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 1, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________ to ___________
Commission File Number 0-15386
CERNER CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 43-1196944
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
2800 Rockcreek Parkway
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, 2000, there were 33,794,735 shares of Common
Stock outstanding, of which 7,810,343 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, 2000,
was $772,223,643.
Documents incorporated by reference: portions of the
Registrant's Proxy Statement for the 2000 Annual Meeting of
Stockholders are incorporated by reference in Part III hereof.
<PAGE>
PART I
Item 1. Business
Overview
- --------
Cerner Corporation ("Cerner" or the "Company") is a Delaware
corporation incorporated in 1980. The Company's principal
offices are located at 2800 Rockcreek Parkway, Kansas City,
Missouri 64117, and its telephone number is (816) 221-1024.
Cerner designs, develops, markets, installs and supports
information technology and content solutions for healthcare
organizations and consumers that are capable of being implemented
on an individual, combined or enterprise-wide basis and are
accessible over the internet by consumers, physicians and
healthcare providers. Cerner's integrated suite of solutions
enable healthcare providers to improve operating effectiveness,
reduce costs and improve the quality of care as measured by
clinical outcomes. Cerner's solutions are designed to provide
the appropriate health information and knowledge to care givers,
clinicians and consumers and the appropriate management
information to healthcare administration on a real-time basis,
allowing secure access to data by clinical and administrative
users in organized settings of care and by consumers from their
home. These solutions can be implemented as part of an enterprise-
wide solution or individually, leveraging the client's existing
investment in information technology. Cerner solutions are
available as integrated applications managed by our clients or as
a service option under the Applications Solutions Provider (ASP)
model, where applications are provided to clients from Cerner's
solutions center in Kansas City, Missouri. Cerner solutions are
designed and developed using the Health Network Architecture
(''HNA''), a single information architecture. HNA is a unified
technology infrastructure for combining clinical and management
information applications. HNA allows each participating
healthcare organization to access an individual's clinical record
at the point of care, to organize it for the specific needs of
the physician, nurse, laboratory technician or other care
provider on a real-time basis, and to use the information in
management decisions to improve the efficiency and productivity
of the entire enterprise. HNA solutions allow healthcare
organizations to reduce costs of delivering care, reduce clinical
variance, reduce medical errors, and improve patient safety.
Cerner has developed and is licensing and installing or offering
as a service, its newest generation of HNA solutions known as
"Millennium". See "Cerner's Techology - Health Network
Architecture (HNA) and HNA Millennium" for a discussion of HNA
Millennium.
Healthcare Industry
- -------------------
While the rate of healthcare cost increases has slowed in the
last five years, the demand for healthcare services has continued
unabated. A more health conscious and better-informed health
consumer combined with the aging of the population in general has
accelerated the demand for healthcare services. In most markets
the drive toward pure capitation (a fixed monthly fee per member
in payment for all required services) and a primary care
gatekeeper model as key components of managed care has slowed. A
virtual integrated health organization built upon connections,
partnerships, alliances, and relationships with physician,
payors, employers, and suppliers is emerging as the operating
model for health organizations. In order to operate effectively
in this virtual model, healthcare organizations must increasingly
rely on broadly deployed information technology to accomplish the
integration necessary to manage costs and deliver high quality
patient outcomes.
The healthcare delivery industry in the United States is highly
fragmented, very complex and remarkably inefficient. While
science and medical technology continue to make significant
breakthrough progress in dealing with human disease and injury,
the management and clinical processes of these complex delivery
organizations have made little progress in the past twenty years.
Even today, the major clinical workflow depends on manual, paper-
based medical record systems augmented by spotty automation.
This has resulted in an industry which is economically
inefficient and produces significant variances in medical
outcomes. In November 1999, the Institute of Medicine released a
report called "To Err is Human"
<PAGE> 2
indicating that medical error is one of the top ten causes of
death in the United States. The industry must address these
issues by identifying ways to enhance efficiencies and improve the
quality of care.
The healthcare industry has also been buffeted by significant
external forces during the 1990's. Managed Care Organizations
defined themselves as an intermediary in the flow of funds and
exerted pressures on healthcare spending. These pressures
resulted in lowering total spending on healthcare but did not
necessarily address any of the larger, systemic issues in the
industry. As a result of the pressures created by managed care,
healthcare providers consolidated both horizontally and
vertically into newly defined delivery systems. It is clear many
of these delivery systems were created to form entities to
negotiate with managed care but many organizations also expected
new economies of scale. For the most part these economies never
materialized.
A number of for-profit business models were created during the
decade attempting to find the leverage point which would
transform the healthcare delivery system. The models included
for-profit acute care, physician practice management companies
and, most recently, the carve-out focused factories specializing
in one element of healthcare, such as cardiology. Most of these
efforts have been unsuccessful.
Finally, Federal government policy in the United States has also
been an active force shaping the health care environment. The
policy impact includes the focus on health care reform in the
1992 presidential election, the very aggressive Medicare Fraud
and Abuse compliance programs initiated during the decade and,
most recently, the passing of the Balanced Budget Act, which
reduced payments to health care providers by over $250 billion
dollars over a five-year period. This legislation took its full
grip on providers here in the United States during 1999,
significantly reducing the operating margins of hospitals and
physician groups while raising their cost of capital.
In order to be competitive in this dynamic marketplace,
healthcare enterprises will need to deploy information technology
solutions that internally automate the paper-based medical record
systems and externally create smart connections between the major
participants in health care: the consumer, the physician, the
hospital and the managed care organization. The emergence of
near ubiquitous internet connectivity has enabled a new class of
eHealth solutions that allow the consumer to participate fully in
the care and health management process. This same technology has
also enabled a new way to deliver these solutions under the
Application Services Provider (ASP) model, whereby information
solutions are delivered to clients from a remote location.
The complexity of healthcare's information requirements will
continue to increase with provider consolidations and the
challenging cost containment pressures created by the Balance
Budget Act. The soon to be published final regulations under the
Health Insurance Portability and Accountability Act of 1996 add
an additional element of uncertainty for healthcare organizations
around security and patient confidentiality. Physician
organizations are affected by the same pressures and will
increasingly need to utilize person/patient focused information
systems (i) to improve quality and efficiency for their growing
practices and physician networks, (ii) to develop the data
necessary to compete for contracts with payors and (iii) 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 to
understand and improve the health of their members, to reduce
medical errors and to reduce costs. These larger, more complex
integrated healthcare enterprises are seeking closer
relationships with technology suppliers that can provide
comprehensive information systems solutions, including integrated
process-based systems for clinical domains, data repositories,
applications for physicians and management teams and consumer
connectivity.
Cerner is responding to the changing and increasing needs of the
healthcare industry for better information systems by developing
HNA Millennium, its latest generation of solutions. See "Cerner's
Techology - Health Network Architecture (HNA) and HNA Millennium"
for a discussion of HNA Millennium.
<PAGE> 3
Healthcare Information Technology (HCIT) Industry
- -------------------------------------------------
The Healthcare Information Technology industry is evolving to
meet the needs of a changing marketplace. Beginning in the
1960's, computer systems developed for use in healthcare were
financially oriented, with a focus on the ability to capture
charges and generate patient bills and update the general ledger.
Later, hospital and commercial 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. During the late eighties and
early nineties, individual clinical departments selected systems
based upon specific features on a ''best of breed'' basis
resulting in disparate and disconnected information systems
within the institution.
Most recently, there has been a shift from the purchase of
disparate clinical systems selected on a ''best of breed'' basis
to systems that are able to integrate communication effectively
throughout the healthcare enterprise. This approach requires a
common system architecture, in which system's functional
components are engineered and built with a common data model,
messaging system, standards and other lower level technical
components. The system users enjoy a common look and feel as
well as common navigation capabilities. This infrastructure
trend also affects the relationship between the health system and
the suppliers of information technology. Moving to a common
architecture approach requires the creation of a strategic
relationship with one HCIT company dedicated to implementing a
shared vision for the role of information in the operation of the
health system.
Many HCIT companies have responded to this trend by acquiring
smaller HCIT companies with existing application offerings and
thereby offering a "solution" under one brand to the market
place. Attempts to integrate these disparate architectures have
not delivered the anticipated clinical or financial benefits for
clients or HCIT companies. In the long run, the Company believes
that value for consumers and providers will center on a common
architectural framework that allows the seamless transmission of
knowledge and processes among all the healthcare constituents.
The internet's role in the transformation of healthcare is not
well defined at present, but all indications are that it will be
one of the major enablers of the shift to a consumer-centric
industry. As more and more households have internet access,
consumers have access to an increasing amount of health
information, resulting in an informed and empowered healthcare
consumer.
The same infrastructure that is automating the clinical and
managerial operations of the medical center and clinic is
extending to all trading partners within the healthcare industry.
Managed care authorizations, referrals, claims and remittance can
be submitted to local, regional, and national exchanges for rapid
processing. Orders for tests and results can be securely
transmitted over the internet to physicians and consumers alike.
Most importantly, consumers will have the option of working
closely with their local healthcare organization to organize and
manage their care or selectively work with providers on an as
needed basis. An internet-based personal health record will
emerge to assist patients and caregivers with maintaining the
wide variety of health and care related information.
Cerner's HNA Millennium solutions, with their person-centric
design and web-based architecture, are well suited to meet the
requirements of the connected health system. See "Cerner's
Techology - Health Network Architecture (HNA) and HNA Millennium"
for a discussion of HNA Millennium.
<PAGE> 4
The Cerner Vision
- -----------------
Cerner's vision is to enable the transformation of healthcare
through the implementation of information technology and the
deployment of medical knowledge. As a result of the rapid
changes in the healthcare and information technology industries,
Cerner believes that a "New Health Enterprise" will emerge with a
digital center and an information "backbone" which connects
consumers, physicians, hospitals, pharmacies, home health
agencies and payors to service the healthcare needs of a
community or defined member population. This digital
information backbone is enabled by the increased connectivity
created by the internet.
Cerner believes that healthcare delivery systems will reach an
inflection point within the next decade, creating the emergence
of these New Health Enterprises in the United States. Currently,
healthcare organizations are seeing increased workflow volume
while the reimbursement per case decreases. The New Health
Enterprise will require information systems that can manage care
delivery virtually across an entire community while
simultaneously managing the business services side of healthcare
management. This will require managing care from the
person/patient's home to the Intensive Care Unit in a paperless
fashion. In this digital environment, Cerner envisions that
consumers and physicians will be able to choose from a variety of
electronic access devices (e.g. Personal Computers linked to
internet portals, Personal Digital Assistants, home/personal-
based diagnostic and therapeutic technology) to connect to the
clinical process of care and create or review a complete health
record for each individual. This precise and specific personal
medical information will create large data repositories storing
and tracking health outcomes over multiple lifetimes. New
knowledge and medical insights will be harvested from this data.
Cerner's products securely manage health care transactions from
each point of access to their destination. Cerner's products
also allow preferencing and customization to the consumer and
physicians, embed clinical rules, clinical evidence and protocols
to monitor care safety and quality, and use of business and
compliance rules to create more efficient business management
between the health enterprise and their payors, patients,
physician groups, supply chain, community, and outside business
relationships.
Cerner's Technology -- Health Network Architecture (HNA) and HNA
- -----------------------------------------------------------------
Millennium
- ----------
The cornerstone of Cerner's technology strategy is HNA, the
single architecture around which each of Cerner's information
products is developed. This open, highly scaleable architecture
allows Cerner to meet the clinical, management, and business
information requirements of a healthcare delivery system across
the continuum of care. Cerner's newest version of HNA computing
platform, Millennium, developed between 1994 and 1999, utilizes
N-tiered client/server technology to optimize distributed
computing performance and scalability across multiple client and
server platforms. The HNA Millennium architecture and
applications were designed and developed to accommodate
healthcare specific requirements for mission critical computing
and secure access, whether the user is inside the healthcare
enterprise or at home via the internet. HNA Millennium's breadth
of focus and functionality are well suited for large-scale and
enterprise application technologies for healthcare organizations,
including the ability to leverage the internet for eHealth-
related self-service and business to business functions.
The value of HNA Millennium to a client organization is the use
across a healthcare organization of a single system based on a
fully integrated common architecture and database. With its
single data model, HNA Millennium provides real time access to
all information across multiple applications, domains,
organizations and physical locations, including physician,
hospital, nursing, laboratory, pharmacy, and consumers, to all of
those needing such access, wherever they are located. Given its
integrated and open design, HNA Millennium can also provide a
centralized repository of clinical and financial transactions to
help standardize access and messaging of disparate applications
across a health system.
The alternative to an architectural approach is to use disparate
systems based on differing architectures and data structures to
automate the care processes across the continuum of care. These
disparate systems must be interfaced together and rely on these
interfaces to transmit, modify and arrange data
<PAGE> 5
exchanged between them, which limits the data's usefulness across
multiple systems and inhibits real-time access. In addition,
many of these systems lack functional scalability and cannot
operate across multiple provider settings or locations within
a healthcare organization.
Two overarching capabilities are embedded into the HNA Millennium
architecture: (i) person centric transactions and messaging,
which considers the breadth of requirements not only of a
patient, but also of healthy consumers, and (ii) healthcare
community dynamics, which takes into account the flexibility
required by the constantly changing relationships between
healthcare organizations, physicians and consumers, and the need
to maintain complex security and end user preferences based on
the context and business attributes of the transaction in a
community setting.
Strategy
- --------
Key elements of the Company's business strategy include:
To penetrate the integrated healthcare provider 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.
To expand its market share in individual domains.
- ------------------------------------------------ Cerner expects
continued growth in clinical domain systems for specific markets
such as nursing, physician office, laboratory, pharmacy,
radiology, surgery, emergency medicine and cardiology, as
institutional providers look to restructure and reengineer these
high cost centers. The Company also intends to market
aggressively Cerner clinical and management information systems
and services to its existing client base.
To remain committed to a common architecture.
- ---------------------------------------------- Because Cerner
believes that the constituents in health management need to work
together to benefit defined populations in a community, the
Company has made a commitment to a single unified architecture as
the platform for "fully integrated'' health information and
management systems. This platform enables Cerner's process-based
HNA systems to be scaleable on a linear basis, using either
Cerner compatible modules for process-oriented applications or
competitive systems interfaced using open system protocols.
To expand its products and services.
- -------------------------------------- Using HNA Millennium,
Cerner intends to continue expanding the range of products and
services offered to providers 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
providers and managed care organizations reach into new markets
and offer more alternative services to remain competitive. The
Company believes these organizations will find value in having
personal health records and trusted health information accessible
to the individual in the home. In addition, Cerner recognizes
the value of the aggregate database being developed by its broad
client base as a potential means to enable comparative or
normative procedure evaluations as a powerful new tool in the
healthcare industry. The substantial project management process
redesign, technology integration, and training involved in
healthcare systems taking advantage of the opportunities provided
by clinical and management information technology represent a
significant market for the Company's consulting services.
To offer web-based solutions.
- ------------------------------- The Company has extended its
product offerings around the HNA Millennium architecture to
facilitate powerful business-to-consumer and business-to-business
connections
<PAGE> 6
via the internet. This satisfies healthcare consumers'
increasing demands for anytime, anywhere access to health
information, communication with their physician, access to
services and management of a personal health record. Cerner's
expertise in complex clinical and management information systems
allows health organizations to create and brand a health "portal"
in their community that connects consumers, physicians,
hospitals, disease management providers, payors, reference labs,
pharmacies, and supply-chain organizations via the internet.
Bringing the consumer and provider closer together in the context
of the health record creates an opportunity for the majority of
Cerner's products to deploy via the internet. Cerner currently
has applications that are developed and being used for web
deployment. Cerner also provides content and applications to
other internet-focused companies, and in the future will offer
additional internet services and solutions, as the business
demand requires.
To offer its products as an Application Service Provider.
- ---------------------------------------------------------- The
Company now offers its HNA Millennium applications through its
new Application Service Provider (ASP) organization. The ASP
organization offers information technology services to clients in
a package that includes software, computer hardware,
implementation, technical support, wide-area network (WAN)
services and automatic software upgrades. Unlike traditional
software implementations, software delivered through an ASP is
not installed at the user's location, but is delivered, operated,
and maintained in Cerner's solutions center in a rapidly
accelerated implementation timeframe with a smaller initial user
investment. Using Cerner's ASP, any size organization can access
the same robust clinical applications, architecture, and user-
interface advantages that were previously only available to
larger institutions.
Our Technology - Information Product Suites
- -------------------------------------------
The Company's technology includes 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 Systems and Knowledge
Solutions, 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's applications can all be delivered over the internet in a
web browser using third-party application server software or for
selected applications, native web implementations. 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 client's
computers, related hardware, networks and sub-licensed software
components that are manufactured and supplied to Cerner by third
parties.
Enterprise Systems and Enterprise Repositories
- ----------------------------------------------
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. It includes a structured repository for the
storage and viewing of health plan information, records,
contracts, eligibility and coverage data. 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, which is
maintained in the Open Clinical Foundation (OCF) data repository.
ePowerChart extends the power of this viewer to the web.
Physicians can gain access to the electronic medical record to
view results and documentation from any internet-based terminal.
It includes a structured repository for the storage of
<PAGE> 7
person/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 (OMF) 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.
Clinical Systems for Direct Care
- --------------------------------
Cerner's CareNet Acute Care Management System is designed to
automate the entire care process in acute or institutional
settings. It collects, refines, organizes, and evaluates
detailed clinical and management data. It enables the entire care
team to plan and manage individual activities and plans, as well
as measure outcomes and goals. CareNet consists of two major
solutions - Care Team Automation, which automates documentation
related to care delivery at the point of care within an acute
care organization, including nursing order entry and viewing of
the patient's medical record, as well as basic registration
capabilities; and Care Coordination, which supports acute care
planning, including pathways used to audit care, nursing care
plans, multidisciplinary care plans, single-discipline pathways
and multidisciplinary pathways.
The INet Intensive Care Management System is designed to automate
the entire care process in intensive care settings. It supports
chart review and browsing, order management, documentation
management, and automatic data acquisition, as well as basic
patient management. 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. ProVide allows an enterprise to deliver a
common medical record effectively integrating the ambulatory and
acute care record in one single instance. In addition to the
traditional implementation and operations model, this system is
immediately deployable under an ASP model hosted in Cerner's
solutions center and includes options for the rapid
implementation of the solution.
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. In addition to
these solutions, ProCall also supports telephonic documentation
to allow patients and caregivers to document activities and
results by using a touch-tone phone. 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. Interfaces to patient billing
systems are also supported. The ProCall system is immediately
deployable under an ASP model hosted in Cerner's solutions center
and includes options for the rapid implementation of the
solution.
<PAGE> 8
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 human leukocyte
antigen. PathNet automates the ordering and reporting of
procedures, the production of accurate and timely reports, and
the maintenance of accessible clinical records. The PathNet
system is immediately deployable under an ASP model hosted in
Cerner's solutions center and includes options for the rapid
implementation of the solution. To facilitate electronic
ordering by community physicians and to allow the rapid
dissemination of lab results, Cerner also provides PathLink, a
web-based application for both order and results. PathLink
combines the order critiquing, routing and labeling logic of
PathNet with the convenience of the web.
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. Specific modules on mammography, film tracking, and
inventory management are also offered. Incorporated in the
RadNet system is the capability to display and route medical
images in a viewer called ProView. Complex interfaces to major
PACS (Pictorial Archive Retrieval Systems) are also offered to
integrate the radiology information system to the PACS.
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/retail 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, including interfaces to automated dispensing devices
also are fully supported. 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, anesthesia management and operating room management.
Case cart management, preference cards, and peri-operative
documentation are key attributes of the system.
The FirstNet Emergency Medicine Information System offers patient
and provider tracking and an intuitive presentation of patient
diagnoses and clinical events for the emergency department.
FirstNet provides basic emergency department functionality,
including quick admits, tracking, triage, and patient history, as
well as a graphical reference to patient location and order
status. Physician documentation following structured
documentation pathways is also offered.
The CVNet Cardiology 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 Systems and Knowledge Solutions
- ------------------------------------------------
Discern Expert is 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. It supports
both synchronous (real-time, interactive) processing and
asynchronous (noninteractive) processing of events. Discern
Expert manages the evaluation and display of executable clinical
knowledge through both Cerner-developed Alerts and Insights,
which are licensed separately, or client-developed alerts.
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.
<PAGE> 9
Alerts and Insights are automated clinical guidelines that,
through Cerner systems, provide decision support. Alerts
represent specific, synchronous (interactive) or asynchronous
(noninteractive), rule-based alerts that operate in conjunction
with Discern Expert. Insights are specific, synchronous
(interactive), rule-based clinical guidelines that operate in
conjunction with Discern Expert and that are peer-reviewed and
medically researched.
Care Designs are clinical pathways and protocols that automate
the specific plans of care for an individual, and operate within
Cerner's clinical systems.
Health Facts is Cerner's comparative data warehouse for
benchmarking information and services for subscribers to support
their own improvement processes. Data is provided from client's
information systems as well as national and regional data sets.
The Health Facts warehouse is hosted at Cerner's World
Headquarters and accessed via the web by any web browser.
Financial and Operational Management Systems
- --------------------------------------------
The ProFit Enterprise Billing & Accounts Receivable System is
Cerner's system for revenue accounting, billing and accounts
receivables for the entire health system as well as each
individual domain or organization.
The ProRate Agreement Management System is a system to designed
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 contained in the Open Management Foundation 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.
The ProCure Materials Management System and the ProTrack
Equipment Management System automate the business operations
around supply chain and includes materials and equipment
management for the organization.
Population Health Management
- ----------------------------
Survey and Assessments produces personal health risk assessments
and analyzes those to create interventions that promote self-care
and improve health. The offering includes both (i) the tools
necessary to build unique survey instruments to assess patient
wellness, functional status and satisfaction and (ii) specific
content to score a health risk assessment.
Demand Management
- -----------------
Health Connections is a demand management system that includes
applications and services to automate and manage the operations
of a call center, including protocol-based triage, referral
management and person information. The ProLink Call Center
Management System is Cerner's suite of applications that enables
call centers to automate the telecare function for providers as
well as health plans or disease management companies.
<PAGE> 10
Personal Health
- ---------------
Vitality is Cerner's internet-based 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.
Vitality can be tightly integrated into the person record within
the health system or can standalone. In either case, relevant
health information can be shared among providers and the patient
under control of the patient. Vitality can be hosted at the
client data center or at Cerner's solution center.
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. The Open Port Interface System
represents Cerner's standardized technology for providing
reliable foreign system, medical device, and other standard
interfaces in a timely manner. Message translation and data
mapping are done with point-and-click tools and a scripting
environment. Communications protocols are configured via table-
driven parameters. These sophisticated methodologies result in
decreased implementation times and greater client satisfaction.
Software Development
- --------------------
Cerner commits significant resources to developing new health
information system products. As of January 1, 2000, 1,022
employees were engaged full-time in product development
activities. Total expenditures for the development and
enhancement of the Company's products were approximately
$88,699,000, $74,159,000 and $54,524,000 during the 1999, 1998
and 1997 fiscal years respectively. These figures include both
capitalized and noncapitalized portions and exclude amounts
amortized for financial reporting purposes.
The Company expects to continue investment and development
efforts for its current and future product offerings. As new
clinical and management information needs emerge, Cerner intends
to enhance its current product lines with new versions released
to clients on a periodic basis. In addition, Cerner plans to
expand its current product lines by developing additional
information systems for clinical, financial, operational and/or
consumer use 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 and OMF product lines.
See "Cerner's Techology - Health Network Architecture (HNA) and
HNA Millennium" for a discussion of the development of Cerner's
latest generation of software products.
Sales and Marketing
- -------------------
The markets for Cerner's information system products include
integrated delivery networks, physician groups and networks and
their management service organizations, managed care
organizations, hospitals, medical centers, free-standing
reference laboratories, blood banks, imaging centers, pharmacies,
pharmaceutical manufacturers, employer coalitions, and public
health organizations. To date, a substantial portion of system
sales have been in clinical applications in hospital-based
provider
<PAGE> 11
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 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 is in the process of expanding its sales force in
anticipation of increased market demands expected to be created
by its HNA Millennium solutions. See "Cerner's Techology -
Health Network Architecture (HNA) and HNA Millennium" for a
discussion of the development of Cerner's latest generation of
software products.
The Company's executive marketing management is located in its
Kansas City, Missouri, headquarters, while its account
representatives are deployed across the United States. The
Company, through subsidiaries and joint ventures, has sales staff
and/or offices in Australia, Canada, 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
$24,001,000, $17,545,000 and $16,272,000 for the 1999, 1998 and
1997 fiscal years, respectively. The Company supports its sales
force with technical personnel who perform demonstrations of
Cerner's products and assist clients in determining the proper
hardware and software configurations. The Company'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.
At the end of 1998 Cerner licensed HNA Millenium functionality to
CareInsite, Inc. ("CareInsite"), in exchange for a 19.9% equity
interest in such company. Cerner currently has a 18.7% equity
interest in CareInsite. CareInsite is majority owned by Medical
Manager, Inc. ("Medical Manager") and was formed for the purpose
of creating internet-based physician connectivity and electronic
commerce. In February of 2000, CareInsite and Medical Manager
announced an agreement to merge with Healtheon/WebMD Corporation.
The merger is subject to shareholder approval and regulatory
clearance.
Client Services
- ---------------
All of Cerner's clients enter into software maintenance
agreements with Cerner for support of their Cerner systems. In
addition to immediate software support in the event of problems,
these agreements allow these clients the use of new releases of
the Cerner products covered by these agreements. Each client has
24-hour access to the client support staff located at Cerner's
corporate headquarters. Most of Cerner's clients also enter into
hardware maintenance agreements with Cerner. These arrangements
normally provide for a fixed monthly fee for specified services.
In the majority of cases, Cerner subcontracts hardware
maintenance to the hardware manufacturer.
Cerner recently modified its strategy of using regional business
centers to provide support for its clients. Due to the increase
in the number of Cerner personnel working at client sites and the
resulting decrease in utilization and cost effectiveness of its
regional branch offices, Cerner decided to close its facilities
in Atlanta, Boston, Dallas, Los Angeles and Washington, D.C.
effective April 30, 2000. Cerner's offices in Detroit and Denver
will remain open.
<PAGE> 12
Backlog
- -------
At January 1, 2000, Cerner had contract backlog of approximately
$338,614,000. 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 1, 2000, the Company had approximately $75,360,000 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 1, 2000, Cerner had a software
support and maintenance backlog of approximately $162,798,000.
Such backlog represents contracted software support and hardware
maintenance services for a period of twelve months. The Company
estimates that approximately 47% of the aggregate backlog of
$501,412,000 will be recognized as revenue during 2000.
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) possible failures or defects in the
performance of the Company's software; (x) the possibility that
the Company's anti-takeover defenses could delay or prevent an
acquisition of the Company; and (xi) risks and uncertainties
related to the Year 2000 transition.
Item 2. Properties
The Company's offices are located in a Company-owned office park
in North Kansas City, Missouri, containing approximately 500,000
square feet of useable space. As of January 1, 2000, the Company
was using approximately 436,000 square feet and substantially all
of the remainder was leased to tenants. The Company also leases
office space for its branch offices in Detroit, Denver and
Australia. The Company's current leases for office space in
Boston and Washington, D.C. terminate at the end of April. The
Company is negotiating the termination of or planning to sublease
its current leases for office space in Atlanta, Dallas and Los
Angeles.
Item 3. Legal Proceedings
On June 11, 1999, a lawsuit was filed against the Company and
eleven other companies engaged in various aspects of the
healthcare information systems business. The lawsuit was brought
in the United States District Court for the Northern District of
Texas Fort Worth Division and is entitled Allcare Health
Management System, Inc. v. Cerner Corporation, et al., and sought
damages for patent infringement. The case was dismissed with
prejudice with respect to the Company on February 9, 2000 and the
Company entered into an agreement with Allcare and its principals
to obtain a license to use the patent which was the subject of
the litigation, as well as all future patents of Allcare and all
patents related to healthcare information systems of Allcare's
principals issued prior to February 1, 2012.
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 1, 2000.
<PAGE> 13
Item 4A. Executive Officers of the Company
The following table sets forth the names, ages, positions and
certain other information regarding the Company's executive
officers as of March 27, 2000. Officers are elected annually and
serve at the discretion of the board of directors.
<TABLE>
Name Age Positions
- ---- --- ---------
<S> <C> <C>
Neal L. Patterson 50 Chairman of the Board of Directors and Chief Executive
Officer
Clifford W. Illig 49 Vice Chairman of the Board of Directors
Earl H. Devanny, III 48 President
Glenn P. Tobin, Ph.D. 38 Executive Vice President and Chief Operating Officer
Jack A. Newman, Jr. 52 Executive Vice President
Paul M. Black 41 Senior Vice President and Chief Sales Officer
Alan D. Dietrich 37 Senior Vice President
Stephen M. Goodrich 48 Senior Vice President
Douglas M. Krebs 42 Senior Vice President and President of Cerner
International
Thomas C. Tinstman, M.D. 54 Senior Vice President and Chief Medical Officer
Marc G. Naughton 45 Vice President and Chief Financial Officer
Stanley M. Sword 38 Vice President and Chief People Officer
Jeffrey A. Townsend 36 Vice President and Chief Engineering Officer
Randy D. Sims 39 Vice President, Chief Legal Officer and Secretary
Richard J. Flanigan, Jr. 40 Vice President and General Manager
Stephen D. Garver 39 Vice President and Managing Partner
Paul J. Sinclair 42 Vice President, Senior Partner and North American
Operations Officer
</TABLE>
Neal L. Patterson has been Chairman of the Board of Directors and
Chief Executive Officer of the Company for more than five years.
Mr. Patterson also served as President of the Company from March
of 1999 until August of 1999.
Clifford W. Illig has been a Director of the Company for more
than five years. He also served as Chief Operating Officer of
the Company for more than five years until October, 1998 and as
President of the
<PAGE> 14
Company for more than five years until March of 1999. Mr. Illig
was appointed Vice Chairman of the Board of Directors in March of
1999.
Earl H. Devanny, III joined the Company in August of 1999 as
President. Prior to joining the Company, Mr. Devanny served as
president of the Health Care Information Systems Division of ADAC
Laboratories. Prior to joining ADAC, Mr. Devanny served as a
Vice President of Cerner from 1994 to 1997. Prior to that he
spent seventeen years with IBM Corporation.
Glenn P. Tobin, Ph.D. joined the Company in April of 1998 as
General Manager and Senior Vice President. On October 29, 1998,
Dr. Tobin was appointed Executive Vice President and Chief
Operating Officer. Prior to joining the Company, Dr. Tobin
served as a senior consultant with McKinsey and Co., Inc. for
more than five years.
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 twenty-two 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.
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 in April 1999.
Douglas M. Krebs joined the Company in June 1994 as Regional Vice
President. He was promoted to Senior Vice President and Area
Manager in April 1999. On February 1, 2000, Doug was appointed
as President of Cerner International, Inc., a wholly owned
subsidiary of the Company. Prior to joining Cerner, he spent
fifteen years with IBM Corporation.
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.
Marc G. Naughton joined the Company in November 1992 as Manager
of Taxes. In November 1995 he was named Chief Financial Officer
and in February 1996 he was promoted to Vice President.
Stanley M. Sword joined the Company in August 1998 in his current
role. Prior to joining Cerner, he served as a client partner in
the outsourcing practice of AT&T Solutions 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.
Randy D. Sims joined the Company in March 1997 as Vice President
and Chief Legal Officer. Prior to joining the Company, Mr. Sims
worked at Farmland Industries, Inc. for three years where he
served most recently as Associate General Counsel. Prior to
Farmland, Mr. Sims was in-house legal counsel at The Marley
Company (now a division of United Dominion Industries) for
seven years. Mr. Sims started his career at Marley as an attorney
and was Assistant General Counsel when he left to join Farmland.
<PAGE> 15
Richard J. Flanigan Jr. joined the Company in November 1994 as
Regional Vice President. In 1997, his responsibilities were
extended and he was named as General Manager. Prior to joining
Cerner, Mr. Flanigan spent more than thirteen years in sales and
management positions at IBM Corporation.
Stephen D. Garver joined the Company in March 1992 as part of
Cerner Consulting. In March of 1999 he was named Vice President
and Managing Partner. Prior to joining the Company, Mr. Garver
spent ten years with Andersen Consulting in a variety of roles
within the systems integration practice.
Paul J. Sinclair joined the Company in October 1996 as Vice
President and Area Operations Officer. In March of 1999 he was
named Senior Partner and North American Operations Officer.
Prior to joining the Company, he worked for seven years at Seer
Technologies.
<PAGE> 16
PART II
Item 5. Market for the Registrant's Common Stock and Related Security
Holder Matters
The Company's common stock trades on The Nasdaq Stock MarketSM
under the symbol CERN. The following table sets forth the high,
low, and last sales prices for the fiscal quarters of 1999 and
1998 as reported by The Nasdaq National Market System. These
quotations represent prices between dealers and do not include
retail mark-up, mark-down, or commissions, and do not necessarily
represent actual transactions.
<TABLE>
1999 1998
------------------------------ -----------------------------
<CAPTION>
High Low Last High Low Last
---- --- ---- ---- --- ----
<S> <C> <C> <C> <C> <C> <C>
First quarter 27 1/4 12 7/8 15 5/8 24 9/16 19 1/16 21 15/16
Second quarter 23 1/2 12 1/2 19 33/64 29 15/16 20 7/8 27 7/8
Third quarter 19 15/16 14 1/4 14 31/32 31 7/16 22 22 5/8
Fourth quarter 20 3/4 12 15/16 19 11/16 27 1/16 20 1/2 26 3/4
</TABLE>
At February 14, 2000, 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
<TABLE>
1999(1)(2) 1998(3) 1997 1996 1995
---------- ------- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statements of Earnings Data:
Revenues $ 340,197 330,902 245,057 189,107 186,901
Operating earnings 3,698 33,530 22,170 10,601 37,265
Earnings before income taxes
and extraordinary item 302 33,268 24,484 12,902 37,220
Extraordinary item - early
extinguishment of debt (1,395) - - - -
Net earnings (loss) (1,211) 20,589 15,148 8,251 22,521
Earnings per share before
extraordinary item:
Basic .01 .63 .46 .25 .75
Diluted .01 .61 .45 .25 .72
Earnings (loss) per share:
Basic (.04) .63 .46 .25 .75
Diluted (.04) .61 .45 .25 .72
Weighted average shares
outstanding:
Basic 33,623 32,825 32,881 32,729 29,845
Diluted 33,916 33,667 33,668 33,620 31,448
Balance Sheet Data:
Working capital $ 170,053 118,681 156,808 171,204 174,064
Total assets 660,891 436,485 331,781 314,753 303,945
Long-term debt, net 100,000 25,000 30,026 30,000 30,104
Stockholders' equity 378,937 271,143 233,747 230,735 221,374
</TABLE>
(1) Includes a non-recurring charge of $5.8 million, net of $3.6
million tax benefit, related to the cost in excess of revenues of
completing fixed fee implementation contracts. The effected tax
impact of non-recurring charges on diluted earnings per share was
($.17) for 1999.
<PAGE> 17
(2) Includes a non-recurring charge of $.9 million, net of $.5
million tax benefit, related to the accrual of branch
restructuring costs. The effected tax impact of non-recurring
charges on diluted earnings per share was ($.03) for 1999.
(3) Includes a non-recurring, acquisition-related charge of $3.1
million, net of $1.9 million tax benefit. The tax-effected
impact of non-recurring charges on diluted earnings per share was
($.09) for 1998.
Summary Financial Data
<TABLE>
___________________________________________________________
1999(1)(2) 1998(3) 1997 1996 1995
---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statements of Earnings Data,
Before Non-recurring Charges:
Revenues $ 340,197 330,902 245,057 189,107 186,901
Operating earnings 14,505 38,568 22,170 10,601 37,265
Earnings before income taxes
and extraordinary item 11,109 38,306 24,484 12,902 37,220
Extraordinary item - early
extinguishment of debt (1,395) - - - -
Net earnings 5,462 23,687 15,148 8,251 22,521
Earnings per share before
extraordinary item:
Basic .20 .72 .46 .25 .75
Diluted .20 .70 .45 .25 .72
Earnings per share:
Basic .16 .72 .46 .25 .75
Diluted .16 .70 .45 .25 .72
Weighted average shares
outstanding:
Basic 33,623 32,825 32,881 32,729 29,845
Diluted 33,916 33,667 33,668 33,620 31,448
Balance Sheet Data:
Working capital $ 170,053 118,681 156,808 171,204 174,064
Total assets 660,891 436,485 331,781 314,753 303,945
Long-term debt, net 100,000 25,000 30,026 30,000 30,104
Stockholders' equity 378,937 271,143 233,747 230,735 221,374
</TABLE>
(1) Statement of Earnings Data excludes a non-recurring charge
of $5.8 million, net of $3.6 million tax benefit, related to the
cost in excess of revenues of completing fixed fee implementation
contracts. The effected tax impact of non-recurring charges on
diluted earnings per share was ($.17) for 1999.
(2) Statement of Earnings Data excludes a non-recurring charge
of $.9 million, net of $.5 million tax benefit, related to the
accrual of branch restructuring costs. The effected tax impact
of non-recurring charges on diluted earnings per share was ($.03)
for 1999.
(3) Statement of Earnings Data excludes a non-recurring,
acquisition-related charge of $3.1 million, net of $1.9 million
tax benefit. The tax-effected impact of non-recurring charges on
diluted earnings per share was ($.09) for 1998.
<PAGE> 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Introduction
- ------------
At the beginning of 1999 the Company indicated that 1999 could be
a difficult year for the Company due to the possible impact of
Y2K issues and the effects of the Balanced Budget Act of 1997 and
unfortunately that became true. In both the first and second
quarters of 1999 our earnings per share were below expectations.
Total revenues declined from the first quarter to the second
quarter and from the second quarter to the third quarter, caused
by a decline in system sales and new bookings. Potential clients
simply could not focus on their Y2K remediation efforts, deal
with the decreased funding resulting from the Balanced Budget Act
of 1997 and invest in new information systems at the same time.
However, beginning in the fourth quarter of 1999 the Company saw
significant improvements. Revenue for the fourth quarter was the
highest for the year and the second highest quarter ever
recorded, bookings in the Company's core business were the
highest ever recorded, cash collections increased significantly
and non-billed receivables declined to approximately 47% of total
receivables, the lowest level since 1996. The increase in
revenues and cash collections and the decline in unbilled
revenues reflect our success in completing HNA Millennium
projects, HNA Millennium market readiness and a declining Y2K
impact in the Company's markets.
However, 1999 did mark important accomplishments. The Company
met all of its Y2K commitments to clients and the Company's
clients have had no Y2K-related problems with the Company's
systems. The Company completed the successful implementation of
349 HNA Millennium applications, more than double the number
completed during 1997 and 1998, and reduced the average time from
project start to conversion from 26.5 months at the end of 1996
to 9.8 months at the end of 1999.
During 2000 patient accounting and other business and management
systems, where the Company currently has no or limited market
share, will become available. 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 can deliver a superior
combination of functionality, efficiency, cost containment and
quality control through interrelated clinical and management
information systems. Although the Company believes that there
will be some "tail" to the Y2K impact into the year 2000, it also
believes that the impact of the Balanced Budget Act of 1997 and
the other pressures to decrease costs and provide improved care
throughout the healthcare system will stimulate the market for
healthcare information systems during the year 2000.
Results of Operations
- ---------------------
Year Ended January 1, 2000, Compared to Year Ended January 2, 1999
The Company's revenues increased 3% to $340,197,000 in 1999 from
$330,902,000 in 1998. Net earnings, before extraordinary item
and non-recurring charges was $6,857,000 in 1999 compared to
$23,687,000 in 1998. Non-recurring charges in 1999, as described
below, included contract reserves and branch restructuring
charges. Non-recurring charges in 1998 include acquisition
related charges. Including the extraordinary item and non-
recurring charges, the Company incurred a loss of $1,211,000, in
1999 compared to earnings of $20,589,000 in 1998.
Revenues - In 1999, revenues increased due to an increase in
support of installed systems and other revenues. System sales
decreased 9% to $224,510,000 in 1999 from $245,490,000 in 1998.
The decrease in system sales is due to a decrease in new contract
bookings in 1999 compared to 1998. The Company believes that
this decrease is due primarily to delays in purchasing decisions
related to Year 2000 and the Balanced Budget Act of 1997. The
sale of additional hardware and software products to the
installed client base increased 27% in 1999 as compared to 1998.
<PAGE> 19
Total sales to the installed base in 1999, including new systems,
incremental hardware and software, support and maintenance
services, and discrete services, were 75% of total revenues in
1999 compared to 69% in 1998. The higher percentage was
primarily due to the decrease in system sales to new clients.
At January 1, 2000, the Company had $338,614,000 in contract
backlog and $162,798,000 in support and maintenance backlog,
compared to $314,965,000 in contract backlog and $153,453,000 in
support and maintenance backlog at the end of 1998.
Support and maintenance revenues increased 23% in 1999 compared
to 12% in 1998. These revenues represented 28% of 1999 total
revenues and 23% of 1998 total revenues. The higher percentage
was primarily attributable to the decrease in system sales and an
increase in installed systems.
Other revenues increased 148% to $21,489,000 in 1999 from
$8,657,000 in 1998. This increase was due primarily to services
performed beyond contracted requirements for existing clients.
The Company anticipates that other revenues will continue to
increase in 2000.
Cost of Revenues - The cost of revenues includes the cost of
third party consulting services, computer hardware and
sublicensed software purchased from computer and software
manufacturers for delivery to clients. It also includes the cost
of hardware maintenance and sublicensed software support
subcontracted to the manufacturers. The cost of revenues was 25%
of total revenues in 1999, excluding a non-recurring fixed fee
implementation cost, as described below, and 27% of total
revenues in 1998. Such costs, as a percent of revenues,
typically have varied as the mix of revenue (software, hardware,
services and support) components carrying different margin rates
changes from period to period. The decrease in the cost of
revenue as a percent of total revenues resulted principally from
a decrease in the percent of revenue from computer hardware and
sublicensed software, which carry a higher cost of revenue
percentage.
Included in the 1999 cost of revenues is a charge of $9,449,000,
which represents the remaining additional costs in excess of
revenues required to complete certain remaining HNA Millennium
fixed fee implementation contracts. The Company switched to an
hourly fee-for-service implementation model in 1997. Delays in
some of the older projects, primarily caused by delays in
development of the Company's HNA Millennium products, increased
the time required to complete these installations. While the
Company originally anticipated these fixed fee implementations
would be completed in 1999, in some instances the focus by
clients on their internal Y2K projects created a further delay.
As a result of the significant implementation work completed in
the last half of 1999 and the agreement between the Company and
these clients in the fourth quarter as to the scope of work
remaining, the Company estimates that the costs to complete
certain fixed fee implementation contracts will exceed the
remaining revenue by $9,449,000. The Company recognized the
impact of these excess costs in the fourth quarter income
statement as a non-recurring cost of revenues.
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 41% in 1999, excluding a non-recurring charge
related to the closing of five branch offices, as described
below, and 35% in 1998. The increase in total sales and client
service expenses is attributable to the cost of a larger field
sales and services organization and marketing of new products.
Included in 1999 sales and client service expenses is a non-
recurring charge related to the closing of five branch offices.
In December, 1999, the Company made a decision to close five of
its branch offices. The Company created a regional branch
structure in 1994 in order to bring associates closer to its
clients. The natural evolution of that strategy and the ability
to leverage internal information technology infrastructure to
create a more virtual workplace has resulted in a significant
decrease in utilization of certain regional offices. This led to
the decision to close these physical locations. The Company
recorded a charge
<PAGE> 20
of $1.4 million in the 1999 fourth quarter to provide for
the costs of closing these locations, primarily based on estimated
lease cancellation fees. The Company will continue to maintain
offices in Denver, Detroit and Australia, in addition to the world
headquarters in Kansas City, Missouri.
Software Development - Software development expenses include
salaries, documentation, and other direct expenses incurred in
product development and amortization of software development
costs. Total expenditures for software development, including
both capitalized and noncapitalized portions, for 1999 and 1998
were $88,699,000 and $74,159,000, respectively. These amounts
exclude amortization. Capitalized software costs were
$30,192,000 and $25,052,000 for 1999 and 1998, respectively. The
increase in aggregate expenditures for software development in
1999 is due to development of HNA Millennium products and
development of community care products.
General and Administrative - General and administrative expenses
include salaries for corporate, financial, and administrative
staffs, utilities, communications expenses, and professional
fees. These expenses as a percent of total revenues were 8% in
1999 and 1998.
Interest Expense, Net - Net interest expense was $3,396,000 in
1999 compared to $262,000 in 1998. The increase is due to an
increase in borrowings. On April 15, 1999, the Company completed
a $100,000,000 private placement of debt pursuant to a Note
Agreement date April 1, 1999. The Series A Senior Notes, with a
$60,000,000 principal amount at 7.14% are payable in five equal
annual installments beginning in April 2002. The Series B Senior
Notes, with a $40,000,000 principal amount at 7.66% are payable
in six equal annual installments beginning April 2004. The
proceeds were used to retire the Company's existing $30,000,000
of debt, and the remaining funds will be used for proposed
capital improvements and to strengthen the Company's cash
position. In connection with the early extinguishment of debt,
the Company incurred a $1,395,000 net of taxes, extraordinary
loss for a prepayment penalty and write-off of deferred loan
costs. The note agreement contains certain net worth, current
ratio, and fixed charge coverage covenants and provides certain
restrictions on the Company's ability to borrow, incur liens,
sell assets, and pay dividends. The Company was in compliance
with all covenants at January 1, 2000.
Income Taxes - The Company's effective tax rate was 39% in 1999
and 38% in 1998.
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.
<PAGE> 21
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 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.
Liquidity and Capital Resources
- -------------------------------
The Company had total cash and cash equivalents of $75,677,000 at
the end of 1999 and working capital of $170,053,000, compared to
cash and cash equivalents of $42,658,000 at the end of 1998, and
working capital of $118,681,000. The increase in working capital
resulted primarily from the completion of a $100,000,000 private
placement of debt, partially offset by the Company's further
investment in software development.
The Company generated cash of $27,389,000, $5,893,000, and
$18,692,000 from operations in 1999, 1998, and 1997,
respectively. Cash flow from operations increased in 1999, due
primarily to increased
<PAGE> 22
collection of receivables, improved payment terms, and record
level conversions. Cash flow from operations decreased in
1998, due primarily to increases in receivables from increased
revenues, and from non-cash consideration received for the
sale of license software.
Cash used in investing activities consisted primarily of
capitalized software development costs of $30,192,000 and
$25,052,000 and purchases of capital equipment of $14,286,000 and
$20,846,000 in 1999 and 1998, respectively. The Company also
made additional investments in affiliates in 1999 of $13,615,000,
primarily CareInsite. The major source of cash from financing
activities in 1999 was provided by the Company's refinancing of
its long-term debt, more fully described in note 6 to the
Consolidated Financial Statements. 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.
Revenues provided under support and maintenance agreements
represent recurring cash flows. Support and maintenance revenues
increased 23%, 12%, and 20%, in 1999, 1998, and 1997,
respectively, and the Company expects these revenues to continue
to grow as the base of installed systems grows.
The Company's liquidity is influenced by many factors, including
the amount and timing of the Company's revenues, its cash
collections from its clients as implementation of its products
proceed and the amounts the Company invests in software
development and capital expenditures. The Company expects to
have an increase in its cash position for 2000. The Company
believes that its present cash position, together with cash
generated from operations, will be sufficient to meet anticipated
cash requirements during 2000. The Company has an $18,000,000
line of credit available.
The effects of inflation 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
<PAGE> 23
anticipated quarterly revenues and consequently its earnings,
since a significant percentage of the Company's expenses are
relatively fixed.
These larger, more complex and costlier systems are installed and
implemented over time periods ranging from approximately six
months to three years and involve significant efforts both by the
Company and the client. In addition, implementation of the
Company's HNA Millennium products is a new and evolving process.
The Company recognizes revenue upon the completion of standard
milestone conditions and the amount of revenue recognized in any
quarter depends upon the Company's and the client's ability to
meet these project milestones. Delays in meeting these milestone
conditions or modification of the contract relating to one or
more of these systems could result in a shift of revenue
recognition from one quarter to another and could have a material
adverse effect on results of operations for a particular quarter.
In addition, support payments by clients for the Company's
products do not commence until the product is in use.
The Company's revenues from system sales historically have been
lower in the first quarter of the year and greater in the fourth
quarter of the year.
Stock Price May Be Volatile
- ------------------------------- - The trading price of the
Company's common stock may be volatile. The market for the
Company's common stock may experience significant price and
volume fluctuations in response to a number of factors including
actual or anticipated quarterly variations in operating results,
changes in expectations of future financial performance or
changes in estimates of securities analysts, governmental
regulatory action, healthcare reform measures, client
relationship developments and other factors, many of which are
beyond the Company's control.
Furthermore, the stock market in general, and the market for
software, healthcare and high technology companies in particular,
has experienced extreme volatility that often has been unrelated
to the operating performance of particular companies. These
broad market and industry fluctuations may adversely affect the
trading price of the Company's common stock, regardless of actual
operating performance.
Market Risk of Investments
- ----------------------------- - The Company accounts for its
investments in equity securities which have readily determinable
fair values as available-for-sale. Available-for-sale securities
are reported at fair value with unrealized gains and losses
reported, net of tax, as a separate component of accumulated
other comprehensive income. Investments in the common stock of
certain affiliates over which the Company exerts significant
influence are accounted for by the equity method. Investments in
other equity securities are reported at cost. All equity
securities are reviewed by the Company for declines in fair
value. If such declines are considered to be other than
temporary, the cost basis of the individual security is written
down to fair value as a new cost basis, and the amount of the
write-down is included in earnings.
Included in the Company's investments is the ownership of
13,149,259 shares (18.7%) of the common stock of CareInsite, Inc.
("CareInsite"), formerly known as Synetic Healthcare
Communications, Inc. which have a cost basis of $81,804,000 and a
carrying value of $248,821,000 at January 1, 2000. 12,437,500 of
these shares were received in 1998 as consideration for the sale
of licensed software, and an additional 711,759 shares were
purchased in 1999. The value assigned to the shares acquired in
1998 was $70,000,000 and was based on a methodology which
utilized both a comparable company and the expected underlying
discounted future cash flows. On June 16, 1999, CareInsite
undertook an initial public offering of common stock. The common
stock of CareInsite is traded in the public market and listed on
the Nasdaq National Market. The stock of CareInsite held by the
Company is not registered and is subject to certain lock-up
provisions. A permanent impairment in the value of CareInsite
common 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 CareInsite stock. An increase in the
value of the CareInsite stock would have no effect on reported
earnings. The Company has not engaged in equity swaps or other
hedging techniques to manage the equity risk inherent in the
CareInsite shares.
<PAGE> 24
Under Statement of Financial Accounting Standards no. 115
"Accounting for Certain Investments in Debt and Equity
Securities" (SFAS No. 115), the Company is required to mark to
market those shares which are classified as available-for-sale.
Additionally, SFAS No. 115 requires shares that are eligible
under Rule 144 for public sale within a twelve month period be
considered as available-for-sale. Under Rule 144, as currently
in effect, a person who has beneficially owned shares of common
stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the
greater of 1% of the number of shares of common stock then
outstanding and the average weekly trading volume of the common
stock during the four preceding calendar weeks. As of January 1,
2000, the Company has marked to market 2,230,700 shares of
CareInsite common stock, with a market value of $179,571,000,
that are considered available-for-sale under Rule 144 and SFAS
No. 115. All CareInsite shares the Company owns will be
considered available-for-sale and be marked to market in the
first quarter of 2000. If all shares were eligible to be marked
to market at January 1, 2000, the market value would be
$1,058,515,000.
If the Company realizes certain performance metrics related to
specified levels of physician usage, CareInsite will issue to the
Company 2,503,125 shares of common stock at a price of $.01 per
share ("Performance Shares"). The measurement date is February
15, 2001. No amounts have been recognized in the consolidated
financial statements for the Performance Shares due to the
uncertainty of the future events.
The Company was also granted, by CareInsite, 1,008,445 common
stock warrants with an exercise price of $4.00 per share ("THINC
Warrants"). The THINC Warrants were exercisable only in the
event that The Health Information Network Connections, LLC
("THINC") exercised warrants granted to them by CareInsite at
$4.00 per share. THINC was allowed to exercise their warrants
180 days after the initial public offering of CareInsite. On
January 29, 2000 CareInsite completed an acquisition of THINC.
As part of that agreement, 806,756 of the 1,008,445 THINC
Warrants became immediately exercisable, with the remaining
amount forfeited. The THINC Warrants expire in three years.
On February 13, 2000 CareInsite entered into an agreement to
merge with Healtheon/WebMD Corporation ("Merger Agreement"). As
part of the Merger Agreement, the Company will receive 1.3 shares
of Healtheon/WebMD Corporation in exchange for each common share
of CareInsite held by the Company. In addition the Performance
Shares will be adjusted at a rate of 1.3 shares of
Healtheon/WebMD Corporation for each share of CareInsite. All
physician users of systems of Healtheon/WebMD Corporation or
its affiliates shall be included for purposes of determining
the specified levels of physician usage. The THINC Warrants
will also be adjusted at a rate of 1.3 shares of Healtheon/WebMD
Corporation for each share of CareInsite. The proposed merger of
CareInsite and Healtheon/WebMD Corporation ("Merger") is subject
to shareholder and regulatory approval. There is no guarantee
the Merger will close.
The Company has agreed under terms of the Merger Agreement to
certain lock-up provisions, which differ from the terms of its
lock-up provisions with CareInsite. The Merger is expected to
close in the second quarter of 2000. If the Merger closes the
Company will record the Healtheon/WebMD Corporation shares
received at their then fair value and recognize a gain on the
disposition of the CareInsite shares. Based on proposed lock-up
provisions, 50% of the Healtheon/WebMD Corporation shares would
thereafter be considered available-for-sale and would be marked
to market at each balance sheet date. The remainder would be
carried at cost until the third quarter of 2000.
The Company owns 50% of Health Network Ventures ("HNV"), a joint
venture investment which is accounted for under the equity
method. Under the terms of the joint venture agreement, the
Company may require its partner to sell to the Company its share
of HNV for $12,000,000, subject to certain adjustments, ("Call
Option") at any time after July 1, 2000. In addition the partner
may require the Company to purchase its share of HNV for
$6,000,000, subject to certain adjustments, ("Put Option") at any
time after July 1, 2000.
<PAGE> 25
The Company is exposed to market risk from changes in marketable
securities (which consist of money market and commercial paper).
At January 1, 2000, marketable securities of the Company were
recorded at cost, which approximates fair value of approximately
$76 million, with an overall average return of approximately 5%
and an overall weighted maturity of less than 90 days. The
marketable securities held by the Company are not subject to
price risk as a result of the short-term nature of the
investments.
The Company is not exposed to material future earnings or cash
flow exposures from changes in interest rates on long-term debt
since 100% of its long-term debt is at a fixed rate. To date,
the Company has not entered into any derivative financial
instruments to manage interest rate risk.
The Company conducts business in several foreign jurisdictions.
However, the business transacted is in the local functional
currency and the Company does not currently have any material
exposure to foreign currency transaction gains or losses. All
other business transactions are in U.S. dollars. To date, the
Company has not entered into any derivative financial instrument
to manage foreign currency risk and is currently not evaluating
the future use of any such financial instruments.
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 principal 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,
<PAGE> 26
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.
Government Regulation
- ---------------------- - The United States Food and Drug
Administration (the "FDA") has declared that software products
intended for the maintenance of data used in making decisions
regarding the suitability of blood donors and the release of
blood or blood components for transfusion are medical devices
under the Federal Food, Drug and Cosmetic Act ("Act") and
amendments to the Act. As a consequence, the Company is subject
to extensive regulation by the FDA with regard to its blood bank
software. If other of the Company's products are deemed to be
actively regulated medical devices by the FDA, the Company could
be subject to extensive requirements governing pre- and post-
marketing requirements including premarket notification clearance
prior to marketing. Complying with these FDA regulations would
be time consuming and expensive. It is possible that the FDA may
become more active in regulating computer software that is used
in healthcare.
Following an inspection by the FDA in March of 1998, the Company
received a Form FDA 483 (Notice of Inspectional Observations)
alleging non-compliance with certain aspects of FDA's Quality
System Regulation with respect to the Company's PathNet HNAC
Blood Bank Transfusion and Donor products (the "Blood Bank
Products"). The Company subsequently received a Warning Letter,
dated April 29, 1998, as a result of the same inspection. The
Company responded promptly to the FDA and undertook a number of
actions in response to the Form 483 and Warning Letter including
an audit by a third party of the Company's Blood Bank Products
and improvements to Cerner's Quality System. A copy of the third
party audit was submitted to the FDA in October of 1998 and, at
the request of the FDA, additional information and clarification
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 FDA inspections and there can be no
assurances that the Company will not be required to undertake
additional actions to comply with the Act and any other
applicable regulatory requirements. Any failure by the Company
to comply with the Act and any other applicable regulatory
requirements could have a material adverse effect on the
Company's ability to continue to manufacture and distribute its
products. FDA has many enforcement tools including recalls,
seizures, injunctions, civil fines and/or criminal prosecutions.
Any of the foregoing 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
<PAGE> 27
against the Company which is uninsured or under-insured could
materially harm its business, results of operations or financial
condition.
System Errors and Warranties
- --------------------------------- - The Company's systems,
particularly the HNA Millennium versions, are very complex. As
with complex systems offered by others, the Company's systems may
contain errors, especially when first introduced. Although the
Company conducts extensive testing, it has discovered software
errors in its products after their introduction. The Company's
systems are intended for use in collecting and displaying
clinical information used in the diagnosis and treatment of
patients. Therefore, users of the Company products have a
greater sensitivity to system errors than the market for software
products generally. The Company's agreements with its clients
typically provide warranties against material errors and other
matters. Failure of a client's system to meet these criteria
could constitute a material breach under such contracts allowing
the client to cancel the contract, or could require the Company
to incur additional expense in order to make the system meet
these criteria. The Company's contracts with its clients
generally limit the Company's liability arising from such claims
but such limits may not be enforceable in certain jurisdictions.
Anti-Takeover Defenses
- ------------------------ - The Company's charter, bylaws,
shareholders' rights plan and certain provisions of Delaware law
contain certain provisions that may have the effect of delaying
or preventing an acquisition of the Company. Such provisions are
intended to encourage any person interested in acquiring the
Company to negotiate with and obtain the approval of the Board of
Directors in connection with any such transaction. These
provisions include (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.
Year 2000
- ---------- - As of the date of this annual report, the Company
has not seen any adverse impact as a result of the Year 2000
transition on any of its systems or those of its clients or
suppliers. Nonetheless, the Company will continue to monitor the
effect of the Year 2000 transition, and there can be no absolute
assurance that Year 2000 issues will not materialize in the
future and have a material adverse effect on the Company, its
products or its operations.
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.
<PAGE> 28
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 26, 2000,
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 26, 2000,
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 26, 2000,
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 26, 2000,
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 26, 2000,
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.
<PAGE> 29
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 1, 2000 and January 2, 1999
Consolidated Statements of Operations -
Years Ended January 1, 2000, January 2, 1999 and
January 3, 1998
Consolidated Statements of Changes In Equity
Years Ended January 1, 2000, January 2, 1999 and
January 3, 1998
Consolidated Statements of Cash Flows
Years Ended January 1, 2000, January 2, 1999 and
January 3, 1998
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 1, 2000 are included herein:
Schedule II - Valuation and Qualifying Accounts,
Independent Auditors' Report on Consolidated
Financial Statement Schedule.
All other schedules are omitted, as the required information is
inapplicable or the information is presented in the consolidated
financial statements or related notes.
(3) The exhibits required to be filed by this item are set forth
below:
Number Description
- ------ -----------
3(a) Restated Certificate of Incorporation of the
Registrant, (filed as Exhibit 3(i) to Registrant's
Quarterly Report on Form 10-Q for the year ended June
29, 1996 and hereby incorporated by reference).
3(b) 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).
<PAGE> 30
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) Credit Agreement between Cerner Corporation and
Mercantile Bank dated April 1, 1999 (filed as Exhibit
4(d) to Registrant's Annual Report on Form 10-K for the
year ended January 2, 1999, and hereby incorporated
herein by reference).
10(a) Incentive Stock Option Plan C of Registrant (filed
as Exhibit 10(f) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1993, and hereby
incorporated herein by reference).*
10(b) Indemnification Agreements between the Registrant
and Neal L. Patterson, Clifford W. Illig, Gerald E.
Bisbee, Jr., Ph.D. and Thomas C. Tinstman, M.D., (filed
as Exhibit 10(i) to Registrant's Annual report on Form
10-K for the year ended December 31, 1992, and
incorporated herein by reference).*
10(c) Indemnification Agreement between Michael E.
Herman and Registrant (filed as Exhibit 10(i)(a) to
Registrant's Quarterly Report on Form 10-Q for the year
ended June 29, 1996 and hereby incorporated by
reference).*
10(d) Indemnification Agreement between John C.
Danforth, and Registrant (filed as Exhibit 10(i)(b) to
Registrant's Quarterly Report on Form 10-Q for the year
ended June 29, 1996 and hereby incorporated by
reference).*
10(e) Indemnification Agreement between Jeff C.
Goldsmith, Ph.D. and Registrant.*
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) Cerner Performance Plan for 1999 (filed as Exhibit
10(j) to Registrant's Annual Report on Form 10-K for
the year ended January 2, 1999, and hereby incorporated
herein by reference).*
10(i) Cerner Performance Plan for 2000.*
10(j) Long-Term Incentive Plan for 1999 (filed as
Exhibit 10(l) to Registrant's Annual Report on Form 10-
K for the year ended January 2, 1999, and hereby
incorporated herein by reference).*
10(k) Promissory Note of Jack A. Newman, Jr. (filed as
Exhibit 10(m) to Registrant's Annual Report on Form 10-
K for the year ended January 2, 1999, and hereby
incorporated herein by reference)*
<PAGE> 31
10(l) Promissory Notes of Earl H. Devanny, III.*
10(m) Promissory Note of Glenn P. Tobin, Ph.D. (filed as
Exhibit 10(o) to Registrant's Annual Report on Form 10-
K for the year ended January 2, 1999, and hereby
incorporated herein by reference).*
10(n) Cerner Corporation Executive Stock Purchase Plan
(filed as Exhibit 4(g) to Registrant's Registration
Statement on Form S-8 (File No. 333-77029) and hereby
incorporated herein by reference).*
10(o) Form of Stock Pledge Agreement for Cerner
Corporation Executive Stock Purchase Plan (filed as
Exhibit 4(h) to Registrant's Registration Statement on
Form S-8 (File No. 333-77029) and hereby incorporated
herein by reference).*
10(p) Form of Promissory Note for Cerner Corporation
Executive Stock Purchase Plan (filed as Exhibit 4(i) to
Registrant's Registration Statement on Form S-8 (File
No. 333-77029) and hereby incorporated herein by
reference).*
10(q) Employment Agreement of Earl H. Devanny, III.*
10(r) Employment Agreement of Glenn P. Tobin, Ph.D.*
10(s) Employment Agreement of Stanley M. Sword.*
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
Reports on form 8-K were filed on March 18, 1999, April 23,
1999 and September 28, 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.
<PAGE> 32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CERNER CORPORATION
Dated: March 27, 2000 By: /s/Neal L.Patterson
--------------------------
Neal L. Patterson
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated:
Signature and Title Date
------------------- ----
____/s/Neal L. Patterson_________________ March 27, 2000
Neal L. Patterson, Chairman of the Board and
Chief Executive Officer (Principal Executive Officer)
____/s/Clifford W. Illig_________________ March 27, 2000
Clifford W. Illig, Vice Chairman and Director
____/s/Marc G. Naughton__________________ March 27, 2000
Marc G. Naughton, Vice President and
Chief Financial Officer (Principal Financial and Accounting Officer)
____/s/Michael E. Herman_________________ March 27, 2000
Michael E. Herman, Director
____/s/Gerald E. Bisbee___________________ March 27, 2000
Gerald E. Bisbee, Jr., Ph.D., Director
____/s/Thomas C. Tinstman__________________ March 27, 2000
Thomas C. Tinstman, M.D., Senior Vice President and Director
<PAGE> 33
____/s/John C. Danforth____________________ March 27, 2000
John C. Danforth, Director
____/s/Jeff C. Goldsmith___________________ March 27, 2000
Jeff C. Goldsmith, Ph.D., Director
<PAGE> 34
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 1, 2000 and
January 2, 1999, and the related consolidated statements of
operations, changes in equity, and cash flows for each of the
years in the three-year period ended January 1, 2000. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with 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 1,
2000 and January 2, 1999, and the results of their operations and
their cash flows for each of the years in the three-year period
ended January 1, 2000, in conformity with generally accepted
accounting principles.
KPMG LLP
Kansas City, Missouri
February 14, 2000
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.
<PAGE> 35
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
January 1, 2000 and January 2, 1999
<TABLE>
1999 1998
----------------------------
(Dollars in thousands)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 75,677 42,658
Receivables 161,174 167,374
Inventory 1,262 2,651
Prepaid expenses and other 4,316 4,234
------------ ------------
Total current assets 242,429 216,917
Property and equipment, net 77,938 77,292
Software development costs, net 71,007 54,971
Intangible assets, net 7,511 8,884
Investments, net 252,123 71,719
Other assets 9,883 6,702
------------ ------------
$ 660,891 436,485
============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 20,261 14,092
Current installments of long-term debt - 5,030
Deferred revenue 21,245 33,921
Income taxes 10,987 26,057
Accrued payroll and tax withholdings 17,241 16,625
Other accrued expenses 2,642 2,511
------------ ------------
Total current liabilities 72,376 98,236
Long-term debt, net 100,000 25,000
Deferred income taxes 93,578 22,106
Deferred revenue 16,000 20,000
Stockholders' Equity:
Common stock, $.01 par value ,150,000,000
shares authorized, 34,932,703 shares
issued in 1999 and 34,674,164 shares in
1998 349 347
Additional paid-in capital 166,735 165,239
Retained earnings 125,651 126,862
Treasury stock, at cost (1,201,518 shares
in 1999 and 1998) (20,796) (20,796)
Accumulated other comprehensive income:
Foreign currency translation
adjustment 23 (243)
Unrealized gain (loss) on available-
for-sale equity securities (net of
deferred tax liability of $59,806
in 1999 and deferred tax asset of
$165 in 1998) 106,975 (266)
------------ ------------
Total stockholders' equity 378,937 271,143
------------ ------------
Commitments (Note 12) $ 660,891 436,485
============= ============
</TABLE>
See notes to consolidated financial statements.
<PAGE> 36
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
For the years ended January 1, 2000, January 2, 1999, and January 3, 1998
<TABLE>
1999 1998 1997
--------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Revenues
System sales $ 224,510 245,490 170,906
Support and maintenance 94,198 76,755 68,713
Other 21,489 8,657 5,438
--------------------------------------
Total revenues 340,197 330,902 245,057
--------------------------------------
Costs and expenses
Cost of revenues 95,038 89,544 71,943
Sales and client service 141,234 117,107 83,788
Software development 72,663 59,754 44,086
General and administrative 27,564 25,929 23,070
Write-off of acquired in-process
research and development - 5,038 -
--------------------------------------
Total costs and expenses 336,499 297,372 222,887
--------------------------------------
Operating earnings 3,698 33,530 22,170
Interest income (expense), net (3,396) (262) 2,314
--------------------------------------
Earnings before income taxes
and extraordinary item 302 33,268 24,484
Income taxes (118) (12,679) (9,336)
--------------------------------------
Earnings before extraordinary item 184 20,589 15,148
Extraordinary item, net of tax (1,395) - -
--------------------------------------
Net earnings (loss) $ (1,211) 20,589 15,148
======================================
Basic earnings per share
before extraordinary item $ .01 .63 .46
======================================
Basic earnings (loss) per share $ (.04) .63 .46
======================================
Diluted earnings per common
share before extraordinary item $ .01 .61 .45
======================================
Diluted earnings (loss) per
common share $ (.04) .61 .45
======================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 37
Consolidated Statements of Changes in Equity
- --------------------------------------------------------------------------------
For the years ended January 1, 2000, January 2, 1999, and January 3, 1998
<TABLE>
Accumulated
Additional Treasury other
Common Stock paid-in Retained stock Comprehensive Comprehensive
Shares Amount capital earnings amount income income
------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 28, 1996 33,404 334 144,941 91,125 (5,693) 28
---------------------------------------------------------------------
Exercise of options 311 3 978 - - -
Issuance of common stock
grants as compensation 2 - 48 - - -
Issuance of restricted
common stock 100 1 1,586 - - -
Tax benefit from disqualifying
disposition of stock options - - 521 - - -
Purchase of 688,500 shares of
treasury stock - - - - (15,103) -
Foreign currency translation
adjustment - - - - - (170) (170)
Net earnings - - - 15,148 - - 15,148
-------------------------------------------------------------------------------------
Comprehensive income 14,978
========
Balance at January 3, 1998 33,817 338 148,074 106,273 (20,796) (142)
---------------------------------------------------------------------
Exercise of options 185 2 1,248 - - -
Issuance of common stock
grants as compensation 2 - 44 - - -
Issuance of common stock 670 7 14,867 - - -
Non-employee stock option
compensation expense - - 385 - - -
Tax benefit from disqualifying
disposition of stock options - - 621 - - -
Foreign currency translation
adjustment - - - - - (101) (101)
Unrealized loss on available-
for-sale equity security,
net of deferred tax asset
of $165 - - - - - (266) (266)
Net earnings - - - 20,589 - - 20,589
--------------------------------------------------------------------------------------
Comprehensive income 20,222
========
Balance at January 2, 1999 34,674 $ 347 165,239 126,862 (20,796) (509)
======================================================================
Exercise of options 257 2 623 - - -
Issuance of common stock
grants as compensation 2 - 40 - - -
Non-employee stock option
compensation expense - - 239 - - -
Tax benefit from disqualifying
disposition of stock options - - 594 - - -
Foreign currency translation
adjustment - - - - - 266 266
Unrealized gain on available-
for-sale equity securities,
net of deferred tax
liability of $59,806 - - - - - 107,241 107,241
Net loss - - - (1,211) - - (1,211)
--------------------------------------------------------------------------------------
Comprehensive income 106,296
========
Balance at January 1, 2000 34,933 $ 349 166,735 125,651 (20,796) 106,998
=====================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 38
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
For years ended January 1, 2000, January 2, 1999, and January 3, 1998
<TABLE>
1999 1998 1997
-----------------------------------------------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ (1,211) 20,589 15,148
Adjustments to reconcile net
earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 31,388 25,411 18,075
Common stock received as consideration
for sale of license software - (70,000) -
Non-recurring fixed fee implementation cost 9,449 - -
Non-recurring branch restructure charge 1,358 - -
Extraordinary item, net of tax 1,395 - -
Write-off of acquired in-process
research and development - 5,038 -
Issuance of common stock grants
as compensation 40 44 48
Non-employee stock option
compensation expense 239 385 -
Equity in losses of affiliates 423 1,601 864
Provision for deferred income taxes (3,165) 15,816 8,246
Tax benefit from disqualifying
dispositions of stock options 594 621 521
Loss on disposal of capital equipment 478 223 110
Changes in operating assets and
liabilities (net of business acquired):
Receivables, net 6,200 (39,481) (27,931)
Inventory 1,389 (908) (127)
Prepaid expenses and other 844 (3,970) (2,075)
Accounts payable (5,207) 2,620 1,984
Accrued income taxes 461 (2,334) -
Deferred revenue (16,676) 45,410 479
Other current liabilities (610) 4,828 3,350
------------------------------------
Total adjustments 28,600 (14,696) 3,544
------------------------------------
Net cash provided by operating
activities 27,389 5,893 18,692
------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of capital equipment (14,286) (20,846) (14,896)
Purchase of land, buildings, and
improvements - (2,767) (86)
Acquisition of business - (6,874) -
Investment in affiliates (13,615) (1,217) (4,500)
Advances to affiliates (1,000) - -
Executive stock purchase program (3,628) - -
Proceeds on disposal of capital
equipment 59 - 212
Capitalized software development
costs (30,192) (25,052) (18,373)
------------------------------------
Net cash used in investing activities (62,662) (56,756) (37,643)
------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of
long-term debt 99,568 - -
Repayment of long-term debt (32,167) (45) (116)
Proceeds from sale of common stock - 14,874 -
Proceeds from exercise of options 625 1,250 981
Purchase of treasury stock - - (15,103)
------------------------------------
Net cash provided by (used in)
financing activities 68,026 16,079 (14,238)
------------------------------------
Foreign currency translation adjustment 266 (101) (170)
------------------------------------
Net increase (decrease) in cash and
cash equivalents 33,019 (34,885) (33,359)
Cash and cash equivalents at beginning
of year 42,658 77,543 110,902
------------------------------------
Cash and cash equivalents at end of year $ 75,677 42,658 77,543
====================================
Supplemental disclosures of cash flow information
Cash paid (received) during the year for:
Interest $ 5,448 2,504 2,473
Income taxes, net of refund 1,647 (2,112) 1,024
Noncash investing and financing activities
Issuance of restricted common
stock and grants 40 44 1,635
</TABLE>
See notes to consolidated financial statements.
<PAGE> 39
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1 Summary of Significant Accounting Policies
(a) Principles of Consolidation - The consolidated financial
statements include the accounts of Cerner Corporation and its
wholly owned subsidiaries (the Company). All significant
intercompany transactions and balances have been eliminated in
consolidation.
(b) Revenue Recognition - Revenues are derived primarily from
the sale of clinical information systems. The Company also
provides project implementation and consulting services. In
addition, revenue is generated from servicing installed clinical
information systems, which generally includes support of software
and maintenance of hardware. The Company also derives revenue
from the sale of computer hardware.
Clinical information system sales contracts are negotiated
separately and generally include the licensing of the Company's
clinical information system software, project-related services
associated with the installation of the systems, and the sale of
computer hardware. Clinical information system sales contracts
are noncancelable and provide for a right of return only in the
event the system fails to meet the performance criteria set forth
in the contracts. The Company recognizes revenue from sales of
clinical information systems using a percentage-of-completion
method based on meeting key milestone events over the term of the
contracts in accordance with Statement of Position 97-2,
"Software Revenue Recognition". Revenue recognized is limited to
amounts to be billed within one year.
Revenue associated with project implementation and consulting
services is recognized as the services are performed. Revenue
from the licensing of additional software is recognized upon
installation at the client's site. Revenue from the sale of
computer hardware is recognized upon shipment. Revenue from
ongoing software support and equipment maintenance is recognized
as the services are rendered.
(c) Fiscal Year - The Company's fiscal year ends on the Saturday
closest to December 31. Fiscal years 1999 and 1998,
respectively, consisted of 52 weeks each, and fiscal year 1997
consisted of 53 weeks. All references to years in these notes to
consolidated financial statements represent fiscal years unless
otherwise noted.
(d) Software Development Costs - Costs incurred internally in
creating computer software products are expensed until
technological feasibility has been established upon completion of
a detail program design. Thereafter, all software development
costs are capitalized and subsequently reported at the lower of
amortized cost or net realizable value. Capitalized costs are
amortized based on current and future revenue for each product
with minimum annual amortization equal to the straight-line
amortization over the estimated economic life of the product.
The Company is amortizing capitalized costs on a straight-line
basis over five years. During 1999, 1998, and 1997, the Company
capitalized $30,192,000, $25,052,000, and $18,373,000,
respectively, of total software development costs of $88,699,000,
$74,159,000, and $54,524,000, respectively. Amortization
expense of capitalized software development costs in 1999, 1998,
and 1997 was $14,156,000, $10,647,000, and $7,935,000,
respectively, and accumulated amortization was $57,698,000,
$43,542,000, and $32,895,000, respectively.
(e) Cash Equivalents - Cash equivalents consist of short-term
marketable securities with original maturities less than ninety
days.
(f) Investments - The Company accounts for its investments in
equity securities which have readily determinable fair values as
available-for-sale. Available-for-sale securities are reported
at fair value with unrealized gains and losses reported, net of
tax, as a separate component of accumulated other comprehensive
income. Investments in the common stock of certain affiliates
over which the Company exerts significant influence are accounted
for by the equity method. Investments in other equity securities
are reported at cost. All equity securities are reviewed by the
Company for declines in fair value. If such
<PAGE> 40
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.
(g) Inventory - Inventory consists primarily of computer
hardware held for resale and is recorded at the lower of cost
(first-in, first-out) or market.
(h) Property and Equipment - Property, equipment, and leasehold
improvements are stated at cost. Depreciation of property and
equipment is computed using the straight-line method over periods
of 5 to 39 years. Amortization of leasehold improvements is
computed using a straight-line method over the lease terms, which
range from periods of two to twelve years.
(i) Earnings per Common Share - Basic earnings per share (EPS)
excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other
contracts to issue stock were exercised or converted into common
stock or resulted in the issuance of common stock that then
shared in the earnings of the Company. A reconciliation of the
numerators and the denominators of the basic and diluted per-
share computations is as follows:
<TABLE>
(In thousands, except per share data)
1999 1998 1997
-----------------------------------------------------------------------------------------------------------
Per Per Per
Earnings Shares Share Earnings Shares Share Earnings Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-----------------------------------------------------------------------------------------------------------
Earnings per share before extraordinary item
- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic earnings
per share
Income available
to common stock
holders
$ 184 33,623 $ .01 20,589 32,825 $ .63 15,148 32,881 $ .46
======= ====== =====
Effect of dilutive
securities
Stock options
-- 293 -- 842 -- 787
Diluted earnings per share
Income available to common
stockholders including
assumed
conversions
----------------------------------------------------------------------------------------------------
$ 184 33,916 $ .01 20,589 33,667 $ .61 15,148 33,668 $ .45
====================================================================================================
Net earnings (loss) per share
Basic earnings (loss)
per share
Income available to
common stock
holders
$(1,211) 33,623 $ (.04) 20,589 32,825 $ .63 15,148 32,881 $ .46
======= ====== =====
Effect of dilutive
securities
Stock
options
-- 293 -- 842 -- 787
Diluted earnings (loss)
per share
Income available
to common stock
holders including
assumed conversions
------------------------------------------------------------------------------------------------------
$(1,211) 33,916 $ (.04) 20,589 33,667 $ .61 15,148 33,668 $ .45
======================================================================================================
</TABLE>
Options to purchase 3,185,000, 1,652,000 and 1,149,000 shares of
common stock at per share prices ranging from $17.50 to $31.00,
$25.00 to $31.00, and $21.50 to $31.00 were outstanding at the
end of 1999, 1998 and 1997, respectively, but were not included
in the computation of diluted earnings per share because the
options' exercise price was greater than the average market price
of the common shares.
<PAGE> 41
(j) Foreign Currency - Assets and liabilities in foreign
currencies are translated into dollars at rates prevailing at the
balance sheet date. Revenues and expenses are translated at
average rates for the year. The net exchange differences
resulting from these translations are reported in accumulated
other comprehensive income. Gains and losses resulting from
foreign currency transactions are included in the consolidated
statements of earnings. The net gain (loss) resulting from
foreign currency transactions was $95,000, ($673,000), and
($762,000) in 1999, 1998, and 1997, respectively.
(k) Income Taxes - Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled.
(l) Goodwill - Excess of cost over net assets acquired
(goodwill) is being amortized on a straight-line basis over seven
to eight years. Accumulated amortization was $5,387,000 and
$4,037,000 at the end of 1999 and 1998, respectively. The
Company assesses the recoverability of goodwill based on
forecasted undiscounted future operating cash flows.
(m) Use of Estimates - The preparation of financial statements
in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
2 Acquisition of Business
On March 16, 1998, the Company purchased all of the outstanding
common stock of Multum Information Systems, Inc., (Multum) for
$6.9 million. Multum is a supplier to the healthcare industry of
drug knowledge databases and intelligent software components
designed to improve the quality and cost-effectiveness of medical
care. The Company plans to incorporate Multum's drug information
and expert dosing component into its Health Network Architecture
Millennium solutions to enable Multum's expert knowledge to
become executable within the process of care delivery.
The acquisition has been accounted for using the purchase method
of accounting with the operating results of Multum included in
the Company's consolidated statement of earnings since the date
of acquisition. Approximately $5,000,000 of the purchase price
was allocated to in-process research and development that had not
reached technological feasibility and was treated as a one-time
charge to earnings reducing after tax income for 1998 by $3.1
million or $.09 per share on a diluted basis. This acquisition
would not have materially affected revenues, net earnings, or
earnings per share on a pro forma basis for any period presented.
The acquired in-process research and development related to
Multum's component based, drug information software development
kit (SDK) for use in clinical information systems. Its
components are designed for use in a variety of configurations
and to provide complete control over the retrieval of drug
information from Multum's knowledge databases. SDK was
approximately 80% complete at the time of the acquisition. When
Multum was acquired, it was projected that SDK would be completed
in 12-18 months at an estimated cost of $1.9 million. The risks
associated with completing SDK are like any other software
development project and include changes in technology and
competition. The SDK project was valued using the income
approach with the following assumptions: material net cash
inflows are expected to commence in 2000; no material changes
from historical pricing, margins or expense levels are
anticipated; and, a 20% risk adjusted discount rate was applied
to estimated net cash flows. SDK was approximately 90% complete
at the end of 1998 and was completed in 1999.
<PAGE> 42
The allocation of the purchase price to the estimated fair values
of the identified tangible and intangible assets acquired and
liabilities assumed, resulted in goodwill of $1,581,000. The
goodwill is being amortized straight-line over seven years.
3 Receivables
Receivables consist of accounts receivable and contracts
receivable. Accounts receivable represent recorded revenues that
have been billed. Contracts receivable represent recorded
revenues that are billable by the Company at future dates under
the terms of a contract with a client. Billings and other
consideration received on contracts in excess of related revenues
recognized under the percentage-of-completion method are recorded
as deferred revenue. A summary of receivables is as follows:
<TABLE>
(In thousands) 1999 1998
--------------------------
<S> <C> <C>
Accounts receivable $ 85,814 72,747
Contracts receivable 75,360 94,627
---------- ----------
Total receivables $ 161,174 167,374
========== ==========
</TABLE>
Substantially all receivables are derived from sales and related
support and maintenance of the Company's clinical information
systems to healthcare providers located throughout the United
States and in certain foreign countries. Included in receivables
at the end of 1999 and 1998 are amounts due from healthcare
providers located in foreign countries of $17,704,000 and
$12,071,000, respectively. Consolidated revenues include foreign
sales of $24,001,000, $17,545,000, and $16,272,000, during 1999,
1998, and 1997, respectively. Consolidated long-lived assets at
the end of 1999 and 1998, include foreign long-lived assets of
$638,000 and $290,000, respectively. Revenues and long-lived
assets from any one foreign country are not material.
The Company provides an allowance for estimated uncollectible
accounts based upon historical experience and management's
judgment. At the end of 1999 and 1998 the allowance for
estimated uncollectible accounts was $4,759,000 and $3,405,000,
respectively.
4 Property and Equipment
A summary of property, equipment, and leasehold improvements
stated at cost, less accumulated depreciation and amortization,
is as follows:
<TABLE>
(In thousands) 1999 1998
--------------------
<S> <C> <C>
Furniture and fixtures $ 21,623 19,153
Computer and communications
equipment 67,462 59,280
Marketing equipment 1,984 1,913
Leasehold improvements 16,905 13,543
Capital lease equipment 713 713
Land, buildings, and improvements 32,437 32,437
--------- ---------
141,124 127,039
Less accumulated depreciation and
amortization 63,186 49,747
--------- ---------
Total property and equipment, net $ 77,938 77,292
========= =========
</TABLE>
<PAGE> 43
5 Investments
Investments consist of the following:
<TABLE>
(In thousands) 1999 1998
--------- -----------
<S> <C> <C>
Investments in available-for-sale
equity securities $ 13,057 503
Plus unrealized holding gain (loss) 166,781 (431)
---------- ----------
Investment in available-for-sale
equity securities, at fair value 179,838 72
Investments in equity securities, at cost 69,822 70,000
Investments accounted for under
the equity method 2,463 1,647
---------- ----------
Total investments, net $ 252,123 71,719
========== ==========
</TABLE>
Included in the Company's investments is the ownership of
13,149,259 shares (18.7%) of common stock, of CareInsite, Inc.
("CareInsite"), formerly known as Synetic Healthcare
Communications, Inc. which have a cost basis of $81,804,000 and
a carrying value of $248,821,000 at January 1, 2000. 12,437,500
of these shares were received in 1998 as consideration for the
sale of license software, and an additional 711,759 shares were
purchased in 1999. The value assigned to the shares acquired in
1998 was $70,000,000 and was based on a methodology which
utilized both a comparable company and the expected underlying
discounted future cash flows. On June 16, 1999, CareInsite
undertook an initial public offering of common stock. The common
stock of CareInsite is traded in the public market and listed on
the Nasdaq National Market. The stock of CareInsite held by the
Company is not registered and is subject to certain lock-up
provisions. A permanent impairment in the value of CareInsite
common 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 CareInsite stock. An increase in the
value of the CareInsite stock would have no effect on reported
earnings. The Company has not engaged in equity swaps or other
hedging techniques to manage the equity risk inherent in the
CareInsite shares.
Under Statement of Financial Accounting Standards no. 115
"Accounting for Certain Investments in Debt and Equity
Securities" (SFAS No. 115), the Company is required to mark to
market those shares which are classified as available-for-sale.
Additionally, SFAS No. 115 requires shares that are eligible
under Rule 144 for public sale within a twelve month period be
considered as available-for-sale. Under Rule 144, as currently
in effect, a person who has beneficially owned shares of common
stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the
greater of 1% of the number of shares of common stock then
outstanding and the average weekly trading volume of the common
stock during the four preceding calendar weeks. As of January 1,
2000, the Company has marked to market 2,230,700 shares of
CareInsite common stock, with a market value of $179,571,000,
that are considered available-for-sale under Rule 144 and SFAS
No. 115. All CareInsite shares the Company owns will be
considered available-for-sale and be marked to market in the
first quarter of 2000. If all shares were eligible to be marked
to market at January 1, 2000, the market value would be
$1,058,515,000.
If the Company realizes certain performance metrics related to
specified levels of physician usage, CareInsite will issue to the
Company 2,503,125 shares of common stock at a price of $.01 per
share ("Performance Shares"). The measurement date is February
15, 2001. No amounts have been recognized in the consolidated
financial statements for the Performance Shares due to the
uncertainty of the future events.
The Company was also granted, by CareInsite, 1,008,445 common
stock warrants with an exercise price of $4.00 per share ("THINC
Warrants"). The THINC Warrants were exercisable only in the
event that The Health Information Network Connections, LLC
("THINC") exercised warrants granted to them by
<PAGE> 44
CareInsite at $4.00 per share. THINC was allowed to exercise
their warrants 180 days after the initial public offering of
CareInsite. On January 29, 2000 CareInsite completed an
acquisition of THINC. As part of that agreement, 806,756 of
the 1,008,445 THINC Warrants became immediately exercisable,
with the remaining amount forfeited. The THINC Warrants expire
in three years.
On February 13, 2000 CareInsite entered into an agreement to
merge with Healtheon/WebMD Corporation ("Merger Agreement"). As
part of the Merger Agreement, the Company will receive 1.3 shares
of Healtheon/WebMD Corporation in exchange for each common share
of CareInsite held by the Company. In addition the Performance
Shares will be adjusted at a rate of 1.3 shares of
Healtheon/WebMD Corporation for each share of CareInsite. All
physician users of systems of Healtheon/WebMD Corporation or its
affiliates shall be included for purposes of determining the
specified levels of physician usage. The THINC Warrants will
also be adjusted at a rate of 1.3 shares of Healtheon/WebMD
Corporation for each share of CareInsite. The proposed merger of
CareInsite and Healtheon/WebMD Corporation ("Merger") is subject
to shareholder and regulatory approval. There is no guarantee
the Merger will close.
The Company has agreed under terms of the Merger Agreement to
certain lock-up provisions, which differ from the terms of its
lock-up provisions with CareInsite. The Merger is expected to
close in the second quarter of 2000. If the Merger closes the
Company will record the Healtheon/WebMD Corporation shares
received at their then fair value and recognize a gain on the
disposition of the CareInsite shares. Based on proposed lock-up
provisions, 50% of the Healtheon/WebMD Corporation shares would
thereafter be considered available-for-sale and would be marked
to market at each balance sheet date. The remainder would be
carried at cost until the third quarter of 2000.
The Company owns 50% of Health Network Ventures ("HNV"), a joint
venture investment which is accounted for under the equity
method. Under the terms of the joint venture agreement, the
Company may require its partner to sell to the Company its share
of HNV for $12,000,000, subject to certain adjustments, ("Call
Option") at anytime after July 1, 2000. In addition the partner
may require the Company to purchase its share of HNV for
$6,000,000, subject to certain adjustments, ("Put Option") at any
time after July 1, 2000.
6 Indebtedness
The Company has a loan agreement with a bank that provides for a
long-term revolving line of credit for working capital purposes.
The long-term revolving line of credit is unsecured and requires
monthly payments of interest only. Interest is payable at the
Company's option at a rate based on prime (8.5% at January 1,
2000) or LIBOR (6.5% at January 1, 2000) plus 1.5%. The
interest rate may be reduced by up to .4% if certain net worth
ratios are maintained. At January 1, 2000, the Company had no
outstanding borrowings under this agreement and had $18,000,000
available for working capital purposes. The agreement contains
certain net worth, current ratio, and fixed charge coverage
covenants and provides certain restrictions on the Company's
ability to borrow, incur liens, sell assets, and pay dividends.
A commitment fee of 3/10% is payable quarterly on the unused
portion of the revolving line of credit.
On April 15, 1999, the Company completed a $100,000,000 private
placement of debt pursuant to a Note Agreement dated April 1,
1999. The Series A Senior Notes, with a $60,000,000 principal
amount at 7.14% are payable in five equal annual installments
beginning in April 2002. The Series B Senior Notes, with a
$40,000,000 principal amount at 7.66% are payable in six equal
annual installments beginning April 2004. The proceeds were used
to retire the Company's existing $30,000,000 of debt, and the
remaining funds will be used for proposed capital improvements and
to strengthen the Company's cash position. In connection with
the early extinguishment of debt, the Company incurred an
extraordinary loss for a prepayment penalty and write-off of
deferred loan costs of $1,395,000 net of taxes. The note
agreement contains certain net worth, current ratio, and fixed
charge coverage covenants and provides certain restrictions on
the Company's ability to borrow, incur liens, sell assets, and
pay dividends. The Company was in compliance with all covenants
at January 1, 2000.
<PAGE> 45
The fair value of the Company's Senior Notes approximates their
carrying value at January 1, 2000 based on current rates offered
to the Company for similar debt instruments of comparable
maturities.
7 Interest Income and Expense
A summary of interest income and expense is as follows:
<TABLE>
(In thousands) 1999 1998 1997
-----------------------------
<S> <C> <C> <C>
Interest income $ 2,582 2,242 4,755
Interest expense (5,978) (2,504) (2,441)
-------- -------- --------
Interest income (expense), net $(3,396) (262) 2,314
======== ======== ========
</TABLE>
8 Stock Options and Warrants
At January 1, 2000, the Company had four fixed stock option
plans. Under Stock Option Plan B, the Company could grant to
associates options to purchase up to 5,600,000 shares of common
stock through November 30, 1993. The options are exercisable at
the fair market value on the date of grant for a period
determined by the Board of Directors (not more than ten years
from the date granted). The options contain restrictions as to
transferability and exercisability after termination of
employment.
Under Stock Option Plan C, the Company is authorized to grant to
associates options to purchase up to 95,000 shares of common
stock through May 18, 2003. The options are exercisable at the
fair market value on the date of grant for a period determined by
the Board of Directors (not more than ten years from the date
granted). The options contain restrictions as to transferability
and exercisability after termination of employment. The Company
has committed not to issue any more stock options under Stock
Option Plan C.
Initially under Stock Option Plan D, the Company was authorized
to grant to associates, directors, consultants, or advisors to
the Company options to purchase up to 2,600,000 shares of common
stock through January 1, 2005. An additional 2,000,000 shares
were approved by the Company's shareholders on May 22, 1998,
increasing the total authorized to grant to 4,600,000 shares.
The options are exercisable at a price (not less than fair market
value on the date of grant) and during a period determined by the
Stock Option Committee. Options under this plan currently vest
over periods of up to ten years and are exercisable for periods
of up to 25 years.
Under Stock Option Plan E, the Company is authorized to grant to
associates (other than officers subject to the provisions of
Section 16(a) of the Securities and Exchange Act of 1934),
consultants, or advisors to the Company options to purchase up to
2,000,000 shares of common stock through January 1, 2005. The
options are exercisable at a price (not less than fair market
value on the date of grant) and during a period determined by the
Stock Option Committee. Options under this plan currently vest
over periods of up to ten years and are exercisable for periods
of up to 25 years.
The Company has also granted 210,362 other non-qualified stock
options under separate agreements to certain third parties.
These options are exercisable at a price equal to or greater than
the fair market value on the date of grant. These options vest
over periods of up to six years and are exercisable for periods
of up to ten years.
The Company accounts for stock options in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees", and related
interpretations. As such, compensation expense is recorded on
the date of grant only if the current market price of the
underlying stock exceeds the exercise price. On December 31,
1995, the Company adopted Statement of
<PAGE> 46
Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (FAS 123), which permits entities to
recognize as expense over the vesting period the fair value of
all stock-based awards on the date of grant. Alternatively,
FAS 123 allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net
earnings and pro forma earnings per share disclosures for
employee stock option grants made in 1995 and future years as
if the fair-value-based method defined in FAS 123 had been
applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro
forma disclosure provisions of FAS 123.
A combined summary of the status of the Company's four fixed
stock option plans and other stock options at the end of 1999,
1998, and 1997, and changes during these years ended is presented
below:
<TABLE>
1999 1998 1997
Weighted- Weighted- Weighted-
Number average Number average Number average
of exercise of exercise of exercise
Fixed Options shares price shares price shares price
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at 5,488,191 $ 20.38 4,179,258 $ 17.74 3,196,072 $ 16.50
beginning of
year
Granted 1,447,246 16.69 1,932,710 24.15 1,592,363 18.22
Exercised (255,747) 4.91 (185,335) 6.88 (310,531) 3.12
Forfeited (1,149,695) 22.40 (438,442) 17.57 (298,646) 17.50
- ----------------------------------------------------------------------------------------
Outstanding at
end of year 5,529,995 $ 19.79 5,488,191 $ 20.38 4,179,258 $ 17.74
========== ========== ==========
Options
exercisable at
year-end 1,297,147 1,111,943 876,376
</TABLE>
The following table summarizes information about fixed and other
stock options outstanding at January 1, 2000.
<TABLE>
Options outstanding Options exercisable
- ---------------------------------------------------------------------------- -----------------------------------
Range of Number Weighted-average Number
exercise Outstanding Remaining Weighted-average exercisable Weighted-average
prices At 01/01/00 contractual life exercise price at 01/01/00 exercise price
- ---------------------------------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.34-15.00 1,762,957 17.8 years $ 14.03 494,770 $ 13.06
15.13-20.50 1,393,497 13.5 17.71 305,613 18.51
20.56-25.00 1,411,870 12.4 23.19 205,557 22.97
25.88-31.00 961,671 14.8 28.37 291,207 29.01
--------- ---------
1.34-31.00 5,529,995 14.8 19.79 1,297,147 19.49
========= =========
</TABLE>
The per share weighted-average fair value of stock options
granted during 1999, 1998 and 1997 was $10.88, $14.97 and $10.99,
respectively, on the date of grant using the Black Scholes option-
pricing model with the following weighted-average assumptions:
<TABLE>
1999 1998 1997
-----------------------------------
<S> <C> <C> <C>
Expected years until exercise 8 8 8
Risk-free interest rate 6.9% 5.0% 6.2%
Expected stock volatility 61.3% 58.5% 56.9%
Expected dividend yield 0% 0% 0%
</TABLE>
Since the Company applies APB Opinion No. 25 in accounting for
its plans, no compensation cost has been recognized for its stock
options issued to employees. Had the Company recorded
compensation expense based on the fair value at the grant date
for its stock options under FAS 123, the Company's net earnings
and earnings per share on a diluted basis would have been reduced
by approximately $3,922,000 or $.12 per share in 1999,
approximately $5,929,000 or $.18 per share in 1998 and
approximately $3,965,000 or $.12 per share in 1997.
<PAGE> 47
Pro forma net earnings reflect only options granted since January
1, 1995. Therefore, the full impact of calculating compensation
expense for stock options under FAS 123 is not reflected in the
pro forma net earnings amounts presented above, because
compensation cost is reflected over the options' vesting period
of ten years for these options. Compensation expense for options
granted prior to January 1, 1995 is not considered.
In November 1998, the Company entered into an agreement with
General Electric Company (GE) to integrate the Company's Health
Network Architecture Millennium RadNet Radiology Information
System with GE Medical Systems' Picture Archive and Communication
Systems technology. In conjunction with the agreement, the
Company sold GE 670,000 shares of common stock for $14,874,000
and granted warrants for the purchase of 500,000 shares of common
stock at an exercise price equal to the fair value of the stock
at the grant date ($25.49). The warrants become exercisable
provided certain conditions are met, including achievement of
certain levels of revenue. The warrants expire after seven years
or thirty days after termination of the agreement.
9 Income Taxes
Income tax expense (benefit) before extraordinary item for the
years ended 1999, 1998, and 1997, consists of the following:
<TABLE>
(In thousands) 1999 1998 1997
<S> <C> <C> <C>
Current:
Federal $ 3,514 (1,929) 916
State 573 (1,061) 80
Foreign (804) (147) 94
--------- -------- --------
Total current 3,283 (3,137) 1,090
--------- -------- --------
Deferred:
Federal (2,891) 13,634 7,338
State (288) 1,565 908
Foreign 14 617 -
--------- -------- --------
Total deferred (3,165) 15,816 8,246
--------- -------- --------
Total income tax expense $ 118 12,679 9,336
========= ======== ========
Income tax benefit attributable to the extraordinary item (early
retirement of debt) was $865,000 in 1999. Income tax expense
(benefit) allocated to stockholders' equity for unrealized
holding gain (losses) on available-for-sale equity securities was
$59,971,000 and ($165,000) in 1999 and 1998, respectively.
<PAGE> 48
Temporary differences between the financial statement carrying
amounts and tax bases of assets and liabilities that give rise to
significant portions of deferred income taxes at the end of 1999
and 1998 relate to the following:
</TABLE>
<TABLE>
(In thousands) 1999 1998
-----------------------------
<S> <C> <C>
Deferred Tax Assets
Contract reserves $ 3,615 -
Acquisition accrual 1,779 2,033
Accrued expenses 4,669 3,223
Separate return net operating losses - 1,577
Other 1,637 1,076
--------- --------
Total deferred tax assets 11,700 7,909
--------- --------
Deferred Tax Liabilities
Unrealized gain on investments (59,806) -
Software development costs (26,812) (20,695)
Contract and service revenues
and costs (23,591) (32,255)
Depreciation and amortization (4,480) (3,856)
Other (5,581) (2,867)
--------- --------
Total deferred tax (120,270) (59,673)
--------- --------
Net deferred tax liability $ (108,570) (51,764)
========== ========
</TABLE>
The effective income tax rates for 1999, 1998, and 1997 were 39%,
38%, and 38%, respectively. These effective rates differ from
the federal statutory rate of 35% as follows:
<TABLE>
(In thousands) 1999 1998 1997
-----------------------------------
<S> <C> <C> <C>
Tax expense at statutory
rates $ 106 11,644 8,569
State income tax, net of
federal benefit 10 1,280 632
Other, net 2 (245) 135
------- ------- ------
Total income tax expense $ 118 12,679 9,336
======= ======= ======
</TABLE>
Income taxes payable are reduced by the tax benefit resulting
from disqualifying dispositions of stock acquired under the
Company's stock option plans. The 1999, 1998, and 1997 benefits
of $594,000, $621,000, and $521,000, respectively, are treated as
increases to additional paid-in capital.
10 Foundations Retirement Plan
The Cerner Corporation Foundations Retirement Plan (the Plan) is
established under Section 401(k) of the Internal Revenue Code.
All full-time associates are eligible to participate.
Participants may elect to make pretax contributions from 1% to
15% of compensation to the Plan, subject to annual limitations
determined by the Internal Revenue Service. Participants may
direct contributions into mutual funds, a money market fund, or a
Company stock fund. The Company makes matching contributions to
the Plan, on behalf of participants, in an amount equal to 20% of
the participant's contribution, limited to an annual maximum of
$600 per participant. The Company's expense for the plan
amounted to $1,187,000, $1,005,000, and $761,000 for 1999, 1998,
and 1997, respectively.
<PAGE> 49
11 Related Party Transactions
In 1999, the Company loaned $3,628,000 to the Company's senior
management under the terms of the Executive Stock Purchase
Program ("Program"). The purpose of the Program is to advance
the interests of the Company, the Company's senior management,
and the Company's shareholders by offering the Company's senior
management an incentive to purchase shares of the Company's stock
on the open market. Pursuant to the Program, the Company
provided Program loans to executives to help finance up to 50% of
the total purchase price of the stock purchased. All Program
loans have a term of five (5) years, at an interest rate of 5.5%.
Principal and interest is not due until the end of the five-year
loan term, unless the executive terminates employment.
Executives may also elect to pay interest annually. If interest
is not paid annually, it will compound annually. All Program
loans are secured by the purchased shares and any pledged shares.
12 Commitments
The Company leases space to unrelated parties in its Kansas City
headquarters complex under noncancelable operating leases.
Included in other revenues is rental income of $1,005,000,
$1,795,000, and $1,694,000 in 1999, 1998, and 1997, respectively.
The Company is committed under operating leases for office space
through December 2004. Rent expense for office and warehouse
space for the Company's regional and international offices for
1999, 1998, and 1997 was $2,226,000, $1,847,000, and $1,759,000,
respectively. Future minimum lease revenues (in thousands) and
aggregate minimum future payments (in thousands) under these
noncancelable operating leases are as follows:
<TABLE>
Future Future
Minimum Minimum
lease lease
Years Revenues Commitments
-----------------------------------
<S> <C> <C>
2000 $ 425 1,566
2001 176 719
2002 40 428
2003 23 435
2004 - 267
</TABLE>
In December, 1999, the Company made a decision to close five of
its branch offices. The Company created a regional branch
structure in 1994 in order to bring associates closer to its
clients. The natural evolution of that strategy and the ability
to leverage internal information technology infrastructure to
create a more virtual workplace has resulted in a significant
decrease in utilization of certain regional offices. This led to
the decision to close these physical locations. The Company
recorded a charge of $1.4 million in sales and client service
expenses in the 1999 fourth quarter to provide for the costs of
closing these locations, primarily based on estimated lease
cancellation fees. The Company will continue to maintain offices
in Denver, Detroit and Australia, in addition to the world
headquarters in Kansas City, Missouri.
13 Stockholders' Equity
At the end of 1999 and 1998, the Company had 1,000,000 shares of
authorized but unissued preferred stock, $.01 par value.
<PAGE> 50
14 Quarterly Results (unaudited)
Selected quarterly financial data for 1999 and 1998 is set forth below:
<TABLE>
(In thousands, except per share data)
Earnings (loss) Basic
before Net earnings Diluted
income taxes and earnings (loss) earnings (loss)
Revenues extraordinary item (loss) per share per share
------------------------------------------------------------------------
1999 quarterly results:
<S> <C> <C> <C> <C> <C>
April 3 $ 86,743 4,543 2,817 .08 .08
July 3 (1) 82,782 428 (1,135) (.03) (.03)
October 2 80,929 1,146 680 .02 .02
January 1 (2) 89,743 (5,815) (3,573) (.11) (.11)
- ----------------------------------------------------------------------------------------------------
Total 340,197 302 (1,211) (.04) (.04)
======= ====== ======= ===== =====
1998 quarterly results:
April 4 (3) 73,674 1,106 671 .02 .02
July 4 79,152 8,726 5,369 .16 .16
October 3 82,832 10,185 6,348 .19 .19
January 2 95,244 13,251 8,201 .26 .24
- ----------------------------------------------------------------------------------------------------
Total 330,902 33,268 20,589 .63 .61
======= ====== ====== ==== ====
</TABLE>
(1) In the second quarter of 1999, the Company incurred an
extraordinary loss on the early extinguishment of debt of
$1,395,000, net of taxes of $865,000. Earnings, basic earnings
per share, and diluted earnings per share, before the
extraordinary item for the second quarter of 1999 were $260,000,
$0.01, and $0.01, respectively.
(2) See note 12 regarding a non-recurring charge in the fourth
quarter of 1999. The fourth quarter of 1999 also includes an
additional non-recurring charge of $5.8 million, net of $3.6
million tax benefit, for contract reserves.
(3) See note 2 regarding a non-recurring charge in the
first quarter of 1998.
<PAGE> 51
<TABLE>
Cerner Corporation
Valuation and Qualifying Accounts Schedule II
<CAPTION>
Additions
Balance at Charged to
Beginning Costs and Balance at
Description of Period Expenses Deductions End of Period
- --------------------------------------------------------------------------------
For Year Ended January 3, 1998
<S> <C> <C> <C> <C>
Doubtful Accounts $ 1,121,000 $ 369,000 $ 0 $ 1,490,000
Sales Allowances $ 0 $ 0 $ 0 $ 0
</TABLE>
<TABLE>
Additions
Balance at Charged to
Beginning Costs and Balance at
Description of Period Expenses Deductions End of Period
- --------------------------------------------------------------------------------
For Year Ended January 2, 1999
<S> <C> <C> <C> <C>
Doubtful Accounts $ 1,490,000 $ 1,915,000 $ 0 $ 3,405,000
Sales Allowances $ 0 $ 0 $ 0 $ 0
</TABLE>
<TABLE>
Additions
Balance at Charged to
Beginning Costs and Balance at
Description of Period Expenses Deductions End of Period
- ------------------------------------------------------------------------------
For Year Ended January 1, 2000
<S> <C> <C> <C> <C>
Doubtful Accounts $ 3,405,000 $ 4,351,000 $(2,997,000) $ 4,759,000
Sales Allowances $ 0 $ 0 $ 0 $ 0
</TABLE>
Independent Auditors' Report
on Financial Statement Schedule
The Board of Directors
Cerner Corporation:
Under date of February 14, 2000, we reported on the
consolidated balance sheets of Cerner Corporation and
subsidiaries as of January 1, 2000 and January 2, 1999 and
the related consolidated statements of operations, changes in
equity, and cash flows for each of the years in the three-
year period ended January 1, 2000. These consolidated
financial statements and our report thereon are included in
the Company's annual report on Form 10-K for the year 1999.
In connection with our audits of the aforementioned
consolidated financial statements, we also have audited the
related financial statement schedule as listed under Item
14(a)(2). This financial statement schedule is the
responsibility of the Company's management. Our
responsibility is to express an opinion on this financial
statement schedule based on our audits.
In our opinion, this financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG LLP
Kansas City, Missouri
February 14, 2000
INDEMNIFICATION AGREEMENT
-------------------------
THIS AGREEMENT is made and entered into this 18th day
of November, 1999, between Cerner Corporation, a Delaware
corporation ("Corporation"), and Jeff Goldsmith ("Indemnitee").
WITNESSETH:
WHEREAS, Indemnitee is a member of the board of
directors of the Corporation and as such is performing a valuable
service for the Corporation; and
WHEREAS, although Indemnitee has certain rights to
indemnification under the Bylaws and Certificate of Incorporation
of the Corporation, such Bylaws and Certificate of Incorporation
specifically provide that they are not exclusive and thereby
contemplate that the Corporation may enter into agreements with
its officers and directors; and
WHEREAS, the Corporation and Indemnitee desire to enter
into this Agreement to provide to Indemnitee additional rights to
indemnification in consideration of Indemnitee's continued
service to the Corporation as a director;
NOW, THEREFORE, in consideration of Indemnitee's
continued service as a director of the Corporation after the date
hereof and for and in consideration of the premises and the
covenants contained herein, the Corporation and Indemnitee do
hereby promise and agree as follows:
1. Indemnification. The Corporation hereby agrees to
---------------
hold harmless and indemnify Indemnitee to the fullest extent
permitted by Section 145, Title 8 of the Delaware Code, as in
effect on the date of the execution of this Agreement and as it
may hereafter be amended, or any other statutory provision
permitting or authorizing such indemnification which is adopted
subsequent to the execution of this Agreement.
2. Maintenance of Insurance. So long as Indemnitee
------------------------
shall continue to serve as a director of the Corporation (or
shall continue at the request of the Corporation or on behalf of
the Corporation to serve as a director, officer, employee or
agent of any Other Enterprise) and thereafter so long as
Indemnitee shall be subject to any possible claim or is a party
or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative, investigative or appellate by reason of the fact
that Indemnitee is or was a director of the Corporation (or is or
was serving in any of said other capacities at the request of the
Corporation), the Corporation may maintain director liability
insurance if such insurance becomes reasonably available and if,
in the business judgment of the board of directors of the
Corporation as it may exist from time to time, both (i) the
premium cost for such insurance is reasonable, and (ii) the
coverage provided by such insurance is not so limited by
exclusions that there is insufficient benefit provided by such
director liability insurance.
3. Additional Indemnification. Subject only to the
--------------------------
provisions in Sections 4, 5, 6 and 7 of this Agreement, the
Corporation hereby further agrees to hold harmless and indemnify
Indemnitee:
(a) Against any and all liabilities and expenses,
including without limitation, judgments, amounts paid in
settlement (provided that such settlement and all amounts
<PAGE>
paid in connection therewith are approved in
advance by the Corporation, which approval shall not be
unreasonably withheld), attorneys' fees, ERISA excise
taxes or penalties, fines and other expenses actually
and reasonably incurred by Indemnitee in connection
with any threatened, pending or completed action, suit
or proceeding (including without limitation the
investigation, defense, settlement or appeal of such
action, suit or proceeding), whether civil, criminal,
administrative, investigative or appellate (including
an action by or in the right of the Corporation) to
which Indemnitee is, was or at any time becomes a
party, or is threatened to be made a party, by reason
of the fact that Indemnitee is, was or at any time
becomes a director of the Corporation, or is or was
serving at the request of the Corporation as a
director, officer, agent or employee of any Other
Enterprise; and
(b) Otherwise to the fullest extent as may be
provided to Indemnitee by the Corporation pursuant to
the non-exclusivity provisions of paragraph 28 of the
Corporation's Bylaws and subsection (f) of Section 145,
Title 8 of the Delaware Code relating to
indemnification.
4. Limitations on Additional Indemnification. (a) The
-----------------------------------------
Corporation will not hold Indemnitee harmless or provide
indemnification pursuant to Section 3 hereof:
(1) except to the extent that the aggregate
amount of losses to be indemnified thereunder exceeds
the amount of such losses for which Indemnitee is
indemnified either pursuant to (i) the Corporation's
Certificate of Incorporation, Bylaws, vote of
stockholders or disinterested directors or other
agreement, (ii) Sections 1 or 2 hereof, (iii) pursuant
to any director liability insurance purchased and
maintained on behalf of Indemnitee by the Corporation,
or (iv) otherwise than pursuant to this Agreement;
(2) in respect of remuneration paid to Indemnitee
if it shall be determined by a final judgment or other
final adjudication that such remuneration was in
violation of law;
(3) on account of any suit for an accounting of
profits made from the purchase or sale by Indemnitee of
securities of the Corporation pursuant to Section 16(b)
of the Securities Exchange Act of 1934 and amendments
thereto or similar provisions of any federal, state or
local law;
(4) on account of Indemnitee's conduct which is
finally adjudged by a court to have been knowingly
fraudulent, deliberately dishonest or willful
misconduct; or
(5) if a final adjudication by a court having
jurisdiction in the matter shall determine that such
indemnification is not lawful.
(b) Notwithstanding any other provisions of this
Agreement, if the Indemnitee is or was serving as a director of
the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of any
Other Enterprise, and has been successful on the merits or other-
wise in defense of any action, suit or proceeding referred to in
Section 3 of this Agreement (including the dismissal of any such
action, suit or proceeding without prejudice), or in defense of
any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees)
<PAGE>
actually and reasonably incurred by him in connection therewith
to the extent he has not been fully indemnified therefor other-
wise than pursuant to this Agreement.
5. Advancement of Expenses. Expenses (including
-------------------------
attorneys' fees) actually and reasonably incurred by an
Indemnitee who may be entitled to indemnification hereunder in
defending an action, suit or proceeding, whether civil, criminal,
administrative, investigative or appellate, shall be paid by the
Corporation in advance of the final disposition of such action,
suit or proceeding upon receipt of an undertaking by or on behalf
of such Indemnitee to repay such amount if it shall ultimately be
determined that the Indemnitee is not entitled to indemnification
by the Corporation. Notwithstanding the foregoing, no advance
shall be made by the Corporation if a determination is reasonably
and promptly made by (i) the board of directors by a majority
vote of a quorum consisting of directors who were not parties to
the action, suit or proceeding from which the advancement is
requested, or (ii) if a quorum is not obtainable, or even if
obtainable, if a quorum of disinterested directors so directs, by
independent legal counsel in a written opinion, or (iii) by the
stockholders, that, based upon the facts known to the board,
counsel or stockholders at the time such determination is made,
such Indemnitee acted in bad faith and in a manner that such
Indemnitee did not believe to be in or not opposed to the best
interest of the Corporation, or, with respect to any criminal
proceeding, that such Indemnitee believed or had reasonable cause
to believe his conduct was unlawful. In no event shall any
advance be made in instances where the board, stockholders or
independent legal counsel reasonably determines that such
Indemnitee deliberately breached his duty to the Corporation or
its stockholders.
6. Notification and Defense of Claim. Promptly after
---------------------------------
receipt by Indemnitee of notice of the commencement of any
action, suit or proceeding, Indemnitee will, if a claim in
respect thereof is to be made against the Corporation under this
Agreement, notify the Corporation of the commencement thereof;
but the omission so to notify the Corporation will not relieve it
from any liability which it may have to Indemnitee otherwise than
under this Agreement. With respect to any such action, suit or
proceeding as to which Indemnitee notifies the Corporation of the
commencement thereof:
(a) The Corporation will be entitled to
participate therein at its own expense;
(b) Except as otherwise provided below, to the
extent that it may wish, the Corporation jointly with
any other indemnifying party similarly notified will be
entitled to assume the defense thereof, with counsel
satisfactory to Indemnitee. After notice from the
Corporation to Indemnitee of its election so to assume
the defense thereof, the Corporation will not be liable
to Indemnitee under this Agreement for any legal or
other expenses subsequently incurred by Indemnitee in
connection with the defense thereof other than
reasonable costs of investigation or as otherwise
provided below. Indemnitee shall have the right to
employ its own counsel in such action, suit or
proceeding but the fees and expenses of such counsel
incurred after notice from the Corporation of its
assumption of the defense thereof shall be at the
expense of Indemnitee unless (i) the employment of
counsel by Indemnitee has been authorized by the
Corporation, (ii) Indemnitee shall have reasonably
concluded that there may be a conflict of interest
between the Corporation and Indemnitee in the conduct
of the defense of such action, or (iii) the Corporation
shall not in fact have employed counsel to assume the
defense of such action, in each of which cases the fees
and expenses of counsel shall be at the expense of the
Corporation. The Corporation shall not be entitled to
assume the defense of any action, suit or proceeding
brought by or on behalf of the Corporation or as to
which Indemnitee shall have made the conclusion
provided for in (ii) above; and
<PAGE>
(c) The Corporation shall not be liable to
indemnify Indemnitee under this Agreement for any
amounts paid in settlement of any action or claim
effected without its prior written consent. The
Corporation shall not settle any action or claim in any
manner which would impose any penalty or limitation on
Indemnitee without Indemnitee's written consent.
Neither the Corporation nor Indemnitee will
unreasonably withhold their consent to any proposed
settlement.
7. Determination of Right to Indemnification. Prior
-----------------------------------------
to indemnifying an Indemnitee pursuant to this Agreement, unless
ordered by a court, the Corporation shall determine that such
Indemnitee is entitled thereto under the terms of this Agreement.
Any determination that a person shall or shall not be indemnified
under this Agreement shall be made by the board of directors by a
majority vote of a quorum consisting of directors who were not
parties to the action, suit or proceeding, or if such quorum is
not obtainable, or even if obtainable, if a quorum of
disinterested directors so directs, by independent legal counsel
in a written opinion or by the stockholders, and such
determination shall be final and binding upon the Corporation;
provided, however, that in the event such determination is
adverse to the Indemnitee, such Indemnitee shall have the right
to maintain an action in any court of competent jurisdiction
against the Corporation to determine whether or not such
Indemnitee is entitled to such indemnification hereunder. If
such court action is successful and the Indemnitee is determined
to be entitled to such indemnification, such Indemnitee shall be
reimbursed by the Corporation for all fees and expenses
(including attorneys' fees) actually and reasonably incurred in
connection with any such action (including without limitation the
investigation, defense, settlement or appeal of such action).
This Agreement shall be applicable to any claim asserted after
the date hereof whether such claim arises from acts or omissions
occurring before or after the date hereof.
8. Certain Definitions. For purposes of this
--------------------
Agreement, references to "Other Enterprise" shall include without
limitation any other corporation, partnership, joint venture,
trust or employee benefit plan; references to "fine" or "fines"
shall include any excise taxes assessed on Indemnitee with
respect to any employee benefit plan; references to "defense"
shall include investigations of any action, suit or proceeding as
well as appeals in any threatened, pending or completed action,
suit or proceeding and shall also include any defensive assertion
of a cross claim or counterclaim; and references to "serving at
the request of the Corporation" shall include any service as a
director of the Corporation which imposes duties on, or involves
services by, Indemnitee with respect to an employee benefit plan,
its participants or beneficiaries; and if Indemnitee acted in
good faith and in a manner he reasonably believed to be in the
interest of the participants and beneficiaries of an employee
benefit plan he shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as referred to
in this Agreement. For the purpose of this Agreement, unless the
board of directors of the Corporation shall determine otherwise,
any Indemnitee who shall serve as an officer or director of any
Other Enterprise of which the Corporation, directly or
indirectly, is a stockholder or creditor, or in which the
Corporation is in any way interested, shall be presumed to be
serving as such director or officer at the request of the
Corporation. In all other instances where any Indemnitee shall
serve as a director, officer, employee or agent of an Other
Enterprise, if it is not otherwise established that such
Indemnitee is or was serving as such director, officer, employee
or agent at the request of the Corporation, the board of
directors of the Corporation shall determine whether such
Indemnitee is or was serving at the request of the Corporation,
and it shall not be necessary to show any actual or prior request
for such service, which determination shall be final and binding
on the Corporation and the Indemnitee seeking indemnification.
9. Continuation and Enforcement of Indemnification.
-----------------------------------------------
<PAGE>
(a) The Corporation expressly confirms and agrees that
it has entered into this Agreement and assumes the obligations
imposed on the Corporation hereby in order to induce Indemnitee
to continue as a director of the Corporation and acknowledges
that Indemnitee is relying upon this Agreement in continuing in
such capacity. The rights to indemnification and advancement of
expenses created by or provided pursuant to this Agreement are
bargained-for conditions of Indemnitee's acceptance and/or
maintenance of his election or appointment as a director of the
Corporation and such rights shall continue after Indemnitee has
ceased to be a director of the Corporation or a director,
officer, employee or agent of any Other Enterprise and shall
inure to the benefit of Indemnitee's heirs, executors,
administrators and estate.
(b) Indemnitee expressly confirms and agrees that
under no circumstances shall the language or any of the promises
and covenants contained in this Agreement be construed or
interpreted as creating a contract of employment.
(c) To the fullest extent permitted by the laws of the
State of Delaware, Indemnitee shall have the right to maintain an
action in any court of competent jurisdiction to enforce and/or
recover damages for breach of the rights to indemnification
created by or provided pursuant to the terms of this Agreement.
If such court action is successful, Indemnitee shall be reim
bursed by the Corporation for all fees and expenses (including
attorneys' fees) actually and reasonably incurred in connection
with such action (including without limitation the investigation,
defense, settlement or appeal of such action).
10. Non-Exclusivity. The right to indemnification
---------------
pursuant to this Agreement shall not be deemed exclusive of any
other rights of indemnification to which Indemnitee may be
entitled under any statute, other agreement, the Certificate of
Incorporation, Bylaws, pursuant to a vote of stockholders or
disinterested directors, insurance policy or otherwise, both as
to actions in his official capacity and as to action in another
capacity while holding his directorship, and shall not limit in
any way any right the Corporation may have to create additional
or independent or supplementary obligations to indemnify
Indemnitee.
11. Severability. Each of the provisions of this
------------
Agreement is a separate and distinct agreement independent of the
others, and if any provision of this Agreement or the application
of any provision hereof to any person or circumstance is held
invalid, illegal or unenforceable by a court for any reason
whatsoever, the remaining provisions of this Agreement and the
application of such provision to other persons or circumstances
shall not be affected thereby. The parties hereto expressly
agree that any provision hereof held invalid, illegal or
unenforceable shall be construed and modified by the court
finding such provision invalid, illegal or unenforceable to the
extent necessary so as to render such provision valid and
enforceable as against all persons or entities and to provide the
maximum possible protection to the person subject to
indemnification hereunder within the bounds of validity, legality
and enforceability. Without limiting the generality of the
foregoing, if the Indemnitee is entitled to indemnification under
this Agreement by the Corporation for some or a portion of the
judgments, amounts paid in settlement, attorneys' fees, ERISA
excise taxes or penalties, fines or other expenses actually and
reasonably incurred by the Indemnitee in connection with any
threatened, pending or completed action, suit or proceeding
(including without limitation, the investigation, defense,
settlement or appeal of such action, suit or proceeding), whether
civil, criminal, administrative, investigative or appellate, but
not, however, for all of the total amount thereof, the
Corporation shall nevertheless indemnify the Indemnitee for the
portion thereof to which such person is entitled.
12. Governing Law. This Agreement shall be governed,
-------------
interpreted and construed in accordance with the laws of the
State of Delaware without regard to any of its conflict of law
rules.
<PAGE>
13. Modification; Survival. This Agreement
------------------------
constitutes the entire agreement of the parties relating to the
subject matter hereof and no amendment, modification, termination
or cancellation of this Agreement shall be effective unless in
writing signed by both parties hereto. The provisions of this
Agreement shall survive the termination of Indemnitee's service
as a director and/or officer of the Corporation with respect to
actions, suits or proceedings brought or instituted in respect of
any action taken or the failure to take any action occurring
prior to such termination of service.
IN WITNESS WHEREOF, the parties hereto have duly
executed this Agreement and affixed their signatures hereto as of
the date first above written.
/s/Jeff Goldsmith
--------------------------
Jeff Goldsmith, Indemnitee
CERNER CORPORATION, a Delaware corporation
By /s/Marc G. Naughton
------------------------
Marc G. Naughton, Chief Financial Officer
[SEAL]
ATTEST:
/s/Randy D. Sims
- -----------------------------
Randy D. Sims, Secretary
Cerner Performance Plans for 2000
CPP Overview
- ------------
Cerner's business is expected to continue to grow at a
phenomenal rate over the coming years. While we continue to
seek talented associates for most areas our our business,
several needs are expected to drive our hiring needs in the
near term. We are aggressively expanding our sales team to
provide better coverage for our prospective clients in the
US, and globally. In addition, we expect to hire a
significant number of: 1) consulting professionals who
implement our solutions and tailor them to drive benefits
for our clients, and 2) functional experts, architects, and
engineers who build and support what have proven to be the
industry leading solutions for all facets of health care.
Currently, approximately 25% of all associates participate
in Cerner Performance Plans. Generally, sales associates
participate in marketing incentives that comprise the
majority of their total compensation. Senior consultants
and leaders with P&L responsibility participate in
performance plans that comprise 20 - 25% of their total
compensation. Executives participate in performance plans
that comprise 30 - 50% of their total compensation,
depending on the nature and scope of their responsibility.
CPP Plans
- ---------
The first structure in the design of CPP is the plan. Plans
are defined by role or team, and reflect the key
responsibilities for an associate. Even though every Cerner
associate "wears multiple hats" or plays multiple roles
through the course of a year, most associates participate in
only one plan. The potential incentive for an associate is
called a Target Bonus Level (TBL).
There are three types of plans:
Business Unit CPP -- All associates participating in Cerner
Performance Plans participate in an Annual CPP plan. Several
types of metrics may be used to calculate performance and
plan payout.
The most common metric is a rewardable event metric, and is
typically a quarterly, cumulative year-to-date target for
business unit bookings, or operating earnings. We calculate
and make quarterly rewardable events payments to reinforce
consistent performance in support of annual corporate
earnings targets. Year-end payments of rewardable events
are adjusted by a factor which reflects the associate's
performance. This Annual Performance Evaluation factor
(APE) is used to reflect and reward success on not only the
"what" dimension of performance, but also the "how." We
believe this is an important factor because Cerner's long-
term success will be highly correlated to "how" (developing
associate capabilities, sharing knowledge, building
effective teams, supporting other business units, etc.)
results are delivered now. The APE factor can adjust
payments downward by as much as 50%, or upward by 30%.
For sales associates, marketing incentives are paid on the
basis of percent of quota, or sales commission. These plans
reward performance within a specified geographical region
and/or product set.
EPS Incentive Plan -- A limited number of senior executives
participate in this plan which is intended to drive
aggressive EPS growth. Payments are calculated annually.
CPP Eligibility and Payments
- ----------------------------
CPP plans are administered on quarterly cycles, which are
aligned with the quarters in the financial year.
Eligibility and payments are made on this basis.
1
<PAGE>
Eligibility
Eligibility for a plan is based on the role of the
associate, and executive approval. Participants will be
eligible for participation in the first full plan quarter
following employment (or transfer into a role). If an
associate starts during the first 15 working days of a
quarter, he/she may be approved to participate in the plan
for that quarter; however, sales associates will receive 50%
of the payout for the agreement margings attained that
quarter, and full payout for following quarters.
If an associate's participation in a Cerner Performance Plan
is terminated due to termination of employment or transfer
to a non-CPP role, the associate will be entitled to payment
for any earned but not yet paid amounts. Payments are
earned only for completed quarters; i.e., if participation
is terminated in the middle of a quarter, no incentive will
be paid for that quarter.
If an associate transfers from one CPP-based role to
another, participation in the previous plan will be "closed
out" per normal end-of-quarter processing under the
provisions of the previous plan. Participation in the new
plan will be effective as of the beginning of the following
quarter. Whenever possible, such transfers should be
coordinated to be effective as of the beginning of a quarter
to avoid partial quarter issues.
Payment Cycles
Rewardable event incentives will be calculated and paid
quarterly. Payments will be made by the 15th of the second
month succeeding quarter.
Marketing Incentives will be calculated and paid quarterly,
by the end of the month following quarter-end. Incentives
are earned only upon completion of certain contracting and
payment requirements. As these requirements are met,
marketing incentive payments are made on a monthly basis.
2
<PAGE>
2000 CPP Metrics
<TABLE>
Neal L. Patterson
EPS Incentive TBL: $210,000
<CAPTION>
Rewardable Event Weighting Cycle
- ---------------- --------- -----
<S> <C> <C>
Corporate EPS 100% A
</TABLE>
<TABLE>
Business Unit TBL: $227,500
<CAPTION>
Rewardable Event Weighting Cycle
- ---------------- --------- -----
<S> <C> <C>
Corporate EPS 100% Q
</TABLE>
<TABLE>
Clifford W. Illig
EPS Incentive TBL: $25,000
<CAPTION>
Rewardable Event Weighting Cycle
- ---------------- --------- -----
<S> <C> <C>
Corporate EPS 100% A
</TABLE>
<TABLE>
Glenn P. Tobin
EPS Incentive TBL: $80,000
<CAPTION>
Rewardable Event Weighting Cycle
- ---------------- --------- -----
<S> <C> <C>
Corporate EPS 100% A
</TABLE>
<TABLE>
Business Unit TBL: $110,000
<CAPTION>
Rewardable Event Weighting Cycle
- ---------------- --------- -----
<S> <C> <C>
Corporate EPS 100% Q
</TABLE>
<TABLE>
Jack A. Newman, Jr.
Business Unit TBL: $235,000
<CAPTION>
Rewardable Event Weighting Cycle
- ---------------- --------- ------
<S> <C> <C>
Client Development Bookings 40% Q
Total Bookings 30% Q
Corporate EPS 30% Q
</TABLE>
<TABLE>
Thomas C. Tinstman, M.D.
Business Unit TBL: $100,000
<CAPTION>
Rewardable Event Weighting Cycle
- ---------------- --------- -----
<S> <C> <C>
Corporate EPS 100% Q
</TABLE>
3
<PAGE>
<TABLE>
Paul M. Black
EPS Incentive TBL: $50,000
<CAPTION>
Rewardable Event Weighting Cycle
- ---------------- --------- -----
<S> <C> <C>
Corporate EPS 100% A
</TABLE>
<TABLE>
Business Unit TBL: $225,000
<CAPTION>
Rewardable Event Weighting Cycle
- ---------------- --------- -----
<S> <C> <C>
Total Bookings 70% Q
Corporate EPS 30% Q
</TABLE>
<TABLE>
Earl H Devanny, III
EPS Incentive TBL: $100,000
<CAPTION>
Rewardable Event Weighting Cycle
- ---------------- --------- -----
<S> <C> <C>
Corporate EPS 100% A
</TABLE>
<TABLE>
Business Unit TBL: $123,750
<CAPTION>
Rewardable Event Weighting Cycle
- ---------------- --------- -----
<S> <C> <C>
Corporate EPS 100% Q
</TABLE>
<TABLE>
Alan D. Dietrich
Business Unit TBL: $125,000
<CAPTION>
Rewardable Event Weighting Cycle
- ---------------- --------- -----
<S> <C> <C>
Business Unit Bookings 50% Q
Total Bookings 20% Q
Corporate EPS 30% Q
</TABLE>
<TABLE>
Stephen M. Goodrich
EPS Incentive TBL: $50,000
<CAPTION>
Rewardable Event Weighting Cycle
- ---------------- --------- -----
<S> <C> <C>
Corporate EPS 100% A
</TABLE>
<TABLE>
Business Unit TBL: $96,250
<CAPTION>
Rewardable Event Weighting Cycle
- ---------------- --------- -----
<S> <C> <C>
Business Unit Operating Earnings 50% Q
Corporate EPS 50% Q
</TABLE>
4
<PAGE>
<TABLE>
Douglas M. Krebs
EPS Incentive TBL: $50,000
<CAPTION>
Rewardable Event Weighting Cycle
- ---------------- --------- -----
<S> <C> <C>
Corporate EPS 100% A
</TABLE>
<TABLE>
Business Unit TBL: $202,500
<CAPTION>
Rewardable Event Weighting Cycle
- ---------------- --------- -----
<S> <C> <C>
Total Bookings 25% Q
International Bookings 50% Q
Corporate EPS 25% Q
</TABLE>
<TABLE>
Stephen D. Garver
EPS Incentive TBL: $50,000
<CAPTION>
Rewardable Event Weighting Cycle
- ---------------- --------- -----
<S> <C> <C>
Corporate EPS 100% A
</TABLE>
<TABLE>
Business Unit TBL: $195,000
<CAPTION>
Rewardable Event Weighting Cycle
- ---------------- --------- -----
<S> <C> <C>
Corporate EPS 30% Q
Cerner Consulting Bookings 30% Q
Cerner Consulting Operating Earnings 40% Q
</TABLE>
<TABLE>
Marc G. Naughton
EPS Incentive TBL: $50,000
<CAPTION>
Rewardable Event Weighting Cycle
- ---------------- --------- -----
<S> <C> <C>
Corporate EPS 100% A
</TABLE>
<TABLE>
Business Unit TBL: $76,250
<CAPTION>
Rewardable Event Weighting Cycle
- ---------------- --------- -----
<S> <C> <C>
Corporate EPS 100% Q
</TABLE>
5
<PAGE>
<TABLE>
Stanley M. Sword
EPS Incentive TBL: $50,000
<CAPTION>
Rewardable Event Weighting Cycle
- ---------------- --------- -----
<S> <C> <C>
Corporate EPS 100% A
</TABLE>
<TABLE>
Business Unit TBL: $100,000
<CAPTION>
Rewardable Event Weighting Cycle
- ---------------- --------- -----
<S> <C> <C>
Corporate EPS 100% Q
</TABLE>
<TABLE>
Jeffrey A. Townsend
EPS Incentive TBL: $50,000
<CAPTION>
Rewardable Event Weighting Cycle
- ---------------- --------- -----
<S> <C> <C>
Corporate EPS 100% A
</TABLE>
<TABLE>
Business Unit TBL: $118,750
<CAPTION>
Rewardable Event Weighting Cycle
- ---------------- --------- -----
<S> <C> <C>
Corporate EPS 70% Q
Total Bookings 30% Q
</TABLE>
<TABLE>
Richard J. Flanigan, Jr.
Business Unit TBL: $201,250
<CAPTION>
Rewardable Event Weighting Cycle
- ---------------- --------- -----
<S> <C> <C>
Corporate EPS 30% Q
Business Unit Bookings 30% Q
Business Unit Operating Earnings 40% Q
</TABLE>
<TABLE>
Paul J. Sinclair
EPS Incentive TBL: $30,000
<CAPTION>
Rewardable Event Weighting Cycle
- ---------------- --------- -----
<S> <C> <C>
Corporate EPS 100% A
</TABLE>
<TABLE>
Business Unit TBL: $142,500
<CAPTION>
Rewardable Event Weighting Cycle
- ---------------- --------- -----
<S> <C> <S>
Corporate EPS 30% Q
Cerner Consulting Bookings 30% Q
Cerner Consulting Operating Earnings 40% Q
</TABLE>
6
<PAGE>
<TABLE>
Randy D. Sims
Business Unit TBL: $68,750
<CAPTION>
Rewardable Event Weighting Cycle
- ---------------- --------- -----
<S> <C> <C>
Corporate EPS 100% Q
</TABLE>
Target Bonus Level (TBL) represents the amount payable if
the target is achieved. If the target is exceeded
additional amounts can be paid.
7
<PAGE>
PROMISSORY NOTE
and SECURITY AGREEMENT
September 13, 1999 $125,000.00
For value received, the undersigned promises to pay to the
order of Cerner Corporation, a Delaware corporation ("Cerner")
the sum of One Hundred Twenty-five Thousand Dollars
($125,000.00), payable as follows:
Date Principal Repayment
---- -------------------
September 13, 2004 $125,000
This Promissory Note will not bear interest for the first two
(2) years. Beginning on September 13, 2001, interest will accrue
on the unpaid principal balance hereof at the rate of five
percent (5%) per annum and shall be payable annually on September
13, with the first interest payment due on September 13, 2002.
Interest shall be computed on the basis of a 360-day year.
Payment of this Promissory Note shall be made at the office of
Cerner at 2800 Rockcreek Parkway, Kansas City, Missouri, 64117,
or at such other place within the State of Missouri as Cerner may
designate in writing to the undersigned, in United States
dollars.
Notwithstanding the foregoing, and without notice by Cerner to
the undersigned, the entire unpaid principal amount of this
Promissory Note (plus accrued interest, if any) shall become
immediately due and payable in full upon (i) the voluntary
termination of the undersigned's employment with Cerner or (ii)
Cerner's termination of the undersigned's employment due to the
undersigned's dishonesty, illegal conduct, breach of Cerner's
policy or breach of the undersigned's Cerner Associate Employment
Agreement, dated August 13, 1999. In the event of the
undersigned's involuntary termination of employment with Cerner
(other than for the undersigned's dishonesty, illegal conduct,
breach of Cerner's policy or breach of the undersigned's Cerner
Associate Employment Agreement, dated August 13,1999), the entire
remaining principal amount of this Promissory Note (plus accrued
interest, if any) will be due and payable one (1) year following
such involuntary termination, without notice by Cerner to the
undersigned.
Any amount hereunder not paid when due shall thereafter bear
interest at the lesser of the highest amount permitted by
applicable law or the prime or base rate of interest announced
from time to time by CitiBank, N.A., New York, New York.
The undersigned hereby grants to Cerner a security interest in
(i) all outstanding Cerner Performance Plan ("CPP") or other
bonus payments due to the undersigned from Cerner at any time,
(ii) all stock options granted to the undersigned by Cerner,
whether vested or not vested, and (iii) any shares of Cerner
Common Stock acquired by the undersigned as a result of
exercising any stock options granted to the undersigned by Cerner
as security for all amounts due to Cerner hereunder. The
undersigned will deliver to Cerner any such certificates
representing Cerner Common Stock to be held by Cerner. The
undersigned shall assist Cerner in taking whatever steps Cerner
deems advisable in perfecting its security interest in the
foregoing collateral, including but not limited to signing
financing statements, stock powers and control agreements. In
the event that this Promissory Note shall become payable in full
as set forth above, Cerner shall have all of the rights and
remedies of a secured party under the Uniform Commercial Code as
in effect in the State of Missouri, including the right to sell
any of the collateral held by Cerner hereunder and apply the
proceeds thereof first to the costs and expenses, including
reasonable attorney's fees and expenses, incurred by Cerner in
exercising its rights hereunder and then to the amount secured by
the collateral. In addition to the foregoing, if the amount of
this Promissory Note is not paid when due, to the extent
permitted by law, Cerner may set off any moneys due from Cerner
to the undersigned, including without limitation, salary, CPP and
any other compensation, if any, against any of the undersigned's
obligations hereunder, whether or not the same is due and in any
order of priority.
<PAGE> 1
The undersigned waives any and all notices, demands,
protests or other indulgences or rights granted by law in
connection with the collection hereof by Cerner.
In witness whereof, the undersigned has executed this
Promissory Note and Security Agreement as of the day and year
first above written.
/s/Earl H. Devanny, III
------------------------
Earl H. Devanny, III
2
PROMISSORY NOTE
and SECURITY AGREEMENT
February 17, 2000 $75,000.00
For value received, the undersigned promises to pay to the
order of Cerner Corporation, a Delaware corporation ("Cerner")
the sum of Seventy-five Thousand Dollars ($75,000.00), payable as
follows:
Date Principal Repayment
---- -------------------
February 17, 2005 $75,000
This Promissory Note will not bear interest for the first two
(2) years. Beginning on February 17, 2002, interest will accrue
on the unpaid principal balance hereof at the rate of five
percent (5%) per annum and shall be payable annually on February
17, with the first interest payment due on February 17, 2003.
Interest shall be computed on the basis of a 360-day year.
Payment of this Promissory Note shall be made at the office of
Cerner at 2800 Rockcreek Parkway, Kansas City, Missouri, 64117,
or at such other place within the State of Missouri as Cerner may
designate in writing to the undersigned, in United States
dollars.
Notwithstanding the foregoing, and without notice by Cerner to
the undersigned, the entire unpaid principal amount of this
Promissory Note (plus accrued interest, if any) shall become
immediately due and payable in full upon (i) the voluntary
termination of the undersigned's employment with Cerner or (ii)
Cerner's termination of the undersigned's employment due to the
undersigned's dishonesty, illegal conduct, breach of Cerner's
policy or breach of the undersigned's Cerner Associate Employment
Agreement, dated August 13, 1999. In the event of the
undersigned's involuntary termination of employment with Cerner
(other than for the undersigned's dishonesty, illegal conduct,
breach of Cerner's policy or breach of the undersigned's Cerner
Associate Employment Agreement, dated August 13,1999), the entire
remaining principal amount of this Promissory Note (plus accrued
interest, if any) will be due and payable one (1) year following
such involuntary termination, without notice by Cerner to the
undersigned.
Any amount hereunder not paid when due shall thereafter bear
interest at the lesser of the highest amount permitted by
applicable law or the prime or base rate of interest announced
from time to time by CitiBank, N.A., New York, New York.
The undersigned hereby grants to Cerner a security interest in
(i) all outstanding Cerner Performance Plan ("CPP") or other
bonus payments due to the undersigned from Cerner at any time,
(ii) all stock options granted to the undersigned by Cerner,
whether vested or not vested, and (iii) any shares of Cerner
Common Stock acquired by the undersigned as a result of
exercising any stock options granted to the undersigned by Cerner
as security for all amounts due to Cerner hereunder. The
undersigned will deliver to Cerner any such certificates
representing Cerner Common Stock to be held by Cerner. The
undersigned shall assist Cerner in taking whatever steps Cerner
deems advisable in perfecting its security interest in the
foregoing collateral, including but not limited to signing
financing statements, stock powers and control agreements. In
the event that this Promissory Note shall become payable in full
as set forth above, Cerner shall have all of the rights and
remedies of a secured party under the Uniform Commercial Code as
in effect in the State of Missouri, including the right to sell
any of the collateral held by Cerner hereunder and apply the
proceeds thereof first to the costs and expenses, including
reasonable attorney's fees and expenses, incurred by Cerner in
exercising its rights hereunder and then to the amount secured by
the collateral. In addition to the foregoing, if the amount of
this Promissory Note is not paid when due, to the extent
permitted by law, Cerner may set off any moneys due from Cerner
to the undersigned, including without limitation, salary, CPP and
any other compensation, if any, against any of the undersigned's
obligations hereunder, whether or not the same is due and in any
order of priority.
This Promissory Note is also secured by and subject to the
benefits of the second mortgage dated February 25, 2000, made by
the undersigned in favor of Cerner.
<PAGE> 1
The undersigned waives any and all notices, demands,
protests or other indulgences or rights granted by law in
connection with the collection hereof by Cerner.
In witness whereof, the undersigned has executed this
Promissory Note and Security Agreement as of the day and year
first above written.
/s/Earl H. Devanny, III
____________________________
Earl H. Devanny, III
STATE OF MISSOURI )
) SS.
COUNTY OF CLAY )
On this 17th day of February, 2000 before me personally
appeared Earl H. Devanny, III, to me known to be the person
described in and who executed the foregoing instrument and
acknowledged that he executed the same as his free act and deed.
/s/Sondra Kiely
___________________________
Notary Public
(NOTARIAL SEAL)
My commission expires:_________________________
SONDRA KIELY
Notary Public - Notary Seal
State of Missouri
Clay County
My Commission Expires May 4, 2002
2
Cerner
Corporation
CERNER ASSOCIATE EMPLOYMENT AGREEMENT
This Cerner Associate Employment Agreement describes the formal
employment relationship between
E. H. Devanny, III
----------------------
ASSOCIATE (Print Name)
and Cerner Corporation, a Delaware corporation
This Agreement is effective on the 13th day of August, 1999.
----- ------
1. CERNER'S LETTER OFFERING EMPLOYMENT TO YOU.
------------------------------------------
At the time you accepted employment with Cerner, you
received an offer letter outlining or confirming the
specifics of Cerner's offer of employment to you. The
position, terms, compensation, benefits and other provisions
of that offer letter represent the initial conditions of
your Cerner employment. The offer letter is incorporated
into this Agreement as Attachment I. Any amendments or
changes to the offer letter are included as part of
Attachment II to this Agreement, and supersede the terms in
the offer letter. Cerner reserves the right to modify at
anytime the conditions of your employment by Cerner.
2. EMPLOYMENT RELATIONSHIP.
-----------------------
A. Formation. By signing this Agreement, you represent
---------
that every material fact contained in your resume and
application for employment with Cerner is true and
accurate to the best of your knowledge and belief. You
also agree that falsification of your resume or
application is grounds for immediate discharge.
B. Type. To the extent permitted by law, your
----
employment relationship with Cerner is "at will", which
means that you may resign from Cerner at any time, for
any reason, or for no reason at all, and without advance
notice (except as described below). It also means that
Cerner may terminate your employment at any time, for
any legally permitted reason, or for no reason at all,
and without advance notice.
C. Resignation and Termination. You agree to cooperate
---------------------------
with Cerner by participating fully in an exit interview
in the event you leave the employ of Cerner. You agree
to give Cerner written notice of your intention to
resign from employment at least ten (10) business days
prior to the last day you intend to work at Cerner. To
facilitate the provisions of paragraphs 7 and 8 of this
agreement, you also agree to report to Cerner, in
conjunction with your written notice of intent, the
identity of your new employer (if any) and the nature of
your proposed duties for that employer. Cerner,
however, reserves the right either to accelerate your
intended effective termination date to an earlier actual
date or to allow your intended effective termination
date to stand. If you resign, however, with fewer
than ten (10) business days notice, or if you actually
leave Cerner's employ prior to expiration of the ten
business days notice period and without the
<PAGE>
permission of Cerner, then you agree that (to the extent
permitted by law) no vacation pay, salary or other
compensation otherwise due, from the date of your
resignation notice until the time of your approved
effective termination date, will be owed or paid to you
by Cerner. Failure to provide a two-week notice period
may affect your future rehire ability with Cerner.
If you voluntarily resign and give proper notice as
outlined above and Cerner elects to accelerate your
effective termination date to a date less than two (2)
weeks from the date of your notice, Cerner will continue
to pay your base salary through the remainder of such
two (2) week period.
In the event your voluntary or involuntary
termination occurs during a performance period
associated with a documented bonus or incentive
compensation plan, any final payments to you as a result
of your participation in such plan will be determined by
the documented procedures of the plan.
In the event Cerner terminates your employment, Cerner
reserves the right to set the effective date of such
termination. Upon your resignation or the termination
of your employment, you agree to promptly execute a
Termination Statement in the form of Attachment III.
D. Severance Payments. If Cerner terminates your employ
------------------
ment (and unless the termination was due to your
dishonesty, illegal conduct, or breach of Cerner's
policy or this Agreement), Cerner will pay you a minimum
of six (6) months severance pay (based on your
annualized base salary amount at the time of your
involuntary termination), less appropriate payroll
deductions, payable on Cerner's regular paydays. In
addition, Cerner will increase the severance period
beyond the minimum six (6) month period at the rate of
two (2) additional months for each one (1) month that
you are employed by Cerner, up to a maximum duration
(the original six (6) month period plus any extension)
of two (2) years. Additionally, at Cerner's sole
discretion and option, Cerner may increase the severance
period beyond that set forth in the preceding sentence
up to a maximum aggregate duration of two (2) years (the
original six (6) month period, plus any extension, plus
any election by Cerner to extend). You understand and
agree that the extension by Cerner of the period of your
severance compensation will also extend the period of
time of your non-competition obligations under Paragraph
7. You also understand and agree that, at Cerner's sole
discretion and option, Cerner may elect to make any
severance payment, or any part thereof, in a lump sum
payment as opposed to making such payment on Cerner's
regular paydays. Any such lump sum payment shall have
no effect upon your obligations to comply with your non-
competition obligations under Paragraph 7.
Notwithstanding the foregoing, it is not the intent of
either of us that you continue to receive any severance
payments (if applicable) after you have accepted other
employment after leaving Cerner. You agree to
immediately notify Cerner if you accept other employment
during the severance and non-competition period provided
for by this Paragraph 2 and Paragraph 7. Cerner's
obligations to make any further severance payments
hereunder shall immediately cease upon your commencement
of employment of a new employer, but your obligations of
non-competition under Paragraph 7 shall continue
pursuant to such terms.
E. Relocation Costs and Other Payments. If Cerner has
-----------------------------------
compensated you for certain costs associated with any
relocation which may be required as a prerequisite to
your being hired into a position with Cerner, all such
compensation shall be made according to Cerner's published
relocation policy. Such compensation, along with any
signing bonus and grant of stock options will be made in
consideration for your agreement to serve in the position
for which you were relocated for at least two years. If
(i) you voluntarily resign from employment with Cerner
(for reasons other than a Change in Control, as defined
in your stock option grant letter) within two (2) years
of the date your move is complete or (ii) Cerner
terminates your employment due to your dishonesty,
illegal conduct, or breach of Cerner policy or this
Agreement within two (2) years of the date your move is
complete and (A) you received a
2
<PAGE>
signing bonus from Cerner, and/or (B) you have realized
any profit from the exercise of stock options granted
to you by Cerner and/or (C) Cerner has compensated you
for any relocation expenses or otherwise reimbursed to
you any sums of money pursuant to Cerner's relocation
policy, then you agree that you shall repay such sums to
Cerner in their entirety.
F. SALES ASSOCIATE/CERNER CONSULTING PROVISIONS. If
---------------------------------------------
you are employed by Cerner in a sales capacity or in
certain Cerner Consulting roles, additional provisions
incorporated as Attachment IV to this Agreement are
applicable to your employment relationship.
3. AGREEMENT NOT TO DISCLOSE OR TO USE CONFIDENTIAL INFORMATION.
------------------------------------------------------------
You agree that you will forever maintain the confidentiality
of Confidential Information. You will never disclose
Confidential Information except to persons who have both the
right and need to know it, and then only for the purpose and
in the course of performing Cerner duties, or of permitting
or assisting in the authorized use of Cerner products and
services. In the event your employment with Cerner
terminates (voluntarily or involuntarily), you will promptly
deliver to Cerner all Confidential Information.
4. NON-CERNER EMPLOYMENT.
---------------------
Except for those part-time associates, hired to work less
than 40 hours per week, employment at Cerner is a full-time
responsibility. As a full-time associate, it is Cerner's
expectation that you devote your full time and attention to
meet your Cerner responsibilities and that you will not
engage in any other employment activities which would
detract from or conflict with your ability to carry out your
duties at Cerner. If you are a part-time associate, it is
Cerner's expectation that you will not engage in other
employment activities that would detract from or conflict
with your ability to carry out your part-time duties at
Cerner.
5. NEW PRODUCTS AND IDEAS.
----------------------
With respect to New Products and Ideas that you develop,
author, or conceive while employed at Cerner, plus for one
year thereafter, you agree to keep accurate, complete and
timely records of such New Products and Ideas, and will
promptly disclose and fully describe such New Products and
Ideas in writing to Cerner.
You agree to assign and transfer to Cerner, without further
consideration, your entire right, title and interest in and
to all such New Products and Ideas. You waive any and all
moral rights which you otherwise would have in any New
Products and Ideas.
You agree to execute promptly at Cerner's expense, a written
assignment of title to Cerner, and all letters (and
applications for letters) of patent and copyright, in all
countries, for any New Products or Ideas required to be
assigned by this Agreement. You also agree to assist Cerner
or its nominee in every reasonable way (at Cerner's request
and expense, but at no charge to Cerner), both during and
after your time of employment at Cerner, in vesting and
defending title to the New Products and Ideas in and for
Cerner, in any and all countries, including the obtainment
and preservation of patents, copyrights, trade secrets and
other proprietary rights.
This Section does not apply to your new products and ideas
which do not relate directly to the business of Cerner, and
which are developed entirely on your own time.
6. PRIOR INVENTIONS.
----------------
Any and all patented and unpatented inventions, new products
and ideas which you made prior to your employment by Cerner
are excluded from the scope of this Agreement and are
documented on Attachment V, Inventory of Prior Inventions.
3
<PAGE>
7. NON-COMPETITION AND NON-SOLICITATION
------------------------------------
For a period of two (2) years after the voluntary or
involuntary termination of your employment with Cerner:
A. You will tell any prospective new employer, prior to
accepting employment, that this Employment Agreement
exists.
B. (i) For a period of two (2) years after the voluntary
termination of your employment with Cerner or your
termination for dishonesty, illegal conduct or breach
of Cerner's policy or this Agreement or, (ii) in the
event Cerner terminates your employment (unless the
termination was due to your dishonesty, illegal conduct
or breach of Cerner's policy or this Agreement), for the
period you are paid severance pursuant to Paragraph 2
(including any time that you would have been paid sever-
ance pursuant to Paragraph 2 but for the fact you
commenced employment with a new employer), you will not
provide services directly or indirectly related to your
employment at Cerner to any Conflicting Organization in
the United States or in any country in which Cerner has
a business interest.
C. Notwithstanding the foregoing, nothing contained in this
Paragraph 7 shall prohibit you (after your termination
of employment with Cerner) from taking a position with a
general consulting organization whose only Conflicting
Product is the provision of consulting services to the
healthcare industry, so long as you personally do not
thereby provide or assist in providing consulting
services to a Client with respect to any Cerner product,
process or service or any Conflicting Product.
D. You agree not, on behalf of yourself or on behalf of any
other person, entity, or organization, to employ, solicit
for employment, or otherwise seek to employ or retain
any Cerner associate or employee, or any employee of a
Cerner client company, or in any way assist or facilitate
any such employment, solicitation, or retention effort.
8. [Omitted].
9. PUBLICITY RELEASE.
-----------------
You consent and agree to the use of your name, voice and
picture (including but not limited to use in still
photographs, videotape and film formats, and both during and
after your period of employment at Cerner) for advertising,
promotional, public relations, and other business purposes
(including its and their use in newspapers, brochures,
magazines, journals and films or videotapes) by Cerner.
10. CERNER PROPERTY.
---------------
You understand that you may be assigned various items of
Cerner property and equipment to help you carry out your
Cerner responsibilities. When such property or equipment is
issued, you will formally acknowledge receipt of it and will
take all reasonable precautions and actions necessary to
safeguard and maintain it in normal operating condition.
You further agree to accept financial responsibility for
damage or wear to the property and equipment you are issued
beyond that associated with normal business use. You will
notify Cerner immediately of any such damage or
loss. If your employment with Cerner terminates, you will
immediately return to Cerner all property and equipment
which you have been issued or which otherwise belongs to
Cerner.
4
<PAGE>
11. SYSTEMS AND PHYSICAL SECURITY.
-----------------------------
You understand the importance of both systems and physical
security to the daily operations of Cerner and to the
protection of business information. You will, therefore,
comply with and assist in the vigorous enforcement of all
policies, practices, and procedures which may be developed
to ensure the integrity of Cerner systems and facilities.
Further, you understand that willful violation of such
policies, practices, and procedures may result in
termination of your employment.
12. PRIOR EMPLOYMENT OBLIGATIONS.
----------------------------
You represent and agree that you will not disclose to
Cerner, or induce Cerner to use, any proprietary or
confidential information belonging to any previous employer
or to others.
13. REMEDIES.
--------
By signing this Agreement, you agree that the promises you
have made in it are of a special nature, and that any
breach, violation or evasion by you of the terms of this
Agreement will result in immediate and irreparable harm to
Cerner. It will also cause damage to Cerner in amounts
difficult to ascertain. Accordingly, Cerner shall be
entitled to the remedies of injunction and specific
performance, as well as to all other legal and equitable
remedies which may be available to Cerner.
14. INDEMNIFICATION.
---------------
You agree to indemnify and hold Cerner harmless from and
against any damages, liability, actions, suits or other
claims arising out of your breach of this Agreement.
15. MODIFICATION.
------------
This Agreement may not be modified in any respect, except by
a written agreement executed by you and Cerner. However,
Cerner may from time to time publish and adopt supplementary
policies with respect to the subject matter of this
Agreement, and you agree that such supplementary policies
shall be binding upon you.
16. NOTICES.
-------
Any notice required or permitted to be given pursuant to the
terms of the Agreement shall be sufficient if given in
writing and if personally delivered by receipted hand
delivery to you or to Cerner, or if deposited in the United
States Mail, postage prepaid, first class or certified mail,
to you at your residence address or to Cerner's Corporate
headquarters address or to such other addresses as each
party may give the other party notice in accordance with
this Agreement.
17. TERM OF THIS AGREEMENT.
----------------------
This Agreement begins as noted above and will continue in
perpetuity, even though your employment can be terminated by
you or by Cerner as described elsewhere herein.
18. GOVERNING LAW; JURISDICTION.
---------------------------
This Agreement will be governed by, construed, interpreted,
and its validity determined, under the laws of the State of
Missouri. You and Cerner each hereby irrevocably and
unconditionally submits to the nonexclusive jurisdiction of
any Missouri state court or federal court of the United
States of America sitting in Kansas City, and any appellate
court from any thereof, in any action or proceeding arising
out of or relating to this Agreement.
5
<PAGE>
19. SEVERABILITY.
------------
If any provision of this Agreement is held to be
unenforceable, then this Agreement will be deemed amended to
the extent necessary to render the otherwise unenforceable
provision, and the rest of this Agreement, valid and
enforceable.
20. ENTIRE AGREEMENT AND PRIOR AGREEMENTS.
-------------------------------------
You hereby acknowledge receipt of a signed counterpart of
this Agreement and acknowledge that it is your entire
agreement with Cerner concerning the subject matter. This
Agreement cancels, terminates, and supersedes any of your
previous oral or written understandings or agreements with
Cerner or with any officer or representative of Cerner with
respect to your employment with Cerner.
21. SUCCESSORS.
----------
This Agreement shall be binding upon Cerner's successors and
assigns. This Agreement shall also be binding upon your
heirs, spouse, assigns and legal representatives.
***********************************************
This Employment Agreement is executed this 13th day of August, 1999.
/s/Earl H. Devanny, III
--------------------------------
E. H. Devanny, III
Cerner Corporation
/s/V. Holmes
-------------------------------
Cerner Human Resources
6
<PAGE>
APPENDIX A
DEFINITION OF TERMS
-------------------
CERNER CORPORATION and CERNER mean Cerner Corporation, the
Delaware corporation. The terms also cover all of Cerner
Corporation's parent, subsidiary and affiliate corporations and
business enterprises, both presently existing and subsequently
created or acquired. Such affiliate corporation may be directly
or indirectly controlled by Cerner or related to Cerner by equity
ownership.
CLIENT means any actual or potential customer or licensee of
Cerner.
CONFIDENTIAL INFORMATION means Cerner, Client and Vendor trade
secrets. It also means other Cerner, Cerner Associate, Client,
and Vendor information which is not generally known, and is
proprietary to Cerner Corporation or to Cerner Associates,
Clients, and Vendors. It includes, but is not limited to,
research, design, development, installation, purchasing,
accounting, marketing, selling, servicing, finance, business
systems, business practices, documentation, methodology,
procedures, manuals (both internal and user), program listings,
source codes, working papers, Client and Vendor lists, marketing
and sales materials not otherwise available to the general
public, sales activity information, computer programs and
software, compensation plans, your personal compensation,
performance evaluations, patient information and other client-
related data, and all other non-public information of Cerner and
its Associates, Clients, and Vendors.
CONFLICTING ORGANIZATION means any person or organization engaged
(or about to become engaged) in research, development,
installation, marketing, selling, or servicing with respect to a
Conflicting Product.
CONFLICTING PRODUCT means any product, process or service which
is the same as, similar to, or competes with any Cerner product,
process or service upon which you worked during the last three
years of your employment by Cerner, or about which you have
acquired Confidential Information.
NEW PRODUCTS AND IDEAS means discoveries, computer programs,
improvements, works of authorship, methods, ideas and products
(whether or not they are described in writing, reduced to
practice, patentable or copyrightable) which results from any
work performed by you for Cerner, or involve the use of any
Cerner equipment, supplies, facilities or Confidential
Information, or relate directly to the business of Cerner, or
relate to Cerner's actual or demonstrably anticipated research or
development.
VENDOR means any actual or potential licensor, supplier,
contractor, agent, consultant or other purveyor of products or
services to Cerner.
7
<PAGE>
APPENDIX B
SUMMARY OF ATTACHMENTS
----------------------
The following documents, if noted, are incorporated as attachments
to this Employment Agreement.
<TABLE>
Not
Included Included Attachment Description
<C> <C> <C> <C>
X I Original Offer Letter
-------- --------
-------- -------- II Offer Letter Amendments
X III Termination Statement
-------- --------
-------- -------- IV Sales Associate Provisions
-------- -------- V Inventory of Prior Inventions
</TABLE>
8
<PAGE>
ATTACHMENT III
--------------
TERMINATION STATEMENT
---------------------
I represent that I have complied with all the provisions of the
Cerner Associate Employment Agreement entered into between Cerner
Corporation and me on the 13th day of August, 199919, in that:
1. I have not improperly disclosed or otherwise misused
any of the Confidential Information covered by such
Agreement. I shall continue to comply with all the
continuing terms of the Agreement, including but not
limited to the non-disclosure and (for the required
term) non-compete provisions, and also including but
not limited to the reporting of any New Products and
Ideas conceived or made by me as covered by the
Agreement.
2. I do not have in my possession, nor have I taken
with me or failed to return, any records, plans,
information, drawings, designs, documents, manuals,
formulae, statistics, correspondence, client and
vendor lists, specifications, blueprints, reproduc-
tions, sketches, notes, reports, proposals, or other
documents or materials, or copies of them, or any
equipment, credit cards or other property belonging
to Cerner or its Clients or Vendors. I have returned
to Cerner (or will return within 10 calendar days)
all material and information compiled or received by
me during the term of such employment. I have
returned (or will return within 10 calendar days)
all Confidential Information, as specified by such
Agreement, and all correspondence and other writings.
I have returned (or will return within 10 calendar
days) all keys and other means of access to Cerner's
premises.
3. I understand and agree that, with regard to all
provisions of this Agreement relating to non-
disclosure, non-solicitation, and confidentiality of
information, such provisions shall not cease as of
this termination but shall continue in full force
and effect in perpetuity or as otherwise indicated
within this Agreement. In compliance with the
Agreement, I shall continue to preserve as confiden-
tial all Confidential Information as defined in the
Agreement.
-------------------------------
Associate
-------------------------------
Date
-------------------------------
Termination Date
Cerner Corporation
-------------------------------
By
-------------------------------
Title
9
<PAGE>
ATTACHMENT IV
-------------
SALES ASSOCIATE AND CERNER CONSULTING PROVISIONS
------------------------------------------------
The following provisions are incorporated into this Employment
Agreement for all associates who are responsible for sales
activities related to Cerner products and certain associates in
the Cerner Consulting group.
Should my employment by Cerner Corporation terminate for any
reason, I understand and agree that:
1. Cerner reserves the right to offset any advances made to
me against commissions or other amounts which I owe to
Cerner, against available but unpaid salary, commissions
payable, accrued vacation, expense reimbursement, or any
other forms of compensation or reimbursement which may be
owed to me. Any such offsets will be clearly documented
by Cerner before they are processed. In addition, I
agree that I will pay to Cerner the amount of any
remaining balance owed to Cerner Corporation after the
foregoing deductions, within 30 days of the end of my
employment.
2. Any commissions to which I might otherwise be entitled
will be payable to me only if the associated contract for
products or services has been completed and fully
executed by both parties, and if all deposit monies
related to such contract have been paid in full by the
client and received by Cerner prior to my last date of
employment, in accordance with the terms of my Cerner
Performance Plan. Cerner will not unreasonably delay or
withhold execution of such contracts for the purpose of
avoiding a commission payment to me, if it would otherwise
be due.
3. Commissions, bonuses or other incentive-based compensation
which may have accrued but are not payable as of my
termination date because of the payment schedule defined
for such compensation in the related Cerner Performance
Plan will be paid to me according to the provisions of
such Plan. Such payment will be subject to the offsets
described in item 1 above and will apply only to items
otherwise payable within one year following my termination
date.
/s/Earl H. Devanny III
---------------------------------
Associate
August 13, 1999
---------------------------------
Date
---------------------------------
Termination Date
Cerner Corporation
/s/V. Holmes
---------------------------------
By
Associate Relations
---------------------------------
Title
10
<PAGE>
CERNER
CORPORATION
CERNER ASSOCIATE EMPLOYMENT AGREEMENT
This Cerner Associate Employment Agreement describes the formal
employment relationship between
Glenn Tobin, Ph.D.
------------------
ASSOCIATE
and
and Cerner Corporation, a Delaware corporation
This Agreement is effective on the 15th day of April, 1998.
1. CERNER'S LETTER OFFERING EMPLOYMENT TO YOU.
------------------------------------------
At the time you accepted employment with Cerner, you received an
offer letter outlining or confirming the specifics of Cerner's
offer of employment to you. The position, terms, compensation,
benefits and other provisions of that offer letter represent the
initial conditions of your Cerner employment. The offer letter is
incorporated into this Agreement as Attachment I. Any amendments
or changes to the offer letter are included as part of Attachment
II to this Agreement, and supersede the terms in the offer letter.
2. EMPLOYMENT RELATIONSHIP.
-----------------------
A. Formation. By signing this Agreement, you represent that
---------
every material fact contained in your resume and application
for employment with Cerner is true and accurate to the best of
your knowledge and belief. You also agree that falsification
of your resume or application is grounds for immediate
discharge.
B. Type. To the extent permitted by law, your employment
----
relationship with Cerner is "at will", which means that you
may resign from Cerner at any time, for any reason, or for no
reason at all, and without advance notice (except as described
below). It also means that Cerner may terminate your
employment at any time, for any legally permitted reason, or
for no reason at all, and without advance notice.
C. Resignation and Termination. You agree to cooperate with
---------------------------
Cerner by participating fully in an exit interview in the
event you leave the employ of Cerner. You agree to give
Cerner written notice of your intention to resign from
employment at least ten (10) business days prior to the last
day you intend to work at Cerner. To facilitate the
provisions of paragraphs 7 and 8 of this agreement, you also
agree to report to Cerner, in conjunction with your written
notice of intent, the identity of your new employer (if any)
and the nature of your proposed duties for that employer.
Cerner, however, reserves the right either to accelerate your
intended effective termination date to an earlier actual date
or to allow your intended effective termination date to stand.
If you resign, however, with fewer than ten (10) business days
notice, or if you actually leave Cerner's employ prior to
expiration of the ten business days notice period and without
the permission of Cerner, then you agree that (to the extent
permitted by law)no vacation pay, salary or other compensation
1
<PAGE>
otherwise due, from the date of your resignation notice until
the time of your approved effective termination date, will be
owed or paid to you by Cerner.
If Cerner terminates your employment (and unless the
termination was due to your dishonesty, illegal conduct, or
breach of Cerner's policy or this Agreement), Cerner will pay
you a minimum of six(6) months severance pay (based on your
annualized base salary amount at the time of your involuntary
termination), less appropriate payroll deductions, payable on
Cerner's regular paydays. In addition, at Cerner's sole
discretion and option, Cerner may increase the severance
period beyond the minimum six (6) month period at the rate of
two (2) additional months for each one (1)month that you are
employed by Cerner, up to a maximum duration (the original six
(6) month period plus any extension) of two (2) years. You
understand and agree that the election by Cerner to extend the
period of your severance compensation will also extend the
period of time of your non-competition obligations under
Paragraph 7. Cerner agrees to notify you of its election
to extend the time of your severance and your non-competition
obligations within thirty (30) days of your last day of
employment at Cerner. You also understand and agree that, at
Cerner's sole discretion and option, Cerner may elect to make
any severance payment, or any part thereof, in a lump sum
payment as opposed to making such payment on Cerner's regular
paydays. Any such lump sum payment shall have no effect upon
your obligations to comply with your non-competition
obligations under Paragraph 7. Notwithstanding the foregoing,
it is not the intent of either of us that you continue to
receive any severance payments (if applicable) after you have
accepted other employment after leaving Cerner. You agree to
immediately notify Cerner if you accept other employment during
the severance and non competition period provided for by this
Paragraph 2 and Paragraph 7. Cerner's obligations to make any
further severance payments hereunder shall immediately cease
upon your commencement of employment with a new employer, but
your obligations of non-competition under Paragraph 7 shall
continue pursuant to such terms.
If you voluntarily resign and give proper notice as outlined
above and Cerner elects to accelerate your effective
termination date to a date less than two (2) weeks from the
date of your notice, Cerner will continue to pay your base
salary through the remainder of such two (2) week period.
In the event your voluntary or involuntary termination occurs
during a performance period associated with a documented bonus
or incentive compensation plan, any final payments to you as a
result of your participation in such plan will be determined
by the documented procedures of the plan.
If Cerner has reimbursed you for certain costs associated with
any relocation which may be required as a prerequisite to your
being hired into a position with Cerner, all such
reimbursements shall be made according to Cerner's published
relocation expense reimbursement policy. Such reimbursements
will be made in consideration for your agreement to serve in
the position for which you were relocated for at least two
years. Therefore, in the event Cerner has reimbursed you for
any relocation expenses or otherwise paid to you any sums of
money pursuant to Cerner's relocation policy, you agree that
you shall repay such sums to Cerner on a prorated basis if (i)
you voluntarily resign from employment with Cerner within two
(2) years of the date your move is complete or (ii) Cerner
terminates your employment due to your dishonesty, illegal
conduct, or breach of Cerner policy or this Agreement within
two (2) years of the date your move is complete.
In the event Cerner terminates your employment, Cerner
reserves the right to set the effective date of such
termination. Upon your resignation or the termination of your
employment, you agree to promptly execute a Termination
Statement in the form of Attachment III.
D. SALES ASSOCIATE PROVISIONS. If you are employed by Cerner
--------------------------
in a sales capacity, additional provisions incorporated as
Attachment IV to this Agreement are applicable to your
employment relationship.
3. AGREEMENT NOT TO DISCLOSE OR TO USE CONFIDENTIAL INFORMATION.
------------------------------------------------------------
You agree that you will forever maintain the confidentiality of
Confidential Information. You will never disclose Confidential
Information except to persons who have both the right and need to
know it, and then
2
<PAGE>
only for the purpose and in the course of performing Cerner duties,
or of permitting or assisting in the authorized use of Cerner
products and services. In the event your employment with Cerner
terminates(voluntarily or involuntarily), you will promptly deliver
to Cerner all Confidential Information.
4. NON-CERNER EMPLOYMENT.
---------------------
Except for those part-time associates, hired to work less than 40
hours per week, employment at Cerner is a full-time
responsibility. As a full-time associate, it is Cerner's
expectation that you devote your full time and attention to meet
your Cerner responsibilities and that you will not engage in any
other employment activities which would detract from or conflict
with your ability to carry out your duties at Cerner. If you are
a part-time associate, it is Cerner's expectation that you will
not engage in other employment activities that would detract from
or conflict with your ability to carry out your part-time duties
at Cerner.
5. NEW PRODUCTS AND IDEAS.
----------------------
With respect to New Products and Ideas that you develop, author,
or conceive while employed at Cerner, plus for one year
thereafter, you agree to keep accurate, complete and timely
records of such New Products and Ideas, and will promptly disclose
and fully describe such New Products and Ideas in writing to
Cerner.
You agree to assign and transfer to Cerner, without further
consideration, your entire right, title and interest in and to all
such New Products and Ideas. You waive any and all moral rights
which you otherwise would have in any New Products and Ideas.
You agree to execute promptly at Cerner's expense, a written
assignment of title to Cerner, and all letters (and applications
for letters) of patent and copyright, in all countries, for any
New Products or Ideas required to be assigned by this Agreement.
You also agree to assist Cerner or its nominee in every reasonable
way (at Cerner's request and expense, but at no charge to Cerner),
both during and after your time of employment at Cerner, in
vesting and defending title to the New Products and Ideas in and
for Cerner, in any and all countries, including the obtainment and
preservation of patents, copyrights, trade secrets and other
proprietary rights.
This Section does not apply to your new products and ideas which
do not relate directly to the business of Cerner, and which are
developed entirely on your own time.
6. PRIOR INVENTIONS.
----------------
Any and all patented and unpatented inventions, new products and
ideas which you made prior to your employment by Cerner are
excluded from the scope of this Agreement and are documented on
Attachment V, Inventory of Prior Inventions.
7. NON-COMPETITION AND NON-SOLICITATION
------------------------------------
A. For a period of two (2) years after the voluntary or
involuntary termination of your employment with Cerner, you
will tell any prospective new employer, prior to accepting
employment, that this Employment Agreement exists.
B. (i) For a period of two (2) years after the voluntary
termination of your employment with Cerner or your termination
for dishonesty, illegal conduct or breach of Cerner's policy
or this Agreement or, (ii) in the event Cerner terminates
your employment (unless the termination was due to your
dishonesty, illegal conduct or breach of Cerner's policy or
this Agreement), for the period you are paid severance pursuant
to Paragraph 2 (including any time that you would have been
paid severance pursuant to Paragraph 2 but for the fact you
commenced employment with a new employer), you will not
provide services directly or indirectly related to your
employment at Cerner to any Conflicting Organization in the
United States or in any country in which Cerner has a business
interest. However, you may accept employment with a large
Conflicting Organization whose business is diversified, and
with a portion of its business that is not a Conflicting
Organization, provided that Cerner, prior to your
3
<PAGE>
acceptance of such employment, shall receive separate written
assurances satisfactory to Cerner from such Conflicting
Organization and from you that you will not render services
directly or indirectly in connection with any Conflicting
Product.
C. For a period of two (2) years after the voluntary or
involuntary termination of your employment with Cerner, you
agree not, on behalf of yourself or on behalf of any other
person, entity, or organization, to employ, solicit for
employment, or otherwise seek to employ or retain any Cerner
associate or employee, or any employee of a Cerner client
company, or in any way assist or facilitate any such
employment, solicitation, or retention effort.
8. INTENTIONALLY DELETED.
---------------------
9. PUBLICITY RELEASE.
-----------------
You consent and agree to the use of your name, voice and picture
(including but not limited to use in still photographs, videotape
and film formats, and both during and after your period of
employment at Cerner) for advertising, promotional, public
relations, and other business purposes (including its and their
use in newspapers, brochures, magazines, journals and films or
videotapes) by Cerner.
10. CERNER PROPERTY.
---------------
You understand that you may be assigned various items of Cerner
property and equipment to help you carry out your Cerner
responsibilities. When such property or equipment is issued, you
will formally acknowledge receipt of it and will take all
reasonable precautions and actions necessary to safeguard and
maintain it in normal operating condition. You further agree to
accept financial responsibility for damage or wear to the property
and equipment you are issued beyond that associated with normal
business use. You will notify Cerner immediately of any such
damage or loss. If your employment with Cerner terminates, you
will immediately return to Cerner all property and equipment which
you have been issued or which otherwise belongs to Cerner.
11. SYSTEMS AND PHYSICAL SECURITY.
-----------------------------
You understand the importance of both systems and physical
security to the daily operations of Cerner and to the protection
of business information. You will, therefore, comply with and
assist in the vigorous enforcement of all policies, practices, and
procedures which may be developed to ensure the integrity of
Cerner systems and facilities. Further, you understand that
willful violation of such policies, practices, and procedures may
result in termination of your employment.
12. PRIOR EMPLOYMENT RELATIONSHIPS AND OBLIGATIONS.
----------------------------------------------
By accepting employment with Cerner, you represent to Cerner that
you are not subject to any non-competition or confidentiality
agreements that your employment and activities at Cerner would
violate. You also represent and agree that you will not disclose
to Cerner, or induce Cerner to use, any proprietary or
confidential information belonging to any previous employer or to
others.
13. REMEDIES.
--------
By signing this Agreement, you agree that the promises you have
made in it are of a special nature, and that any breach, violation
or evasion by you of the terms of this Agreement will result in
immediate and irreparable harm to Cerner. It will also cause
damage to Cerner in amounts difficult to ascertain. Accordingly,
Cerner shall be entitled to the remedies of injunction and
specific performance, as well as to all other legal and equitable
remedies which may be available to Cerner.
4
<PAGE>
14. INDEMNIFICATION.
---------------
You agree to indemnify and hold Cerner harmless from and against
any damages, liability, actions, suits or other claims arising out
of your breach of this Agreement.
15. MODIFICATION.
------------
This Agreement may not be modified in any respect, except by a
written agreement executed by you and Cerner. However, Cerner may
from time to time publish and adopt supplementary policies with
respect to the subject matter of this Agreement, and you agree
that such supplementary policies shall be binding upon you.
16. NOTICES.
-------
Any notice required or permitted to be given pursuant to the terms
of the Agreement shall be sufficient if given in writing and if
personally delivered by receipted hand delivery to you or to
Cerner, or if deposited in the United States Mail, postage
prepaid, first class or certified mail, to you at your residence
address or to Cerner's Corporate headquarters address or to such
other addresses as each party may give the other party notice in
accordance with this Agreement.
17. TERM OF THIS AGREEMENT.
----------------------
This Agreement begins as noted above and will continue in
perpetuity, even though your employment can be terminated by you
or by Cerner as described elsewhere herein.
18. GOVERNING LAW.
-------------
This Agreement will be governed by, construed, interpreted, and
its validity determined, under the laws of the State of Missouri.
19. SEVERABILITY.
------------
If any provision of this Agreement is held to be unenforceable,
then this Agreement will be deemed amended to the extent necessary
to render the otherwise unenforceable provision, and the rest of
this Agreement, valid and enforceable.
20. ENTIRE AGREEMENT AND PRIOR AGREEMENTS.
-------------------------------------
You hereby acknowledge receipt of a signed counterpart of this
Agreement and acknowledge that it is your entire agreement with
Cerner concerning the subject matter. This Agreement cancels,
terminates, and supersedes any of your previous oral or written
understandings or agreements with Cerner or with any officer or
representative of Cerner with respect to your employment with
Cerner.
5
<PAGE>
21. SUCCESSORS.
----------
This Agreement shall be binding upon Cerner's successors and
assigns. This Agreement shall also be binding upon your heirs,
spouse, assigns and legal representatives.
***********************************************
This Employment Agreement is executed this 15th day of April, 1998.
Associate
/s/Glenn Tobin
-------------------------------
Glenn Tobin, Ph.D.
Cerner Corporation
/s/Clifford W. Illig
------------------------------
Cerner Human Resources
6
<PAGE>
APPENDIX A
DEFINITION OF TERMS
-------------------
CERNER CORPORATION and CERNER mean Cerner Corporation, the Delaware
corporation. The terms also cover all of Cerner Corporation's parent,
subsidiary and affiliate corporations and business enterprises, both
presently existing and subsequently created or acquired. Such
affiliate corporation may be directly or indirectly controlled by
Cerner or related to Cerner by equity ownership.
CLIENT means any actual or potential customer or licensee of Cerner.
CONFIDENTIAL INFORMATION means Cerner, Client and Vendor trade secrets.
It also means other Cerner, Cerner Associate, Client, and Vendor
information which is not generally known, and is proprietary to Cerner
Corporation or to Cerner Associates, Clients, and Vendors. It
includes, but is not limited to, research, design, development,
installation, purchasing, accounting, marketing, selling, servicing,
finance, business systems, business practices, documentation,
methodology, procedures, manuals (both internal and user), program
listings, source codes, working papers, Client and Vendor lists,
marketing and sales materials not otherwise available to the general
public, sales activity information, computer programs and software,
compensation plans, your personal compensation, performance
evaluations, patient information and other client-related data, and all
other non-public information of Cerner and its Associates, Clients, and
Vendors.
CONFLICTING ORGANIZATION means any person or organization engaged (or
about to become engaged) in research, development, installation,
marketing, selling, or servicing with respect to a Conflicting Product.
The following types of organizations are specifically included within
the definition of Conflicting Organization: (i) any large provider of a
broad health care information technology product line (e.g. HBO &
Company, SMS Corporation, IDX Systems, Medaphis Corporation, Meditech,
etc.); (ii) specialist providers of health care information technology
products in areas in which Cerner has a product line (e.g. radiology
departments) or is making a major strategic thrust (e.g. consumer-
focused health care information); and (iii) specialist health care
consulting companies primarily focused on information technology (e.g.
Superior Consulting Company, Inc. or First Consulting Group). The
following types of organizations are specifically excluded from the
definition of Conflicting Organization (so long as your role with such
organization would not involve the development or management of a
significant Conflicting Product): (i) broad providers of management
consulting services (e.g. McKinsey or Andersen Consulting); (ii)
specialist health care consulting firms not focused on information
technology (e.g. APM); (iii) medical device or pharmaceutical
companies; (iv) payor and provider-based organizations; and (v) health
care service companies.
CONFLICTING PRODUCT means any product, process or service which is the
same as, similar to, or competes with any Cerner product, process or
service in which Cerner has a Significant Business Interest or about
which you have acquired Confidential Information or upon which you
worked directly during the last two years of your employment by Cerner,
NEW PRODUCTS AND IDEAS means discoveries, computer programs,
improvements, works of authorship, methods, ideas and products (whether
or not they are described in writing, reduced to practice, patentable
or copyrightable) which results from any work performed by you for
Cerner, or involve the use of any Cerner equipment, supplies,
facilities or Confidential Information, or relate directly to the
business of Cerner, or relate to Cerner's actual or demonstrably
anticipated research or development.
SIGNIFICANT BUSINESS INTEREST means any of Cerner's base information
technology and services, businesses, any product process or service in
which Cerner has made a major strategic thrust, or had developed
significant strategic plans. Cerner does not have a Significant
Business Interest in products, processes or services that are (i)
ancillary to Cerner's core offerings, (ii) discontinued or (iii)
substantially noncompetitive in the marketplace.
VENDOR means any actual or potential licensor, supplier, contractor,
agent, consultant or other purveyor of products or services to Cerner.
7
<PAGE>
APPENDIX B
SUMMARY OF ATTACHMENTS
----------------------
The following documents, if noted, are incorporated as attachments to
this Employment Agreement.
<TABLE>
Not
Included Included Attachment Description
<C> <C> <C> <C>
X I Original Offer Letter
-------- --------
-------- -------- II Offer Letter Amendments
X III Termination Statement
-------- --------
-------- -------- IV Sales Associate Provisions
-------- -------- V Inventory of Prior Inventions
8
<PAGE>
ATTACHMENT II
-------------
TERMINATION STATEMENT
---------------------
I represent that I have complied with all the provisions of the Cerner
Associate Employment Agreement entered into between Cerner Corporation
and me on the ______________________ day of _________________, 19____,
in that:
1. I have not improperly disclosed or otherwise misused any of
the Confidential Information covered by such Agreement. I
shall continue to comply with all the continuing terms of the
Agreement, including but not limited to the non-disclosure and
(for the required term) non-compete provisions, and also
including but not limited to the reporting of any New Products
and Ideas conceived or made by me as covered by the Agreement.
2. I do not have in my possession, nor have I taken with me or
failed to return, any records, plans, information, drawings,
designs, documents, manuals, formulae, statistics,
correspondence, client and vendor lists, specifications,
blueprints, reproductions, sketches, notes, reports,
proposals, or other documents or materials, or copies of them,
or any equipment, credit cards or other property belonging to
Cerner or its Clients or Vendors. I have returned to Cerner
(or will return within 10 calendar days) all material and
information compiled or received by me during the term of such
employment. I have returned (or will return within 10
calendar days) all Confidential Information, as specified by
such Agreement, and all correspondence and other writings. I
have returned (or will return within 10 calendar days) all
keys and other means of access to Cerner's premises.
3. I understand and agree that, with regard to all provisions of this
Agreement relating to non-disclosure, non-solicitation, and
confidentiality of information, such provisions shall not cease as
of this termination but shall continue in full force and effect in
perpetuity or as otherwise indicated within this Agreement. In
compliance with the Agreement, I shall continue to preserve as
confidential all Confidential Information as defined in the
Agreement.
----------------------------------
Associate
----------------------------------
Date
----------------------------------
Termination Date
Cerner Corporation
---------------------------------
By
---------------------------------
Title
9
</TABLE>
CERNER
CORPORATION
CERNER ASSOCIATE EMPLOYMENT AGREEMENT
This Cerner Associate Employment Agreement describes the formal
employment relationship between
Stanley M. Sword
----------------
ASSOCIATE
and
and Cerner Corporation, a Delaware corporation
This Agreement is effective on the 10th day of August, 1998.
1. CERNER'S LETTER OFFERING EMPLOYMENT TO YOU.
------------------------------------------
At the time you accepted employment with Cerner, you received an
offer letter outlining or confirming the specifics of Cerner's
offer of employment to you. The position, terms, compensation,
benefits and other provisions of that offer letter represent the
initial conditions of your Cerner employment. The offer letter is
incorporated into this Agreement as Attachment I. Any amendments
or changes to the offer letter are included as part of Attachment
II to this Agreement, and supersede the terms in the offer letter.
Cerner reserves the right to modify at any time the conditions of
your employment at Cerner.
2. EMPLOYMENT RELATIONSHIP.
-----------------------
A. Formation. By signing this Agreement, you represent that
---------
every material fact contained in your resume and application
for employment with Cerner is true and accurate to the best of
your knowledge and belief. You also agree that falsification
of your resume or application is grounds for immediate
discharge.
B. Type. To the extent permitted by law, your employment
----
relationship with Cerner is "at will", which means that you
may resign from Cerner at any time, for any reason, or for no
reason at all, and without advance notice (except as described
below). It also means that Cerner may terminate your
employment at any time, for any legally permitted reason, or
for no reason at all, and without advance notice.
C. Resignation and Termination. You agree to cooperate with
---------------------------
Cerner by participating fully in an exit interview in the
event you leave the employ of Cerner. You agree to give
Cerner written notice of your intention to resign from
employment at least ten (10) business days prior to the last
day you intend to work at Cerner. To facilitate the
provisions of paragraphs 7 and 8 of this agreement, you also
agree to report to Cerner, in conjunction with your written
notice of intent, the identity of your new employer (if any)
and the nature of your proposed duties for that employer.
Cerner, however, reserves the right either to accelerate your
intended effective termination date to an earlier actual date
or to allow your intended effective termination date to stand.
If you resign, however, with fewer than ten (10) business days
notice, or if you actually leave Cerner's employ prior to
expiration of the ten business days notice period and without
the permission of Cerner, then you agree that (to the extent
permitted by law) no vacation pay, salary or other compensation
1
<PAGE>
otherwise due, from the date of your resignation notice until
the time of your approved effective termination date, will be
owed or paid to you by Cerner.
If Cerner terminates your employment prior to the date you
move your family to the Kansas City area (and unless the
termination was due to your dishonesty, illegal conduct, or
breach of Cerner's policy or this Agreement), Cerner will pay
you a minimum of three (3) months severance pay (based on your
annualized base salary amount at the time of your involuntary
termination), less appropriate payroll deductions, payable on
Cerner's regular paydays. If Cerner terminates your employment
after the date you move your family to the Kansas City area
(and unless the termination was due to your dishonesty,
illegal conduct, or breach of Cerner's policy or this
Agreement), Cerner will pay you a minimum of six (6) months
severance pay (based on your annualized base salary amount at
the time of your involuntary termination), less appropriate
payroll deductions, payable on Cerner's regular paydays. In
addition, the severance period will increase beyond the
minimum six (6) month period at the rate of one (1) additional
month for each six (6) months that you are employed by Cerner,
up to a maximum duration (the original six (6) month period
plus any extension) of one (1) year. You understand and agree
that the period of your severance compensation will also
extend the period of time of your non-competition obligations
under Paragraph 7. You also understand and agree that, at
Cerner's sole discretion and option, Cerner may elect to make
any severance payment, or any part thereof, in a lump sum
payment as opposed to making such payment on Cerner's regular
paydays. Any such lump sum payment shall have no effect upon
your obligations to comply with your non-competition
obligations under Paragraph 7. Notwithstanding the foregoing,
it is not the intent of either of us that you continue to
receive any severance payments (if applicable) after you have
accepted other employment after leaving Cerner. You agree to
immediately notify Cerner if you accept other employment
during the severance and non-competition period provided for
by this Paragraph 2 and Paragraph 7. Cerner's obligations to
make any further severance payments hereunder shall
immediately cease upon your commencement of employment with a
new employer, but your obligations of non-competition under
Paragraph 7 shall continue pursuant to such terms.
If you voluntarily resign and give proper notice as
outlined above and Cerner elects to accelerate your effective
termination date to a date less than two (2) weeks from the
date of your notice, Cerner will continue to pay your base
salary through the remainder of such two (2) week period.
In the event your voluntary or involuntary termination
occurs during a performance period associated with a
documented bonus or incentive compensation plan, any final
payments to you as a result of your participation in such plan
will be determined by the documented procedures of the plan.
If Cerner has reimbursed you for certain costs associated with
any relocation which may be required as a prerequisite to your
being hired into a position with Cerner, all such
reimbursements shall be made according to Cerner's published
relocation expense reimbursement policy. Such reimbursements
will be made in consideration for your agreement to serve in
the position for which you were relocated for at least two (2)
years. Therefore, in the event Cerner has reimbursed you for
any relocation expenses or otherwise paid to you any sums of
money pursuant to Cerner's relocation policy, you agree that
you shall repay such sums to Cerner on a prorated basis if (i)
you voluntarily resign from employment with Cerner within two
(2) years of the date your move is complete or (ii) Cerner
terminates your employment due to your dishonesty, illegal
conduct, or breach of Cerner policy or this Agreement within
two (2) years of the date your move is complete.
In the event Cerner terminates your employment, Cerner
reserves the right to set the effective date of such
termination. Upon your resignation or the termination of your
employment, you agree to promptly execute a Termination
Statement in the form of Attachment III.
D. SALES ASSOCIATE PROVISIONS. If you are employed by Cerner
--------------------------
in a sales capacity, additional provisions incorporated as
Attachment IV to this Agreement are applicable to your
employment relationship.
2
<PAGE>
3. AGREEMENT NOT TO DISCLOSE OR TO USE CONFIDENTIAL INFORMATION.
------------------------------------------------------------
You agree that you will forever maintain the confidentiality of
Confidential Information. You will never disclose Confidential
Information except to persons who have both the right and need to
know it, and then only for the purpose and in the course of
performing Cerner duties, or of permitting or assisting in the
authorized use of Cerner products and services. In the event your
employment with Cerner terminates (voluntarily or involuntarily),
you will promptly deliver to Cerner all Confidential Information.
4. NON-CERNER EMPLOYMENT.
---------------------
Except for those part-time associates, hired to work less than 40
hours per week, employment at Cerner is a full-time
responsibility. As a full-time associate, it is Cerner's
expectation that you devote your full time and attention to meet
your Cerner responsibilities and that you will not engage in any
other employment activities which would detract from or conflict
with your ability to carry out your duties at Cerner. If you are
a part-time associate, it is Cerner's expectation that you will
not engage in other employment activities that would detract from
or conflict with your ability to carry out your part-time duties
at Cerner.
5. NEW PRODUCTS AND IDEAS.
----------------------
With respect to New Products and Ideas that you develop, author,
or conceive while employed at Cerner, plus for one (1) year
thereafter, you agree to keep accurate, complete and timely
records of such New Products and Ideas, and will promptly disclose
and fully describe such New Products and Ideas in writing to
Cerner.
You agree to assign and transfer to Cerner, without further
consideration, your entire right, title and interest in and to all
such New Products and Ideas. You waive any and all moral rights
which you otherwise would have in any New Products and Ideas.
You agree to execute promptly at Cerner's expense, a written
assignment of title to Cerner, and all letters (and applications
for letters) of patent and copyright, in all countries, for any
New Products or Ideas required to be assigned by this Agreement.
You also agree to assist Cerner or its nominee in every reasonable
way (at Cerner's request and expense, but at no charge to Cerner),
both during and after your time of employment at Cerner, in
vesting and defending title to the New Products and Ideas in and
for Cerner, in any and all countries, including the obtainment and
preservation of patents, copyrights, trade secrets and other
proprietary rights.
This Section does not apply to your new products and ideas which
do not relate directly to the business of Cerner, and which are
developed entirely on your own time.
6. PRIOR INVENTIONS.
----------------
Any and all patented and unpatented inventions, new products and
ideas which you made prior to your employment by Cerner are
excluded from the scope of this Agreement and are documented on
Attachment V, Inventory of Prior Inventions.
7. NON-COMPETITION AND NON-SOLICITATION
------------------------------------
A. For a period of two (2) years after the voluntary or
involuntary termination of your employment with Cerner, you
will tell any prospective new employer, prior to accepting
employment, that this Employment Agreement exists.
B. (i) For a period of two (2) years after the voluntary
termination by you of your employment with Cerner or your
termination for dishonesty, illegal conduct or breach of
Cerner's policy or this Agreement or, (ii) in the event Cerner
terminates your employment (unless the termination was due to
your dishonesty, illegal conduct or breach of Cerner's policy
or this Agreement), for the period you are paid severance
pursuant to Paragraph 2 (including any time that you would have
been paid severance pursuant to
3
<PAGE>
Paragraph 2 but for the fact you commenced employment with a
new employer), you will not provide services directly or
indirectly related to your employment at Cerner to any
Conflicting Organization in the United States or in any country
in which Cerner has a business interest. However, you may
accept employment with a large Conflicting Organization whose
business is diversified, and with a portion of its business
that is not a Conflicting Organization, provided that Cerner,
prior to your acceptance of such employment, shall receive
separate written assurances satisfactory to Cerner from such
Conflicting Organization and from you that you will not
render services directly or indirectly in connection with any
Conflicting Product.
C. For a period of two (2) years after the voluntary or
involuntary termination of your employment with Cerner for any
reason or for no reason, you agree not, on behalf of yourself
or on behalf of any other person, entity, or organization, to
employ, solicit for employment, or otherwise seek to employ or
retain any Cerner associate or employee, or any employee of a
Cerner client company, or in any way assist or facilitate any
such employment, solicitation, or retention effort.
8. INTENTIONALLY DELETED.
---------------------
9. PUBLICITY RELEASE.
-----------------
You consent and agree to the use of your name, voice and picture
(including but not limited to use in still photographs, videotape
and film formats, and both during and after your period of
employment at Cerner) for advertising, promotional, public
relations, and other business purposes (including its and their
use in newspapers, brochures, magazines, journals and films or
videotapes) by Cerner.
10. CERNER PROPERTY.
---------------
You understand that you may be assigned various items of Cerner
property and equipment to help you carry out your Cerner
responsibilities. When such property or equipment is issued, you
will formally acknowledge receipt of it and will take all
reasonable precautions and actions necessary to safeguard and
maintain it in normal operating condition. You further agree to
accept financial responsibility for damage or wear to the property
and equipment you are issued beyond that associated with normal
business use. You will notify Cerner immediately of any such
damage or loss. If your employment with Cerner terminates, you
will immediately return to Cerner all property and equipment which
you have been issued or which otherwise belongs to Cerner.
11. SYSTEMS AND PHYSICAL SECURITY.
-----------------------------
You understand the importance of both systems and physical
security to the daily operations of Cerner and to the protection
of business information. You will, therefore, comply with and
assist in the vigorous enforcement of all policies, practices, and
procedures which may be developed to ensure the integrity of
Cerner systems and facilities. Further, you understand that
willful violation of such policies, practices, and procedures may
result in termination of your employment.
12. PRIOR EMPLOYMENT RELATIONSHIPS AND OBLIGATIONS.
----------------------------------------------
By accepting employment with Cerner, you represent to Cerner that
you are not subject to any non-competition or confidentiality
agreements that your employment and activities at Cerner would
violate. You also represent and agree that you will not disclose
to Cerner, or induce Cerner to use, any proprietary or
confidential information belonging to any previous employer or to
others.
13. REMEDIES.
--------
By signing this Agreement, you agree that the promises you have
made in it are of a special nature, and that any breach, violation
or evasion by you of the terms of this Agreement will result in
immediate and
4
<PAGE>
irreparable harm to Cerner. It will also cause damage to Cerner
in amounts difficult to ascertain. Accordingly, Cerner shall be
entitled to the remedies of injunction and specific performance,
as well as to all other legal and equitable remedies which may be
available to Cerner.
14. INDEMNIFICATION.
---------------
You agree to indemnify and hold Cerner harmless from and against
any damages, liability, actions, suits or other claims arising out
of your breach of this Agreement.
15. MODIFICATION.
------------
This Agreement may not be modified in any respect, except by a
written agreement executed by you and Cerner. However, Cerner may
from time to time publish and adopt supplementary policies with
respect to the subject matter of this Agreement, and you agree
that such supplementary policies shall be binding upon you.
16. NOTICES.
-------
Any notice required or permitted to be given pursuant to the terms
of the Agreement shall be sufficient if given in writing and if
personally delivered by receipted hand delivery to you or to
Cerner, or if deposited in the United States Mail, postage
prepaid, first class or certified mail, to you at your residence
address or to Cerner's Corporate headquarters address or to such
other addresses as each party may give the other party notice in
accordance with this Agreement.
17. TERM OF THIS AGREEMENT.
----------------------
This Agreement begins as noted above and will continue in
perpetuity, even though your employment can be terminated by you
or by Cerner as described elsewhere herein.
18. GOVERNING LAW; JURISDICTION.
---------------------------
This Agreement will be governed by, construed, interpreted, and
its validity determined, under the laws of the State of Missouri.
You and Cerner each hereby irrevocably and unconditionally submits
to the nonexclusive jurisdiction of any Missouri state court or
federal court of the United States of America sitting in Kansas
City, and any appellate court from any thereof, in any action or
proceeding arising out of or relating to this Agreement.
19. SEVERABILITY.
------------
If any provision of this Agreement is held to be unenforceable,
then this Agreement will be deemed amended to the extent necessary
to render the otherwise unenforceable provision, and the rest of
this Agreement, valid and enforceable.
20. ENTIRE AGREEMENT AND PRIOR AGREEMENTS.
-------------------------------------
You hereby acknowledge receipt of a signed counterpart of this
Agreement and acknowledge that it is your entire agreement with
Cerner concerning the subject matter. This Agreement cancels,
terminates, and supersedes any of your previous oral or written
understandings or agreements with Cerner or with any officer or
representative of Cerner with respect to your employment with
Cerner.
5
<PAGE>
21. SUCCESSORS.
----------
This Agreement shall be binding upon Cerner's successors and
assigns. This Agreement shall also be binding upon your heirs,
spouse, assigns and legal representatives.
***********************************************
This Employment Agreement is executed this 10th day of August, 1998.
Associate
/s/Stanley M. Sword
------------------------------------
Stanley M. Sword
Cerner Corporation
/s/Clifford W. Illig
-----------------------------------
6
<PAGE>
APPENDIX A
DEFINITION OF TERMS
-------------------
CERNER CORPORATION and CERNER mean Cerner Corporation, the Delaware
corporation. The terms also cover all of Cerner Corporation's parent,
subsidiary and affiliate corporations and business enterprises, both
presently existing and subsequently created or acquired. Such
affiliate corporation may be directly or indirectly controlled by
Cerner or related to Cerner by equity ownership.
CLIENT means any actual or potential customer or licensee of Cerner.
CONFIDENTIAL INFORMATION means Cerner, Client and Vendor trade secrets.
It also means other Cerner, Cerner Associate, Client, and Vendor
information which is not generally known, and is proprietary to Cerner
Corporation or to Cerner Associates, Clients, and Vendors. It
includes, but is not limited to, research, design, development,
installation, purchasing, accounting, marketing, selling, servicing,
finance, business systems, business practices, documentation,
methodology, procedures, manuals (both internal and user), program
listings, source codes, working papers, Client and Vendor lists,
marketing and sales materials not otherwise available to the general
public, sales activity information, computer programs and software,
compensation plans, your personal compensation, performance
evaluations, patient information and other client-related data, and all
other non-public information of Cerner and its Associates, Clients, and
Vendors.
CONFLICTING ORGANIZATION means any person or organization engaged (or
about to become engaged) in research, development, installation,
marketing, selling, or servicing with respect to a Conflicting Product.
CONFLICTING PRODUCT means any product, process or service which is the
same as, similar to, or competes with any Cerner product, process or
service upon which you worked during the last three years of your
employment by Cerner, or about which you have acquired Confidential
Information.
NEW PRODUCTS AND IDEAS means discoveries, computer programs,
improvements, works of authorship, methods, ideas and products (whether
or not they are described in writing, reduced to practice, patentable
or copyrightable) which results from any work performed by you for
Cerner, or involve the use of any Cerner equipment, supplies,
facilities or Confidential Information, or relate directly to the
business of Cerner, or relate to Cerner's actual or demonstrably
anticipated research or development.
VENDOR means any actual or potential licensor, supplier, contractor,
agent, consultant or other purveyor of products or services to Cerner.
7
<PAGE>
APPENDIX B
SUMMARY OF ATTACHMENTS
----------------------
The following documents, if noted, are incorporated as attachments to
this Employment Agreement.
Not
Included Included Attachment Description
X I Original Offer Letter
-------- --------
-------- -------- II Offer Letter Amendments
X III Termination Statement
-------- --------
-------- -------- IV Sales Associate Provisions
-------- -------- V Inventory of Prior Inventions
8
<PAGE>
ATTACHMENT III
--------------
TERMINATION STATEMENT
---------------------
I represent that I have complied with all the provisions of the Cerner
Associate Employment Agreement entered into between Cerner Corporation
and me on the ______________________ day of _______________, ____, in
that:
1. I have not improperly disclosed or otherwise misused any of
the Confidential Information covered by such Agreement. I
shall continue to comply with all the continuing terms of the
Agreement, including but not limited to the non-disclosure and
(for the required term) non-compete provisions, and also
including but not limited to the reporting of any New Products
and Ideas conceived or made by me as covered by the Agreement.
2. I do not have in my possession, nor have I taken with me or
failed to return, any records, plans, information, drawings,
designs, documents, manuals, formulae, statistics,
correspondence, client and vendor lists, specifications,
blueprints, reproductions, sketches, notes, reports,
proposals, or other documents or materials, or copies of them,
or any equipment, credit cards or other property belonging to
Cerner or its Clients or Vendors. I have returned to Cerner
(or will return within 10 calendar days) all material and
information compiled or received by me during the term of such
employment. I have returned (or will return within 10
calendar days) all Confidential Information, as specified by
such Agreement, and all correspondence and other writings. I
have returned (or will return within 10 calendar days) all
keys and other means of access to Cerner's premises.
3. I understand and agree that, with regard to all provisions
of this Agreement relating to non-disclosure, non-
solicitation, and confidentiality of information, such
provisions shall not cease as of this termination but shall
continue in full force and effect in perpetuity or as
otherwise indicated within this Agreement. In compliance with
the Agreement, I shall continue to preserve as confidential
all Confidential Information as defined in the Agreement.
---------------------------------
Associate
---------------------------------
Date
---------------------------------
Termination Date
Cerner Corporation
--------------------------------
By
--------------------------------
Title
9
<TABLE>
Exhibit 21
SUBSIDIARIES OF REGISTRANT
<CAPTION>
Name State of Incorporation
---- ----------------------
<S> <C>
Cerner Corporation Pty Limited New South Wales (Australia)
Cerner Deutschland GmbH Germany
Cerner FSC, Inc. Barbados
Cerner Health Connections, Inc. Delaware
Cerner Health Facts, Inc. Delaware
Cerner HealthWise, Inc. Delaware
Cerner International, Inc. Delaware
Cerner Limited United Kingdom
Cerner Performance Logistics, Inc. Delaware
Cerner Properties, Inc. Delaware
Cerner Singapore Limited Delaware
Cerner (Malaysia) Sdn Bnd Malaysia
Cerner Canada Limited Delaware
Cerner Multum, Inc. Delaware
Cerner Investment Corp. Nevada
Cerner Campus Redevelopment Corporation Missouri
</TABLE>
Independent Auditors' Consent
The Board of Directors
Cerner Corporation:
We consent to incorporation by reference in the Registration
Statements (No. 333-77029, No. 33-56868, No. 33-55082, No. 33-
41580, No. 33-39777, No. 33-39776, No. 33-20155, and No. 33-
15156) on Form S-8 and Registration Statement No. 33-72756 on
Form S-3 of Cerner Corporation of our reports, dated
February 14, 2000, relating to the consolidated balance
sheets of Cerner Corporation as of January 1, 2000 and
January 2, 1999 and the related consolidated statements of
operations, changes in equity, and cash flows and related
schedule for each of the years in the three-year period ended
January 1, 2000, which reports are incorporated herein by
reference or are included herein.
KPMG LLP
Kansas City, Missouri
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-END> JAN-01-2000
<CASH> 75,677,000
<SECURITIES> 0
<RECEIVABLES> 165,933,000
<ALLOWANCES> 4,759,000
<INVENTORY> 1,262,000
<CURRENT-ASSETS> 242,429,000
<PP&E> 141,124,000
<DEPRECIATION> 63,186,000
<TOTAL-ASSETS> 660,891,000
<CURRENT-LIABILITIES> 72,376,000
<BONDS> 0
0
0
<COMMON> 349,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 660,891,000
<SALES> 340,197,000
<TOTAL-REVENUES> 340,197,000
<CGS> 95,038,000
<TOTAL-COSTS> 241,461,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,396,000
<INCOME-PRETAX> 302,000
<INCOME-TAX> 118,000
<INCOME-CONTINUING> 184,000
<DISCONTINUED> 0
<EXTRAORDINARY> 1,395,000
<CHANGES> 0
<NET-INCOME> (1,211,000)
<EPS-BASIC> (.04)
<EPS-DILUTED> (.04)
</TABLE>
