previous acquisitions
will no longer be subject to amortization, but will be subject to annual
evaluations for impairment based on fair value. The Company completed two
acquisitions subsequent to June 30, 2001, which resulted in approximately, $14.2
million of goodwill that was not amortized in accordance with SFAS 142. Goodwill
amortization for 2001 was approximately $2,247,000. Management is currently
reviewing the impact that the provisions of this statement will have on the
Company's financial statements.
Factors that may Affect Future Results of Operations, Financial Condition or
- ----------------------------------------------------------------------------
Business
- --------
Statements made in this report, the Annual Report to Shareholders in which this
report is made a part, other reports and proxy statements filed with the
Securities and Exchange Commission, communications to stockholders, press
releases and oral statements made by representatives of the Company that are not
historical in nature, or that state the Company's or management's intentions,
hopes, beliefs, expectations or predictions of the future, are "forward-looking
statements" within the meaning of Section 21E of the Securities and Exchange Act
of 1934, as amended, and involve risks and uncertainties. The words "could,"
"should," "will be," "will lead," "will assist," "intended," "continue,"
"believe," "may," "expect," "hope," "anticipate," "goal," "forecast" and similar
expressions are intended to identify such forward-looking statements. It is
important to note that any such performance and actual results, financial
condition or business, could differ materially from those expressed in such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below as well as
those discussed elsewhere in reports filed with the Securities and Exchange
Commission. The Company undertakes no obligation to update or revise
forward-looking statements to reflect changed assumptions, the occurrence of
unanticipated events or changes in future operating results, financial condition
or business over time.
Quarterly Operating Results May Vary - The Company's quarterly operating results
have varied in the past and may continue to vary in future periods. Quarterly
operating results may vary for a number of reasons including demand for the
Company's products and services, the Company's long sales cycle, potentially
long installation and implementation cycle for these larger, more complex and
costlier systems and other factors described in this section and elsewhere in
this report. As a result of healthcare industry trends and the market for the
Company's Cerner Millennium products, a large percentage of the Company's
revenues are generated by the sale and installation of larger, more complex and
costlier systems. The sales process for these systems is lengthy and involves a
significant technical evaluation and commitment of capital and other resources
by the client. The sale may be subject to delays due to clients' internal
budgets and procedures for approving large capital expenditures and by competing
needs for other capital expenditures and deploying new technologies or personnel
resources. Delays in the expected sale or installation of these large contracts
may have a significant impact on the Company's anticipated quarterly revenues
and consequently its earnings, since a significant percentage of the Company's
expenses are relatively fixed.
These larger, more complex and costlier systems are installed and implemented
over time periods ranging from approximately one month to three years and may
involve significant efforts both by the Company and the client. The Company
recognizes revenue upon the completion of standard milestone conditions and the
amount of revenue recognized in any quarter depends upon the Company's and the
28
client's ability to meet these project milestones. Delays in meeting these
milestone conditions or modification of the contract relating to one or more of
these systems could result in a shift of revenue recognition from one quarter to
another and could have a material adverse effect on results of operations for a
particular quarter. In addition, support payments by clients for the Company's
products generally do not commence until the product is in use.
The Company's revenues from system sales historically have been lower in the
first quarter of the year and greater in the fourth quarter of the year.
Stock Price May Be Volatile - The trading price of the Company's common stock
may be volatile. The market for the Company's common stock may experience
significant price and volume fluctuations in response to a number of factors
including actual or anticipated quarterly variations in operating results,
changes in expectations of future financial performance or changes in estimates
of securities analysts, governmental regulatory action, healthcare reform
measures, client relationship developments and other factors, many of which are
beyond the Company's control.
Furthermore, the stock market in general, and the market for software,
healthcare and high technology companies in particular, has experienced extreme
volatility that often has been unrelated to the operating performance of
particular companies. These broad market and industry fluctuations may adversely
affect the trading price of the Company's common stock, regardless of actual
operating performance.
Market Risk of Investments - The Company accounts for its investments in equity
securities which have readily determinable fair values as available-for-sale.
Available-for-sale securities are reported at fair value with unrealized gains
and losses reported, net of tax, as a separate component of accumulated other
comprehensive income. Investments in the common stock of certain affiliates over
which the Company exerts significant influence are accounted for by the equity
method. Investments in other equity securities are reported at cost. All equity
securities are reviewed by the Company for declines in fair value. If such
declines are considered to be other than temporary, the cost basis of the
individual security is written down to fair value as a new cost basis, and the
amount of the write-down is included in earnings.
At December 29, 2001, the Company owned 14,820,527 shares of common stock of
WebMD Corporation (WebMD) (formerly CareInsite, Inc.), which have a cost basis
of $85,811,000 and a carrying value of $104,485,000, as these shares are
accounted for as available-for-sale. 2,000,000 shares of WebMD held by the
Company are not registered. At December 29, 2001 the Company also holds
1,048,783 warrants of WebMD with an exercise price of $3.08 and a cost basis and
carrying value of $4,146,000. The warrants are carried at cost, as they do not
have a fair value that is currently available on a securities exchange. The
warrants expire on January 26, 2003.
On February 13, 2000 CareInsite entered into an agreement to merge with WebMD.
The merger of CareInsite and WebMD ("Merger") closed on September 12, 2000.
Prior to the merger, the carrying value of the CareInsite stock was $6.22 per
share, the market price of WebMD on September 12, 2000 was $15.00 per share.
Upon the exchange of CareInsite stock for WebMD stock the Company recorded a
non-recurring investment gain of $120,362,000, net of tax, as a result of the
exchange.
On December 12, 2000, the Company sold 4,273,509 shares of WebMD for
$25,641,000. Accordingly, the Company recorded a non-recurring investment loss
of $24,539,000, net of tax, as a result of the sale.
On June 18, 2001 the Company reached an agreement with WebMD regarding certain
performance metrics related to specified levels of physician usage arising out
of the original license transaction between the Company and CareInsite, which
has been merged into WebMD. Under the agreement, the Company received 2,000,000
shares of WebMD stock, valued at $11,580,000, in exchange for $432,000 in cash
and the cancellation of various obligations due to the Company by WebMD. As a
result of this agreement, the Company recognized a non-recurring gain of
$4,836,000, net of $2,744,000 in tax, on software license settlement in the
accompanying consolidated statement of operations. The Company's policy is to
review declines in fair value of its marketable equity securities for declines
that may be other than temporary. As a result of this policy, during the second
quarter of 2001, the Company recorded a
29
write-down of its investment in WebMD from $15.00 to $5.79 per share.
Accordingly, the Company recognized a charge to earnings in 2001 of $81,419,000,
net of $46,197,000 in tax.
At December 29, 2001, marketable securities (which consist of money market and
commercial paper) of the Company were recorded at cost, which approximates fair
value of approximately $108 million, with an overall average return of
approximately 4.5% and an overall weighted maturity of less than 90 days. The
marketable securities held by the Company are not subject to significant price
risk as a result of the short-term nature of the investments.
The Company has limited exposure to material future earnings or cash flow
exposures from changes in interest rates on long-term debt since substantially
all of its long-term debt is at a fixed rate. The Company also had $15,000,000
outstanding under its working capital line of credit, which has a variable
interest rate based on prime (4.75% at December 29, 2001) less .5% or LIBOR
(1.87% at December 29, 2001) plus 1.35%. To date, the Company has not entered
into any derivative financial instruments to manage interest rate risk.
The Company conducts business in several foreign jurisdictions. However, the
business transacted is in the local functional currency and the Company does not
currently have any material exposure to foreign currency transaction gains or
losses. All other business transactions are in U.S. dollars. To date, the
Company has not entered into any derivative financial instruments to manage
foreign currency risk.
Potential Impairment of Goodwill - Excess of cost over net assets acquired
(goodwill) is being amortized on a straight-line basis over four to eight years.
Accumulated amortization was $8,727,000, and $5,964,000 at the end of 2001, and
2000, respectively. The Company assesses the recoverability of goodwill based on
forecasted undiscounted future operating cash flows.
Effective January 1, 2002, under SFAS 141 and SFAS 142 goodwill from previous
acquisitions will no longer be subject to amortization, but will be subject to
annual evaluations for impairment based on fair value. The Company completed two
acquisitions subsequent to June 30, 2001, which resulted in approximately $14.2
million of goodwill that was not amortized in accordance with SFAS 142. Goodwill
amortization for 2001 was approximately $2,247,000. In the event that goodwill
becomes impaired the Company would be required to take a charge against earnings
for the impairment.
Changes in the Healthcare Industry - The healthcare industry is highly regulated
and is subject to changing political, economic and regulatory influences. For
example, the Balanced Budget Act of 1997 (Public Law 105-32) contains
significant changes to Medicare and Medicaid and began to have its initial
impact in 1998 due to limitations on reimbursement, resulting cost containment
initiatives, and effects on pricing and demand for capital intensive systems. In
addition, the issued and pending rules under the Health Information Portability
and Accountability Act of 1996 (HIPAA), will have a direct impact on the
healthcare industry by requiring identifiers and standardized transactions/code
sets and necessary security and privacy measures in order to ensure the
protection of patient health information. These factors affect the purchasing
practices and operation of healthcare organizations. Federal and state
legislatures have periodically considered programs to reform or amend the U.S.
healthcare system at both the federal and state level and to change healthcare
financing and reimbursement systems. These programs may contain proposals to
increase governmental involvement in healthcare, lower reimbursement rates or
otherwise change the environment in which healthcare industry participants
operate. Healthcare industry participants may respond by reducing their
investments or postponing investment decisions, including investments in the
Company's products and services.
Many healthcare providers are consolidating to create integrated healthcare
delivery systems with greater market power. These providers may try to use their
market power to negotiate price reductions for the Company's products and
services. As the healthcare industry consolidates, the Company's client base
could be eroded, competition for clients could become more intense and the
importance of acquiring each client becomes greater.
Significant Competition - The market for healthcare information systems is
intensely competitive, rapidly evolving and subject to rapid technological
change. The Company believes that the principal competitive factors in this
market include the breadth and quality of system and product offerings, the
stability of the
30
information systems provider, the features and capabilities of the information
systems, the ongoing support for the system and the potential for enhancements
and future compatible products.
Certain of the Company's competitors have greater financial, technical, product
development, marketing and other resources than the Company and some of its
competitors offer products that it does not offer. The Company's principal
existing competitors include GE Medical Systems, Siemens Medical Solutions
Health Services Corporation, IDX Systems Corporation, McKesson HBOC, Inc. and
Eclipsys Corporation, each of which offers a suite of products that compete with
many of the Company's products. There are other competitors that offer a more
limited number of competing products.
In addition, the Company expects that major software information systems
companies, large information technology consulting service providers and system
integrators, Internet-based start-up companies and others specializing in the
healthcare industry may offer competitive products or services. The pace of
change in the healthcare information systems market is rapid and there are
frequent new product introductions, product enhancements and evolving industry
standards and requirements. As a result, the Company's success will depend upon
its ability to keep pace with technological change and to introduce, on a timely
and cost-effective basis, new and enhanced products that satisfy changing client
requirements and achieve market acceptance.
Proprietary Technology May Be Subjected to Infringement Claims or May Be
Infringed Upon - The Company relies upon a combination of trade secret,
copyright and trademark laws, license agreements, confidentiality procedures,
employee nondisclosure agreements and technical measures to maintain the trade
secrecy of its proprietary information. The Company recently initiated a patent
program but currently has a very limited patent portfolio. As a result, the
Company may not be able to protect against misappropriation of its intellectual
property.
In addition, the Company could be subject to intellectual property infringement
claims as the number of competitors grows and the functionality of its products
overlaps with competitive offerings. These claims, even if not meritorious,
could be expensive to defend. If the Company becomes liable to third parties for
infringing their intellectual property rights, it could be required to pay a
substantial damage award and to develop noninfringing technology, obtain a
license or cease selling the products that contain the infringing intellectual
property.
Government Regulation - The United States Food and Drug Administration (the
"FDA") has declared that software products intended for the maintenance of data
used in making decisions regarding the suitability of blood donors and the
release of blood or blood components for transfusion are medical devices under
the Federal Food, Drug and Cosmetic Act ("Act") and amendments to the Act. As a
consequence, the Company is subject to extensive regulation by the FDA with
regard to its blood bank software. If other of the Company's products are deemed
to be actively regulated medical devices by the FDA, the Company could be
subject to extensive requirements governing pre- and post-marketing requirements
including premarket notification clearance prior to marketing. Complying with
these FDA regulations would be time consuming and expensive. It is possible that
the FDA may become more active in regulating computer software that is used in
healthcare.
Following an inspection by the FDA in March of 1998, the Company received a Form
FDA 483 (Notice of Inspectional Observations) alleging non-compliance with
certain aspects of FDA's Quality System Regulation with respect to the Company's
PathNet HNAC Blood Bank Transfusion and Donor products (the "Blood Bank
Products"). The Company subsequently received a Warning Letter, dated April 29,
1998, as a result of the same inspection. The Company responded promptly to the
FDA and undertook a number of actions in response to the Form 483 and Warning
Letter including an audit by a third party of the Company's Blood Bank Products
and improvements to Cerner's Quality System. A copy of the third party audit was
submitted to the FDA in October of 1998 and, at the request of the FDA,
additional information and clarification were submitted to the FDA in January of
1999.
There can be no assurance, however, that the Company's actions taken in response
to the Form 483 and Warning Letter will be deemed adequate by the FDA or that
additional actions on behalf of the Company will not be required. In addition,
the Company remains subject to periodic FDA inspections and there can be no
assurances that the Company will not be required to undertake additional actions
to comply with the Act and any other applicable regulatory requirements. Any
failure by the Company to comply with
31
the Act and any other applicable regulatory requirements could have a material
adverse effect on the Company's ability to continue to manufacture and
distribute its products. FDA has many enforcement tools including recalls,
seizures, injunctions, civil fines and/or criminal prosecutions. Any of the
foregoing could have a material adverse effect on the Company's business,
results of operations or financial condition.
Product Related Liabilities - Many of the Company's products provide data for
use by healthcare providers in providing care to patients. Although no such
claims have been brought against the Company to date regarding injuries related
to the use of its products, such claims may be made in the future. Although the
Company maintains product liability insurance coverage in an amount that it
believes is sufficient for its business, there can be no assurance that such
coverage will prove to be adequate or that such coverage will continue to remain
available on acceptable terms, if at all. A successful claim brought against the
Company which is uninsured or under-insured could materially harm its business,
results of operations or financial condition.
System Errors and Warranties - The Company's systems, particularly the Cerner
Millennium versions, are very complex. As with complex systems offered by
others, the Company's systems may contain errors, especially when first
introduced. Although the Company conducts extensive testing, it has discovered
software errors in its products after their introduction. The Company's systems
are intended for use in collecting and displaying clinical information used in
the diagnosis and treatment of patients. Therefore, users of the Company
products have a greater sensitivity to system errors than the market for
software products generally. The Company's agreements with its clients typically
provide warranties against material errors and other matters. Failure of a
client's system to meet these criteria could constitute a material breach under
such contracts allowing the client to cancel the contract, or could require the
Company to incur additional expense in order to make the system meet these
criteria. The Company's contracts with its clients generally limit the Company's
liability arising from such claims but such limits may not be enforceable in
certain jurisdictions.
Anti-Takeover Defenses - The Company's charter, bylaws, shareholders' rights
plan and certain provisions of Delaware law contain certain provisions that may
have the effect of delaying or preventing an acquisition of the Company. Such
provisions are intended to encourage any person interested in acquiring the
Company to negotiate with and obtain the approval of the Board of Directors in
connection with any such transaction. These provisions include (a) a Board of
Directors that is staggered into three classes to serve staggered three-year
terms, (b) blank check preferred stock, (c) supermajority voting provisions, (d)
inability of shareholders to act by written consent or call a special meeting,
(e) limitations on the ability of shareholders to nominate directors or make
proposals at shareholder meetings and (f) triggering the exercisability of stock
purchase rights on a discriminatory basis, which may invoke extensive economic
and voting dilution of a potential acquirer if its beneficial ownership of the
Company's common stock exceeds a specified threshold. Certain of these
provisions may discourage a future acquisition of the Company not approved by
the Board of Directors in which shareholders might receive a premium value for
their shares.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Information contained under the caption "Factors That May Affect Future Results
of Operations, Financial Condition or Business -- Market Risk of Investments"
set forth under "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in Item 7 is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Notes required by this Item are submitted as a
separate part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
32
PART III
Item 10. Directors and Executive Officers of the Registrant
The Registrant's Proxy Statement to be used in connection with the Annual
Meeting of Shareholders to be held on May 24, 2002, contains under the caption
"Election of Directors" certain information required by Item 10 of Form 10-K and
such information is incorporated herein by this reference. The information
required by Item 10 of Form 10-K as to executive officers is set forth in Item
4A of Part I hereof.
The Registrant's Proxy Statement to be used in connection with the Annual
Meeting of Shareholders to be held on May 24, 2002, contains under the caption
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" certain
information required by Item 10 of Form 10-K and such information is
incorporated herein by this reference.
Item 11. Executive Compensation
The Registrant's Proxy Statement to be used in connection with the Annual
Meeting of Shareholders to be held on May 24, 2002, contains under the caption
"Executive Compensation" the information required by Item 11 of Form 10-K and
such information is incorporated herein by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The Registrant's Proxy Statement to be used in connection with the Annual
Meeting of Shareholders to be held on May 24, 2002, contains under the caption
"Voting Securities and Principal Holders Thereof" the information required by
Item 12 of Form 10-K and such information is incorporated herein by this
reference.
Item 13. Certain Relationships and Related Transactions
The Registrant's Proxy Statement to be used in connection with the Annual
Meeting of Shareholders to be held on May 24, 2002, 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.
33
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports On Form 8-K
(a) Financial Statements.
(1) Consolidated Financial Statements:
Independent Auditors' Report on Consolidated Financial Statements
Consolidated Balance Sheets -
December 29, 2001 and December 30, 2000
Consolidated Statements of Operations -
Years Ended December 29, 2001, December 30, 2000 and January 1, 2000
Consolidated Statements of Changes In Equity
Years Ended December 29, 2001, December 30, 2000 and January 1, 2000
Consolidated Statements of Cash Flows
Years Ended December 29, 2001, December 30, 2000 and January 1, 2000
Notes to Consolidated Financial Statements
(2) The following financial statement schedule and
independent auditors' report on financial statement
schedule of the Registrant for the three-year period
ended December 29, 2001 are included herein:
Schedule II - Valuation and Qualifying Accounts,
Independent Auditors' Report on Consolidated
Financial Statement Schedule.
All other schedules are omitted, as the required information is inapplicable or
the information is presented in the consolidated financial statements or related
notes.
(3) The exhibits required to be filed by this item are set forth below:
Number Description
- ------ -----------
3(a) Restated Certificate of Incorporation of the Registrant, (filed as Exhibit 3(i)
to Registrant's Quarterly Report on Form 10-Q for the year ended June 29, 1996
and hereby incorporated by reference).
3(b) Amended and Restated Bylaws, dated March 9, 2001, (filed as Exhibit 4.2 to
Registrant's Form S-8 filed on September 26, 2001 and hereby incorporated by
reference).
4(a) Amended and Restated Rights Agreement, dated as of March 12, 1999, between
Cerner Corporation and UMB Bank, n.a., as Rights Agents, which includes the Form
of Certificate of Designation, Preferences and Rights of Series A Preferred
Stock of Cerner Corporation, as Exhibit A, and the Form of Rights Certificate,
as Exhibit B (filed as an Exhibit to Registrant's current report on Form 8-A/A
dated March 31, 1999 and incorporated herein by reference).
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).
34
4(c) Credit Agreement between Cerner Corporation and Mercantile Bank dated April 1,
1999 (filed as Exhibit 4(d) to Registrant's Annual Report on Form 10-K for the
year ended January 2, 1999, and hereby incorporated herein by reference).
4(d) First Amendment to Credit Agreement between Cerner Corporation and Firstar Bank
Midwest, N.A., a successor to Mercantile Bank dated June 30, 2000.
4(e) Second Amendment to Credit Agreement between Cerner Corporation and Firstar
Bank, N.A. Overland Park, formerly known as Firstar Bank Midwest, N.A. and
successor to Mercantile Bank dated July 1, 2001.
4(f) Third Amendment to Credit Agreement between Firstar Bank, N.A. formerly known as
or as successor to Firstar Bank, N.A. Overland Park, Firstar Bank Midwest, N.A.
and Mercantile Bank dated December 21, 2001.
4(g) Cerner Corporation Note Agreement dated as of April 1, 1999 among Cerner
Corporation, Principal Life Insurance Company, Principal Life Insurance Company,
on behalf of one or more separate accounts, Commercial Union Life Insurance
Company of America, Nippon Life Insurance Company of America, John Hancock
Mutual Life Insurance Company, John Hancock Variable Life Insurance Company, and
Investors Partner Life Insurance Company (filed as Exhibit 4(e) to Registrant's
Form 8-K date April 23, 1999, and hereby incorporate by reference).
10(a) Incentive Stock Option Plan C of Registrant (filed as Exhibit 10(f) to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1993,
and hereby incorporated herein by reference).*
10(b) Indemnification Agreements between the Registrant and Neal L. Patterson,
Clifford W. Illig, Gerald E. Bisbee, Jr., Ph.D. and Thomas C. Tinstman, M.D.,
(filed as Exhibit 10(i) to Registrant's Annual report on Form 10-K for the year
ended December 31, 1992, and incorporated herein by reference).*
10(c) Indemnification Agreement between Michael E. Herman and Registrant (filed as
Exhibit 10(i)(a) to Registrant's Quarterly Report on Form 10-Q for the year
ended June 29, 1996 and hereby incorporated by reference).*
10(d) Indemnification Agreement between John C. Danforth, and Registrant (filed as
Exhibit 10(i)(b) to Registrant's Quarterly Report on Form 10-Q for the year
ended June 29, 1996 and hereby incorporated by reference).*
10(e) Indemnification Agreement between Jeff C. Goldsmith, Ph.D. and Registrant (filed
as Exhibit 10(e) to Registrant's Annual Report on Form 10-K for the year ended
January 1, 2000, and hereby incorporated by reference).*
10(f) Indemnification Agreement between William B. Neaves Ph.D. and Nancy-Ann DeParle
and Registrant (filed as Exhibit 10.1 and 10.2 to Registrant's Form 10-Q for the
quarter ended September 29, 2001 and hereby incorporated herein by reference).*
10(g) Amended Stock Option Plan D of Registrant as of December 8, 2000 (filed as
Exhibit 10(f) to Registrant's Annual Report on Form 10-K for the year ended
December 30, 2000, and hereby incorporated herein by reference).*
10(h) Amended Stock Option Plan E of Registrant as of December 8, 2000 (filed as
Exhibit 10(g) to Registrant's Annual Report on Form 10-K for the year ended
December 30, 2000, and hereby incorporated herein by reference).*
35
10(i) Cerner Performance Plan for 2000 (filed as Exhibit 10(i) to Registrant's Annual
Report on Form 10-K for the year ended January 1, 2000, and hereby incorporated
herein by reference).*
10(j) Long-Term Incentive Plan for 1999 (filed as Exhibit 10(l) to Registrant's Annual
Report on Form 10-K for the year ended January 2, 1999, and hereby incorporated
herein by reference).*
10(k) Promissory Note of Jack A. Newman, Jr. (filed as Exhibit 10(m) to Registrant's
Annual Report on Form 10-K for the year ended January 2, 1999, and hereby
incorporated herein by reference).*
10(l) Promissory Notes of Earl H. Devanny, III (filed as Exhibit 10(l) to Registrant's
Annual Report on Form 10-K for the year ended January 1, 2000, and hereby
incorporated herein by reference).*
10(m) Promissory Note of Glenn P. Tobin, Ph.D. (filed as Exhibit 10(o) to Registrant's
Annual Report on Form 10-K for the year ended January 2, 1999, and hereby
incorporated herein by reference).*
10(n) Cerner Corporation Executive Stock Purchase Plan (filed as Exhibit 4(g) to
Registrant's Registration Statement on Form S-8 (File No. 333-77029) and hereby
incorporated herein by reference).*
10(o) Form of Stock Pledge Agreement for Cerner Corporation Executive Stock Purchase
Plan (filed as Exhibit 4(h) to Registrant's Registration Statement on Form S-8
(File No. 333-77029) and hereby incorporated herein by reference).*
10(p) Form of Promissory Note for Cerner Corporation Executive Stock Purchase Plan
(filed as Exhibit 4(i) to Registrant's Registration Statement on Form S-8 (File
No. 333-77029) and hereby incorporated herein by reference).*
10(q) Employment Agreement of Earl H. Devanny, III (filed as Exhibit 10(q) to
Registrant's Annual Report on Form 10-K for the year ended January 1, 2000, and
hereby incorporated herein by reference).*
10(r) Employment Agreement of Glenn P. Tobin, Ph.D. (filed as Exhibit 10(r) to
Registrant's Annual Report on Form 10-K for the year ended January 1, 2000, and
hereby incorporated herein by reference).*
10(s) Employment Agreement of Stanley M. Sword (filed as Exhibit 10(s) to Registrant's
Annual Report on Form 10-K for the year ended January 1, 2000, and hereby
incorporated herein by reference).*
10(t) Employment Agreement of Jack A. Newman, Jr. (filed as Exhibit 10(s) to
Registrant's Annual Report on Form 10-K for the year ended December 30, 2000).*
10(u) Employment Agreement of Robert (Rick) M. Smith.
10(v) Cerner Corporation 2001 Long-Term Incentive Plan F (filed as Annex I to
Registrant's 2001 Proxy Statement and hereby incorporated by reference).*
10(w) Cerner Corporation 2001 Associate Stock Purchase Plan (filed as Annex II
Registrant's 2001 Proxy Statement and hereby incorporated by reference).*
10(x) Qualified Performance-Based Compensation Plan.*
36
11 Computation of Registrant's Earnings Per Share. (Exhibit omitted. Information
contained in notes to consolidated financial statements.)
22 Subsidiaries of Registrant.
23 Consent of Independent Auditors.
* Management contracts or compensatory plans or arrangements required to be
identified by Item 14(a)(3).
(b) Reports on Form 8-K.
Report on Form 8-K was filed on December 21, 2001.
(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.
37
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 29, 2002 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 29, 2002
- ---------------------------------------
Neal L. Patterson, Chairman of the Board and
Chief Executive Officer (Principal Executive Officer)
/s/ Clifford W. Illig March 29, 2002
- ---------------------------------------
Clifford W. Illig, Vice Chairman and Director
/s/ Marc G. Naughton March 29, 2002
- ---------------------------------------
Marc G. Naughton, Senior Vice President and
Chief Financial Officer (Principal Financial and Accounting Officer)
/s/ Michael E. Herman March 29, 2002
- ---------------------------------------
Michael E. Herman, Director
/s/ Gerald E. Bisbee March 29, 2002
- ---------------------------------------
Gerald E. Bisbee, Jr., Ph.D., Director
/s/ John C. Danforth March 29, 2002
- ---------------------------------------
John C. Danforth, Director
/s/ Jeff C. Goldsmith March 29, 2002
- ---------------------------------------
Jeff C. Goldsmith, Ph.D., Director
/s/ William B. Neaves March 29, 2002
- ---------------------------------------
William B. Neaves, Ph.D., Director
/s/ Nancy-Ann DeParle March 29, 2002
- ---------------------------------------
Nancy-Ann DeParle
38
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Board of Directors and Stockholders
Cerner Corporation:
We have audited the accompanying consolidated balance sheets of Cerner
Corporation and subsidiaries as of December 29, 2001 and December 30, 2000, and
the related consolidated statements of operations, changes in equity, and cash
flows for each of the years in the three-year period ended December 29, 2001.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cerner Corporation
and subsidiaries as of December 29, 2001 and December 30, 2000, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 29, 2001, in conformity with accounting principles
generally accepted in the United States of America.
KPMG LLP
Kansas City, Missouri
January 23, 2002
- --------------------------------------------------------------------------------
Management's Report
The management of Cerner Corporation is responsible for the consolidated
financial statements and all other information presented in this report. The
financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America appropriate to the
circumstances, and, therefore, included in the financial statements are certain
amounts based on management's informed estimates and judgments. Other financial
information in this report is consistent with that in the consolidated financial
statements. The consolidated financial statements have been audited by Cerner
Corporation's independent certified public accountants and have been reviewed by
the audit committee of the Board of Directors.
39
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
December 29, 2001 and December 30, 2000
2001 2000
---------------------------------
(Dollars in thousands)
Assets
Current Assets:
Cash and cash equivalents $ 107,536 90,893
Receivables 220,205 188,036
Inventory 5,834 2,174
Prepaid expenses and other 14,101 7,393
---------------------------------
Total current assets 347,676 288,496
Property and equipment, net 94,705 82,234
Software development costs, net 96,962 83,276
Intangible assets 41,894 22,227
Investments 122,992 130,626
Other assets 8,073 9,552
---------------------------------
$ 712,302 616,411
=================================
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 20,942 20,532
Current installments of long-term debt 27,187 72
Deferred revenue 53,304 40,212
Income taxes 5,661 9,718
Accrued payroll and tax withholdings 40,565 27,338
Other accrued expenses 10,529 4,443
---------------------------------
Total current liabilities 158,188 102,315
Long-term debt, net 92,132 102,299
Deferred income taxes 62,393 57,430
Deferred revenue 4,750 10,650
Stockholders' Equity:
Common stock, $.01 par value,150,000,000 shares authorized,
36,564,690 shares issued in 2001 and
35,967,618 shares in 2000 366 360
Additional paid-in capital 216,811 192,715
Retained earnings 188,550 230,916
Treasury stock, at cost (1,201,625 shares in 2001 and 2000) (20,799) (20,799)
Accumulated other comprehensive income:
Foreign currency translation adjustment (2,095) (743)
Unrealized gain (loss) on available-for-sale equity securities
(net of deferred tax liability of $6,810 in 2001 and
deferred tax asset of $33,036 in 2000) 12,006 (58,732)
---------------------------------
Total stockholders' equity 394,839 343,717
---------------------------------
Commitments (Note 13)
$ 712,302 616,411
=================================
See notes to consolidated financial statements.
40
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
For the years ended December 29, 2001, December 30, 2000 and January 1, 2000
2001 2000 1999
---------------------------------------------
(In thousands, except per share data)
Revenues
System sales $ 373,078 263,109 224,510
Support and maintenance 140,666 114,898 94,198
Other 28,861 26,497 21,489
---------------------------------------------
Total revenues 542,605 404,504 340,197
---------------------------------------------
Costs and expenses
Cost of revenues 115,606 90,118 95,038
Sales and client service 226,776 169,289 141,234
Software development 100,186 78,425 72,663
General and administrative 38,505 29,483 27,564
Write-off of acquired in-process
research and development - 4,900 -
Write-down of intangible assets - 6,687 -
---------------------------------------------
Total costs and expenses 481,073 378,902 336,499
---------------------------------------------
Operating earnings 61,532 25,602 3,698
Other income (expense):
Interest expense, net (4,425) (3,671) (3,396)
Write-down of investment (127,616) - -
Gain on software license settlement 7,580 - -
Realized gain on exchange of stock - 188,654 -
Realized loss on sale of stock (385) (38,462) -
---------------------------------------------
Total other income (expense), net (124,846) 146,521 (3,396)
---------------------------------------------
Earnings (loss) before income taxes and extraordinary item (63,314) 172,123 302
Income taxes 20,948 (66,858) (118)
---------------------------------------------
Earnings (loss) before extraordinary item (42,366) 105,265 184
Extraordinary item, net of tax - - (1,395)
---------------------------------------------
Net earnings (loss) $ (42,366) 105,265 (1,211)
=============================================
Basic earnings (loss) per share before extraordinary item $ (1.21) 3.08 .01
=============================================
Basic earnings (loss) per share $ (1.21) 3.08 (.04)
=============================================
Diluted earnings (loss) per common share before extraordinary item $ (1.21) 2.96 .01
=============================================
Diluted earnings (loss) per common share $ (1.21) 2.96 (.04)
=============================================
See notes to consolidated financial statements.
41
Consolidated Statements of Changes in Equity
- --------------------------------------------------------------------------------
For the years ended December 29, 2001, December 30, 2000 and January 1, 2000
Accumulated
Additional Treasury other
Common Stock paid-in Retained stock comprehensive Comprehensive
Shares Amount capital earnings amount income income (loss)
----------------------------------------------------------------------------------
(In thousands)
Balance at January 2,1999 34,674 $ 347 165,239 126,862 (20,796) (509)
-----------------------------------------------------------------
Exercise of options 257 2 623 - - -
Issuance of common stock grants as
compensation 2 - 40 - - -
Non-employee stock option compensation
expense - - 239 - - -
Tax benefit from disqualifying disposition
of stock options - - 594 - - -
Foreign currency translation adjustment - - - - - 266 266
Unrealized gain on available-for-sale
equity security, net of deferred tax
expense of $59,971 - - - - - 107,241 107,241
Net loss - - - (1,211) - - (1,211)
----------------------------------------------------------------------------------
Comprehensive income 106,296
==============
Balance at January 1, 2000 34,933 $ 349 166,735 125,651 (20,796) 106,998
=================================================================
Exercise of options 439 5 7,050 - (3) -
Issuance of common stock grants as
compensation 2 - 31 - - -
Acquisition of business 594 6 14,056 - - -
Non-employee stock option compensation
expense - - 229
Fair value of employee stock options
exchanged in acquisition of business
Tax benefit from disqualifying disposition - - 1,089 - - -
of stock options - - 3,525 - - -
Foreign currency translation adjustment - - - - - (766) (766)
Unrealized loss on available-for-sale
equity securities, net of deferred tax
benefit of $92,842 - - - - - (69,807) (69,807)
Reclassification adjustment for gains
recognized in net income, net of
deferred taxes of $54,400 - - - - - (95,900) (95,900)
Net earnings - - - 105,265 - - 105,265
----------------------------------------------------------------------------------
Comprehensive income (loss) (61,208)
==============
Balance at December 30, 2000 35,968 $ 360 192,715 230,916 (20,799) (59,475)
=================================================================
Exercise of options 235 2 4,065 - - -
Acquisition of business 362 4 17,667 - - -
Non-employee stock option compensation
expense - - 215 - - -
Tax benefit from disqualifying disposition
of stock options - - 2,328 - - -
Associate stock purchase plan discounts - - (179) - - -
Foreign currency translation adjustment - - - - - (1,352) (1,352)
Unrealized gain on available-for-sale
equity securities, net of deferred tax
expense of $6,810 - - - - - 12,006 12,006
Reclassification adjustment for losses
recognized in net loss, net of deferred
taxes of $33,036 - - - - - 58,732 58,732
Net loss - - - (42,366) - (42,366)
----------------------------------------------------------------------------------
Comprehensive income 27,020
==============
Balance at December 29, 2001 36,565 $ 366 216,811 188,550 (20,799) 9,911
=================================================================
See notes to consolidated financial statements.
42
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
For the years ended December 29, 2001, December 30, 2000 and January 1, 2000
2001 2000 1999
-------------------------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ (42,366) 105,265 (1,211)
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization 47,305 37,988 31,388
Common stock received as consideration for sale of license software (750) (6,150) -
Write down of investment 127,616 - -
Gain on software license settlement (7,580) - -
Realized gain on exchange of stock - (188,654) -
Realized loss on sale of stock 385 38,462 -
Write-down of intangible assets - 6,687 -
Write-off of acquired in-process research and development - 4,900 -
Non-recurring fixed fee implementation cost - - 9,449
Non-recurring branch restructure charge - - 1,358
Extraordinary item, net of tax - - 1,395
Issuance of common stock grants as compensation - 31 40
Non-employee stock option compensation expense 215 229 239
Equity in losses of affiliates 1,525 1,095 423
Provision for deferred income taxes (43,199) 67,640 (3,165)
Tax benefit from disqualifying dispositions of stock options 2,328 3,525 594
Loss on disposal of capital equipment - 33 478
Changes in operating assets and liabilities (net of businesses acquired):
Receivables, net (26,389) (14,994) 6,200
Inventory (3,252) 595 1,389
Prepaid expenses and other (8,216) (7,025) 844
Accounts payable (4,572) (3,389) (5,207)
Accrued income taxes 10,207 (5,329) 461
Deferred revenue (2,164) 5,280 (16,676)
Other current liabilities 13,745 7,124 (610)
-------------------------------------
Total adjustments 107,204 (51,952) 28,600
-------------------------------------
Net cash provided by operating activities 64,838 53,313 27,389
-------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of capital equipment (17,654) (16,154) (14,345)
Purchase of land, buildings, and improvements (8,068) - -
Acquisition of businesses, net of cash received (4,045) (16,829) -
Investment in affiliates (1,664) (7,370) (13,615)
Proceeds from sale of stock of available for sale securities 1,572 26,152 -
Advances to affiliates - 1,000 (1,000)
Issuance of notes receivable (205) (385) (3,628)
Repayment of notes receivable 707 1,152 -
Capitalized software development costs (37,828) (30,982) (30,192)
-------------------------------------
Net cash used in investing activities (67,185) (43,416) (62,662)
-------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 18,088 - 99,568
Repayment of long-term debt (1,634) (967) (32,167)
Proceeds from sale of common stock - - -
Proceeds from exercise of options 4,067 7,052 625
Associate stock purchase plan discounts (179) - -
-------------------------------------
Net cash provided by financing activities 20,342 6,085 68,026
-------------------------------------
Foreign currency translation adjustment (1,352) (766) 266
-------------------------------------
Net increase in cash and cash equivalents 16,643 15,216 33,019
Cash and cash equivalents at beginning of year 90,893 75,677 42,658
-------------------------------------
Cash and cash equivalents at end of year $ 107,536 90,893 75,677
=====================================
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 7,341 7,348 5,448
Income taxes, net of refund 9,535 930 1,647
Noncash investing and financing activities
Issuance of common stock for acquisition of business 17,671 14,062 -
Issuance of notes payable for acquisition of business - 1,385 -
Addition to paid-in capital for the fair value of
employee stock options exchanged in the acquisition
of business - 1,089 -
See notes to consolidated financial statements.
43
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1 Summary of Significant Accounting Policies
(a) Principles of Consolidation - The consolidated financial statements include
the accounts of Cerner Corporation and its wholly owned subsidiaries (the
Company). All significant intercompany transactions and balances have been
eliminated in consolidation.
(b) Nature of Operations - The Company designs, develops, markets, installs,
hosts and supports software information technology and content solutions for
healthcare organizations and consumers. The Company also implements these
solutions as individual, combined or enterprise-wide systems.
(c) Revenue Recognition - Revenues are derived primarily from the sale of
clinical and financial information systems and solutions. The components of
these revenues are the licensing of computer software, software support and
hardware maintenance, remote hosting and outsourcing, training, installation,
consulting and implementation services, subscription content, and the sale of
computer hardware and sublicensed software.
The Company recognizes revenue in accordance with the provisions of Statement of
Position (SOP) No. 97-2, "Software Revenue Recognition," as amended by SOP No.
98-4, SOP 98-9 and clarified by Staff Accounting Bulletin (SAB) 101 "Revenue
Recognition in Financial Statements". SOP No 97-2, as amended, generally
requires revenue earned on software arrangements involving multiple elements to
be allocated to each element based on the relative fair values of those
elements. Revenue from multiple-element software arrangements is recognized
using the residual method. Under the residual method, revenue is recognized in a
multiple element arrangement when Company-specific objective evidence of fair
value exists for all of the undelivered elements in the arrangement (i.e.
professional services, maintenance, hardware and sublicensed software), but does
not exist for one or more of the delivered elements in the arrangement (i.e.
software products). The Company allocates revenue to each element in a multiple
element arrangement based on its respective fair value, with the fair value
determined by the price charged when that element is sold separately.
Specifically, the Company determines the fair value of the maintenance portion
of the arrangement based on the renewal price of the maintenance charged to
clients, professional services portion of the arrangement, other than
installation services, based on hourly rates which the Company charges for these
services when sold apart from a software license, and the hardware and
sublicense software based on the prices for these elements when they are sold
separate from the software. If evidence of the fair value cannot be established
for the undelivered elements of a license agreement, the entire amount of
revenue under the arrangement is deferred until these elements have been
delivered or objective evidence can be established.
Inherent in the revenue recognition process are significant management
estimates and judgements which influence the timing and the amount of revenue
recognition. The Company provides several models for the procurement of its
clinical and financial information systems. The predominant method is a
perpetual software license agreement, project related installation services,
implementation and consulting services, computer hardware and sublicensed
software, and software support. For those arrangements involving the use of
services, the Company uses the percentage of completion method of accounting,
following the guidance in the AICPA Statement of Position No. 81-1 (SOP 81-1),
Accounting for Performance of Construction-Type and Certain Production-Type
Contracts.
The Company provides installation services, which include project scoping
services, conducting pre-installation audit, and creating initial environments.
Because installation services are deemed to be essential to the functionality of
the software, software license and installation services fees are recognized
over the software installation period using output measures which reflect direct
labor hours incurred, beginning at software delivery and culminating at
completion of installment, typically a three to six month process.
44
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Company also provides implementation and consulting services, which include
consulting activities that fall outside of the scope of the standard
installation services. These services vary depending on the scope and complexity
requested by the client. Examples of such services may include additional
database consulting, system configuration, project management, testing
assistance, network consulting and post conversion review services.
Implementation and consulting services are generally not deemed to be essential
to the functionality of the software, and, thus, do not impact the timing of the
software license recognition, unless software license fees are tied to
implementation milestones. In those instances, the portion of the software
license fee tied to implementation milestones is deferred until the related
milestone is accomplished and related fees become billable and non-forfeitable.
Implementation fees are recognized over the service period, which may extend
from six months to three years.
Remote hosting and outsourcing services are marketed under long-term
arrangements generally over periods of 5 to 10 years. Revenues from these
arrangements are recognized as the services are performed.
Software maintenance fees are marketed under annual and multi-year arrangements
and are recognized as revenue ratably over the contracted maintenance term.
Hardware maintenance revenues are billed and recognized monthly over the
contracted maintenance term.
Subscription and content fees are generally marketed under annual and multi-year
agreements and are recognized ratably over the contracted terms.
Hardware and sublicensed software sales are generally recognized upon delivery
to the customer.
The Company also offers its products on an application service provider ("ASP")
or term license basis, making available Company software functionality on a
remote processing basis from the Company's data centers. The data centers
provide system and administrative support as well as processing services.
Revenue on software and services provided on an ASP or term license basis is
recognized on a monthly basis over the term of the contract. The Company
capitalizes related direct costs consisting of third party costs and direct
software installation and implementation costs. These costs are amortized over
the term of the arrangement.
In the event the Company contractually agrees to develop new or customized
software code for a client, the Company will utilize percentage of completion
accounting in accordance with SOP 81-1.
Deferred revenue is comprised of deferrals for license fees, maintenance and
other services for which payment has been received and for which the service has
not yet been performed. Long-term deferred revenue, at December 29, 2001,
represents amounts received from license fees, maintenance and other services to
be earned or provided beginning in periods on or after December 29, 2002.
(d) Fiscal Year - The Company's fiscal year ends on the Saturday closest to
December 31. Fiscal years 2001, 2000 and 1999 consisted of 52 weeks each. All
references to years in these notes to consolidated financial statements
represent fiscal years unless otherwise noted.
(e) Software Development Costs - Costs incurred internally in creating computer
software products are expensed until technological feasibility has been
established upon completion of a detailed program design. Thereafter, all
software development costs are capitalized and subsequently reported at the
lower of amortized cost or net realizable value. Capitalized costs are amortized
based on current and expected future revenue for each product with minimum
annual amortization equal to the straight-line amortization over the estimated
economic life of the product. The Company is amortizing capitalized costs over
five years. During 2001, 2000 and
45
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1999, the Company capitalized $37,828,000, $30,982,000 and $30,192,000,
respectively, of total software development costs of $113,872,000, $90,694,000,
and $88,699,000, respectively. Amortization expense of capitalized software
development costs in 2001, 2000, and 1999 was $24,142,000, $18,713,000, and
$14,156,000, respectively, and accumulated amortization was $100,553,000,
$76,411,000, and $57,698,000, respectively.
The Company expects that major software information systems companies, large
information technology consulting service providers and systems integrators,
internet-based start-up companies and others specializing in the healthcare
industry may offer competitive products or services. The pace of change in the
healthcare information systems market is rapid and there are frequent new
product introductions, product enhancements and evolving industry standards and
requirements. As a result, the capitalized software may become less valuable or
obsolete and could be subject to impairment.
(f) Cash Equivalents - Cash equivalents consist of short-term marketable
securities with original maturities less than ninety days.
(g) Investments - The Company accounts for its investments in equity securities
which have readily determinable fair values as available-for-sale.
Available-for-sale securities are reported at fair value with unrealized gains
and losses reported, net of tax, as a separate component of accumulated other
comprehensive income. For realized gains and losses on available-for-sale
investments, the Company utilizes the specific identification method as the
basis to determine cost. Investments in the common stock of certain affiliates
over which the Company exerts significant influence are accounted for by the
equity method.
The Company also has certain other minority equity investments in non-publicly
traded securities. These investments are generally carried at cost as the
Company owns less than 20% of the voting equity and does not have the ability to
exercise significant influence over these companies. The balance of these
investments at December 29, 2001 and December 30, 2000 was $18,212,000 and
$26,601,000, respectively. These investments are inherently high risk as the
market for technologies and content by these companies are usually early stage
at the time of the investment by the Company and such markets may never be
significant. The Company could lose its entire investment in certain or all of
these companies. The Company monitors these investments for impairment and makes
appropriate reductions in carrying values when necessary.
All equity securities are reviewed by the Company for declines in fair value. If
such declines are considered to be other than temporary, the cost basis of the
individual security is written down to fair value as a new cost basis, and the
amount of the write-down is included in earnings.
(h) Inventory - Inventory consists primarily of computer hardware and
sub-licensed software held for resale and is recorded at the lower of cost
(first-in, first-out) or market.
(i) Property and Equipment - Property, equipment and leasehold improvements are
stated at cost. Depreciation of property and equipment is computed using the
straight-line method over periods of 5 to 39 years. Amortization of leasehold
improvements is computed using a straight-line method over the lease terms,
which range from periods of two to twelve years.
(j) Earnings Per Common Share - Basic earnings per share (EPS) excludes dilution
and is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
Company. A reconciliation of the numerators and the denominators of the basic
and diluted per-share computations is as follows:
46
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(In thousands, except per share data)
2001 2000 1999
---------------------------------------------------------------------------------------------------------
Per- Per- Per-
Earnings Shares Share Earnings Shares Share Earnings Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
---------------------------------------------------------------------------------------------------------
Earnings per share before
extraordinary item
Basic earnings (loss)
per share
Income available to
common stockholders $ (42,366) 34,907 $(1.21) 105,265 34,123 $ 3.08 184 33,623 $ .01
======= ======== ======
Effect of dilutive
securities
Stock options -- -- -- 1,480 -- 293
Diluted earnings (loss)
per share
Income available to
common stockholders
including assumed ---------------------------------------------------------------------------------------------------------
conversions $ (42,366) 34,907 $(1.21) 105,265 35,603 $ 2.96 184 33,916 $ .01
=========================================================================================================
Net earnings (loss)
per share
Basic earnings (loss)
per share
Income available to
common stockholders (42,366) 34,907 $(1.21) 105,265 34,123 $ 3.08 (1,211) 33,623 $(.04)
======= ======== =======
Effect of dilutive
securities
Stock options -- -- -- 1,480 -- 293
Diluted earnings (loss)
per share
Income available to
common stockholders
including assumed ---------------------------------------------------------------------------------------------------------
conversions (42,366) 34,907 $(1.21) 105,265 35,603 $ 2.96 (1,211) 33,916 $(.04)
=========================================================================================================
Options to purchase 299,000, 521,000, and 3,185,000 shares of common stock at
per share prices ranging from $48.19 to $574.82, $35.88 to $84.07, and $17.50 to
$31.00 were outstanding at the end of 2001, 2000 and 1999, respectively, but
were not included in the computation of diluted earnings per share because the
options' exercise price was greater than the average market price of the common
shares. Additionally, all options were excluded from the 2001 diluted earnings
per share computations as the effect of their inclusion would have been
anti-dilutive on the loss per share calculation.
(k) Foreign Currency - Assets and liabilities in foreign currencies are
translated into dollars at rates prevailing at the balance sheet date. Revenues
and expenses are translated at average rates for the year. The net exchange
differences resulting from these translations are reported in accumulated other
comprehensive income. Gains and losses resulting from foreign currency
transactions are included in the consolidated statements of earnings. The net
gain (loss) resulting from foreign currency transactions was $23,813, ($518,000)
and $95,000 in 2001, 2000 and 1999, respectively.
(l) Income Taxes - Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
(m) Goodwill - Excess of cost over net assets acquired (goodwill) is being
amortized on a straight-line basis over four to eight years. Accumulated
amortization was $8,727,000, and $5,964,000 at the end of 2001, and 2000,
respectively. The Company assesses the recoverability of goodwill based on
forecasted undiscounted future operating cash flows.
47
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
On June 30, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 141, "Business
Combinations", and SFAS 142, "Goodwill and Intangible Assets". Major provisions
of these Statements are as follows: all business combinations initiated after
June 30, 2001 must use the purchase method of accounting; the pooling of
interests method of accounting is prohibited except for transactions initiated
before July 1, 2001; intangible assets acquired in a business combinations must
be recorded separately from goodwill if they arise from contractual or other
legal rights or are separable from the acquired entity and can be sold,
transferred, licensed, retired or exchanged, either individually or as part of a
related contract, asset or liability; goodwill and intangible assets with
indefinite lives are not amortized but are tested for impairment annually, and
whenever there is an impairment indicator; all acquired goodwill must be
assigned to reporting units for purposes of impairment testing and segment
reporting; and effective January 1, 2002, goodwill from previous acquisitions
will no longer be subject to amortization, but will be subject to annual
evaluations for impairment based on fair value. The Company completed two
acquisitions subsequent to June 30, 2001, which resulted in approximately $14.2
million of goodwill that was not amortized in accordance with SFAS 142. Goodwill
amortization for 2001 was approximately $2,247,000. Management is currently
reviewing the impact that the provisions of this statement will have on the
Company's financial statements.
(n) Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
(o) Segment Reporting - In June of 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 131 (SFAS No. 131),
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 establishes annual and interim reporting standards for operating segments of
a company. It also requires entity-wide disclosures about the products and
services an entity provides, the material countries in which it holds assets and
reports revenues, and its major customers. The Company is not organized by
multiple operating segments for the purpose of making operating decisions or
assessing performance. Accordingly, the Company operates in one operating
segment and reports only certain enterprise-wide disclosures.
(p) Concentrations - Substantially all of the Company's cash and cash
equivalents, short-term investments, are held at two major U.S. financial
institutions. The majority of the Company's cash equivalents consist of U.S.
Government Federal Agency Securities, short-term marketable securities, and
overnight repurchase agreements. Deposits held with banks may exceed the amount
of insurance provided on such deposits. Generally these deposits may be redeemed
upon demand and, therefore, bear minimal risk.
Substantially all of the Company's clients are integrated delivery networks,
hospitals, and other healthcare related organizations. If significant adverse
macro-economic factors were to impact these organizations it could materially
adversely affect the Company. The Company's access to certain software and
hardware components are dependent upon single and sole source suppliers. The
inability of any supplier to fulfill supply requirements of the Company could
affect future results.
The Company performs ongoing credit evaluations of its clients and generally
does not require collateral from its clients. The Company maintains an allowance
for potential losses on a specific identification basis and based on historical
experience and mangement's judgements. The
48
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Company's allowance for doubtful accounts as of December 29, 2001 and December
30, 2000 was $6,880,000 and $5,999,000, respectively.
2 Business Acquisitions
During the three years ended December 29, 2001, the Company completed six
acquisitions, which were accounted for under the purchase method of accounting.
Pro forma results of operations have not been presented for any of the
acquisitions because the effects of these acquisitions were not material to the
Company on either an individual or an aggregate basis. The results of operations
of each acquisition are included in the Company's consolidated statement of
operations from the date of each acquisition.
The amounts allocated to purchased in-process research and development (IPRD)
were determined through established valuation techniques in the software
industry and were expensed upon acquisition because technological feasibility
had not been established and no future alternative uses existed. Research and
development costs to bring the products from the acquired companies to
technological feasibility, individually or in the aggregate, are not expected to
have a material impact on the Company's future results of operations or cash
flows. Amounts allocated to goodwill and other intangibles are amortized on a
straight-line basis over five to seven years, except for the goodwill for the
acquisitions in 2001, which were not amortized in accordance with SFAS 142.
Amounts allocated to software are amortized based on current and expected future
revenues for each product with minimum annual amortization equal to the
straight-line amortization over the estimated economic life of the product. The
IPRD amounts in the table below are reflected as one-time charges to earnings at
the date of acquisition.
49
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
A summary of the Company's purchase acquisitions for the three years ended
December 29, 2001, is included in the following table (in millions, except share
amounts):
- -------------------------------------------------------------------------------------------------------------------------
Entity Name, Description of Developed Customer
Business Acquired, and Date Consideration Goodwill Technology Workforce Base IPRD Form of
Reason Business Acquired Consideration
- -------------------------------------------------------------------------------------------------------------------------
Fiscal 2001 Acquisitions
- -------------------------------------------------------------------------------------------------------------------------
Dynamic Healthcare 12/01 $20.0 $9.2 $7.5 -- -- -- $2.3 cash
Technologies (d) (e) $17.7 362,000
shares of
common stock
issued
Clinical and diagnostic
workflow for pathology,
laboratory and radiology
Intergrate technology into
Cerner Millennium
- -------------------------------------------------------------------------------------------------------------------------
7/01 $3.6 $5.0 $0.2 -- -- -- $3.6 cash
APACHE Medical Systems
(d) (f)
Clinical decision support
/outcomes management systems
Integrate knowledge into
Cerner Millennium
- -------------------------------------------------------------------------------------------------------------------------
Fiscal 2000 Acquisitions
- -------------------------------------------------------------------------------------------------------------------------
ADAC Healthcare Information 11/00 $5.3 $3.4 $3.0 $.4 $1.7 $1.7 $3.9 cash
Systems, Inc. (a) (f) $1.4 note
payable
Image management solutions
for radiology departments
Integrate technology into
Cerner Millennium
- -------------------------------------------------------------------------------------------------------------------------
CITATION Computer Systems, 8/00 $17.8 $8.3 $2.7 $1.2 $2.0 $3.2 $2.6 cash
Inc. (b) $14.1 594,000
shares of
Laboratory systems for small common stock
to mid-sized hospitals issued
$1.1 vested
Integrate technology into options
Cerner Millennium assumed
- -------------------------------------------------------------------------------------------------------------------------
Mitch Cooper & Associates (f) 4/00 $2.0 $2.0 -- -- -- -- $2.0 cash
Supply chain re-engineering
consulting practice
Integrated knowledge into
Cerner Millennium
- -------------------------------------------------------------------------------------------------------------------------
Health Network Ventures, 4/00 $8.3 $4.2 -- -- -- -- $8.3 cash
Inc. (c)
Software solutions that
enable transaction processing
between providers and other
health-related entities
Integrate knowledge into
Cerner Millennium
- -------------------------------------------------------------------------------------------------------------------------
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(a) The acquired in-process research and development is related to the PACS
(Picture Archiving and Communications Systems) product. The PACS product, when
integrated with the Company's radiology information system, provides a
comprehensive radiology solution, from automating and streamlining the
information workflow to complete image management. PACS was approximately 86%
complete at the time of the acquisition. When ADAC HCIS was acquired, management
projected that PACS would be completed in 3 months at an estimated cost of
$150,000. The risks associated with PACS are like any other software development
project and include changes in technology and competition. The PACS project was
valued using the income approach with the following assumptions: material net
cash inflows were expected to commence in 2001; no material changes from
historical pricing, margins, or expense levels are anticipated; and, a 20% risk
adjusted discount rate was applied to the estimated net cash flows. PACS was
complete at the end of 2001.
(b) The acquired in-process research and development is related to CITATION's
enhanced versions of the C-LAB and C-COM products. C-LAB addresses the complex
information needs of the laboratory's general lab, microbiology, anatomical
pathology and blood bank departments with a Windows NT client server solution.
C-LAB was approximately 68% complete at the time of the acquisition. When
CITATION was acquired, management projected that C-LAB would be completed in 6-9
months at an estimated cost of $700,000. The risks associated with C-LAB are
like any other software development project and include changes in technology
and competition. The C-LAB project was valued using the income approach with the
following assumptions: material net cash inflows were expected to commence in
2001; no material changes from historical pricing, margins, or expense levels
are anticipated; and, a 20% risk adjusted discount rate was applied to the
estimated net cash flows. C-LAB was approximately 85% complete at the end of
2001. C-COM is also designed for a Windows NT client server user and works with
other information systems in healthcare facilities by providing a central data
repository for clinical orders and results. It then allows for routing of the
patient information to all care-providing centers throughout the healthcare
enterprise. C-COM was approximately 75% complete at the time of the acquisition.
When CITATION was acquired, management projected that C-COM would be completed
in 3-6 months at an estimated cost of $500,000. The risks associated with C-COM
are like any other software development project and include changes in
technology and competition. The C-COM project was valued using the income
approach with the following assumptions: material net cash inflows were expected
to commence in 2001; no material changes from historical pricing, margins, or
expense levels are anticipated; and, a 20% risk adjusted discount rate was
applied to the estimated net cash flows. C-COM was complete at the end of 2001.
(c) Subsequent to the acquisition of Health Network Ventures, Inc., the Company
determined that it would discontinue the portion of the business focused on
individual physician practice connectivity and transaction processing. As a
result of this decision, the Company recorded a non-recurring charge in the
second quarter of 2000 in the amount of $6,687,000 related to a write-down of
intangible assets.
(d) The assets and liabilities of the acquired companies at the date of
acquisition are as follows:
Dynamic
Healthcare APACHE Medical
Technologies Systems
----------------------------------------
Current Assets $10,896,000 $249,000
Total Assets $29,087,000 $5,728,000
Current Liabilities $14,335,000 $2,129,000
Total Liabilities $9,116,000 $2,178,000
51
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(e) The Company is in the process of obtaining additional information regarding
the valuation of certain contracts acquired from DHT in making a final
determination in the allocation of the purchase price to the net assets
acquired. Any adjustment to the valuation of these contracts would result in a
corresponding adjustment to the amount assigned to goodwill.
(f) The following goodwill amounts are deductible for tax purposes:
Goodwill Deductible for
tax purposes
-------------------------
APACHE Medical Systems $5,000,000
ADAC Healthcare Information Systems, Inc. $3,400,000
Mitch Cooper & Associates $2,000,000
3 Receivables
Receivables consist of accounts receivable and contracts receivable. Accounts
receivable represent recorded revenues that have been billed. Contracts
receivable represent recorded revenues that are billable by the Company at
future dates under the terms of a contract with a client. Billings and other
consideration received on contracts in excess of related revenues recognized
under the percentage-of-completion method are recorded as deferred revenue. A
summary of receivables is as follows:
(In thousands) 2001 2000
------------ ----------
Accounts receivable $ 139,491 96,946
Contracts receivable 80,714 91,090
------------ ----------
Total receivables $ 220,205 188,036
============ ==========
Substantially all receivables are derived from sales and related support and
maintenance of the Company's clinical and financial information systems to
healthcare providers located throughout the United States and in certain foreign
countries. Included in receivables at the end of 2001, 2000 and 1999 are amounts
due from healthcare providers located in foreign countries of $19,611,000,
$23,600,000 and $17,704,000, respectively. Consolidated revenues include foreign
sales of $22,350,000, $25,815,000, and $24,001,000, during 2001, 2000 and 1999,
respectively. Consolidated long-lived assets at the end of 2001, and 2000,
include foreign long-lived assets of $776,000, and $649,000, respectively.
Revenues and long-lived assets from any one foreign country are not material.
The Company provides an allowance for estimated uncollectible accounts based
upon historical experience and management's judgment. At the end of 2001, and
2000 the allowance for estimated uncollectible accounts was $6,880,000, and
$5,999,000, respectively.
52
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
4 Property and Equipment
A summary of property, equipment, and leasehold improvements stated at cost,
less accumulated depreciation and amortization, is as follows:
(In thousands) 2001 2000
----------- -----------
Furniture and fixtures $ 27,339 24,004
Computer and communications equipment 96,855 82,769
Marketing equipment 2,381 2,045
Shop equipment 2,902 2,902
Leasehold improvements 26,578 21,533
Capital lease equipment 2,202 1,104
Land, buildings, and improvements 43,809 32,437
----------- -----------
202,066 166,794
Less accumulated depreciation and amortization 107,361 84,560
----------- -----------
Total property and equipment, net $ 94,705 82,234
=========== ===========
5 Investments
Investments consist of the following:
(In thousands) 2001 2000
----------- ------------
Investments in available-for-sale equity securities, at cost $ 85,964 194,268
Plus unrealized holding gain (loss) 18,816 (91,768)
----------- ------------
Investment in available-for-sale equity securities, at fair 104,780 102,500
value
Investments in non-marketable equity securities, at cost 18,212 26,601
Investments accounted for under the equity method - 1,525
----------- ------------
Total investments, net $ 122,992 130,626
=========== ============
At December 29, 2001, the Company owned 14,820,527 shares of common stock of
WebMD Corporation (WebMD) (formerly CareInsite, Inc.), which have a cost basis
of $85,811,000 and a carrying value of $104,485,000, as these shares are
accounted for as available-for-sale. 2,000,000 shares of WebMD held by the
Company are not registered. At December 29, 2001 the Company also holds
1,048,783 warrants of WebMD with an exercise price of $3.08 and a cost basis and
carrying value of $4,146,000. The warrants are carried at cost, as they do not
have a fair value that is currently available on a securities exchange. The
warrants expire on January 26, 2003.
On February 13, 2000 CareInsite entered into an agreement to merge with WebMD.
The merger of CareInsite and WebMD ("Merger") closed on September 12, 2000.
Prior to the merger, the carrying value of the CareInsite stock was $6.22 per
share, and the market price of WebMD on September 12, 2000 was $15.00 per share.
Upon the exchange of CareInsite stock for WebMD stock, the Company recorded a
non-recurring investment gain of $120,362,000, net of tax, as a result of the
exchange.
On December 12, 2000, the Company sold 4,273,509 shares of WebMD for
$25,641,000. Accordingly, the Company recorded a non-recurring investment loss
of $24,539,000, net of tax, as a result of the sale.
On June 18, 2001 the Company reached an agreement with WebMD regarding certain
performance metrics related to specified levels of physician usage arising out
of the original license transaction between the Company and CareInsite, which
has been merged into WebMD. Under the agreement, the Company received 2,000,000
shares of WebMD stock, valued at $11,580,000, in exchange for $432,000 in cash
and the cancellation of various obligations due to
53
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
the Company by WebMD. As a result of this agreement, the Company recognized a
non-recurring gain of $4,836,000, net of $2,744,000 in tax, in gain on software
license settlement in the accompanying consolidated statement of operations. The
Company's policy is to review declines in fair value of its marketable equity
securities for declines that may be other than temporary. As a result of this
policy, during the second quarter of 2001, the Company recorded a write-down of
its investment in WebMD from $15.00 per share to $5.79 per share. Accordingly,
the Company recognized a charge to earnings of $81,419,000, net of $46,197,000
in tax.
6 Indebtedness
The Company has a loan agreement with a bank that provides for a current
revolving line of credit for working capital purposes. The current 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 (4.75% at
December 29, 2001) less .5% or LIBOR (1.87% at December 29, 2001) plus 1.35%.
The interest rate may be reduced by up to .5% if certain net worth ratios are
maintained. At December 29, 2001, the Company had $15,000,000 in outstanding
borrowings under this agreement and had $45,000,000 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 1/4% is payable quarterly on the unused portion of the
revolving line of credit. The revolving line of credit matures on September 30,
2002.
On April 15, 1999, the Company completed a $100,000,000 private placement of
debt pursuant to a Note Agreement dated April 1, 1999. The Series A Senior
Notes, with a $60,000,000 principal amount at 7.14% are payable in five equal
annual installments beginning in April 2002. The Series B Senior Notes, with a
$40,000,000 principal amount at 7.66% are payable in six equal annual
installments beginning April 2004. The proceeds were used to retire the
Company's existing $30,000,000 of debt, and the remaining funds were used for
capital improvements and to strengthen the Company's cash position. During 1999
in connection with the early extinguishment of debt, the Company incurred an
extraordinary loss for a prepayment penalty and write-off of deferred loan costs
of $1,395,000 net of taxes. The note agreement contains certain net worth,
current ratio, and fixed charge coverage covenants and provides certain
restrictions on the Company's ability to borrow, incur liens, sell assets, and
pay dividends. The Company was in compliance with all covenants at December 29,
2001.
The Company also has capital lease obligations and other notes payable amounting
to $4,319,000, payable over the next four years.
The aggregate maturities for the Company's long-term debt is as follows (in
thousands):
2002 $ 27,187
2003 16,132
2004 18,667
2005 18,667
2006 18,667
2007 and thereafter 19,999
-----------
$ 119,319
===========
The Company estimates the fair value of its long-term, fixed-rate debt using
discounted cash flow analysis based on the Company's current borrowing rates for
debt with similar maturities. The fair value of the Company's long-term debt is
$97,686,000 at December 29, 2001.
54
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
7 Interest Income and Expense
A summary of interest income and expense is as follows:
(In thousands) 2001 2000 1999
---------------------------------------------------
Interest income $ 2,896 3,645 2,582
Interest expense (7,321) (7,316) (5,978)
------------- --------------- -------------
Interest expense, net $ (4,425) (3,671) (3,396)
============= =============== =============
8 Stock Options, Warrants and Equity
At the end of 2001 and 2000, the Company had 1,000,000 shares of authorized but
unissued preferred stock, $.01 par value.
At December 29, 2001, the Company had five fixed stock option plans. Under Stock
Option Plan B, the Company could grant to associates options to purchase up to
5,600,000 shares of common stock through November 30, 1993. The options are
exercisable at the fair market value on the date of grant for a period
determined by the Board of Directors (not more than ten years from the date
granted). The options contain restrictions as to transferability and
exercisability after termination of employment.
Under Stock Option Plan C, the Company is authorized to grant to associates
options to purchase up to 645,000 shares of common stock through May 18, 2003.
The options are exercisable at the fair market value on the date of grant for a
period determined by the Board of Directors (not more than ten years from the
date granted). The options contain restrictions as to transferability and
exercisability after termination of employment. The Company has committed not to
issue any more stock options under Stock Option Plan C.
Initially, under Stock Option Plan D, the Company was authorized to grant to
associates, directors, consultants or advisors to the Company options to
purchase up to 50,000 shares of common stock through January 1, 2005. Additional
shares were approved by the Company's shareholders on May 17, 1994, May 16, 1995
and May 22, 1998, increasing the total authorized to grant to 4,600,000 shares.
The options are exercisable at a price (not less than fair market value on the
date of grant) and during a period determined by the Stock Option Committee.
Options under this plan currently vest over periods of up to ten years and are
exercisable for periods of up to 25 years.
Initially, under Stock Option Plan E, the Company was authorized to grant to
associates (other than officers subject to the provisions of Section 16(a) of
the Securities and Exchange Act of 1934), consultants, or advisors to the
Company options to purchase up to 2,000,000 shares of common stock through
January 1, 2005. Additional shares of 1,100,000 and 1,000,000 were approved by
the Company's Board of Directors on December 8, 2000 and March 9, 2001,
respectively, increasing the total authorized to grant to 4,100,000 shares. The
options are exercisable at a price (not less than fair market value on the date
of grant) and during a period determined 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.
Under the 2001 Long-Term Incentive Plan F, the Company is authorized to grant to
associates, directors and consultants 2,000,000 shares of common stock awards.
Awards under this plan may consist of stock options, restricted stock and
performance shares, as well as other awards such as stock appreciation rights,
phantom stock and performance unit awards which may be payable in the form of
common stock or cash. However, not more than 500,000 of such shares will be
available to granting any types of grants other than options or stock
appreciation rights.
55
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Company has also granted 504,507 other non-qualified stock options under
separate agreements to employees and certain third parties. These options are
exercisable at a price equal to or greater than the fair market value on the
date of grant. These options vest over periods of up to six years and are
exercisable for periods of up to ten years. The Company recognized expenses
related to the non-qualified stock options of $215,000 and $229,000 for 2001 and
2000, respectively. In 2000, the Company granted an additional 350,000 stock
options to a third party at an exercise price equal to the fair market value on
the date of grant. The options are vested and become exercisable at the earlier
of five years or when certain conditions are met.
The Company accounts for associate stock options in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations. As such, compensation
expense is recorded on the date of grant only if the current market price of the
underlying stock exceeds the exercise price. On December 31, 1995, the Company
adopted Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (FAS 123), which permits entities to recognize as
expense over the vesting period the fair value of all stock-based awards on the
date of grant. Alternatively, FAS 123 allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net earnings and pro
forma earnings per share disclosures for employee stock option grants made in
1995 and future years as if the fair-value-based method defined in FAS 123 had
been applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of FAS 123.
A combined summary of the status of the Company's five fixed stock option plans
and other stock options at the end of 2001, 2000, and 1999, and changes during
these years ended is presented below:
2001 2000 1999
-----------------------------------------------------------------------------
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 6,300,265 $ 22.50 5,529,995 $ 19.79 5,488,191 20.38
Granted 1,483,998 47.37 1,684,144 31.50 1,447,246 16.69
Exercised (235,942) 17.46 (455,706) 17.23 (255,747) 4.91
Forfeited (304,097) 26.04 (458,168) 21.13 (1,149,695) 22.40
- --------------------------------------------------------------------------------------------------------------
Outstanding at end of year 7,244,224 $ 28.79 6,300,265 $ 22.50 5,529,995 $ 19.79
============ =========== ============
Options exercisable at year-end 1,825,150 $ 24.29 1,458,001 $ 20.97 1,297,147 $ 19.49
The following table summarizes information about fixed and other stock options
outstanding at December 29, 2001.
Options outstanding Options exercisable
- -------------------------------------------------------------------- -------------------------------
Range of Number Weighted-average Number
Exercise outstanding remaining Weighted-average exercisable Weighted-average
Prices At 12/29/01 contractual life exercise price at 12/29/01 exercise price
- -------------------------------------------------------------------- -------------------------------
$ 5.90-17.04 1,818,787 15.1 years $ 14.71 676,413 $ 14.59
17.25-25.00 2,122,915 11.0 22.06 633,861 21.39
25.50-43.29 2,176,636 10.7 34.27 466,389 29.04
43.33-574.82 1,125,886 7.5 53.69 48,487 151.91
----------- -----------
5.90-574.82 7,244,224 11.4 28.79 1,825,150 24.29
=========== ===========
56
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The per share weighted-average fair value of stock options granted during 2001,
2000 and 1999 was $25.93, $18.96 and $10.88, respectively, on the date of grant
using the Black Scholes option-pricing model with the following weighted-average
assumptions:
2001 2000 1999
-----------------------------------------
Expected years until exercise 4.7 4.7 8
Risk-free interest rate 4.5% 5.0% 6.9%
Expected stock volatility 71.3% 72.1% 61.3%
Expected dividend yield 0% 0% 0%
Since the Company applies APB Opinion No. 25 in accounting for its plans, no
compensation cost has been recognized for its stock options issued to employees.
Had the Company recorded compensation expense based on the fair value at the
grant date for its stock options under FAS 123, the Company's net earnings and
earnings per share on a diluted basis would have been reduced by approximately
$11,172,000 or $.30 per share in 2001, approximately $7,527,000 or $.21 per
share in 2000 and approximately $3,922,000 or $.12 per share in 1999.
Pro forma net earnings reflect only options granted since January 1, 1995.
Therefore, the full impact of calculating compensation expense for stock options
under FAS 123 is not reflected in the pro forma net earnings amounts presented
above, because compensation cost is reflected over the options' vesting period
of ten years for these options. Compensation expense for options granted prior
to January 1, 1995 is not considered.
9 Associate Stock Purchase Plan
The Company established an Associate Stock Purchase Plan (ASPP) in 2001, which
qualifies under Section 423 of the Internal Revenue Code. All full-time
associates are eligible to participate. Participants may elect to make
contributions from 1% to 20% of compensation to the ASPP, subject to annual
limitations determined by the Internal Revenue Service. Participants may
purchase Company Common Stock at a 15% discount on the last day of the purchase
period. Under APB No. 25 the ASPP qualifies as a non-compensatory plan and no
compensation expense has been recognized.
10 Foundations Retirement Plan
The Cerner Corporation Foundations Retirement Plan (the Plan) is established
under Section 401(k) of the Internal Revenue Code. All full-time associates are
eligible to participate. Participants may elect to make pretax contributions
from 1% to 80% of compensation to the Plan, subject to annual limitations
determined by the Internal Revenue Service. Participants may direct
contributions into mutual funds, a money market fund, or a Company stock fund.
The Company makes matching contributions to the Plan, on behalf of participants,
in an amount equal to 33% of the first 6% of the participant's contribution. The
Company's expense for the plan amounted to $3,269,000, $2,532,000 and $1,187,000
for 2001, 2000 and 1999, respectively.
The Company added a discretionary match to the Plan in 2000. Contributions are
based on attainment of established earnings per share goals for the year. Only
participants in the Plan are eligible to receive the discretionary match
contribution. For the year ended December 29, 2001 and December 30, 2000, the
Company expensed $3,688,000 and $1,100,000 for discretionary distributions,
respectively.
57
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
11 Income Taxes
Income tax expense (benefit) before extraordinary item for the years ended 2001,
2000 and 1999, consists of the following:
(In thousands) 2001 2000 1999
--------------------------------------
Current:
Federal $ 20,129 175 3,514
State 2,862 (70) 573
Foreign (740) (887) (804)
--------- --------- ----------
Total current 22,251 (782) 3,283
--------- --------- ----------
Deferred:
Federal (41,307) 63,524 (2,891)
State (1,451) 4,482 (288)
Foreign (441) (366) 14
-------- --------- ----------
Total deferred (43,199) 67,640 (3,165)
--------- --------- ----------
Total income tax expense (benefit) $(20,948) 66,858 118
========= ========= ==========
Income tax benefit attributable to the extraordinary item (early retirement of
debt) was $865,000 in 1999. Income tax expense (benefit) allocated to
stockholders' equity for unrealized holding gain (losses) on available-for-sale
equity securities was ($39,846,000) and ($92,842,000) for the years ended 2001
and 2000, respectively.
Temporary differences between the financial statement carrying amounts and tax
basis of assets and liabilities that give rise to significant portions of
deferred income taxes at the end of 2001 and 2000 relate to the following:
(In thousands) 2001 2000
--------------------------
Deferred Tax Assets
Accrued expenses $ 6,304 6,395
Separate return net operating losses 14,151 12,281
Other 2,726 1,718
----------- ------------
Total deferred tax assets 23,181 20,394
----------- ------------
Deferred Tax Liabilities
Unrealized gain on investments (10,754) (21,975)
Software development costs (40,673) (32,143)
Contract and service revenues and costs (40,559) (37,930)
Depreciation and amortization (2,622) (2,764)
Other (1,464) (1,446)
----------- ------------
Total deferred tax liabilities (96,072) (96,258)
----------- ------------
Net deferred tax liability $ (72,891) (75,864)
=========== ============
Based upon the level of historical taxable income and projections for future
taxable income over the periods which the deferred tax assets are deductible, as
well as the scheduled reversal of deferred tax liabilities, management believes
it is more likely than not the Company will realize the benefit of these
deductible differences.
58
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The effective income tax rates for 2001, 2000, and 1999 were 33%, 39%, and 39%,
respectively. These effective rates differ from the federal statutory rate of
35% as follows:
(In thousands) 2001 2000 1999
------------------------------------------
Tax expense (benefit) at statutory rates $ (22,160) 60,243 106
State income tax, net of federal benefit 43 2,972 10
Goodwill 705 4,225 259
Other, net 464 (582) (257)
----------- ----------- -----------
Total income tax expense (benefit) $ (20,948) 66,858 118
=========== =========== ===========
Income taxes payable are reduced by the tax benefit resulting from disqualifying
dispositions of stock acquired under the Company's stock option plans. The 2001,
2000, and 1999 benefits of $2,328,000, $3,525,000, and $594,000, respectively,
are treated as increases to additional paid-in capital.
12 Related Party Transactions
The Company loaned $165,000 in 2001 and $160,000 in 2000, to the Company's
senior management under the terms of the Executive Stock Purchase Program
("Program"). The purpose of the Program is to advance the interests of the
Company, the Company's senior management, and the Company's shareholders by
offering the Company's senior management an incentive to purchase shares of the
Company's stock on the open market. Pursuant to the Program, the Company
provided Program loans to executives to help finance up to 50% of the total
purchase price of the stock purchased. All Program loans have a term of five (5)
years, at an interest rate of 5.5%. Principal and interest is not due until the
end of the five-year loan term, unless the executive terminates employment.
Executives may also elect to pay interest annually. If interest is not paid
annually, it will compound annually. All Program loans are secured by the
purchased shares and any pledged shares. The balance of these loans, including
accrued interest, at December 29, 2001 and December 30, 2000 was $2,543,000 and
$2,764,000, respectively.
The Company leases an airplane from a company owned by Mr. Neal L. Patterson and
Mr. Clifford W. Illig. The airplane is leased on a per mile basis with no
minimum usage guarantee. The lease rate is believed to approximate fair market
value for this type of aircraft. During 2001 and 2000, respectively, the Company
paid an aggregate of $548,000 and $496,000 for the rental of the airplane. The
airplane is used principally by Mr. Patterson, Mr. Tobin, Mr. Black and Mr.
Devanny to make client visits.
On July 1, 2001, the Company completed its purchase of certain assets and
certain liabilities for cash of APACHE Medical Systems, Inc., a Delaware
corporation ("APACHE"), as further described in note 2, Business Acquisitions.
One of the Company's directors, Gerald E. Bisbee, Jr., Ph.D., was at the time
Chairman of the Board and a shareholder of APACHE.
13 COMMITMENTS
The Company leases space to unrelated parties in its North Kansas City
headquarters complex under noncancelable operating leases. Included in other
revenues is rental income of $183,000, $624,000 and $1,005,000, in 2001, 2000
and 1999, respectively.
The Company is committed under operating leases for office space through October
2006. Rent expense for office and warehouse space for the Company's regional and
global offices for 2001, 2000 and 1999 was $2,718,000, $1,735,000 and
$2,226,000, respectively. Future minimum lease revenues (in thousands) and
aggregate minimum future payments (in thousands) under these noncancelable
operating leases are as follows:
59
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Future
Minimum
lease
Years commitments
-------------------------------
2002 $ 5,419
2003 5,449
2004 3,588
2005 1,257
2006 425
At December 29, 2001, the Company was committed to spending between $35,000,000
to $40,000,000 under a construction contract for a new building at its Kansas
City headquarters complex.
In December, 1999, the Company made a decision to close five of its branch
offices. The Company created a regional branch structure in 1994 in order to
bring associates closer to its clients. The natural evolution of that strategy
and the ability to leverage internal information technology infrastructure to
create a more virtual workplace resulted in a significant decrease in
utilization of certain regional offices. This led to the decision to close these
physical locations. The Company recorded a charge of $1.4 million in sales and
client service expenses in the 1999 fourth quarter to provide for the costs of
closing these locations, primarily based on estimated lease cancellation fees.
All of these costs were paid in 2000.
60
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
14 Quarterly Results (unaudited)
Selected quarterly financial data for 2001 and 2000 is set forth below:
Earnings (loss) Basic
(In thousands, except per share data) before income Net earnings Diluted
taxes and earnings (loss) earnings (loss)
Revenues extraordinary item (loss) per share per share
----------------------------------------------------------------------------------------
2001 quarterly results:
March 31 $ 120,996 10,428 6,328 .18 .17
June 30 (1) (2) 129,986 (107,470) (68,983) (1.98) (1.98)
September 29 139,837 15,459 9,242 .26 .25
December 29 151,786 18,269 11,047 .32 .30
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 542,605 (63,314) (42,366)
=========== ========= ========
2000 quarterly results:
April 1 $ 87,107 3,986 2,392 .07 .07
July 1 (3) 93,502 44 (2,613) (.08) (.08)
September 30 (4)(5) 104,325 195,588 123,336 3.61 3.45
December 30 (6)(7) 119,570 (27,495) (17,850) (.51) (.51)
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 404,504 172,123 105,265
=========== ========= ========
(1) Includes a non-recurring gain on the settlement of the WebMD
performance warrants. The impact of this gain is a $4.8 million (net of
tax) increase in net earnings and an increase to diluted earnings per
share of $.13 for the second quarter and for 2001.
(2) Includes a non-recurring charge on the adjustment of the carrying value
of the WebMD shares. The impact of this charge is an $81.4 million (net
of tax) decrease in net earnings and a decrease to diluted earnings per
share of ($2.23) for the second quarter and ($2.21) for 2001.
(3) Includes a non-recurring charge of $6.7 million related to the
write-down of intangible assets associated with the acquisition of
Health Network Ventures, Inc. The impact of this non-recurring charge
on diluted earnings per share was ($.19) for the second quarter and for
2000.
(4) Includes a non-recurring charge of $3.2 million related to the
acquisition of CITATION Computer Systems, Inc. The impact of this
non-recurring charge on diluted earnings per share was ($.09) for the
third quarter and for 2000.
(5) Includes a non-recurring investment gain of $120.4 million, net of
$68.3 million tax expense, related to the conversion of shares of
CareInsite common stock to shares of WebMD common stock. The impact of
this non-recurring investment gain on diluted earnings per share was
$3.37 for the third quarter and $3.38 for 2000.
(6) Includes a non-recurring charge of $1.0 million, net of $.7 million tax
benefit, related to the acquisition of ADAC Healthcare Information
Systems, Inc. The impact of this non-recurring charge on diluted
earnings per share was ($.03) for the fourth quarter and for 2000.
(7) Includes a non-recurring investment loss of $24.5 million, net of $13.9
million tax benefit, related to the sale of shares of WebMD common
stock. The impact of this non-recurring
61
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
investment loss on diluted earnings per share was ($.67) for the fourth
quarter and ($.69) for 2000.
62
Independent Auditors' Report
on Financial Statement Schedule
The Board of Directors
Cerner Corporation:
Under date of January 23, 2002, we reported on the consolidated balance sheets
of Cerner Corporation and subsidiaries as of December 29, 2001 and December 30,
2000 and the related consolidated statements of operations, changes in equity,
and cash flows for each of the years in the three-year period ended December 29,
2001. These consolidated financial statements and our report thereon are
included in the Company's annual report on Form 10-K for the year 2001. In
connection with our audits of the aforementioned consolidated financial
statements, we also have audited the related financial statement schedule as
listed under Item 14(a)(2). This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, this financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
Kansas City, Missouri
January 23, 2002
Cerner Corporation
Valuation and Qualifying Accounts Schedule II
Additions
Balance at Charged to Additions
Beginning Costs and Through Balance at
Description of Period Expenses Acquisitions Deductions End of Period
- ----------------------------------------------------------------------------------------------------------------------------
For Year Ended January 1, 2000
Doubtful Accounts and Sale Allowances $ 3,405,000 $ 1,354,000 $ 0 $ 0 $ 4,759,000
Additions
Balance at Charged to Additions
Beginning Costs and Through Balance at
Description of Period Expenses Acquisitions Deductions End of Period
- ----------------------------------------------------------------------------------------------------------------------------
For Year Ended December 30, 2000
Doubtful Accounts and Sale Allowances $ 4,759,000 $ 0 $ 1,341,000 $ (101,000) $ 5,999,000
Additions
Balance at Charged to Additions
Beginning Costs and Through Balance at
Description of Period Expenses Acquisitions Deductions End of Period
- ----------------------------------------------------------------------------------------------------------------------------
For Year Ended December 29, 2001
Doubtful Accounts and Sale Allowances $ 5,999,000 $ 800,000 $ 365,000 $ (284,000) $ 6,880,000