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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 2, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________ to ___________
Commission File Number 0-15386
CERNER CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 43-1196944
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
2800 Rockcreek Parkway, Suite 601
Kansas City, Missouri 64117
(816) 221-1024
(Address of principal executive offices, including zip code;
Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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, 1999, there were 33,573,446 shares of Common
Stock outstanding, of which 7,884,975 shares were owned by
affiliates. The aggregate market value of the outstanding Common
Stock of the Registrant held by non-affiliates, based on the
average of bid and asked prices of such stock on March 15, 1999,
was $340,372,241.
Documents incorporated by reference: portions of the
Registrant's Proxy Statement for the 1999 Annual Meeting of
Stockholders are incorporated by reference in Part III hereof.
PART I
Item 1. Business
General
- -------
Cerner Corporation ("Cerner" or the "Company") is a Delaware
corporation incorporated in 1980. The Company's principal
offices are located at 2800 Rockcreek Parkway, Kansas City,
Missouri 64117, and its telephone number is (816) 221-1024.
Cerner designs, develops, markets, installs and supports
person/member/patient-focused clinical and management information
systems that are capable of being implemented on an individual,
combined or enterprise-wide basis. Cerner systems are designed
to automate the process of healthcare by accumulating data on
care provided to members/patients, maintaining such data in a
database repository and providing access to such data for users
of clinical information across a healthcare system, including in
the home, at physician's offices and at ambulatory, inpatient and
intensive care settings. Cerner's systems are designed and
developed using the Health Network Architecture (''HNA''), a
single information architecture. HNA is a unified system for
combining clinical and management information applications. HNA
allows each participating facility within an integrated
healthcare enterprise to access an individual's clinical record
at the point of care, to organize it for the specific needs of
the physician, nurse, laboratory technician or other care
provider on a real-time basis, and to use the information in
management decisions to improve the efficiency and productivity
of the location and the entire enterprise. Cerner has developed
and is licensing and installing its newest generation of HNA
products known as "Millennium". See "Cerner's HNA Approach and
HNA Millennium" for a discussion of Millennium.
Healthcare Industry
- -------------------
The dramatic increase in healthcare costs in the United
States, which historically were based on a fee-for-service model,
has caused significant changes in the healthcare industry.
Managed care organizations and other payers have developed
alternative payment models to control costs, including procedure-
based cost limits, contractually approved providers and
capitation (a fixed monthly fee per member in payment for all
required services). The result has been a continuing shift of
financial risk from the payer to both the physician provider and
the institutional provider (hospitals, clinics, long-term care,
subacute providers and rehabilitative care centers). In
response, institutional providers are aligning with one another
and with physician groups to form Integrated Delivery Systems
(''IDS's''), and IDS's are aligning with payer organizations to
form Integrated Health Organizations (''IHO's''), in each case to
reduce costs in an effort to compete more effectively in the
changing healthcare environment.
The changes occurring in the healthcare industry have
resulted in changes in the needs for clinical and management
information systems by hospitals, physicians, managed care
organizations and IDS's. Hospitals' information requirements
have become more complex as cost containment pressures have
driven the needs for efficiency and process automation while the
increasing number of relationships they have with other providers
requires additional sophistication. As physicians combine into a
variety of provider configurations, management structures and
incentive plans, they are increasingly utilizing member/patient
focused information systems to improve quality and efficiency for
their growing practices and physician networks, to develop the
data necessary to compete for contracts with payers and to be
able to share the financial risks of healthcare delivery.
Managed care organizations are increasingly recognizing the value
of process-oriented and clinically-driven information as it
relates to understanding and improving the health of their
members. Information system requirements for IDS's and IHO's
encompass many of the same needs as hospitals, physicians and
managed care organizations. Many IDS's and IHO's are becoming
aggressively involved with institutional providers and physicians
in various relationships where information sharing and process
automation are paramount. Many of these larger, more complex
organizations are seeking closer relationships with suppliers
that can provide comprehensive information systems solutions.
Information system requirements for IDS's and IHO's
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include integrated process-based systems for clinical domains,
data repositories and applications for physicians and management
teams. Cerner is responding to the changing and increasing needs
of the healthcare industry for better information systems by
developing HNA Millennium, its latest generation of products. See
"Cerner's HNA Approach and HNA Millennium" for a discussion of
Millennium.
Healthcare Information Systems Industry
- ---------------------------------------
Healthcare information systems are evolving to meet the
needs of a changing marketplace. Initially, computer systems
developed for use in healthcare were financially oriented, with a
focus on the ability to capture charges and generate patient
bills. Beginning in the mid-1960s, institutional provider
organizations began to use clinical information systems, which
automate the activities within clinical departments, such as
laboratory, pharmacy, radiology and surgery departments, to
improve the productivity of resources and automate the production
and use of significant amounts of clinical information.
Individual departments selected systems based upon specific
features on a ''best of breed'' basis resulting in disparate
information systems within the institutional provider.
More recently, there has been a shift from the purchase of
disparate clinical systems on a ''best of breed'' basis to
systems which are able to integrate communication effectively
throughout the healthcare enterprise. The two principle
approaches to meet this need are a common architecture, in which
systems communicate through inherent design, and point-to-point
interfaces, in which systems with different architectures
communicate through interface linkages. This infrastructure
trend also affects the relationship between the health system and
the suppliers of information technology. The approach of
interfacing disparate systems typically involves multiple system
suppliers and the health system must act as the intermediary and
integrator. The common architecture approach relies more on a
strategic relationship with one or very few suppliers dedicated
to implementing a shared vision for the role of information in
the operation of the health system.
The same forces that are causing other healthcare providers
to join together are causing physicians to combine into larger
organizations, including Independent Practice Associations
(''IPA's'') and Preferred Provider Organizations (''PPO's''), and
are increasingly supported administratively through Management
Services Organizations ("MSO's") which offer management and
administrative services to physicians. In some cases, such
organizations align with IDS's and IHO's. Cerner believes that
such physician groups require clinical and management information
systems that allow them to participate in the community-wide
clinical and management information systems employed by the IDS's
and IHO's.
The Cerner Vision
- -----------------
As a result of the rapid transformation of the healthcare
industry, Cerner believes that a new center of healthcare will
emerge--the IHO, which is a combination of payers, physicians and
institutional providers affiliated to service a community or
defined member population. The focus of the IHO is to be
accountable for the health status of a defined population, with
strong financial incentives to manage health on a preventive or
wellness basis and reduce costs.
Cerner believes that many large IHO's will emerge in the
United States in the next decade. These IHO's will need to
implement information systems that manage the delivery of care
across an entire community while simultaneously managing the
business side of health management. Only through automating the
core process of healthcare delivery from member enrollment
through the ordering and delivery of care will IHO's be able to
actually manage and measure care. Process automation will enable
healthcare systems interactively to affect the care that is
delivered throughout the entire system at each point of delivery.
Cerner believes that managing these integrated healthcare systems
will require the accumulation and refining of enormous amounts of
process-related data in order to monitor performance against
plans and to make informed business decisions. This process-
oriented approach will also provide the information basis to
measure health system performance, in values known as outcomes,
from clinical, functional, process, member satisfaction and
economic perspectives.
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When all of the complex clinical processes that comprise
care delivery in IHO's are automated using fully integrated
information systems, it becomes possible to extend automation to
the management processes of healthcare.
Cerner's HNA Approach and HNA Millennium
- ----------------------------------------
The cornerstone of Cerner's information systems strategy is
HNA, the single architecture around which each of Cerner's
products is developed. This highly scaleable architecture allows
Cerner to meet the clinical, management, and business information
requirements of a healthcare delivery system across the continuum
of care from the physician practice to the IHO and to integrate
the information requirements of clinical operations and business
functions. Cerner's newest HNA platform, HNA Millennium, utilizes
three-tiered client/server technology to optimize distributed
computing performance and functionality advantages. Millennium's
breadth of focus and functionality are well suited for large-
scale and enterprise application technologies for healthcare
organizations. HNA Millennium's system architecture allows its
applications to work together as one system. The value of HNA
Millennium to a client is the use across a healthcare
organization of a single system based on a fully integrated
common architecture and data structure. With its single data
structure HNA Millennium provides real time access to all
information across multiple applications, such as laboratory,
pharmacy, nursing and physicians, to all of those needing such
access, wherever they are located. Systems based on differing
architectures and data structures 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 cannot operate across multiple provider
settings or locations within a healthcare organization.
March of 1998 marked the completion of the major development
cycle of HNA Millennium. During that development cycle the
Company expended approximately $130 million developing HNA
Millennium. At the end of 1998, 187 HNA Millennium systems were
being used by Cerner clients. As of March of 1999, 23 of HNA
Millennium's initial 30 product lines were being used by Cerner
clients. By comparison, the Classic version of Cerner's products
had 7 product lines. Cerner expects to have more than 400
Millennium systems in use by the end of 1999. Implementation of
Millennium at client sites is a much more complex process than
implementation of HNA Classic due to the greater range of
capability of the Millennium products and its complexity.
Substantial project management, process redesign, technology
integration and training are all required in order for clients to
achieve the full benefits offered by Millennium.
Cerner's systems also allow the use of other vendors
products in conjunction with Cerner's system through the use of
Cerner's Open Engine Gateway System that allows the exchange of
data with the foreign system.
Strategy
- --------
Key elements of the Company's business strategy include:
To penetrate the integrated healthcare market.
---------------------------------------------------- The
transformation of healthcare delivery must deal with the changing
financial model from fee-for-service to fixed or controlled fee
payments for services provided. In order to accomplish the
transition, integrated healthcare systems must decrease costs
generally, utilize fewer resources per patient or member
encounter, decrease the amount of care required by focusing on
preventative measures and increase member populations by
attracting additional members through better quality healthcare
and services. Cerner's process-based, clinical and management
systems provide the technology to enable an integrated system to
manage healthcare to significantly reduce costs, improve the
efficiency of healthcare delivery and maintain and improve the
quality of healthcare.
3
To penetrate the physician market.
---------------------------------- As physicians combine to
form organizations such as IPA's and PPO's, and then participate
in MSO's, they require clinical and process-based systems to
manage the member/patient care processes within their own
practices. As such groups align with IDS's and IHO's, they
further require clinical and management information systems that
allow them to share clinical and management processes with these
community-wide systems. Healthcare organizations are developing
strategies for connecting community-based physicians to the
information resources of the health system using the internet.
Cerner's systems provide the member/patient data repositories,
clinical, management tools and connectivity required by
physicians in order for them to participate effectively in the
changing healthcare marketplace.
To expand its core business.
------------------------------- Cerner expects continued
growth in core business areas, including clinical domain systems
for specific markets such as PathNet, RadNet and PharmNet, as
institutional providers look to restructure and reengineer these
high cost centers within their IDS's and IHO's. The Company also
intends to market aggressively Cerner clinical and management
information systems and services to its existing client base.
To remain committed to a unified architecture.
------------------------------------------------- Because
Cerner believes that the constituents in health management need
to work together to benefit defined populations in a community,
the Company has made a commitment to a single unified
architecture as the platform for "fully integrated'' health
information and management systems. This platform enables
Cerner's process-based HNA systems to be scaleable on a linear
basis, using either Cerner compatible modules for process-
oriented applications or competitive systems interfaced using
open system protocols.
To expand its products and services.
--------------------------------------- Using Millennium,
Cerner intends to expand the range of products and services
offered to providers, including IDS's and IHO's, either through
internal development or by acquisitions or joint ventures. These
new products and services will complement the systems currently
offered, address the emerging information needs of clients or
employ technological advances. Cerner believes that major
opportunities exist as IHO's begin to include service
organizations and on-line services to the home, particularly
because the member/patient focus of Cerner's architecture
provides the basis for individual electronic medical records
which can be used throughout a member-focused health system. In
addition, Cerner recognizes the value of the aggregate database
being developed by its broad client base as a potential means to
enable comparative or normative procedure evaluations as a
powerful new tool in the healthcare industry. The substantial
project management process redesign, technology integration, and
training involved in healthcare systems taking advantage of the
opportunities provided by clinical and management information
technology represent a significant market for the Company's
consulting services.
4
Products
- --------
The Company's products include Enterprise Systems, which
automate processes across and throughout the health system
enterprise; Enterprise Repositories, which capture, sort, present
and analyze clinical and business information; Clinical Systems
for Direct Care, which automate the clinical processes within
hospitals and the physicians practice; Clinical Systems for Care
Centers, which automate the clinical processes within specific
departments or domains; Decision Support and Executable Knowledge
systems, which enhance clinical and business processes with
information and actions; Financial and Operational Management
Systems, which automate the business operations; Population
Health Management systems for managing health; Demand Management
systems and services for managing the need for care; Personal
Health systems for individuals to manage their own health; and
Interface Technologies for connecting other technologies to HNA
Millennium. These systems can be acquired individually or as a
fully integrated health information system. The individual
systems perform together even if installed at different times.
Cerner also markets over 200 product options that complement
Cerner's major information systems. In connection with the
licensing of an information system, Cerner also generally sells
to its clients computers and related hardware that are
manufactured and supplied to Cerner by third parties.
Enterprise Systems
- ------------------
Cerner's Enterprise Systems automate processes across the
entire health system. Capstone automates the identification,
eligibility, registration and scheduling processes across
hospitals, clinics, physician practices and other care delivery
organizations, integrating the health system and incorporating
existing systems. Powerlink connects community-based physicians
to health systems for referrals, authorizations, claims,
eligibility, and reporting. PowerChart is the enterprise
clinician's desktop solution for viewing, ordering and
documenting the electronic medical record.
Enterprise Repositories
- -----------------------
Open Agreement Foundation Data Repository is a structured
repository for the storage and viewing of health plan
information, records, contracts, eligibility and coverage data.
Open Clinical Foundation Data Repository is a structured
repository for the storage of member/patient orders; discrete
results; clinical reports and other documents; indexes to
document images from foreign document imaging systems; and
indexes to third-party dictation systems.
Open Management Foundation Data Repository is a structured
repository for process- and activity-related information useful
for management of a healthcare organization. Information can
originate from numerous sources and can be maintained in an
easily accessible, standardized format. OMF can be integrated
into an architecture containing products from different
suppliers.
Open Health Foundation Data Repository is a structured
repository for the storage and viewing of health information
related to populations, in support of applications and services
designed to manage the health status of those populations.
Open Outcome Foundation Data Repository is a structured
repository for the storage and viewing of the data that supports
the reporting and management of outcomes in the areas of
clinical, medical, process, economic and satisfaction.
Clinical Systems for Direct Care
- --------------------------------
Cerner's CareNet Acute Care Management System is designed to
automate the entire care process in acute or institutional
settings. It collects, refines, organizes, and evaluates
detailed clinical and management data. It enables the entire care
team to plan and manage individual activities and plans, as
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well as measure outcomes and goals. CareNet consists of five major
solutions - patient registration, scheduling, orders,
documentation, care planning and diagnostic and therapeutic care.
The INet Intensive Care Management System is designed to
automate the entire care process in intensive care settings. It
supports patient management, chart review and browsing, order
management, documentation management, scheduling, and automatic
data acquisition. It automatically acquires patient data from
bedside medical devices, manages information flow and
presentation at the bedside, supports care management through
care planning and critical pathways, and encourages timely
decisions based on comprehensive data availability; information
tailored to the practitioner and the patient; and rule-based
decision support.
The ProVide Physician Office Management System supports the
broad range of clinical and business activities that occur within
a physician office, clinic, or large physician organization (such
as a multi-site clinic or management service organization) and
ties the office together with others in the community. It
automates key activities of the care team in both primary and
specialty care settings. ProVide offers clinicians and staff a
variety of functional capabilities, including patient/member
tracking, clinical records access and navigation, eligibility
checking, order and referral processing, and reference library
access and navigation.
The ProCall Home Care Management System automates the
clinical and business processes of home health organizations,
such as visiting nurse associations and hospices. It is
appropriate for Medicare-certified or noncertified agencies
providing skilled nursing, specialized care, supervisory
activities, assessments, and unskilled attendant or medical
delivery services. ProCall facilitates the documentation of care
activities in the home and provides access to the electronic
medical record. It automates the referral, scheduling, and
management reporting processes performed by office personnel in
home care agencies, and supports their business and
administrative processes. Financial and management reporting
capabilities provide needed information to directors and managers
in home care agencies to allow them to compete in a prospective-
pay environment.
Clinical Systems for Care Centers
- ---------------------------------
The PathNet Laboratory Information System addresses the
information management needs of six clinical areas: general
laboratory, microbiology, blood bank transfusion services, blood
bank donor services, anatomic pathology, and HLA. PathNet
automates the ordering and reporting of procedures, the
production of accurate and timely reports, and the maintenance of
accessible clinical records.
The RadNet Radiology Information System addresses the
operational and management requirements of diagnostic radiology
departments or services. It allows a department to replace its
manual, paper-based system of record-keeping with an efficient
computer-based system
The PharmNet Pharmacy Information System provides full
integration in an HNA environment for rapid pharmacy order entry
and support of the clinical pharmacy in either an inpatient or
outpatient setting. PharmNet streamlines medication order entry,
enabling the pharmacist or technician to place all types of
pharmaceutical orders on one easy-to-use screen. Dispensing
functions also are fully automated. Medication fill lists,
intravenous fill lists and medication administration records are
produced automatically or on demand.
The SurgiNet Surgery Information System is designed to
address the needs of the surgical department, including
automating the functions of resource and equipment scheduling,
inventory management, and operating room management.
The FirstNet Emergency Department Information System offers
patient and provider tracking and an intuitive presentation of patient
diagnoses and clinical events for the emergency department. FirstNet
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provides basic emergency department functionality, including quick
admits, tracking, triage, and patient history, as well as a graphical
reference to patient location and order status.
The CVNet Cardiology Department Information System automates
the processes within the department of cardiology, supporting the
scheduling, ordering, documentation and data capture required by
professionals in the cardiology domain.
Decision Support and Executable Knowledge
- -----------------------------------------
Discern Structured Care Design is clinical pathways and
protocols that automate the specific plans of care for an
individual, and operates within Cerner's clinical systems.
Discern Dialogue is a real-time decision support software
application that incorporates executable knowledge and provides
order advice to clinicians. It manages the display of clinical
alerts through Discern Insights, which are licensed separately.
Discern Dialogue provides specific recommendations to change,
cancel, or create orders.
Discern Expert and Alerts are an event-driven, rule-based,
decision support software application that allows users to define
clinical and management rules that are applied to events
accessing data that is captured or generated by other HNA
applications.
Discern Explorer is a decision support software application
integrated with other Cerner HNA clinical and management
information systems that allows users to execute predetermined or
ad hoc queries and reports regarding process-related data that is
generated by the other HNA applications.
Health Facts is Cerner's comparative data warehouse for
benchmarking information and services for subscribers to support
their own improvement processes.
Financial and Operational Management Systems
- --------------------------------------------
ProFit is Cerner's application for revenue accounting,
billing and accounts receivables for the entire health system as
well as each individual domain or organization.
ProRate is an application to automate the managed care
processes around membership, eligibility tracking, claims
processing and contract management.
The ProLogue Enterprise Management System includes a suite
of management applications specifically designed to assemble and
use the information to help an organization complete its
strategic plans, including clinical metrics, case profiling, and
performance profiling of individuals and organizations.
The ProFile Health Information Management System helps meet
the operations management needs of the health information
management (medical records) department and includes
functionality for the various chart tracking and completion tasks
commonly associated with maintaining medical records.
ProCure and ProTrack automates the business operations
around materials and equipment management for the organization.
Population Health Management
- ----------------------------
IQ Health produces personal health risk assessments and
analyzes those to create interventions that promote self care and
improve health.
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Demand Management
- -----------------
Health Connections includes applications and services to
automate and manage the operations of telecare, including
protocol-based triage and person information.
Personal Health
- ---------------
Vitality is Cerner's home software product designed to
extend medical care to the consumer's home. It provides a way
for the consumer to interact on a regular basis with a healthcare
provider. Vitality can store health and medical records for easy
access. By providing health appraisals and personalized health
plans, Vitality takes the first step toward improving health
education for members in a community.
Interface Technologies
- ----------------------
The Open Engine Application Gateway System facilitates the
exchange of data and assists in the management of point-to-point
interfaces between foreign systems. It serves as a toolkit to
help write interface code.
Software Development
- --------------------
Cerner commits significant resources to developing new
health information system products. As of January 2, 1999, 1,032
employees were engaged full-time in product development
activities. Total expenditures for the development and
enhancement of the Company's products were approximately
$74,159,000, $54,524,000 and $43,133,000 during the 1998, 1997
and 1996 fiscal years respectively. These figures include both
capitalized and noncapitalized portions and exclude amounts
amortized for financial reporting purposes.
The Company expects to continue investment and development
efforts for its current and future product offerings. As new
clinical and management information needs emerge, Cerner intends
to enhance its current product lines with new versions released
to clients on a periodic basis. In addition, Cerner plans to
expand its current product lines by developing additional
information systems for use in clinical departments and to
continue to support simultaneous use of Cerner's products across
multiple facilities. All Cerner systems are developed under HNA
using a proprietary systems development methodology. This
methodology defines and controls each task throughout the product
development cycle and ensures that current and future products
can be fully integrated.
The Company is committed to maintaining open attributes in
its system architecture through operability in a diverse set of
technical and application environments. The Company strives to
design its systems to co-exist with disparate applications
developed and supported by other suppliers. This effort is
exemplified by Cerner's Open Engine, OCF and OMF product lines.
See "Cerner's HNA Approach and HNA Millennium" for a
discussion of the development of Cerner's latest generation of
software products.
Sales and Marketing
- -------------------
The markets for Cerner's information system products include
IHO's, IDS's, physician groups and networks and their MSO's,
managed care organizations, hospitals, medical centers, free-
standing reference laboratories, blood banks, imaging centers,
pharmacies, employer coalitions, and public health organizations.
To date, a substantial portion of system sales have been in
clinical applications in hospital-based provider organizations.
Cerner's HNA architecture is highly scaleable, with applications
being used in hospitals ranging from under 50 beds to over 2,000
beds and managed care settings with over 2,000,000 members. All
Cerner systems are designed to operate on computers manufactured
by Compaq Computer Corporation (''Compaq''). In addition, many
Cerner Classic applications are available
8
on IBM's RISC System/6000 AIX (UNIX) platform. All HNA
Millennium applications are designed to operate on either
Compaq or IBM platforms, thereby allowing Cerner to be price
competitive across the full range of size and
organizational structure of healthcare providers. The sale of
a health information system usually takes approximately nine to
eighteen months, from the time of initial contact to the
signing of a contract.
The Company's executive marketing management is located in
its Kansas City, Missouri, headquarters, while its account
representatives are deployed through regional offices across the
United States. The Company, through subsidiaries, and joint
ventures has offices and sales staff in Australia, Singapore and
Saudi Arabia. The Company has a nonexclusive distribution
agreement with Siemens Health Service GmbH & Co. KG by which its
products are marketed, implemented and supported in Europe and
elsewhere. Cerner's consolidated revenues include foreign sales
of $17,545,000, $16,272,000 and $15,874,000 for the 1998, 1997
and 1996 fiscal years, respectively. The Company supports its
sales force with technical personnel who perform demonstrations
of Cerner's products and assist clients in determining the proper
hardware and software configurations. The Company has a
demonstration and presentation facility at its headquarters in
Kansas City, Missouri, called the Cerner Vision Center. This
facility enables the Company to actually demonstrate the
processes automated through HNA and adapt the presentations to
the clients' environments. The Company's primary direct
marketing strategy is to generate sales contacts from its
existing client base and through presentations at industry
seminars and tradeshows. Cerner attends a number of major
tradeshows each year and has begun to sponsor executive
conferences, which feature industry experts who address the
information system needs of large healthcare organizations.
During 1998 Cerner entered into a technology and marketing
agreement with General Electric Company, acting through its GE
Medical Systems division. Cerner is a leader in radiology
information systems and GE is a leader in radiology imaging
systems, as well as picture archiving communication systems.
Picture archiving communication systems are designed to store,
retrieve and enhance digital images produced by modern radiology
imaging systems such as CAT SCAN systems, MRIs and ultrasound
medical technology. This agreement is focused upon building and
marketing the next generation of solutions in the radiology
suite, a fully integrated radiology information system and
picture archiving communication system.
At the end of 1998 Cerner licensed HNA Millenium
functionality to Synetic Healthcare Communications, Inc., in
exchange for a 19.9% equity interest in such company. Synetic
Healthcare Communications is majority owned by Synetic, Inc. and
was formed for the purpose of creating Internet-based physician
connectivity and electronic commerce.
Client Services
- ---------------
Cerner uses a regional strategy to provide the full range of
product and service capabilities to its clients from seven
locations throughout the United States. Each regional center
reflects Cerner's corporate culture and provides support services
and resources, including training and development opportunities,
for Company personnel working in the geographical area. The
regional centers are also used for client education activities.
Through the regional centers, Cerner provides on-site personnel
for the development and management of systems projects, learn the
evolving information needs of clients based on geographical
trends in the healthcare industry, work with clients in the
development of new products and services and share with clients
Cerner's vision of the changing healthcare delivery market and
the role of information systems in that transformation. The
Company has regional offices in Atlanta, Boston, Dallas, Detroit,
Kansas City, Los Angeles and Washington, D.C. Each regional
office is focused on long-term marketplace development, product
marketing, client project management, long-term client service
and client satisfaction for a group of clients within a specific
geographical region.
All of Cerner's clients enter into software maintenance
agreements with Cerner for support of their Cerner systems. In
addition to immediate software support in the event of problems,
these agreements
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allow these clients the use of new releases of the Cerner products
covered by these agreements. Each client has 24-hour access to
the client support staff located at Cerner's corporate headquarters.
Most of Cerner's clients also enter into hardware maintenance
agreements with Cerner. These arrangements normally provide for a
fixed monthly fee for specified services. In the majority of cases,
Cerner subcontracts hardware maintenance to the hardware manufacturer.
Backlog
- -------
At January 2, 1999, Cerner had contract backlog of
$314,965,000. Such backlog represents system sales from signed
contracts which had not yet been recognized as revenue. The
Company recognizes revenue on a percent of completion basis,
based on certain milestone conditions, for its software products.
At January 2, 1999, the Company had $94,627,000 of contracts
receivable, which represents revenues recognized under the
percent of completion method but not yet billable under the terms
of the contract. At January 2, 1999, Cerner had a software
support and maintenance backlog of $153,453,000. Such backlog
represents contracted software support and hardware maintenance
services for a period of twelve months. The Company estimates
that approximately 43% of the aggregate backlog of $468,418,000
will be recognized as revenue during 1999.
Other Factors Affecting the Company's Business
- ----------------------------------------------
Information under the caption "Factors that may Affect
Future Results of Operations, Financial Condition or 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 (i) variations in the
Company's quarterly operating results; (ii) volatility of the
Company's stock price; (iii) market risk of investments; (iv)
changes in the healthcare industry; (v) significant competition;
(vi) the Company's proprietary technology may be subjected to
infringement claims or may be infringed upon; (vii) possible
regulation of the Company's software by the U.S. Food and Drug
Administration or other government regulation; (viii) the
possibility of product-related liabilities; (ix) risks and
uncertainties related to the Year 2000; (x) possible failures or
defects in the performance of the Company's software; and (xi)
the possibility that the Company's anti-takeover defenses could
delay or prevent an acquisition of the Company.
Item 2. Properties
The Company's offices are located in a Company-owned office
park in North Kansas City, Missouri, containing approximately
500,000 square feet of useable space. As of January 2, 1999, the
Company was using approximately 434,000 square feet and
substantially all of the remainder was leased to tenants. The
Company also leases office space for its branch offices in
Atlanta, Boston, Dallas, Detroit, Los Angeles and Washington D.C.
Item 3. Legal Proceedings
The Company is not involved in any material pending
litigation.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the stockholders of
the Company during the fourth quarter of the fiscal year ended
January 2, 1999.
10
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 April 1, 1999. Officers are elected annually and
serve at the discretion of the board of directors.
Name Age Positions
- ---- --- ---------
Neal L. Patterson 49 Chairman of the Board of Directors,
Chief Executive Officer and President
Clifford W. Illig 48 Vice Chairman of the Board of Directors
Glenn P. Tobin, Ph.D. 37 Executive Vice President and
Chief Operating Officer
Jack A. Newman, Jr. 51 Executive Vice President
Paul M. Black 40 Senior Vice President and
Chief Sales Officer
Robert C. Dieterle 48 Senior Vice President and
General Manager
Alan D. Dietrich 36 Senior Vice President
Stephen M. Goodrich 47 Senior Vice President
Douglas M. Krebs 41 Senior Vice President and
Area Manager
Marvin G. Pember 45 Senior Vice President and
General Manager
Thomas C. Tinstman, M.D. 53 Senior Vice President and
Chief Medical Officer
Marc G. Naughton 44 Vice President and
Chief Financial Officer
Stanley M. Sword 37 Vice President and
Chief People Officer
Jeffrey A. Townsend 35 Vice President and
Chief Engineering Officer
11
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 was appointed President of the
Company in March 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.
Glenn P. Tobin, Ph.D. joined the Company in early 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.
Jack A. Newman, Jr. joined the Company in January 1996 as
Executive Vice President. Prior to joining the Company, he was
with KPMG LLP for 22 years. Immediately prior to joining Cerner
he was National Partner-in-Charge of KPMG's Health Care Strategy
Practice.
Paul M. Black joined the Company in March, 1994 as a
Regional Vice President. He was promoted in December 1998 to his
current position. Prior to joining Cerner, he spent twelve years
with IBM Corporation.
Robert C. Dieterle joined the Company in July, 1995 as
Senior Vice President and General Manager. Prior to joining
Cerner, he spent over 20 years in a variety of executive health
care positions throughout the country.
Alan D. Dietrich joined the Company in 1990 as Director of
Business, Planning and Development. In January 1994 he was
promoted to Senior Vice President.
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 effective April 1, 1999.
Douglas M. Krebs joined the Company in June 1994 as Regional
Vice President. He was promoted to Senior Vice President and
Area Manager effective April 1, 1999. Prior to joining Cerner,
he spent 15 years with IBM Corporation.
Marvin G. Pember joined the Company in April, 1998 in his
current role. Prior to joining Cerner, he served as Chief
Financial Officer and Managing Director for Integris Health in
Oklahoma City for more than five years.
Thomas C. Tinstman, M.D. joined the Company in November 1995
as Senior Vice President and Chief Medical Officer and has been a
Director of the Company since May 1989. Prior to joining the
Company, Dr. Tinstman was Director of Medical Informatics with
University of Texas Medical Branch in Galveston, Texas. Prior to
that he was a physician in private practice with Internal
Medicine Associates, P.C. in Omaha, Nebraska. From 1977 to
January, 1994, Dr. Tinstman served as Associate Medical Director
of Pulmonary Medical Services at Bishop Clarkson Memorial
Hospital and as Medical Director of the Respiratory Therapy
Department of Midland Hospital, both in Omaha, Nebraska. Dr.
Tinstman has served as a director of Smith-Haynes Trust, Inc.
since 1988.
Marc G. Naughton joined the Company in November 1992 as
Manager of Taxes. In November 1995 he was elected Chief
Financial Officer and in February 1996 he was promoted to Vice
President.
12
Stanley M. Sword joined Cerner in July 1998 in his current
role. Prior to joining Cerner, he served as a client partner in
the outsourcing practice of AT&T Solutions for more than five
years.
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.
13
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
1998 and 1997 as reported by The NASDAQ National Market System.
1998 1997
-------------------------------- ----------------------------
High Low Last High Low Last
_________ ________ _________ _______ _______ _______
First quarter 24 9/16 19 1/16 21 15/16 16 1/4 13 1/4 13 1/4
Second quarter 29 15/16 20 7/8 27 7/8 22 1/8 11 7/8 21 3/8
Third quarter 31 7/16 22 22 5/8 32 7/8 20 3/4 25
Fourth quarter 27 1/16 20 1/2 26 3/4 30 1/2 20 1/4 22
At February 3, 1999, there were approximately 1,300 owners
of record. To date, the Company has paid no dividends and it
does not intend to pay dividends in the foreseeable future.
Management believes it is in the stockholders' best interest to
reinvest funds in the operation of the business.
Item 6. Selected Financial Data
1998(1) 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except per share data)
Statement of Earnings Data:
Revenues $ 330,902 245,057 189,107 186,901 155,917
Operating earnings 38,568 22,170 10,601 37,256 33,779
Earnings before income taxes 38,306 24,484 12,902 37,220 32,451
Net earnings 23,687 15,148 8,251 22,521 19,501
Earnings per share:
Basic .72 .46 .25 .75 .71
Diluted .70 .45 .25 .72 .66
Weighted average shares
outstanding:
Basic 32,825 32,881 32,729 29,845 27,651
Diluted 33,667 33,667 33,620 31,448 29,762
Balance Sheet Data:
Working capital $ 118,681 156,808 171,204 174,064 52,370
Total assets 436,485 331,781 314,753 303,945 156,410
Long-term debt, net 25,000 30,026 30,000 30,104 30,235
Stockholders'equity 271,143 233,747 230,735 221,374 85,777
(1) 1998 Statement of Earnings Data excludes acquisition related charges.
14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
____________
1998 reflected major accomplishments that will provide long-
term financial and strategic benefits for the Company, but also
included disappointments in bookings and stock performance
despite a 35% increase in revenues and 56% increase in net
earnings (excluding acquisition related charges) as compared to
1997. Most notably, the Company completed the major development
cycle of HNA Millennium. The Company believes HNA Millennium
provides a significant competitive advantage because it utilizes
the only fully integrated, large-scale, enterprise-wide
architecture in the industry and thus can deliver a superior
combination of functionality, efficiency, cost-containment and
quality control through intrarelated clinical and management
information systems.
The Company is now effectively positioned to meet the
complex needs of a dynamic and consolidating health-care industry
that requires sophisticated, powerful and comprehensive solutions
to information sharing and process automation. Many analysts
expect that the overall health information marketplace will grow
at least 20% per year for the next five years following the
millennium. The Company expects that the clinical information
segments of this marketplace will grow even faster. With over 30
product lines currently in HNA Millennium, which will grow over
the next few years, the Company believes it can sustain its
technological leadership and capitalize on this opportunity.
These 30 product lines will include, early in 2000, patient
accounting and other business and management systems, where the
Company currently has no or limited market share.
In the fourth quarter of 1998, the Company licensed a broad
set of HNA Millennium applications to Synetic Healthcare
Communications, Inc. ("SHC") which is focused on clinical e-
commerce through an Internet platform that connects payers,
physicians and patients. In exchange for granting this license
and entering into related marketing and other agreements, the
Company received 19.9% of SHC's common stock which the Company
valued at $70 million. In November of 1998, the Company entered
into an agreement with GE Medical Systems division of General
Electric Company ("GE") to develop and market the next generation
of solutions in the radiology suite that combines the Company's
leadership in radiology information systems with GE's leadership
in radiology imaging systems and picture archival communication
systems. These alliances create the potential to leverage the
Company's access to customers, emerging markets and technology.
The Company's human resources were augmented significantly
during 1998. The Company recruited and promoted a number of
talented executives to its senior management team last year,
including: Jeff Townsend, Chief of Engineering; Glenn Tobin,
Chief Operating Officer; Marvin Pember, responsible for provider-
based and managed cared Enterprise Business Units; Stan Sword,
Chief People Officer; and Paul Black, promoted to Chief Sales
Officer. The Company also added approximately 550 associates.
The Company's ability to recruit and retain such talent was
recognized in 1998 by Fortune Magazine with its award as "One of
the Top 100 Companies" to work for in the United States. The
quality and service-orientation of our associates was also
validated by external surveys which identified the Company as the
"Best Telephone Support" provider in the industry.
Despite the many positive developments that occurred in
1998, the Company was disappointed with its financial
performance. The Company did not fully anticipate the decrease
in demand for large-scale systems within the health care industry
resulting from the diversion of capital and human resources to
solve Year 2000 compliance issues. It is currently expected that
this decline in demand will likely persist during 1999 as
customers continue to focus on efforts to update their current
systems to become Year 2000 compliant. However, after January 1,
2000, the Company expects that this problem will quickly
dissipate. Sales of enterprise wide systems were negatively
impacted during 1998 because the Company
15
did not have a large, complex reference site using significant
portions of HNA Millenium applications until January of 1999.
While the Company is quite optimistic about its financial
performance heading into the new millennium, it is taking a
conservative view for 1999. This cautiousness is predicated
primarily on the continued uncertainty that Year 2000 compliance
issues create for the buyers of health care information systems.
Nevertheless, the Company believes that its revenues and earnings
will exceed those of 1998. Earnings from implementation services
are expected to increase as more projects are billed under a
closely-scoped fee-for-service approach. Approximately 43% of
the aggregate backlog of $468,418,000 is expected to be
recognized as revenues during 1999.
Results of Operations
- ---------------------
Year Ended January 2, 1999, Compared to Year Ended January 3, 1998
The Company's revenues increased 35% to $330,902,000 in 1998
from $245,057,000 in 1997. Net earnings increased 36% to
$20,589,000 in 1998 from $15,148,000 in 1997. Excluding
acquisition related charges, net earnings increased 56% to
$23,687,000 in 1998 relative to 1997.
Revenues
- -------- - In 1998, revenues increased due to an increase in
system sales and support of installed systems. System sales
increased 44% to $245,490,000 in 1998 from $170,906,000 in 1997.
This increase in system sales resulted primarily from an increase
in installations under Health Network Architecture (HNA)
contracts. Revenue from HNA contracts increased 23% compared to
1997. The sale of additional hardware and software products to
the installed client base increased 30% in 1998 as compared to
1997.
Total sales to the installed base in 1998, including new systems,
incremental hardware and software, support and maintenance
services, and discrete services, were 69% of total revenues in
1998 compared to 73% in 1997. The lower percentage was primarily
due to the increase in system sales to new clients.
At January 2, 1999, the Company had $314,965,000 in contract
backlog and $153,453,000 in support and maintenance backlog,
compared to $198,274,000 in contract backlog and $132,842,000 in
support and maintenance backlog at the end of 1997.
Support and maintenance revenues increased 12% in 1998 compared
to 20% in 1997. These revenues represented 23% of 1998 total
revenues and 28% of 1997 total revenues. The lower percentage was
primarily due to the increase in system sales.
Other revenues increased 59% to $8,657,000 in 1998 from
$5,438,000 in 1997. This increase was due primarily to services
performed beyond contracted requirements for existing clients.
Cost of Revenues
- ---------------- - The cost of revenues includes the cost of
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 27% of total revenues in 1998 and 29% of total
revenues in 1997. 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
16
salaries, travel expenses, trade show costs,
and advertising costs. These expenses as a percent of total
revenues were 35% in 1998 and 34% in 1997. 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 1998 and 1997
were $74,159,000 and $54,524,000, respectively. These amounts
exclude amortization. Capitalized software costs were
$25,052,000 and $18,373,000 for 1998 and 1997, respectively. The
increase in aggregate expenditures for software development in
1998 is due to development of HNA Millennium products and
development of community care products.
General and Administrative
- -------------------------- - General and administrative expenses
include salaries for corporate, financial, and administrative
staffs, utilities, communications expenses, and professional
fees. These expenses as a percent of total revenues were 8% in
1998 and 9% in 1997.
Write-off of In-Process Research and Development
- ------------------------------------------------ - Write-off of
in-process research and development is a one-time expense
resulting from the acquisition of Multum.
Interest Income (Expense), Net
- ------------------------------ - Net interest expense was
$262,000 in 1998 compared to net interest income of $2,314,000
in 1997. The decrease is due primarily to a decrease in invested
cash.
Income Taxes
- ------------ - The Company's effective tax rate was 38% in 1998
and 1997.
Year Ended January 3, 1998, Compared to Year Ended December 28, 1996
The Company's revenues increased 30% to $245,057,000 in 1997
from $189,107,000 in 1996. Net earnings increased 84% to
$15,148,000 in 1997 from $8,251,000 in 1996. Net earnings from
the Company's foreign operations decreased to $2,389,000 in 1997
from $2,897,000 in 1996.
Revenues
- -------- - In 1997, revenues increased due to an increase in
system sales and support of installed systems. System sales
increased 39% to $170,906,000 in 1997 from $122,836,000 in 1996.
This increase in system sales resulted primarily from an increase
in installations under Health Network Architecture (HNA)
contracts. HNA contracts were 57% of total systems sales in
1997, compared to 43% in 1996. The sale of additional hardware
and software products to the installed client base decreased 8%
in 1997 as compared to 1996.
Total sales to the installed base in 1997, including new systems,
incremental hardware and software, support and maintenance
services, and discrete services, were 73% of total revenues in
1997 compared to 79% in 1996. The lower percentage was primarily
due to the increase in system sales to new clients.
At January 3, 1998, the Company had $198,274,000 in contract
backlog and $132,842,000 in support and maintenance backlog,
compared to $110,330,000 in contract backlog and $107,255,000 in
support and maintenance backlog at the end of 1996.
Support and maintenance revenues increased 20% in 1997 compared
to 16% in 1996. This increase was due primarily to the increase
in the Company's installed and converted client base. These
revenues represented 28% of 1997 total revenues and 30% of 1996
total revenues.
Other revenues decreased 38% to $5,438,000 in 1997 from
$8,841,000 in 1996. This decrease was due primarily to a
decrease in real estate lease revenues from the rental to outside
tenants, as the Company utilizes more office space, and the
reporting of certain services revenue as system sales in 1997.
17
Cost of Revenues
- ---------------- - The cost of revenues includes the cost of
computer hardware and sublicensed software purchased from
computer and software manufacturers for delivery to clients. It
also includes the cost of hardware maintenance and sublicensed
software support subcontracted to the manufacturers. The cost of
revenues was 29% of total revenues in 1997 and 31% of total
revenues in 1996. Such costs, as a percent of revenues,
typically have varied as the mix of revenue (software, hardware,
services and support) components carrying different margin rates
changes from period to period. The decrease in the cost of
revenue as a percent of total revenues resulted principally from
a decrease in the percent of revenue from computer hardware and
sublicensed software, which carry a higher cost of revenue
percentage.
Sales and Client Service
- ------------------------ - Sales and client service expenses
include salaries of client service personnel, communications
expenses, and unreimbursed travel expenses. Also included are
sales and marketing salaries, travel expenses, trade show costs,
and advertising costs. These expenses as a percent of total
revenues were 34% in 1997 and 1996. The increase in total sales
and client service expenses is attributable to the cost of a
larger field sales and services organization and marketing of new
products.
Software Development
- -------------------- - Software development expenses include
salaries, documentation, and other direct expenses incurred in
product development and amortization of software development
costs. Total expenditures for software development, including
both capitalized and noncapitalized portions, for 1997 and 1996
were $54,524,000 and $43,133,000, respectively. These amounts
exclude amortization. Capitalized software costs were
$18,373,000 and $13,240,000 for 1997 and 1996, respectively. The
increase in aggregate expenditures for software development in
1997 is due to development of HNA Millennium products and
development of community care products.
General and Administrative
- -------------------------- - General and administrative expenses
include salaries for corporate, financial, and administrative
staffs, utilities, communications expenses, and professional
fees. These expenses as a percent of total revenues were 9% in
1997 and 10% in 1996.
Interest Income, Net
- -------------------- - Net interest income was $2,314,000 in
1997 compared to $2,301,000 in 1996.
Income Taxes
- ------------ - The Company's effective tax rates were 38% and 36%
for 1997 and 1996, respectively. The lower 1996 tax rate is due
to the utilization of foreign net operating losses.
Liquidity and Capital Resources
- -------------------------------
The Company had total cash and cash equivalents of
$42,658,000 at the end of 1998 and working capital of
$118,681,000, compared to cash and cash equivalents of
$77,543,000 at the end of 1997, and working capital of
$156,808,000. The decrease in working capital resulted primarily
from the Company's investment in software development, the
purchase of capital equipment and the acquisition of Multum. In
November 1998, the Company sold 670,000 shares of common stock to
General Electric Company, which resulted in cash proceeds of
$14,874,000.
The Company generated cash of $5,893,000, $18,692,000, and
$28,262,000 from operations in 1998, 1997, and 1996,
respectively. Cash flow from operations decreased in 1998 and
1997, due primarily to increases in receivables from increased
revenues, and, in 1998 from non-cash consideration received for
the sale of license software.
Revenues provided under support and maintenance agreements
represent recurring cash flows. Support and maintenance revenues
increased 12%, 20%, and 16%, in 1998, 1997, and 1996,
respectively, and the Company expects these revenues to continue
to grow as the base of installed systems grows.
The Company's liquidity is influenced by many factors,
including the amount and timing of the Company's revenues, its
cash collections from its clients as implementation of its
products proceed and
18
the amounts the Company invests in software development and
capital expenditures. The Company's liquidity has decreased
over the three year period ended January 2, 1999 due primarily
to increased investment in software development and increase
in receivables due to increased sales. The Company expects
that its cash position will decrease during the first half of
1999 as it continues its investment in software development,
but the Company expects to have an increase in its cash position
for the fourth quarter of 1999. The Company believes that its
present cash position, together with cash generated from operations,
will be sufficient to meet anticipated cash requirements during 1999.
The Company has an $18,000,000 line of credit available but may
obtain additional debt capital in order to provide greater
financial flexibility.
The effects of inflations were minimal on the Company's
business.
Factors that may Affect Future Results of Operations, Financial
- ---------------------------------------------------------------
Condition or Business
- ---------------------
Statements made in this report, 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
"should," "will be," "intended," "continue," "believe," "may,"
"expect," "hope," "anticipate," "goal," "forecast" and similar
expressions are intended to identify such forward-looking
statements. It is important to note that any such performance,
and actual results, financial condition or business could differ
materially from those expressed in such forward-looking
statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed
below as well as those discussed elsewhere in reports filed with
the Securities and Exchange Commission. The Company undertakes
no obligation to update or revise forward-looking statements to
reflect changed assumptions, the occurrence of unanticipated
events or changes in future operating results, financial
condition or business over time.
Quarterly Operating Results May Vary
- ------------------------------------ - The Company's quarterly
operating results have varied in the past and may continue to
vary in future periods. Quarterly operating results may vary for
a number of reasons including demand for the Company's products
and services, the Company's long sales cycle, the long
installation and implementation cycle for these larger, more
complex and costlier systems and other factors described in this
section and elsewhere in this report. As a result of healthcare
industry trends and the market for the Company's HNA Millennium
products, a large percentage of the Company's revenues are
generated by the sale and installation of larger, more complex
and costlier systems. The sales process for these systems is
lengthy and involves a significant technical evaluation and
commitment of capital and other resources by the customer. The
sale may be subject to delays due to customers' 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 nine
months to three years and involve significant efforts both by the
Company and the client. In addition, implementation of the
Company's Millennium products is a new and evolving process. The
Company recognizes revenue upon the completion of standard
milestone conditions and the amount of revenue recognized in any
quarter depends upon the Company's and the client's ability to
meet these project milestones. Delays in meeting these milestone
conditions or modification of the contract relating to one or
more of these systems could result in a shift of revenue
recognition from one quarter to another and could have a material
adverse effect on results of operations for a particular quarter.
In addition, support payments by clients for the Company's
products do not commence until the product is in use.
19
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 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.
Included in the Company's investments is the ownership of 19.9%
of the common stock of Synetic Healthcare Communications, Inc.
("SHC"). There is no current market for this common stock and it
is not accounted for as available-for-sale. As a result, the
stock was valued at $70,000,000 based on a methodology which
utilized both a comparable company and the expected underlying
discounted future cash flows. The common stock is subject to
certain lock-up provisions. A permanent impairment in the value
of SHC stock would result in a charge to earnings in either the
then current or future periods. There would be no effect on cash
flows because the revenue was earned through contractual rights
granted in exchange for SHC stock. An increase in the value of
the SHC stock would have no effect on reported earnings.
Synetic, Inc., the parent of SHC, has publicly announced that SHC
plans to conduct an initial public offering of its shares. The
Company has agreed to purchase additional SHC shares in that
offering which may maintain its proportionate ownership of SHC.
The Company has not engaged in equity swaps or other hedging
techniques to manage the equity risk inherent in the SHC shares.
The Company is exposed to market risk from changes in marketable
securities (which consist of money market and commercial paper).
At January 2, 1999, marketable securities of the Company were
recorded at a fair value of approximately $43 million, with an
overall average return of approximately 5% and an overall
weighted maturity of less than 90 days. The marketable
securities held by the Company are not subject to price risk as
they are held to maturity.
The Company is not exposed to material future earnings or cash
flow exposures from changes in interest rates on long-term debt
since 100% of its long-term debt is at a fixed rate. To date,
the Company has not entered into any derivative financial
instruments to manage interest rate risk and is currently not
evaluating the future use of any such financial instruments.
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 instrument
to manage foreign currency risk and is currently not evaluating
the future use of any such financial instruments.
20
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. 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 customer base
could be eroded, competition for customers could become more
intense and the importance of acquiring each customer becomes
greater.
Significant Competition
- ----------------------- - The market for healthcare information
systems is intensely competitive, rapidly evolving and subject to
rapid technological change. The Company believes that the
principal competitive factors in this market include the breadth
and quality of system and product offerings, the stability of the
information systems provider, the features and capabilities of
the information systems, the ongoing support for the system, and
the potential for enhancements and future compatible products.
Certain of the Company's competitors have greater financial,
technical, product development, marketing and other resources
than the Company and some of its competitors offer products that
it does not offer. The Company's principle existing competitors
include Shared Medical Systems 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
customer 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 has not historically filed
patent applications or copyrights covering its software
technology. 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.
21
Government Regulation
- --------------------- - The United States Food and Drug
Administration (the "FDA") has declared that software products
that are intended for the maintenance of data used in making
decisions regarding the suitability of blood donors and the
release of blood or blood components for transfusion are medical
devices under the 1976 Medical Device Amendments to the Federal
Food, Drug and Cosmetic Act and the Safe Medical Devices Act of
1990. As a consequence, the Company is subject to extensive
regulation by the FDA with regard to its blood bank software. If
other of the Company's products are deemed to be medical devices
by the FDA, the Company could be subject to extensive
requirements governing pre- and post- marketing conditions, such
as device investigation, approval, labeling and manufacturing.
Complying with these FDA regulations would be time consuming,
burdensome and expensive. The Company expects that the FDA is
likely to 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 two-item Form FDA 483 (Notice of Inspectional
Observations) containing observations of non-compliance with the
Federal Food, Drug and Cosmetic Act (the "Act") with respect to
the Company's PathNet HNA 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. 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 was
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 inspections and there can be no
assurances that the Company will not be required to undertake
additional actions to comply with the Act and any other
applicable regulatory requirements. Any failure by the Company
to comply with the Act and any other applicable regulatory
requirements could have a material adverse effect on the
Company's ability to continue to manufacture and distribute its
products, and in more serious cases, could result in seizure,
recall, injunction and/or civil fines. Any of the foregoing
would 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.
Year 2000
- --------- - The following statements are a "Year 2000 Readiness
Disclosure" within the meaning of the Year 2000 Information and
Readiness Disclosure Act. Computer programs that use two digits
to identify a year may fail or create errors in the year 2000,
leading to system failures or miscalculations causing disruptions
to the operations of the user. The Company has conducted a Year
2000 review of its operations focusing on the Company's products
and their use by its clients, the computers, operating systems
and data bases used in conjunction with its products and the
Company's internal operations.
The Company's software products currently being marketed are Year
2000 compliant. The costs incurred to make the Company's current
versions compliant have occurred in the ordinary course of
software development and enhancement and have not been material.
All of the Company's clients using older versions of its software
products are entitled to upgrade to the compliant versions with
no charge for the compliant version. However, some have elected
not to do so for a variety of reasons. The Company is
22
working with the clients who wish to upgrade to address Year
2000 issues. These clients have either been upgraded to compliant
versions or are scheduled to be upgraded to compliant versions
of the Company's software by August 1999. The Company is assisting
those clients to upgrade using electronic access from the
Company's facilities without charge. If the client desires on-
site assistance, the Company is assessing its normal charges.
These services are being conducted in the ordinary course of the
Company's business by its employees, and the costs to the Company
are not expected to be material. The Company is also engaged in
many projects to implement its products at client sites. These
projects require efforts both by the Company and its clients.
For some of these clients, these projects constitute their
solution to Year 2000 issues. Substantially all of these
projects are planned to be completed by September 1999. The
Company is working with its clients, or the clients are working
independently, on contingency plans for Year 2000 issues where
there is a reasonable likelihood the project may not be completed
by the end of 1999.
As clients and potential customers focus on efforts to update
their current systems, they may elect to delay capital
investments in information systems in order to focus their
capital budgets on the expenditures necessary to bring their
existing systems into Year 2000 compliance. As a result, the
Company may not achieve expected sales revenues and its business,
financial condition and results of operations could be materially
adversely affected.
The Company believes that its internal third-party software
applications, operating systems and telephone systems are Year
2000 compliant. The Company did have some internally developed
software applications that required upgrading to be Year 2000
compliant. These upgrades were done internally and have been
completed. The Company has also replaced some older computers
and operating systems that were not Year 2000 compliant in the
normal course of infrastructure maintenance.
The suppliers of the computers, operating systems and data bases
necessary to operate the current versions of the Company's
software products have indicated to the Company that those
products either are Year 2000 compliant or they would be by the
end of 1999. The Company has conducted tests of such computers,
operating systems and databases with its products now being
marketed and currently has no reasonable cause to believe that
the Company's products are not Year 2000 compliant when operated
with such computers, operating systems and databases. However,
in operation at clients' sites, the Company's software products
interchange data with many third party systems through interfaces
that may be unique to the client or the third party system. Such
interfaces or data interchanged may contain inaccuracies or such
data may not be in a format that allows the Company's system to
correctly identify the date. There can be no assurance that the
Company will not be subject to claims that result from the
failure of third party systems or their related interfaces to be
Year 2000 compliant. These claims, even if not meritorious,
could be expensive to defend.
Although the Company believes its Year 2000 review and the
actions it has taken and plans to take in response to the review
are appropriate, there can be no assurance that the review
identified all possible issues or that all identified issues will
be satisfactorily resolved. A material failure of the Company's
internal systems to be Year 2000 compliant, a material failure in
suppliers of the computers, operating systems and databases used
in conjunction with the Company's products to be Year 2000
compliant or a material delay in client projects related to Year
2000 issues could have a material adverse effect on the Company's
business, results of operations or financial condition.
System Errors and Warranties
- ---------------------------- - The Company's systems,
particularly the 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
23
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 contract 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 (i) a Board of Directors that is staggered
into three classes to serve staggered three-year terms, (ii)
blank check preferred stock, (iii) supermajority voting
provisions, (iv) inability of stockholders to act by written
consent or call a special meeting, (v) limitations on the ability
of stockholders to nominate directors or make proposals at
stockholder meetings, and (vi) 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.
24
PART III
Item 10. Directors and Executive Officers of the Registrant
The Registrant's Proxy Statement to be used in connection
with the Annual Meeting of Stockholders to be held on May 28,
1999, contains under the caption "Election of Directors" certain
information required by Item 10 of Form 10-K and such information
is incorporated herein by this reference. The information
required by Item 10 of Form 10-K as to executive officers is set
forth in Item 4A of Part I hereof.
The Registrant's Proxy Statement to be used in connection
with the Annual Meeting of Stockholders to be held on May 28,
1999, contains under the caption "Compliance with Section 16(a)
of the Securities Exchange Act of 1934" certain information
required by Item 10 of Form 10-K and such information is
incorporated herein by this reference.
Item 11. Executive Compensation
The Registrant's Proxy Statement to be used in connection
with the Annual Meeting of Stockholders to be held on May 28,
1999, 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 Stockholders to be held on May 28,
1999, contains under the caption "Voting Securities and Principal
Holders Thereof" the information required by Item 12 of Form 10-K
and such information is incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions
The Registrant's Proxy Statement to be used in connection
with the Annual Meeting of Stockholders to be held on May 28,
1999, 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.
25
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) Financial Statements.
(1) Consolidated Financial Statements:
Independent Auditors' Report on Consolidated Financial Statements
Consolidated Balance Sheets -
January 2, 1999 and January 3, 1998
Consolidated Statements of Earnings -
Years Ended January 2, 1999, January 3, 1998 and
December 28, 1996
Consolidated Statements of Changes In Equity
Years Ended January 2, 1999, January 3, 1998 and
December 28, 1996
Consolidated Statements of Cash Flows
Years Ended January 2, 1999, January 3, 1998 and
December 28, 1996
Notes to Consolidated Financial Statements
(2) The following financial statement,
schedule and independent auditors' report
on financial statement schedule of the
Registrant for the three-year period ended
January 2, 1999 are included herein:
Schedule II - Valuation and Qualifying Accounts,
Independent Auditors' Report on Consolidated
Financial Statement Schedule.
All other schedules are omitted, as the required
information is inapplicable or the information is presented in
the consolidated financial statements or related notes.
(3) The exhibits required to be filed by this item are set forth
below:
Number Description
- ------ -----------
3(a) Restated Certificate of Incorporation of the Registrant, (filed
as Exhibit 3(i) to Registrant's Quarterly Report on Form 10-Q
for the year ended June 29, 1996 and hereby incorporated by
reference).
3(b) Bylaws, as amended (filed as Exhibit 3 to the Registrant's
Quarterly Report on Form 10-Q for the six months ended
June 30, 1995, and hereby incorporated by reference).
26
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).
4(c) Note Agreement between Cerner Corporation, Principal Mutual Life
Insurance Company, and Principal National Life Insurance Company
dated July 1, 1994, (filed as Exhibit 10(a) to Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1994, and hereby incorporated by reference.
4(d) Credit Agreement between Cerner Corporation and Mercantile Bank
dated April 1, 1999.
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. and
Thomas C. Tinstman, (filed as Exhibit 10(i) to Registrant's
Annual report on Form 10-K for the year ended December 31, 1992,
and incorporated herein by reference).*
10(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 Thomas A. McDonnell and
Registrant (filed as Exhibit 10(i)(c) to Registrant's Quarterly
Report on Form 10-Q for the year ended June 29, 1996 and hereby
incorporated by reference).*
10(f) Amended Stock Option Plan D of Registrant (filed as Exhibit 10(g)
to Registrant's Annual Report on Form 10-K for the year ended
January 3, 1998, and hereby incorporated by reference).*
10(g) Stock Option Plan E of Registrant (filed as Exhibit 10(h) to
Registrant's Annual Report on Form 10-K for the year ended
January 3, 1998, and hereby incorporated by reference).*
10(h) Agreement for Cerner Corporation Consulting Services with
Gerald E. Bisbee, Ph.D. (filed as Exhibit 10(i) to Registrant's
Annual Report on Form 10-K for the year ended January 3, 1998,
and hereby incorporated by reference).*
10(i) Cerner Performance Plan for 1998.*
10(j) Cerner Performance Plan for 1999.*
10(k) Long-Term Incentive Plan for 1998.*
27
10(l) Long-Term Incentive Plan for 1999.*
10(m) Promissory Note of Jack A. Newman, Jr.*
10(n) Promissory Note of Robert C. Dieterle.*
10(o) Promissory Note of Glenn P. Tobin.*
10(p) Promissory Note of Marvin G. Pember.*
11 Computation of Registrant's Earnings Per Share.
(Exhibit omitted. Information contained in notes to
consolidated financial statements.)
21 Subsidiaries of Registrant.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
* Management contracts or compensatory plans or arrangements required to be
identified by Item 14(a)(3).
(b) Reports on Form 8-K
A report on form 8-K was filed on March 18, 1999.
(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.
28
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: April 1, 1999 By:/s/Neal L. Patterson
--------------------
Neal L. Patterson
Chairman of the Board,
Chief Executive Officer and President
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 April 1, 1999
- -----------------------------
Neal L. Patterson, Chairman of the Board,
Chief Executive Officer (Principal Executive Officer) and President
/s/Clifford W. Illig April 1, 1999
- -----------------------------
Clifford W. Illig, Vice Chairman and Director
/s/Marc G. Naughton April 1, 1999
- -----------------------------
Marc G. Naughton, Vice President and
Chief Financial Officer (Principal Financial and Accounting Officer)
/s/Michael E. Herman April 1, 1999
- -----------------------------
Michael E. Herman, Director
/s/Gerald E. Bisbee April 1, 1999
- ------------------------------
Gerald E. Bisbee, Jr., Director
/s/Thomas C. Tinstman April 1, 1999
- -------------------------------
Thomas C. Tinstman, M.D., Senior Vice President and Director
29
/s/John C. Danforth April 1, 1999
- -------------------------------
John C. Danforth, Director
/s/Thomas A. McDonnell April 1, 1999
- -------------------------------
Thomas A. McDonnell, Director
30
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Board of Directors and Stockholders
Cerner Corporation:
We have audited the accompanying consolidated balance sheets of
Cerner Corporation and subsidiaries as of January 2, 1999 and
January 3, 1998, and the related consolidated statements of
earnings, changes in equity, and cash flows for each of the years
in the three-year period ended January 2, 1999. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Cerner Corporation and subsidiaries as of January 2,
1999 and January 3, 1998, and the results of their operations and
their cash flows for each of the years in the three-year period
ended January 2, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
Kansas City, Missouri
February 3, 1999
Management's Report
- --------------------------------------------------------------------------------
The management of Cerner Corporation is responsible for the
consolidated financial statements and all other information
presented in this report. The financial statements have been
prepared in conformity with generally accepted accounting
principles appropriate to the circumstances, and, therefore,
included in the financial statements are certain amounts based on
management's informed estimates and judgments. Other financial
information in this report is consistent with that in the
consolidated financial statements. The consolidated financial
statements have been audited by Cerner Corporation's independent
certified public accountants and have been reviewed by the audit
committee of the Board of Directors.
31
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
January 2, 1999 and January 3, 1998
1998 1997
-------------------------
(Dollars in thousands)
Assets
Current Assets:
Cash and cash equivalents $ 42,658 77,543
Receivables 167,374 125,516
Inventory 2,651 1,743
Prepaid expenses and other 4,234 3,553
----------- -----------
Total current assets 216,917 208,355
Property and equipment, net 77,292 65,724
Software development costs, net 54,971 40,566
Intangible assets, net 8,884 6,402
Investments, net 71,719 2,534
Other assets 6,702 8,200
----------- -----------
$ 436,485 331,781
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 14,092 11,330
Current installments of long-term debt 5,030 35
Deferred revenue 33,921 8,290
Income taxes 26,057 18,245
Accrued payroll and tax withholdings 16,625 11,610
Other accrued expenses 2,511 2,037
----------- -----------
Total current liabilities 98,236 51,547
Long-term debt, net 25,000 30,026
Deferred income taxes 22,106 16,461
Deferred revenue 20,000 --
Stockholders' Equity:
Common stock, $.01 par par value, 150,000,000 shares authorized,
34,674,164 shares issued in 1998 and
33,816,829 shares in 1997 347 338
Additional paid-in capital 165,239 148,074
Retained earnings 126,862 106,273
Treasury stock, at cost
(1,201,518 shares in 1998 and 1997) (20,796) (20,796)
Accumulated other comprehensive income:
Foreign currency translation adjustment (243) (142)
Unrealized loss on available-for-sale equity security
(net of deferred tax liability of $165) (266) --
----------- -----------
Total stockholders' equity 271,143 233,747
----------- -----------
Commitments (Note 11)
$ 436,485 331,781
=========== ===========
See notes to consolidated financial statements.
32
Consolidated Statements of Earnings
- --------------------------------------------------------------------------------
For the years ended January 2, 1999, January 3, 1998, and December 28, 1996
1998 1997 1996
----------------------------------
(In thousands, except per share data)
Revenues
System sales $ 245,490 170,906 122,836
Support and maintenance 76,755 68,713 57,430
Other 8,657 5,438 8,841
_________________________________
Total revenues 330,902 245,057 189,107
---------------------------------
Costs and expenses
Cost of revenues 89,544 71,943 58,892
Sales and client service 117,107 83,788 65,005
Software development 59,754 44,086 35,890
General and administrative 25,929 23,070 18,719
Write-off of acquired in-process
research and development 5,038 -- --
--------------------------------
Total costs and expenses 297,372 222,887 178,506
--------------------------------
Operating earnings 33,530 22,170 10,601
Interest income (expense), net (262) 2,314 2,301
--------------------------------
Earnings before income taxes 33,268 24,484 12,902
Income taxes 12,679 9,336 4,651
--------------------------------
Net earnings $ 20,589 15,148 8,251