-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Lig4JGR5vVwo/v2BPwuw9ghat8MVo3EAONM5ZjkwlaEY43tXP+uIfO4FLsnzZk4j jmkoIVjB4zxjdkXy4bZ24w== 0000804753-96-000015.txt : 19960401 0000804753-96-000015.hdr.sgml : 19960401 ACCESSION NUMBER: 0000804753-96-000015 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19951230 FILED AS OF DATE: 19960329 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CERNER CORP /MO/ CENTRAL INDEX KEY: 0000804753 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 431196944 STATE OF INCORPORATION: DE FISCAL YEAR END: 1230 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-15386 FILM NUMBER: 96541183 BUSINESS ADDRESS: STREET 1: 2800 ROCKCREEK PKWY-STE 601 CITY: KANSAS CITY STATE: MO ZIP: 64117 BUSINESS PHONE: 8162211024 MAIL ADDRESS: STREET 1: 2800 ROCKCREEK PKWY STREET 2: DROP 1624 CITY: KANSAS CITY STATE: MO ZIP: 64117 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ( X ) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 30, 1995 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from _____________ to ___________ Commission File Number 0-15386 CERNER CORPORATION (Exact name of Registrant as specified in its charter) Delaware 43-1196944 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 2800 Rockcreek Parkway, Suite 601 Kansas City, Missouri 64117 (816) 221-1024 (Address of principal executive offices, including zip code; Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] At March 1, 1996, there were 32,542,563 shares of Common Stock outstanding, of which 7,491,002 shares were owned by affiliates. The aggregate market value of the outstanding Common Stock of the Registrant held by non-affiliates, based on the average of bid and asked prices of such stock on March 1, 1996, was $591,843,128. Documents incorporated by reference: portions of the Registrant's Proxy Statement for the 1996 Annual Meeting of Stockholders are incorporated by reference in Part III hereof. PART I Item 1. Business General - ------- Cerner Corporation was incorporated in Missouri in 1980. Through a merger into a wholly-owned Delaware subsidiary effected in June 1987, Cerner Corporation ("Cerner" or the "Company") became a Delaware corporation. The Company's principal offices are located at 2800 Rockcreek Parkway, Kansas City, Missouri 64117, and its telephone number is (816) 221-1024. Cerner designs, develops, markets, installs and supports member/patient-focused clinical and management information systems that are capable of being implemented on an individual, combined or enterprise-wide basis. Cerner systems are designed to automate the process of healthcare by accumulating data on care provided to members/patients, maintaining such data in a member/patient database repository and providing access to such data for users of clinical information across a healthcare system. Cerner's systems are designed and developed using the Health Network Architecture (''HNA''), a single architecture. HNA is a unified system for combining clinical and management information applications. HNA allows each participating facility within an integrated healthcare enterprise to access an individual's clinical record at the point of care, to organize it for the specific needs of the physician, nurse, laboratory technician or other care provider on a real-time basis, and to use the information in management decisions to improve the efficiency and productivity of the location and the entire enterprise. Healthcare Industry - ------------------- The dramatic increase in healthcare costs in the United States, which historically were based on a fee-for- service model, has caused significant changes in the healthcare industry. Managed care organizations and other payers have developed alternative payment models to control costs, including procedure-based cost limits, contractually approved providers and capitation (a fixed monthly fee per member in payment for all required services). The result has been a continuing shift of financial risk from the payer to both the physician provider and the institutional provider (hospitals, clinics, long-term care, subacute providers and rehabilitative care centers). In response, institutional providers are aligning with one another and with physician groups to form Integrated Delivery Systems (''IDSs''), and IDSs are aligning with payer organizations to form Integrated Health Organizations (''IHOs''), in each case in an effort to compete more effectively in the changing healthcare environment. The changes occurring in the healthcare industry have resulted in changes in the needs for clinical and management information systems by hospitals, physicians, managed care organizations and Integrated Delivery Systems. Hospitals' information requirements have become more complex as cost containment pressures have driven the needs for efficiency and process automation while the increasing number of relationships they have with other providers requires additional sophistication. As physicians combine into a variety of provider configurations, management structures and incentive plans, they are increasingly utilizing member/patient focused information systems to improve quality and efficiency for their growing practices and physician networks, to develop the data necessary to compete for contracts with payers and to be able to share the financial risks of healthcare delivery. Managed care organizations are increasingly recognizing the value of process- oriented and clinically-driven information as it relates to understanding and improving the health of their members. Information system requirements for IDSs and IHOs encompass many of the same needs as hospitals, physicians and managed care organizations. Many IDSs and IHOs are becoming aggressively involved with institutional providers and physicians in various relationships where information sharing and process automation are paramount. Many of these larger, more complex organizations are seeking closer relationships with suppliers that can provide comprehensive information systems solutions. Information system requirements for IDSs and IHOs include integrated process-based systems for clinical domains, data repositories and applications for physicians and management teams. Healthcare Information Systems Industry - --------------------------------------- Healthcare information systems are evolving to meet the needs of a changing marketplace. Initially, computer systems developed for use in healthcare were financially oriented, with a focus on the ability to capture charges and generate patient bills. Beginning in the mid-1960s, institutional provider organizations began to use clinical information systems, which automate the activities within clinical departments, such as laboratory, pharmacy, radiology and surgery departments, to improve the productivity of resources and automate the production and use of significant amounts of clinical information. Individual departments selected systems based upon specific features on a ''best of breed'' basis resulting in disparate information systems within the institutional provider. More recently, there has been a shift from the purchase of disparate clinical systems on a ''best of breed'' basis to systems which are able to integrate communication effectively throughout the healthcare enterprise. The two principal approaches to meet this need are a common architecture, in which systems communicate through inherent design, and point-to-point interfaces, in which systems with different architectures communicate through interface linkages. This infrastructure trend also affects the relationship between the health system and the suppliers of information technology. The approach of interfacing disparate systems typically involves multiple system suppliers and the health system must act as the intermediary and integrator. The common architecture approach relies more on a strategic relationship with one or very few suppliers dedicated to implementing a shared vision for the role of information in the operation of the health system. The same forces that are causing other healthcare providers to join together are causing physicians to combine into larger organizations, including Independent Practice Associations (''IPAs'') and Preferred Provider Organizations (''PPOs''). In some cases, such organizations align with IDSs and IHOs. Cerner believes that such physician groups require clinical and management information systems that allow them to participate in the community-wide clinical and management information systems employed by the IDSs and IHOs. The Cerner Vision - ----------------- As a result of the rapid transformation of the healthcare industry, Cerner believes that a new center of healthcare will emerge-the IHO, which is a combination of payers, physicians and institutional providers, into a single organization to service a community or defined member population. IHOs have the capacity to contract with both the government and employers to provide healthcare services to member/patients. The focus of the IHO is to be accountable for the health status of a defined population, with strong financial incentives to manage health on a preventive or wellness basis and reduce costs. Cerner believes that many large IHOs will emerge in the United States in the next decade. The creation of IHOs results from the combination of existing payers, physicians and institutional providers. These IHOs will need to implement information systems that manage the delivery of care across its entire community while simultaneously managing the business side of health management. Only through automating the core process of healthcare delivery from member enrollment through the ordering and delivery of care will IHOs be able to actually manage and measure care. Process automation will enable healthcare systems interactively to affect the care that is delivered throughout the entire system at each point of delivery. Cerner believes that managing these integrated healthcare systems will require the accumulation and refining of enormous amounts of process-related data in order to monitor performance against projected plan and to make informed business decisions. This process-oriented approach will also provide the information basis to measure health system performance, in values known as outcomes, from clinical, functional, process, member satisfaction and economic perspectives. When all of the complex clinical processes that comprise care delivery in IHOs are automated using fully integrated information systems, it becomes possible to extend automation to the management processes of healthcare. Cerner's HNA Approach - --------------------- The cornerstone of Cerner's information systems strategy is HNA, the single architecture around which each of Cerner's products is developed. This highly scaleable architecture allows Cerner to meet the clinical and management information requirements of a healthcare delivery system across the continuum of care from the physician practice to the IHO. The value of HNA is the creation of systems that ''intrarelate'' as opposed to being integrated. Most healthcare organizations are using some form of information technology to manage their clinical, financial and administrative operations. Typically, a multitude of systems, operating on differing technology platforms from various suppliers, are used within a single organization. These systems rely on a series of interfaces to transmit information to one another which may inhibit real-time access to comprehensive patient information. In addition, the data collected by disparate systems is usually maintained in a variety of formats, and is indexed or codified using different approaches, which dilutes the data's usefulness. Cerner's approach to system design is to first understand the intricate processes of providing care and then to design systems that support and streamline those processes. Cerner's system architecture allows its applications to work together as one system. Cerner's systems are ''intrarelated'', which means that they are designed around a single architecture that automatically organizes and presents information in a manner relevant to a clinician's decision process. With ''intrarelated'' systems, all caregivers are kept apprised of each patient's condition, allowing the activities of the care team to be more carefully and efficiently orchestrated in an effort to deliver the highest possible quality of care. Strategy - -------- Key elements of the Company's business strategy include: To penetrate the integrated healthcare market. The transformation of healthcare delivery must deal with the changing financial model from fee-for-service to fixed or controlled fee payments for services provided. In order to accomplish the transition, integrated healthcare systems must decrease costs generally, utilize fewer resources per patient or member encounter, decrease the amount of care required by focusing on preventative measures and increase member populations by attracting additional members through better quality healthcare and services. Cerner's process-based, repository and clinical systems provide the technology to enable an integrated system to manage healthcare to significantly reduce costs, improve the efficiency of healthcare delivery and maintain and improve the quality of healthcare. To penetrate the physician market. As physicians combine to form organizations such as IPAs and PPOs, they require clinical and process-based systems to manage the member/patient care processes within their own practices. As such groups align with IDSs and IHOs, they further require clinical and management information systems that allow them to share clinical and management processes with these community- wide systems. Cerner's systems provide the member/patient data repositories and clinical and management tools required by physicians in order for them to participate effectively in the changing healthcare marketplace. To expand its core business. Cerner expects continued growth in core business areas, including clinical domain systems such as PathNet, RadNet and PharmNet, as institutional providers look to restructure and reengineer these high cost centers within their IDSs and IHOs. The Company also intends to market aggressively Cerner clinical and management information systems and services, such as RadNet and PharmNet, to its existing client base. To remain committed to a unified architecture. Because Cerner believes that the constituents in health management need to work together to benefit defined populations in a community, the Company has made a commitment to a single unified architecture as the platform for fully ''intrarelated'' health information and management systems. This platform enables Cerner's process-based HNA system to be scaleable on a linear basis, using either Cerner compatible modules for process- oriented applications or competitive systems interfaced using open system protocols. In addition, the HNA system can be accessed throughout the enterprise at the point of care, which improves data integrity, allows for coordination of procedures at multiple locations and enables reliable communication without delay. To expand its products and services. Using its HNA platform, Cerner intends to expand the range of products and services offered to providers, including IDSs and IHOs, either through internal development or by acquisitions or joint ventures. These new products and services will complement the systems currently offered, address the emerging information needs of clients or employ technological advances. Cerner believes that major opportunities exist as IHOs begin to include service organizations and on-line services to the home, particularly because the member/patient focus of Cerner's architecture provides the basis for individual electronic medical records which can be used throughout a member-focused health system. In addition, Cerner recognizes the value of the aggregate database being developed by its broad client base as a potential means to enable comparative or normative procedure evaluations as a powerful new tool in the healthcare industry. Products - -------- The Company's products include: (i) process-based systems, which automate clinical care processes throughout and between entities; (ii) repository systems, which capture, sort, present and analyze clinical and process related data; and (iii) clinical domain systems, which automate complex clinical processes within specific departments or domains. These systems can be acquired individually or as a fully intrarelated health information system. The individual systems perform together even if installed at different times. Cerner also markets over 200 product options that complement Cerner's major information systems. Process-based Systems Cerner's CareNet Care Management System is designed to automate the entire care process. It collects, refines, organizes, and evaluates vast amounts of detailed clinical and management data. CareNet enables the data and information to be used as executable knowledge. CareNet supports the delivery of care throughout the enterprise, from acute care settings to outpatient facilities and ambulatory services. Care teams, therefore, can not only treat illness but also proactively manage the health status of a population. CareNet also supports point-of-care (POC) automation, which enables real-time documentation, simplifies information management, and drives enhancements to the delivery of care. It enables the entire care team to plan and manage individual activities and plans, as well as measure outcomes and goals. All care team members have immediate access to clinical and management information and can customize plans of care for each patient. CareNet heightens communication, optimizes use of time, and eliminates redundant data entry-all in real-time. CareNet consists of five major components: Patient Management, Order Management, Scheduling Management, Documentation Management, and Case Management. Patient Management is the hub of patient communications and the link between a lifetime of care episodes across a spectrum of providers in the community. It enables care providers to transfer and discharge patients electronically as they are actually moving or leaving. Order Management simplifies and streamlines the process of order entry, whether from ad hoc orders or order sets, by communicating orders electronically. The system warns of contradictions and eliminates duplicate orders-all from a single screen. Charges also can be automatically generated at various stages within the order communication process. Scheduling Management supports referrals and schedules procedures and appointments for all providers across all institutions within an organization. Documentation Management is designed to automate the information gathering, recording, and reporting activities of the care team. It eliminates redundant charting and streamlines documentation by allowing care team members to enter information once and have it automatically updated throughout the system. Case Management plans and orchestrates patient care activities throughout the care delivery cycle. When a clinical guideline or plan of care is activated, it automatically initiates ordering, scheduling, and documentation. Discern Expert is an event-driven, rule-based, decision support software application integrated with other Cerner HNA clinical and management information systems. This tool allows users to define clinical and management rules that are applied to events accessing data that is captured or generated by other HNA applications. Discern Expert accomplishes a variety of tasks, including cost reduction, resource utilization, quality-assurance and risk management. The users can define the action to be taken by the system ranging broadly from sending an alert to the appropriate caregiver to creation, cancellation or suspension of an active clinical order. Repository Systems Open Clinical Foundation Data Repository (''OCF'') is a structured repository of clinical information of members/patients. OCF forms the foundation of Cerner's electronic medical record functionality. This information can originate from numerous sources and is maintained in an easily accessible, standardized format. OCF can be used on a stand- alone basis, but is significantly more effective when used as part of the comprehensive HNA solution. For most enterprises in which the various laboratories and ancillaries cooperatively share data over the entire enterprise, OCF provides a means of sorting and retrieving data. With OCF, the amount of on-line clinical data that are retained in departmental systems can be significantly reduced. Furthermore, health enterprises can scale OCF for a particular clinical area's use and integrate it into an environment containing products from different suppliers, including competitors. The interface specifications to OCF are available for use by suppliers who comply with the interface requirements. PowerChart is a PC-workstation-based product that enables care providers to electronically view, organize, annotate and amend a patient record so that it is presented in a manner that allows them to navigate through the chart using patient-provider and encounter relationships. PowerChart gives healthcare providers structured access to the clinical information contained electronically in OCF. The format of the on-line patient chart consists of pages displayed from a patient's computer-based patient record and information electronically transmitted from connected systems. Clinicians are able to browse through pages much the same as with printed documents. Clinicians can access documents through tables of contents or search for terms in the document text. The scope of documents available is limited only by the system interfaces to OCF. Open Management Foundation Data Repository (''OMF'') is a structured repository for process-and activity-related information useful for management of a healthcare institution. Information can originate from numerous sources and can be maintained in an easily accessible, standardized format. OMF can be scaled for a particular department's use and can be integrated into an architecture containing products from different suppliers. PowerVision is a comprehensive, PC-based health management information system used to view information in OMF in much the same manner as PowerChart is used with OCF. This management access tool presents summary information through a graphical user interface, making key information available to all levels of management. PowerVision is equipped with features that allow the user to pursue ''what if '' and other investigatory information paths. This enables an executive to determine the status of the institution in many critical areas, as well as provides managers with a quick, up-to-the-minute view of leading business management indicators regarding the performance of a department, care area or facility. Open Engine Application Gateway System facilitates the exchange of data and assists in the management of point-to-point interfaces between foreign systems and serves as a toolkit to help clients write interface code. Clinical Domain Systems PathNet Laboratory Information System addresses the information management needs of five clinical areas: general laboratory, microbiology, blood bank transfusion services, blood bank donor services and anatomic pathology. PathNet automates the ordering and reporting of procedures, the production of accurate and timely reports and the maintenance of accessible clinical records. PathNet can be interfaced with automated instruments and databases, allowing for efficient and accurate transfer of information. PathNet communicates laboratory information to patient care areas and other information systems. Cerner attributes PathNet's acceptance to its functional capability, ease of use and event-level cost accounting, which allows healthcare managers to better control costs and assess profitability. MedNet Internal Medicine Information System is a family of software products that addresses the clinical information needs of various internal medicine areas within the health organization. Introduced as a pulmonary information system in 1987, MedNet's functionality now serves the disciplines of cardiology, neuro-diagnostics, rehabilitation services and nutritional services, as well as many ancillary areas. Like PathNet, MedNet automates procedure requests, patient and therapist scheduling and the processing, validation and presentation of results. The system provides reports on clinical activity, workload and billing charges by drawing from the departmental databases. RadNet Radiology Information System addresses the operational and management requirements of diagnostic radiation and radiation oncology departments. It allows a department to replace its manual, paper-based system of record-keeping with an efficient computer-based system. RadNet is designed to adapt easily to the department's existing operations. In addition, the system addresses such tasks as scheduling patients, modifying orders, tracking patients, locating films, transcribing reports, upgrading the quality and content of reports and reporting on productivity. PharmNet Pharmacy Information System provides intrarelation in an HNA environment for rapid pharmacy order entry and support of the clinical pharmacy in either an inpatient or outpatient setting. PharmNet streamlines medication order entry, enabling the pharmacist or technician to place all types of pharmaceutical orders on one easy-to-use screen. Dispensing functions also are fully automated. Medication, intravenous fill lists and medication administration records are produced automatically or on demand. Charges are automatically captured at the time the fill list is generated. Patient profiles and pharmaceutical inventories are maintained without the intervention of the pharmacist, saving significant time and resources. Features are designed to address the special needs of the clinical pharmacy, including on-line order entry screening for drug-drug interactions, drug-food and drug- lab interferences, drug-disease states, intravenous incompatibilities, dose range and therapeutic treatment duplication. Clinical notes can be recorded on-line and sent to other clinicians for comment or follow-up. MSmeds Pharmacy Information System focuses on automating the pharmacy department. MSmeds was developed by a company acquired by Cerner in 1993. MSmeds is sold on a stand- alone basis, but can be interfaced to the Company's HNA products. Designed to meet the specialized and individual needs of the pharmacy department, MSmeds incorporates windows, on-line help, menu and table-driven entry, a built-in system customization tool, and an application generator. The order entry application gives the pharmacist fast order entry capabilities with a high level of quality control. Safeguards that ensure the integrity of patient therapy include: dose level checking by 36 parameters, drug warnings, drug-drug interaction checking and pharmacokinetics. The system generates a number of reports to assure the appropriateness of drug therapy, including drug interaction, patients on specific drugs, drug utilization by therapeutic category and dose checking. On-line storage on removable disks provides full patient detail for a period of up to ten years. MSmeds offers the availability of full detail patient information for drug utilization evaluation, as well as labor and cost efficiencies. Admission, discharge and transfer, billing, results display and order entry interfaces are contained within the system. SurgiNet Surgery Information System and MRNet Medical Record Department Information System are scheduled for commercial release in the first half of 1996. SurgiNet is intended to address the needs of the surgical department, including automating the functions of resource and equipment scheduling, inventory management and operating room management. MRNet is intended to help meet the operations management needs of the medical records department and includes functionality for the various chart tracking and completion tasks commonly associated with maintaining medical records. Software Development - -------------------- Cerner commits significant resources to developing new health information system products. As of December 30, 1995, 556 employees were engaged full-time in product development activities. Total expenditures for the development and enhancement of the Company's products were approximately $19,432,000, $26,897,000, and $33,957,000 in 1993, 1994 and 1995, respectively. These figures include the amounts capitalized and exclude amounts amortized for financial reporting purposes. The Company expects to continue investment and development efforts for its current and future product offerings. As new clinical and management information needs emerge, Cerner intends to enhance its current HNA-based product lines with new versions released to clients on a periodic basis. In addition, Cerner plans to expand its current product lines by developing additional information systems for use in clinical departments and to continue to support simultaneous use of Cerner's HNA products across multiple facilities. All Cerner systems are developed under HNA using a proprietary systems development methodology. This methodology defines and controls each task throughout the product development cycle and ensures that current and future products can be fully intrarelated. The Company is committed to maintaining open attributes in its system architecture through operability in a diverse set of technical and application environments. The Company strives to design its systems to co-exist with disparate applications developed and supported by other suppliers. This effort is exemplified by Cerner's Open Engine, OCF and OMF product lines. Cerner is developing a new version (referred to as V500) of its software, which will incorporate a client-server architecture, a comprehensive graphical user interface and open systems concepts for relational databases, operating systems, networks and hardware platforms. Development of V500 began in the summer of 1993. The Company is committed to maintaining open attributes in its V500 system architecture. Cerner expects its V500 applications to run on multiple operating systems, networks, databases and hardware platforms and to co-exist with disparate applications developed and supported by other companies. Cerner expects to begin installation of V500 applications in the third quarter of 1996. Sales and Marketing - ------------------- The market for Cerner's information system products includes IHOs, IDSs, physician groups and networks, managed care organizations, hospitals, free-standing reference laboratories, blood banks, imaging centers and pharmacies. To date, a substantial portion of system sales have been in clinical applications in hospital-based provider organizations. Cerner's 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 current HNA systems are designed to operate on computers manufactured by Digital Equipment Corporation (''Digital''). In addition, Open Engine, PathNet, RadNet and MSmeds are available on IBM's RISC System/6000 AIX (UNIX) platform. Over time, all HNA applications will be available on both the Digital and 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 fifteen months, from the time of initial contact to the signing of a contract. The Company's executive marketing management is located in its Kansas City, Missouri, headquarters, while its account representatives are deployed through regional offices across the United States. The Company, through subsidiaries, has offices and sales staff in the United Kingdom, Australia, Germany and Saudi Arabia. The Company supports its sales force with technical personnel who perform demonstrations of Cerner's products and assist clients in determining the proper hardware and software configurations. The Company has developed a demonstration and presentation facility at its headquarters in Kansas City, Missouri, called the Cerner Vision Center. This facility enables the Company to actually demonstrate the processes automated through HNA and adapt the presentations to the clients' environments. The Company's primary direct marketing strategy is to generate sales contacts from its existing client base and through presentations at industry seminars and trade shows. Cerner attends a number of major trade shows each year and has begun to sponsor executive conferences, which feature industry experts who address the information system needs of large healthcare organizations. Consolidated revenues include foreign sales of $8,417,000, $13,274,000 and $8,823,000 for the years ended December 31, 1993 and 1994, and December 30, 1995, respectively. Client Services - --------------- Cerner uses a regional strategy to provide the full range of product and service capabilities to its clients from eight locations throughout the United States and four international locations. Each regional center reflects Cerner's corporate culture and interfaces with the Company's clients on a regular and highly accessible basis. In this way, Cerner can provide on-site personnel for the development and management of systems projects, learn the evolving information needs of clients based on geographical trends in the healthcare industry, work with clients in the development of new products and services and share with clients Cerner's vision of the changing healthcare delivery market and the role of information systems in that transformation. The Company has regional offices in Atlanta, Boston, Dallas, Detroit, Kansas City, Los Angeles, Seattle and Washington, D.C. and international offices in Luton, England; Munich, Germany; Riyadh, Saudi Arabia; and Sydney, Australia. Each regional office is focused on long-term marketplace development, product marketing, client project management, long-term client service and client satisfaction for a group of clients within a specific geographical region. All of Cerner's clients enter into software maintenance agreements with Cerner for support of their Cerner systems. In addition to immediate software support in the event of problems, these agreements allow these clients the use of new releases of the Cerner products covered by these agreements. Each client has 24-hour access to the client support staff located at Cerner's corporate headquarters. Most of Cerner's clients also enter into hardware maintenance agreements with Cerner. These arrangements normally provide for a fixed monthly fee for specified services. In the majority of cases, Cerner subcontracts hardware maintenance to the hardware manufacturer. Backlog - ------- At December 30, 1995 Cerner had contract backlog of $77,495,000. Such backlog represents system sales from signed contracts which have not yet been recognized as revenue. The Company recognizes revenue on a percent of completion basis, based on certain milestone conditions, for its software products. At December 30, 1995, the Company had $48,625,000 of contracts receivable, which represents revenues recognized under the percent of completion method but not yet billable under the terms of the contract. At December 30, 1995, Cerner had a software support and maintenance backlog of $94,538,000. Such backlog represents contracted software support and hardware maintenance services for a period of twelve months. Item 2. Properties The Company's offices are located in an office park in North Kansas City, Missouri. As of December 30, 1995, the Company was using approximately 482,000 square feet and substantially all of the remainder was leased to tenants. In December 1995 the Company completed construction of a combination child care and fitness facility at the office park for the use of the Company's employees. The Company believes that its employees are its most important asset and that this facility will enable the Company to attract and retain it's relatively young work force which contains a large number of married women. The Company also leases office space for its branch offices in Atlanta, Boston, Dallas, Detroit, Los Angeles, Seattle and Washington D.C. Item 3. Legal Proceedings The Company is not involved in any material pending litigation. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of the stockholders of the Company during the fourth quarter of the fiscal year ended December 30, 1995. Item 4A. Executive Officers of the Company The following table sets forth the names, ages, positions and certain other information regarding the Company's executive officers as of March 1, 1996. Officers are elected annually and serve at the discretion of the board of directors.
Name Age Positions - ---- --- --------- Neal L. Patterson 46 Chairman of the Board of Directors and Chief Executive Officer Clifford W. Illig 45 President and Chief Operating Officer Charles S. Runnion, III 48 Executive Vice President and General Manager David M. Margulies, M.D. 44 Executive Vice President of Product Engineering Jeffrey C. Reene 41 Executive Vice President Jack A. Newman, Jr. 48 Senior Vice President and Managing Director, Cerner 2000 Thomas C. Tinstman, M.D. 51 Senior Vice President Alan D. Dietrich 33 Group Vice President and General Manager Charles O. Whitcraft 44 Group Vice President of Product Engineering Gary W. Willett 51 Group Vice President and Chief Operating Officer of Cerner International, Inc. Marc G. Naughton 41 Vice President and Chief Financial Officer
Neal L. Patterson was President, Chairman of the Board of Directors and Chief Executive Officer of the Company from its incorporation to May 1987. Since May 1987 he has been Chairman of the Board of Directors and Chief Executive Officer of the Company. Mr. Patterson has served as a director of Home Office Reference Laboratory since August 1988. Clifford W. Illig was Executive Vice President, Secretary, Treasurer and Chief Financial Officer and a Director of the Company from its incorporation to May 1987. From May 1987 to May 1993, he was a Director, President, Chief Operating Officer and Chief Financial Officer of the Company. Since May 1993, he has been a Director, President and Chief Operating Officer. Charles S. Runnion, III joined the Company in July 1989 and since that date has been an Executive Vice President and Director of the Company. Prior to working at the Company, he spent fourteen years with the IBM Corporation in a variety of marketing and management positions. David M. Margulies, M.D. joined the Company in February 1991 and since that date has been an Executive Vice President of the Company. Prior to joining the Company, for four years, he was Vice President in charge of information systems at Children's Hospital, a healthcare institution located in Boston, Massachusetts. During this time Dr. Margulies also was the Director of the Program in Medical Information Sciences at Harvard Medical School. Dr. Margulies has served as a Director of the Company since May 1991. Jeffrey C. Reene joined the Company in September 1991 as Group Vice President of Client Services. He was promoted to Executive Vice President in June of 1994. Prior to joining the Company, he was with Andersen Consulting from July 1978 to August 1991, being a Partner with Andersen Consulting since September, 1988. Jack A. Newman, Jr. joined the Company in January 1996 as Senior Vice President and Managing Director of Cerner 2000. Prior to joining the Company, he was with KPMG Peat Marwick LLP for 22 years. Most recently he was National Partner-in-Charge of of KPMG's Health Care Strategy Practice, leading more than 200 professional and administrative staff members who provided strategy consulting services to healthcare clients nationwide, including healthcare systems, physician groups, managed care plans, and other provider and payor organizations. Thomas C. Tinstman, M.D. joined the Company in November 1995 and has been a Director of the Company since May 1989. Prior to joining the Company, Dr. Tinstman was Director of Medical Informatics with University of Texas Medical Branch in Galveston, Texas. Prior to that he was a physician in private practice with Internal Medicine Associates, P.C. in Omaha, Nebraska. From 1977 to January, 1994, Dr. Tinstman served as Assciate Medical Director of Pulmonary Medical Services at Bishop Clarkson Memorial Hospital and as Medical Director of the Respiratory Therapy Department of Midland Hospital, both in Omaha, Nebraska. Dr. Tinstman has served as a director of Smith-Haynes Trust, Inc. since 1988. Alan D. Dietrich joined the Company in 1990 as Director of Business, Planning and Development. In January 1994 he was promoted to Vice President. Prior to joining the Company, he spent seven years with IBM Corporation. Charles O. Whitcraft joined the Company as Vice President of Technology in January 1984. Since that time he has served in several executive positions dealing with technology and engineering. Gary W. Willett joined the Company in April 1990 as Group Vice President of Client Services and has served in various executive capacities. Prior to joining the Company, he spent twenty-one years with IBM Corporation in a variety of marketing and management positions. Marc G. Naughton joined the Company in November 1992 as Manager of Taxes. In November 1995 he was elected Chief Financial Officer and in February 1996 he was promoted to Vice President. Prior to joining the Company, he spent nine years with The Marley Company, a multinational manufacturing company, in a variety of financial management positions. PART II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters The Company's common stock trades on the Nasdaq National Market tier of the Nasdaq Stock Market under the symbol CERN. The following table sets forth the high, low, and last sales prices for the fiscal quarters of 1995 and 1994 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.
1995 1994 ------------------------ ------------------------ High Low Last High Low Last ---- --- ---- ---- --- ---- First Quarter 24 5/8 20 7/8 24 1/4 24 3/4 19 3/8 20 3/4 Second Quarter 32 7/8 21 30 5/8 22 1/2 11 3/4 13 7/8 Third Quarter 35 3/4 29 3/4 34 1/4 21 3/4 12 7/16 20 7/16 Fourth Quarter 34 1/4 20 20 1/2 22 5/8 18 5/8 22 1/16
At February 10, 1996, 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
Years 1995 1994 1993 1992 1991 ------- ------- ------- ------- ------- (In thousands, except per share data) Statement of Earnings Data: Revenues $ 186,901 155,917 120,572 101,145 77,240 Operating earnings 37,265 33,779 24,330 16,587 8,068 Earnings before income taxes 37,220 32,451 24,120 16,293 7,552 Net earnings 22,521 19,501 14,558 9,932 4,688 Primary earnings per share .72 .66 .50 .35 .17 Primary weighted average shares outstanding 31,448 29,762 29,158 28,680 26,874 Balance Sheet Data: Working capital $ 174,064 52,370 42,603 30,522 22,588 Total assets 303,945 156,410 104,910 66,667 56,155 Long-term debt, net 30,104 30,235 10,354 8,310 7,982 Stockholders' equity 221,374 85,777 64,230 38,643 27,517
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations For a more thorough understanding of management's analysis of results of operations and financial condition, the following discussion should be read in conjunction with the Letter to Shareholders and the discussion of the Company's business operations. Year Ended December 30, 1995 Compared to Year Ended December 31, 1994 Results of Operations - The Company's revenues increased 20% to $186,901,000 in 1995, from $155,917,000 in 1994. Net earnings increased 15% to $22,521,000 in 1995 from $19,501,000 in 1994. Net earnings from the Company's foreign operations decreased 195% to a loss of $1,867,000 in 1995 from earnings of $1,973,000 in 1994. Revenues - In 1995, revenues increased due to an increase in system sales and support of installed systems. System sales increased 20% to $129,917,000 in 1995, from $108,322,000 in 1994. This increase in system sales resulted principally from an increase in installations under HNA contracts and additional hardware and software sales to the Company's existing client base. HNA contracts were 42% of total system sales in 1995, compared to 37% in 1994. The sale of additional hardware and software products to the installed client base increased 36% in 1995 and 40% in 1994. The Company has seen a significant increase in the number of clients who have purchased two or more clinical system units on their initial contract, or clients from the installed base who purchase one or more system units subsequent to their initial contract. Total sales to the installed base in 1995, including new systems, incremental hardware and software, and recurring and discrete services, were 71% of total revenues in 1995 compared to 73% in 1994. At December 30, 1995, the Company had $77,495,000 in contract backlog and $94,538,000 in support and maintenance backlog, compared to $57,547,000 in contract backlog and $77,222,000 in support and maintenance backlog at the end of 1994. Support and maintenance revenues increased 19% in 1995 compared to 24% in 1994. These revenues represented 26% of 1995 total revenues and 27% of 1994 total revenues. Other revenues increased 22% to $7,633,000 in 1995 from $6,273,000 in 1994. This increase was due primarily to twelve months of real estate lease revenues from the rental to outside tenants as compared to eight months of lease revenues in 1994; space in the Company's headquarters complex not currently being utilized by the Company is leased to outside tenants. Cost of Revenues - The cost of revenues includes the cost of computer hardware and sublicensed software purchased from computer and software manufacturers for delivery to clients. It also includes the cost of hardware maintenance and sublicensed software support subcontracted to the manufacturers. The cost of revenues was 28% of total revenues in 1995 and 30% of total revenues in 1994. Such costs, as a percent of revenues, typically have varied as the mix of revenue (software, hardware, and support) components carrying different margin rates changes from period to period. The decrease in the cost of revenue as a percent of total revenues resulted principally from an increase in multiproduct projects which carry a lower cost of revenue percentage. Sales and Client Service - Sales and client service expenses include salaries of client service personnel, communications expenses, and unreimbursed travel expenses. Also included are sales and marketing salaries, tradeshow costs, and advertising costs. These expenses as a percent of total revenues were 27% in 1995 compared to 26% in 1994. The increase in total sales and client service expenses 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 1995 and 1994 were $33,957,000 and $26,897,000, respectively. These amounts exclude amortization. Capitalized software costs were $9,210,000 and $8,131,000 for 1995 and 1994, respectively. The increase in aggregate expenditures for software development in 1995 is due to development of more clinical information system products to complement the existing product line. The percentage of costs capitalized is expected to remain fairly constant as the Company continues to develop new products. General and Administrative - General and administrative expenses include salaries for corporate, financial, and administrative staffs, utilities, communications expenses, and professional fees. These expenses as a percent of total revenues were 9% in 1995 and 8% in 1994. Interest Expense - Net interest expense was considerably lower in 1995 than in 1994. This decrease was due primarily to interest income from investment of the proceeds from the sale of 3,716,000 new shares of common stock from the August 1995 public offering. Income Taxes - The Company's effective tax rates were 39.4% and 39.9% for 1995 and 1994, respectively, which were not significantly different from the combined federal and state statutory rates. Year Ended December 31, 1994 Compared to Year Ended December 31, 1993 Results of Operations - The Company's revenues increased 29% to $155,917,000 in 1994, from $120,572,000 in 1993. Net earnings increased 34% to $19,501,000 in 1994 from $14,558,000 in 1993. Net earnings from the Company's foreign operations increased 110% to $1,973,000 in 1994 from $938,000 in 1993. Revenues - In 1994, revenues increased due to an increase in system sales and support of installed systems. System sales increased 29% to $108,322,000 in 1994 from $84,024,000 in 1993. This increase in system sales resulted principally from an increase in installations under HNA contracts and additional hardware and software sales to the Company's existing client base. HNA contracts were 37% of total system sales in 1994, compared to 30% in 1993. The sale of additional hardware and software products to the installed client base increased 40% in 1994 and 9% in 1993. The Company has seen a significant increase in the number of clients who have purchased two or more clinical system units on their initial contract, or clients from the installed base who purchase one or more system units subsequent to their initial contract. Total sales to the installed base in 1994, including new systems, incremental hardware and software, and recurring and discrete services, were 73% in 1994 compared to 63% in 1993. At December 31, 1994, the Company had $57,547,000 in contract backlog and $77,222,000 in support and maintenance backlog, compared to $42,183,000 in contract backlog and $57,341,000 in support and maintenance backlog at the end of 1993. Support and maintenance revenues increased 24% in 1994 and 25% in 1993. These revenues represented 27% of 1994 total revenues and 28% of total 1993 total revenues. Other revenues increased 87% to $6,273,000 in 1994 from $3,348,000 in 1993. This increase was due primarily to real estate lease revenues from the rental to outside tenants of space in the Company's headquarters complex not currently being utilized by the Company. 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 30% of total revenues in 1994 and 36% in 1993. Such costs, as a percent of revenues, typically have varied as the mix of revenue (software, hardware, and support) components carrying different margin rates changes from period to period. The decrease in the cost of revenue as a percent of total revenues resulted principally from an increase in multiproduct projects which carry a lower cost of revenue percentage. Sales and Client Service - Sales and client service expenses include salaries of client service personnel, communications expenses, and unreimbursed travel expenses. Also included are sales and marketing salaries, tradeshow costs, and advertising costs. These expenses as a percent of total revenues were 26% and 23% in 1994 and 1993, respectively. Increases in total sales and client service expenses are attributable to the cost of a larger field sales and services organization, marketing of new products, and international marketing initiatives. 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 1994 and 1993 were $26,897,000 and $19,432,000, respectively. These amounts exclude amortization. Capitalized software costs were $8,131,000 and $6,181,000 for 1994 and 1993, respectively. The increase in aggregate expenditures for software development in 1994 was due to development of more clinical information system products to complement the existing product line. The percentage of costs capitalized should remain fairly constant as the Company continues to develop new products. General and Administrative - General and administrative expenses include salaries for corporate, financial, and administrative staffs, utilities, communications expenses, and professional fees. These expenses as a percent of total revenues were 8% and 7% for 1994 and 1993, respectively. Interest Expense - Net interest expense was considerably higher in 1994 than 1993. This increase in interest expense was due to financing the $20,000,000 purchase of the Company's headquarters complex. The financing initially consisted of a term loan for $17,425,000, with the remainder provided by additional borrowing under the Company's revolving line of credit. On July 29, 1994, the Company issued $30,000,000 in Senior Notes bearing an interest rate of 8.3%. The proceeds of the Senior Notes were used to repay the term loan and reduce the outstanding borrowings under the revolving line of credit. The remaining proceeds will be used for capital improvements to the headquarters complex. The higher interest expense was offset by a reduction in the Company's rent expense and an increase in lease revenues from unrelated parties. Income Taxes - The Company's effective tax rates were 39.9% and 39.6% for 1994 and 1993, respectively, which were not significantly different from the combined federal and state statutory rates. Quarterly Results Quarterly Results - The Company's quarterly revenues and net earnings historically have been variable and cyclical. The variability is attributable primarily to the number and size of project milestone events in any fiscal quarter. The Company expects the fluctuation in quarterly financial results to continue. Liquidity and Capital Resources Liquidity and Capital Resources - The Company's liquidity position remains strong, with total cash and cash equivalents of $8,640,000 and short-term investments of $103,478,000 at December 30, 1995 and working capital of $174,064,000 compared to cash and cash equivalents of $5,984,000 and short-term investments of $9,321,000 at December 31, 1994, and working capital of $52,370,000. During August 1995, the Company sold 3,716,000 shares of common stock in a public offering. The proceeds of this sale, net of underwriting discounts and commissions and expenses, were $108,287,000. Prior to the public offering the Company financed its operations, capital expenditures (other than the purchase of the Kansas City headquarters complex and its related capital improvements), and working capital from internally generated funds and bank borrowings. The Company has $18,000,000 of long-term, revolving credit from banks, all of which was available as of December 30, 1995. On April 19, 1994, the Company purchased its Kansas City headquarters complex for $20,000,000. The purchase was initially funded by bank borrowings. The purchase has no material effect on operating cash flow, since the reduction in lease payments and increase in net rental income approximates the debt service payments. On July 29, 1994, the Company issued $30,000,000 of Senior Notes, due in 2004. The proceeds were used to repay the bank borrowings related to the purchase of the Company's headquarters complex and retire existing debt. The interest is paid semiannually; principal is due in five equal installments beginning in 2000. The Company generated cash of $15,329,000, $18,949,000, and $15,856,000, from operations in 1995, 1994, and 1993, respectively. Cash flow from operations in 1994 increased primarily because of the increase in net earnings and decreased in 1995 due primarily to an increase in receivables. Revenues provided under support and maintenance agreements of the Company represent recurring cash flows. Support and maintenance revenues increased 19%, 24%, and 25% in 1995, 1994, and 1993, respectively, and the Company expects these revenues to continue to grow as the base of installed systems grows. The Company believes its present cash and cash equivalent position, together with cash generated from operations and the current bank borrowing facility, will be sufficient to meet anticipated cash requirements. Inflation - The effects of inflation were minimal on the Company's business. Recent Accounting Pronouncement - Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (Statement 123) will require pro forma disclosures in 1996 of net income and earnings per share as if a new accounting method based on estimated fair value of employee stock options had been adopted. The Company has not yet decided if the optional accounting treatment proposed, Statement 123, will be adopted. Item 8. Financial Statements and Supplementary Data The Financial Statements and Notes required by this Item are submitted as a separate part of this report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant The Registrant's Proxy Statement to be used in connection with the Annual Meeting of Stockholders to be held on May 14, 1996, 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 14, 1996, 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 14, 1996, contains under the caption "Executive Compensation" the information required by Item 11 of Form 10-K and such information is incorporated herein by this reference (except that the information set forth under the following sub captions is expressly excluded from such incorporation: "Executive Compensation and Stock Option Committee Report" and "Company Performance"). Item 12. Security Ownership of Certain Beneficial Owners and Management The Registrant's Proxy Statement to be used in connection with the Annual Meeting of Stockholders to be held on May 14, 1996, 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 14, 1996, contains under the caption "Certain Transactions" the information required by Item 13 of Form 10-K and such information is incorporated herein by this reference. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Financial Statements. (1) Consolidated Financial Statements: Independent Auditors' Report on Consolidated Financial Statements Consolidated Balance Sheets - December 30, 1995 and December 31, 1994 Consolidated Statements of Earnings - Years Ended December 30, 1995, and December 31, 1994 and 1993 Consolidated Statements of Stockholders' Equity - Years Ended December 30, 1995, and December 31, 1994 and 1993 Consolidated Statements of Cash Flows - Years Ended December 30, 1995, and December 31, 1994 and 1993 Notes to Consolidated Financial Statements (2) The following financial statement, schedule and independent auditors' report on financial statement schedule of the Registrant for the three-year period ended December 30, 1995 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)(i) Restated Certificate of Incorporation, as amended through December 31, 1993, (filed as Exhibit 3(a) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and hereby incorporated by reference). 3(a)(ii) Amendment to the Restated Certificate of Incorporation (filed as Exhibit 3(a) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, and hereby incorporated by reference). 3(b) Bylaws, as amended (filed as Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the six months ended June 30, 1995, and hereby incorporated by reference). 4(a) Reference is made to the Restated Certificate of Incorporation and Bylaws of Registrant described above under 3(a) and 3(b), respectively. 4(b) Specimen stock certificate (filed as Exhibit 4(a) to Registrant's Registration Statement on Form S-8 (File No. 33-15156) and hereby incorporated herein by reference). 4(c) Note Agreement between Cerner Corporation, Principal Mutual Life Insurance Company, and Principal National Life Insurance Company dated July 1, 1994, (filed as Exhibit 10(a) to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, and hereby incorporated by reference. 4(d) Credit Agreement between Cerner Corporation, Cerner Properties, Inc. Mark Twain Kansas Bank, and Harris Trust & Savings Bank dated April 18, 1994, (filed as Exhibit 10(b) to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, and hereby incorporated by reference). 10(a) Employment Agreement, dated January 1, 1990, between Clifford W. Illig and Registrant (filed as an Exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, and hereby incorporated herein by reference).* 10(b) Employment Agreement, dated January 1, 1990, between Neal L. Patterson and Registrant (filed as an Exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, and hereby incorporated herein by reference).* 10(c) Standard Volume Agreement, dated July 6, 1989, between Digital Equipment Corporation and Registrant (filed as Exhibit 10(g) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1989, and hereby incorporated herein by reference). 10(d) 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(e) Indemnification Agreements between the Registrant and Neal L. Patterson, Clifford W. Illig, Gerald E. Bisbee, Jr., David J. Hart, Thomas C. Tinstman, David M. Margulies and Charles S. Runnion, III (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(f) Amended Non-Qualified Stock Option Plan of Registrant (filed as Exhibit 10(a) to Registrant's Quarterly Report on Form 10-Q for the quarter ended July 1, 1995, and hereby incorporated herein by reference).* 10(g) Employment Agreement dated February 22, 1991, between Cerner Corporation and David M. Margulies, M.D. (filed as Exhibit 10(1) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, and hereby incorporated herein by reference).* 10(h) Incentive Stock Option Agreement (Non-Standard Vesting) dated February 22, 1991, between Cerner Corporation and David M. Margulies, M.D. (filed as Exhibit 10(m) to Registrant's Annual Report on Form 10- K for the year ended December 31, 1991, and hereby incorporated herein by reference).* 10(i) Stock Option Agreement (Non-Qualified-Milestone) dated February 22, 1991, between Cerner Corporation and David M. Margulies, M.D. (filed as Exhibit 10(n) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, and hereby incorporated herein by reference).* 10(j) Cerner East Deferred Payout Plan dated March 7, 1991, for the benefit David M. Margulies, M.D. and Edwin D. Trautman (filed as Exhibit 10(o) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, and hereby incorporated herein by reference).* 10(k) Non-Qualified Stock Option Agreement dated February 19, 1991, between Cerner Corporation and David J. Hart (filed as Exhibit 10(q) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, and hereby incorporated herein by reference).* 10(l) Stock Option Agreement dated May 15, 1990, between Cerner Corporation and Gerald E. Bisbee, Jr. (filed as Exhibit 10(r) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, and hereby incorporated herein by reference).* 10(m) Stock Option Agreement dated May 15, 1990, between Cerner Corporation and Thomas C. Tinstman (filed as Exhibit 10(s) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, and hereby incorporated herein by reference).* 10(n) Cerner Performance Plan for 1994 (filed as Exhibit 10(u) to Registrant's Annual Report on Form 10- K for the year ended December 31, 1994, and hereby incorporated herein by reference).* 10(o) Non-Qualified Stock Option Agreement dated July 20, 1994, between the Registrant and Alan E. Dietrich (filed as Exhibit 10(o) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, and hereby incorporated herein by reference).* 10(p) Incentive Stock Option Agreement dated September 12, 1990, between the Registrant and Alan E. Dietrich (filed as Exhibit 10(p) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, and hereby incorporated herein by reference).* 10(q) Incentive Stock Option Agreement dated August 22, 1991, between the Registrant and Jeffrey C. Reene (filed as Exhibit 10(q) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, and hereby incorporated herein by reference).* 10(r) Incentive Stock Option Agreement dated May 15, 1990, between the Registrant and Gary W. Willett (filed as Exhibit 10(r) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, and hereby incorporated herein by reference).* 10(s) Incentive Stock Option Agreement dated February 27, 1985, between the Registrant and Charles O. Whitcraft (filed as Exhibit 10(s) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, and hereby incorporated herein by reference).* 10(t) Incentive Stock Option Agreement dated May 15, 1990, between the Registrant and Charles O. Whitcraft (filed as Exhibit 10(t) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, and hereby incorporated herein by reference).* 10(u) Non-Qualified Stock Option Agreement between the Registrant and Michael E. Herman (filed as Exhibit 10(b) to the Registrant's Quarterly Report on Form 10- Q for the quarter ended July 1, 1995, and hereby incorporated herein by reference).* 10(v) Non-Qualified Stock Option Agreement between the Registrant and Clifford W. Illig (filed as Exhibit 10(c) to the Registrant's Quarterly Report on Form 10- Q for the quarter ended July 1, 1995, and hereby incorporated herein by reference).* 10(w) Non-Qualified Stock Option Agreement between the Registrant and Neal L. Patterson (filed as Exhibit 10(d) to the Registrant's Quarterly Report on Form 10- Q for the quarter ended July 1, 1995, and hereby incorporated herein by reference).* 10(x) Non-Qualified Stock Option Agreement between the Registrant and Jack A. Newman, Jr.* 10(y) Non-Qualified Stock Option Agreement between the Registrant and Thomas C. Tinstman, M.D.* 10(z) Cerner Performance Plan for 1995.* 10(aa) Real Estate Sales Contract dated April 18, 1994, between Northtown Devco and Cerner Corporation (filed as Exhibit 10(c) to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, and hereby incorporated herein by reference). 10(bb)(i) Standard Form of Agreement between Owner and Contractor dated September 1, 1994, between Cerner Properties, Inc. and J. E. Dunn Construction Company (filed as Exhibit 10(w)(i) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, and hereby incorporated herein by reference). 10(bb)(ii) Supplement to General Conditions of the Contractor for Construction dated September 1, 1994, between Cerner Properties, Inc. and J. E. Dunn Construction Company (filed as Exhibit 10(w)(ii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, and hereby incorporated herein by reference). 10(bb)(iii) Amendment No. 1 to the Agreement dated October 24, 1994, between Cerner Properties, Inc. and J. E. Dunn Construction Company (filed as Exhibit 10(w)(iii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, and hereby incorporated herein by reference). 10(cc) Standard Form of Agreement Between Owner and Architect dated April 29, 1994, between Cerner Properties, Inc. and The Hollis & Miller Group, Inc. (filed as Exhibit 10(x) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, and hereby incorporated herein by reference). 11 Computation of Registrant's Earnings Per Share. 22 Subsidiaries of Registrant. 23 Consent of Independent Auditors. 27 Financial Data Schedule. * Management contracts or compensatory plans or arrangements required to be identified by Item 14(a)(3). (b) Reports on Form 8-K. No reports on Form 8-K were filed by Registrant during the fourth quarter of the fiscal year ended December 30, 1995. (c) Exhibits. The response to this portion of Item 14 is submitted as a separate section of this report. (d) Financial Statement Schedules. The response to this portion of Item 14 is submitted as a separate section of this report. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CERNER CORPORATION Dated: March 28, 1996 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 28, 1996 - ------------------------------ -------------- Neal L. Patterson, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/Clifford W. Illig March 28, 1996 - ------------------------------ -------------- Clifford W. Illig, President, Chief Operating Officer and Director /s/Marc G. Naughton March 28, 1996 - ------------------------------ -------------- Marc G. Naughton, Principal Financial and Accounting Officer /s/David M. Margulies, M.D. March 28, 1996 - ------------------------------ -------------- David M. Margulies, M.D., Director /s/Michael E. Herman March 28, 1996 - ------------------------------ -------------- Michael E. Herman, Director Signature and Title Date ------------------- ---- /s/Gerald E. Bisbee, Jr. March 28, 1996 - ------------------------------ -------------- Gerald E. Bisbee, Jr., Director /s/Charles S. Runnion, III March 28, 1996 - ------------------------------ -------------- Charles S. Runnion, III, Director /s/Thomas C. Tinstman, M.D. March 28, 1996 - ------------------------------ -------------- Thomas C. Tinstman, M.D., Director /s/David J. Hart March 28, 1996 - ------------------------------ -------------- David J. Hart, Director Independent Auditors' Report - ---------------------------------------------------------------- The Board of Directors and Stockholders Cerner Corporation: We have audited the accompanying consolidated balance sheets of Cerner Corporation and subsidiaries as of December 30, 1995 and December 31, 1994, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended December 30, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cerner Corporation and subsidiaries as of December 30, 1995 and December 31, 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 30, 1995, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Kansas City, Missouri February 10, 1996 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 in the circumstances, and, therefore, included in the financial statements are certain amounts based on management's informed estimates and judgments. Other financial information in this report is consistent with that in the consolidated financial statements. The consolidated financial statements have been audited by Cerner Corporation's independent certified public accountants and have been reviewed by the audit committee of the Board of Directors. Consolidated Balance Sheets - ------------------------------------------------------------------------------- December 30, 1995 and December 31, 1994
1995 1994 ---------------------- (Dollars in thousands) Assets Current Assets: Cash and cash equivalents $ 8,640 5,984 Short-term investments 103,478 9,321 Receivables 98,154 65,148 Inventory 2,246 2,218 Prepaid expenses and other 4,393 979 ------- ------- Total current assets 216,911 83,650 Property and equipment, net 53,693 41,129 Software development costs, net 22,885 18,784 Intangible assets, net 4,414 6,390 Noncurrent receivables 4,097 4,508 Other assets 1,945 1,949 ------- ------- $ 303,945 156,410 ------- ------- ------- ------- Liabilities and Stockholders' Equity Current Liabilities: Accounts payable $ 14,932 13,485 Current installments of long-term debt 130 160 Advanced billings 6,162 3,737 Deferred income taxes 13,946 6,652 Accrued payroll and tax withholdings 5,112 4,689 Other accrued expenses 2,565 2,557 ------- ------- Total current liabilities 42,847 31,280 Long-term debt, net 30,104 30,235 Deferred income taxes 9,620 9,118 Stockholders' Equity: Common stock, $.01 par value, 50,000,000 shares authorized, 33,001,973 shares issued in 1995 and 28,508,614 shares in 1994 330 285 Additional paid-in capital 143,876 30,807 Retained earnings 82,874 60,353 Treasury stock, at cost (513,018 shares in 1995 and 1994 (5,693) (5,693) Foreign currency translation adjustment (13) 25 -------- -------- Total stockholders' equity 221,374 85,777 ------- ------- ------- ------- Commitments (Note 11) $ 303,945 156,410 ------- ------- ------- ------- See notes to consolidated financial statements.
Consolidated Statements of Earnings - ----------------------------------------------------------------------------- For the years ended December 30, 1995, December 31, 1994, and 1993
1995 1994 1993 ------- -------- ------- (In thousands, except per share data) Revenues: System sales $ 129,917 108,322 84,024 Support and maintenance 49,351 41,322 33,200 Other 7,633 6,273 3,348 ------- ------- ------- Total revenues 186,901 155,917 120,572 ------- ------- ------- Costs and expenses: Cost of revenues 52,270 46,426 43,921 Sales and client service 49,889 39,857 28,248 Software development 30,193 22,688 16,000 General and administrative 17,284 13,167 8,073 ------- ------- ------- Total costs and expenses 149,636 122,138 96,242 ------- ------- ------- Operating earnings 37,265 33,779 24,330 Interest expense, net 45 1,328 210 ------- ------- ------- Earnings before income taxes 37,220 32,451 24,120 Income taxes 14,699 12,950 9,562 ------- ------- ------- Net earnings $ 22,521 19,501 14,558 ------- ------- ------- ------- ------- ------- Primary earnings per share $ .72 .66 .50 ------- ------- ------- ------- ------- ------- See notes to consolidated financial statements.
Consolidated Statements of Stockholders' Equity - ---------------------------------------------------------------------------- For the years ended December 30, 1995, December 31, 1994, and 1993
Foreign Additional Treasury currency Common Stock paid-in Retained stock translation Shares Amount capital earnings amount adjustment Total ---------------------------------------------------------------------- (In thousands) Balance at December 31, 1992 26,171 $ 261 17,848 26,294 (5,693) (67) 38,643 Exercise of options 1,038 10 980 - - - 990 Issuance of stock grants - - 8 - - - 8 Issuance of stock for acquisition 520 6 6,767 - - - 6,773 Tax benefit from disqualifying dispositions of stock options - - 3,200 - - - 3,200 Foreign currency translation adjustment - - - - - 58 58 Net earnings - - - 14,558 - - 14,558 ----------------------------------------------------------------- Balance at December 31, 1993 27,729 277 28,803 40,852 (5,693) (9) 64,230 ----------------------------------------------------------------- Exercise of options 778 6 981 - - - 987 Issuance of stock grants 2 2 23 - - - 25 Tax benefit from disqualifying dispositions of stock options - - 1,000 - - - 1,000 Foreign currency translation adjustment - - - - - 34 34 Net earnings - - - 19,501 - - 19,501 ----------------------------------------------------------------- Balance at December 31, 1994 28,509 285 30,807 60,353 (5,693) 25 85,777 ----------------------------------------------------------------- Exercise of options 777 8 1,484 - - - 1,492 Issuance of stock grants - - 10 - - - 10 Common shares sold in public offering, net of issuance costs 3,716 37 108,250 - - - 108,287 Tax benefit from disqualifying dispositions of stock options - - 3,325 - - - 3,325 Foreign currency translation adjustment - - - - - (38) (38) Net earnings - - - 22,521 - - 22,521 ----------------------------------------------------------------- Balance at December 30, 1995 33,002 $ 330 143,876 82,874 (5,693) (13) 221,374 ----------------------------------------------------------------- ----------------------------------------------------------------- See notes to consolidated financial statements.
Consolidated Statements of Cash Flows - ----------------------------------------------------------------------------- For the years ended December 30, 1995, December 31, 1994, and 1993
1995 1994 1993 ----------------------------------- (In thousands) Cash flows from operating activities: Net earnings $ 22,521 19,501 14,558 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 12,218 10,062 6,434 Issuance of stock as compensation 10 25 8 Provision for deferred income taxes 7,796 8,017 7,500 Tax benefit from disqualifying dispositions of stock options 3,325 1,000 3,200 Loss on disposal of capital equipment 42 165 -- Changes in assets and liabilities: Receivables (32,595) (23,221) (13,426) Inventory (28) (1,194) 821 Prepaid expenses and other (2,263) 1,213 391 Accounts payable 1,447 1,969 2,901 Accrued income taxes -- -- (5,791) Other current liabilities 2,856 1,412 (740) --------- --------- -------- Total adjustments (7,192) (552) 1,298 --------- --------- -------- Net cash provided by operating activities 15,329 18,949 15,856 --------- --------- -------- Cash flows from investing activities: Purchase of capital equipment (10,620) (11,291) (7,078) Purchase of land, building, and improvements (8,266) (20,939) -- Proceeds on disposal of capital equipment -- 21 -- Capitalized software development costs (9,210) (8,131) (6,181) Acquisition of business -- -- (585) --------- --------- -------- Net cash used in investing activities (28,096) (40,340) (13,844) --------- --------- -------- Cash flows from financing activities: Net borrowings (payments) under short-term notes payable -- (639) 388 Proceeds from issuance of long-term debt 6,745 50,273 109 Repayment of long-term debt (6,906) (30,743) (511) Proceeds from public offering, net of expenses 108,287 -- -- Proceeds from exercise of options 1,492 987 990 --------- --------- -------- Net cash provided by financing activities 109,618 19,878 976 --------- -------- -------- Foreign currency translation adjustment (38) 34 58 --------- -------- -------- Net increase (decrease) in cash, cash equivalents, and short- term investments 96,813 (1,479) 3,046 Cash, cash equivalents, and short-term investments at beginning of year 15,305 16,784 13,738 --------- -------- -------- Cash, cash equivalents, and short-term investments at end of year $ 112,118 15,305 16,784 --------- -------- -------- --------- -------- -------- Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 2,607 1,110 686 Income taxes, net of refund 4,016 3,574 4,499 Noncash investing and financing activities: Acquisition of business $ -- -- 6,773 Acquisition of equipment through capital leases -- 386 139 See notes to consolidated financial statements.
Notes to Consolidated Financial Statements - ---------------------------------------------------------------------------- 1 Summary of Significant Accounting Policies (a) Principles of Consolidation - The consolidated financial statements include the accounts of Cerner Corporation and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. (b) Revenue Recognition - Revenues are derived primarily from the sale of clinical information systems. In addition, revenue is generated from servicing installed clinical information systems, which generally include 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 and the sale of computer hardware. Clinical information system sales contracts are noncancelable and provide for a right of return only in the event the system fails to meet the performance criteria set forth in the contracts. The Company recognizes revenue from sales of clinical information systems using a percentage-of- completion method based on meeting key milestone events over the term of the contracts in accordance with Statement of Position 91-1, "Software Revenue Recognition." Revenue from the licensing of additional software is recognized upon installation at the client's site. Revenue from the sale of computer hardware is recognized upon shipment. Revenue from ongoing software support and equipment maintenance is recognized as the services are rendered. (c) 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 the years ended December 30, 1995, December 31, 1994 and 1993, the Company capitalized $9,210,000, $8,131,000, and $6,181,000, respectively, of total software development costs of $33,957,000, $26,897,000, and $19,432,000, respectively. Amortization expense of capitalized software development costs for the years ended December 30, 1995, December 31, 1994, and 1993, was $5,109,000, $3,918,000, and $2,652,000, respectively, and accumulated amortization was $18,963,000, $13,854,000, and $9,936,000, respectively. (d) Inventory - Inventory consists primarily of computer hardware held for resale and is recorded at the lower of cost (first-in, first-out) or market. (e) Property and Equipment - Property, equipment, and leasehold improvements are stated at cost. Depreciation of property and equipment is computed using the straight-line method over periods of 5 to 39 years. Amortization of leasehold improvements is computed using a straight-line method over the lease terms, which range from periods of two to five years. (f) Earnings Per Share - Earnings per share is based on the weighted average number of common shares and common share equivalents outstanding. Common share equivalents consist of shares issuable upon exercise of stock options using the treasury stock method. The computation of fully diluted earnings per share reflects additional dilution under the treasury stock method when the Company's stock price at the end of a reporting period exceeds the average price. Fully diluted earnings per share is not materially different from primary earnings per share. Weighted average shares outstanding utilized in the computation of primary earnings per share were 31,448,053, 29,762,208, and 29,158,356, and fully diluted earnings per share were 31,448,053, 29,807,504, and 29,285,798, for the years ended December 30, 1995, December 31, 1994, and 1993, respectively. (g) Stock Split - On July 17, 1995, the Company's Board of Directors declared a two-for-one stock split in the form of a one hundred percent (100%) stock dividend payable on August 4, 1995, to stockholders of record July 24, 1995. All share and per share data have been restated for all periods presented herein to reflect the stock split. (h) Foreign Currency - Assets and liabilities in foreign currencies are translated into dollars at rates prevailing at the balance sheet date. Revenues and expenses are translated at average rates for the year. The net exchange differences resulting from these translations are reported in stockholders' equity. Gains and losses resulting from foreign currency transactions are included in the consolidated statements of earnings. The net gain (loss) resulting from foreign currency transactions was $33,000, $107,000, and ($83,000), in 1995, 1994, and 1993, respectively. (i) Income Taxes - Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. (j) Goodwill - Excess of cost over net assets acquired (goodwill) is being amortized on a straight-line basis over eight years. Accumulated amortization was $1,355,000 at December 30, 1995 and $916,000 at December 31, 1994. The Company assesses the recoverability of goodwill based on forecasted undiscounted future operating cash flows. (k) Reclassifications - Certain prior year amounts have been reclassified to conform with current year presentation. (l) 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 On November 1, 1993, the Company completed the acquisition of Megasource, Inc. through the merger of Megasource, Inc. into a new wholly owned subsidiary of the Company. The Company issued 519,540 shares of common stock, valued at approximately $6,773,000, in the merger. Megasource, Inc. was engaged in the design, sale, and support of several clinical information systems, the most significant of which was its pharmacy system. The acquisition has been accounted for as a purchase with the operating results of Megasource, Inc. included in the Company's consolidated statement of earnings from November 1, 1993. The Company has determined that the consolidated results of operations as if the acquisition had occurred at the beginning of 1993 would have had no material effect on the overall results of the Company. 3 Cash and Short-term investments Cash, cash equivalents, and short-term investments consist of the following:
1995 1994 ------------------------ (In thousands) Cash and cash equivalents $ 8,640 5,984 Repurchase agreements 916 659 Commercial paper -- 3,982 Variable rate securities 500 500 Fixed rate securities 101,212 3,330 Certificates of deposit 850 850 ------- ------- Total cash, cash equivalents, and short-term investments $ 112,118 15,305 ------- ------- ------- -------
On January 1, 1995, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (Statement 115). Under Statement 115, debt and marketable equity securities are classified in one of three categories: trading, available for sale or held-to-maturity. The Company classifies all of its investment securities as held-to-maturity. Held-to-maturity securities are those securities in which the Company has the positive intent and ability to hold until maturity. Held-to- maturity securities are recorded at cost, adjusted for the amortization or accretion of premiums or discounts. There was no financial statement impact upon adoption of Statement 115. All cash equivalents and short-term investments held at December 30, 1995 mature within 90 days. The amortized cost of cash equivalents and short-term investments approximates fair value. 4 Receivables Receivables consist of accounts receivable and contracts receivable. Accounts receivable represent recorded revenues that have been billed. Contracts receivable represent recorded revenues that are billable by the Company at future dates under the terms of a contract with a client. Contract receivables that are not expected to be collected within one year are classified as noncurrent. Billings on contracts in excess of related revenues recognized under the percentage of completion method are recorded as advanced billings. A summary of current receivables is as follows:
1995 1994 -------------------- (In thousands) Current receivables: Accounts receivable $ 49,529 37,019 Contracts receivable 48,625 28,129 ------- ------- Total current receivables $ 98,154 65,148 ------- -------
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 December 30, 1995 and December 31, 1994, are amounts due from healthcare providers located in foreign countries of $3,821,000 and $3,777,000 respectively. Consolidated revenues include foreign sales of $8,823,000, $13,274,000, and $8,417,000, for the years ended December 30, 1995, December 31, 1994, and 1993, respectively. The Company provides an allowance for estimated uncollectible accounts based upon historical experience and management's judgment. At December 30, 1995 and December 31, 1994 the estimated allowance for uncollectible accounts was $1,109,000 and $734,000, respectively. The fair value of the Company's noncurrent receivables is estimated to be $3,808,000, based on current interest rates offered to the Company for debt of the same maturities. 5 Property and Equipment A summary of property, equipment, and leasehold improvements stated at cost, less accumulated depreciation and amortization, is as follows:
1995 1994 -------------------- (In thousands) Furniture and fixtures $ 13,661 9,942 Computer equipment 22,373 18,163 Marketing equipment 1,240 913 Communications equipment 1,859 1,612 Leasehold improvements 6,105 4,319 Capital lease equipment 600 1,055 Land, building, and improvements 29,213 20,939 ------- ------- 75,051 56,943 Less accumulated depreciation and amortization 21,358 15,814 ------- ------- Total property and equipment, net $ 53,693 41,129 ------- ------- ------- -------
6 Indebtedness The Company has a loan agreement with two banks which 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 December 30, 1995) or LIBOR plus 1.75% (7.59% at December 30, 1995). The interest rate may be reduced by up to .5% if certain net worth ratios are maintained. At December 30, 1995, the Company had no outstanding borrowings under this agreement and had $18,000,000 available for working capital purposes. The agreement contains certain net worth, current ratio, and fixed charge coverage covenants and provides certain restrictions on the Company's ability to borrow, incur liens, sell assets, and pay dividends. A commitment fee of 3/16% is payable quarterly on the unused portion of the revolving line of credit. The Company also had a loan agreement with two banks that provided for a term loan of $17,425,000 to fund the $20,000,000 purchase of its Kansas City headquarters complex. On July 29, 1994, the Company issued $30,000,000 of Senior Notes. The note proceeds were used to repay the term loan, which then terminated, and reduce borrowings under the revolving line of credit. The Senior Notes are payable in five equal annual installments beginning in August 2000. Interest is payable on February 1 and August 1 at a rate of 8.3%. The note agreement contains certain net worth, current ratio, and fixed charge coverage covenants and provides certain restrictions on the Company's ability to borrow, incur liens, sell assets, and pay dividends. The fair value of the Company's Senior Notes is estimated to be $32,400,000, based on the quoted market prices for similar issues offered to the Company for debt of the same remaining maturities. The Company estimates that the fair value of the long-term portion of capital leases approximates the carrying value. Long-term debt is as follows:
1995 1994 ------------------- (In thousands) Senior Notes, 8.3% due 2004 $ 30,000 30,000 Obligation under capital lease agreements, interest at 6 - 10% payable in monthly installments through August 1997, secured by equipment 234 395 ------- ------- 30,234 30,395 Less current installments 130 160 ------- ------- Long-term debt, excluding current installments $ 30,104 30,235 ------- ------- ------- -------
Scheduled maturities of long-term debt (in thousands) at December 30, 1995, are as follows: Years ------------ 1996 $ 130 1997 104 2000 and thereafter 30,000 -------- $ 30,234 -------- -------- 7 Interest Income and Expense A summary of interest income and expense is as follows:
1995 1994 1993 -------------------------------- (In thousands) Interest income $ 2,380 542 438 Interest expense (2,425) (1,870) (648) -------- -------- ------- Interest expense, net $ (45) (1,328) (210) -------- -------- ------- -------- -------- -------
8 Stock Options The Company has three incentive stock option plans and a non- qualified stock option plan. Stock Option Plan A (Plan A) was approved by the Board of Directors on September 20, 1983, and expired on September 20, 1993. Stock Option Plan B (Plan B) was approved by the Board of Directors on November 30, 1983, and expired on November 30, 1993. Stock Option Plan C (Plan C) was approved by the Board of Directors on May 18, 1993. Stock Option Plan D (Plan D), formerly the Non-Qualified Stock Option Plan, was approved by the Board of Directors on February 19, 1991. All associate stock options authorized under Plan A were granted prior to December 31, 1983. Options granted under Plan A were exercisable through September 20, 1993, at $.19 per share (fair market value on the date of grant) and contained restrictions as to transferability and exercisability after termination of employment. Transactions for associate stock options under Plan A are summarized as follows:
Number of shares Exercise Shares under option price exercisable --------------------------------------- Outstanding, December 31, 1992 238,400 $ .19 238,400 Exercised (238,400) .19 --------- --------- --------- Outstanding, December 31, 1993, 1994, and December 30, 1995 - $ - - --------- ---------
Under Plan B, the Company could grant to associates options to purchase 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. Transactions for associate stock options under Plan B are summarized as follows:
Number of shares Exercise Shares under option price exercisable ----------------------------------------- Outstanding, December 31, 1992 2,895,776 $ .50-12.07 1,634,408 Granted 142,000 8.63-17.56 Canceled (49,200) 1.35-10.69 Exercised (719,162) .50- 2.25 ----------- Outstanding, December 31, 1993 2,269,414 .50-17.56 1,469,334 Canceled (36,800) 1.35 Exercised (697,560) .50- 4.47 ----------- Outstanding, December 31, 1994 1,535,054 .50-17.56 1,129,454 Canceled (20,000) 2.25-17.53 Exercised (549,516) .50-17.56 ----------- Outstanding, December 30, 1995 965,538 $ .50-17.56 797,938 ----------- -----------
Under Plan C, the Company may grant to associates options to purchase 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. Transactions for associate stock options under Plan C are summarized as follows:
Number of shares Exercise Shares under option price exercisable ------------------------------------------- Outstanding, December 31, 1993 - $ - - Granted 95,000 12.56-18.88 Canceled (600) 14.13 -------- Outstanding, December 31, 1994 94,400 12.56-18.88 - Exercised (4,000) 12.56 Canceled (200) 14.13 -------- Outstanding, December 30, 1995 90,200 $ 12.56-18.88 14,000 -------- --------
Under Plan D, the Company may grant to associates, consultants, or advisors options to purchase shares of common stock through January 1, 2000. The options are exercisable at a price and during a period determined by the Stock Option Committee. Options under this plan currently vest over periods of up to ten years. Transactions under Plan D and other non-qualified stock option agreements are summarized as follows:
Number of shares Exercise Shares under option price exercisable ----------------------------------------- Outstanding, December 31, 1992 584,000 $ 1.25- 1.53 228,000 Exercised (80,000) 1.35 ---------- Outstanding, December 31, 1993 504,000 1.25- 1.53 212,000 Granted 315,832 12.56-18.88 Exercised (80,000) 1.35 ---------- Outstanding, December 31, 1994 739,832 1.25-18.88 244,000 Granted 1,198,616 18.13-37.75 Canceled (40,000) 1.34 Exercised (223,400) 1.34-19.44 ---------- Outstanding, December 30, 1995 1,675,048 $ 1.25-37.75 97,240 ---------- ----------
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (Statement 123) will require pro forma disclosures in 1996 of net income and earnings per share as if a new accounting method based on estimated fair value of employee stock options had been adopted. The Company has not yet decided if the optional accounting treatment proposed, Statement 123, will be adopted. 9 Income Taxes Income taxes for the years ended December 30, 1995 and December 31, 1994, and 1993, consist of the following:
1995 1994 1993 --------------------------- (In thousands) Current: Federal $ 6,272 3,740 1,767 State 798 692 333 Foreign (167) 501 (38) ------- ------- ------- Total current 6,903 4,933 2,062 ------- ------- ------- Deferred: Federal 6,850 7,043 6,531 State 946 919 969 Foreign -- 55 -- ------- ------- ------- Total deferred 7,796 8,017 7,500 ------- ------- ------- Total income tax expense $ 14,699 12,950 9,562 ------- ------- ------- ------- ------- -------
Included in 1993 deferred income tax expense is approximately $88,000 resulting from the increase in the statutory tax rate. 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 December 30, 1995 and December 31, 1994, relate to the following:
1995 1994 ---------------------- (In thousands) Deferred Tax Asset Separate return net operating losses $ 2,389 -- Other 1,465 2,392 -------- -------- Total deferred tax assets 3,854 2,392 Less valuation allowance (1,189) (404) -------- -------- Net deferred tax assets 2,665 1,988 -------- -------- Deferred Tax Liability Software development costs $ (8,090) (6,776) Contract and service revenues and costs (16,791) (9,840) Depreciation and amortization (1,187) (789) Other (163) (353) -------- -------- Total deferred tax liability (26,231) (17,758) -------- -------- Net deferred tax liability $ (23,566) (15,770) -------- -------- -------- --------
The valuation allowance for 1995 and 1994 was $1,189,000 and $404,000 respectively. The valuation allowance is attributable to the continued uncertainty of the future realization of deferred tax assets generated mainly from losses recorded by certain foreign operations. The effective income tax rates for 1995, 1994, and 1993 were 39.4%, 39.9%, and 39.6%, respectively. These effective rates differ from the federal statutory rate of 35% in 1995, 1994, and 1993 as follows:
1995 1994 1993 ------------------------------- (In thousands) Tax expense at statutory rates $ 13,027 11,358 8,442 State income tax, net of federal benefit 1,352 1,047 846 Other, net 320 545 274 ------- ------ ------ Total income tax expense $ 14,699 12,950 9,562 ------- ------ ------ ------- ------ ------
Income taxes payable at December 30, 1995 and December 31, 1994 and 1993, are reduced by the tax benefit resulting from disqualifying dispositions of stock acquired under the Company's stock option plans. The 1995, 1994, and 1993 benefits of $3,325,000, $1,000,000, and $3,200,000, respectively, are treated as increases to additional paid-in capital. Income taxes payable as December 30, 1995 are also reduced by the use of separate return net operating losses. The 1995 tax benefit of $431,000 was treated as a reduction in goodwill. 10 Associate Stock Purchase Retirement Plan The Company established the Cerner Corporation Associate Stock Purchase Retirement Plan (the Plan) under Section 401(k) of the Internal Revenue Code. All full-time associates are eligible to participate. Participants may elect to make pre-tax contributions from 1% to 15% of compensation to the Plan, subject to annual limitations determined by the Internal Revenue Service. Participants may direct contributions into mutual funds, a money market fund, or a Company stock fund. The Company makes matching contributions to the Plan, on behalf of participants, in an amount equal to 20% of the participant's contribution, limited to a maximum of $600 per participant. The Company's expense for the plan amounted to $431,000, $316,000, and $275,000 for 1995, 1994, and 1993, respectively. 11 Commitments The Company is committed under operating leases for office space through December 1999 and for computer equipment through December 1996. Rent expense for office and warehouse space for the Company's regional and international offices for 1995, 1994, and 1993 was $1,192,000, $1,721,000, and $2,195,000, respectively. Lease expense for computer equipment was $68,000, $328,000, and $323,000, in 1995, 1994, and 1993, respectively. Aggregate minimum future payments (in thousands) under these noncancelable leases are as follows: Years ---------------- 1996 $ 1,539 1997 1,502 1998 1,279 1999 531 2000 180 12 Real Estate Lease Revenue The Company leases space to unrelated parties in its Kansas City headquarters complex under noncancelable operating leases. Rental income from January 1, 1995 to December 30, 1995, was $2,577,000. Future minimum lease revenues (in thousands) under these noncancelable operating leases expiring through 2000 are as follows: Years ---------------- 1996 $ 2,040 1997 1,695 1998 1,285 1999 1,018 2000 694 13 Stockholders' Equity At December 30, 1995 and December 31, 1994, the Company had 1,000,000 shares of authorized but unissued preferred stock, $.01 par value. 14 Quarterly Results (unaudited) Selected quarterly financial data for 1995 and 1994 is set forth below:
Earnings before Primary income Net earnings Revenues taxes earnings per share ------------------------------------------- (In thousands, except per share data) 1995 Quarterly Results: April 1 $ 43,192 7,817 4,541 .15 July 1 48,967 10,271 6,184 .21 September 30 41,724 5,775 3,491 .11 December 30 53,018 13,357 8,305 .25 -------- ------- ------- Total $ 186,901 37,220 22,521 .72 -------- ------- ------- -------- ------- ------- 1994 Quarterly Results: March 31 $ 30,515 4,724 3,002 .10 June 30 39,795 8,253 4,903 .17 September 30 40,933 8,387 5,069 .17 December 31 44,674 11,087 6,527 .22 -------- ------- ------- Total $ 155,917 32,451 19,501 .66 -------- ------- ------- -------- ------- -------
SCHEDULE II Cerner Corporation Valuation and Qualifying Accounts Additions Balance at Charged to Beginning Costs and Balance at Description of Period Expenses Deductions End of Period - ---------------------------------------------------------------------------- For Year Ended December 31, 1994 Doubtful Accounts $ 534,268 $ 0 $ 100,000 $ 434,268 Sales Allowances $ 300,000 $ 0 $ 0 $ 300,000
Additions Balance at Charged to Beginning Costs and Balance at Description of Period Expenses Deductions End of Period - ---------------------------------------------------------------------------- For Year Ended December 30, 1995 Doubtful Accounts and Allowances $ 434,268 $ 674,750 $ 0 $ 1,109,018 Sales Allowances $ 300,000 $ 0 $ 300,000 $ 0
INDEPENDENT AUDITORS' REPORT ---------------------------- ON FINANCIAL STATEMENT SCHEDULE ------------------------------- The Board of Directors Cerner Corporation: Under date of February 10, 1996, we reported on the consolidated balance sheets of Cerner Corporation and subsidiaries as of December 30, 1995 and December 31, 1994, and the related consolidated statments of earnings, stockholders' equity and cash flows for each of the years in the three-year period ended Decmeber 30, 1995. These consolidated financial statements and our report thereon are included in the Company's annual report on Form 10-K for the year 1995. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedule as listed in Item 14(a)(2). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits. In our opinion, this financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Kansas City, Missouri February 10, 1996 EX-10 2 PLAN D STOCK OPTION AGREEMENT - JACK A. NEWMAN, JR. 10(X) CERNER CORPORATION PLAN D STOCK OPTION AGREEMENT THIS AGREEMENT, made and entered into this twenty-ninth day of December, 1995 (the "Granting Date"), by and between CERNER CORPORATION, a Delaware corporation (the "Company"), and Jack A. Newman, Jr. (the "Optionee"), WITNESSETH: WHEREAS, the Stock Option Committee of the Board of Directors of the Company (the "Committee") has determined that the Optionee is eligible to receive an option to purchase shares of common stock of the Company under the Company's Non-Qualified Stock Option Plan (the "Plan"); NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained and other good and valuable consideration, the parties hereto do hereby agree as follows: 1. Incorporation of the Plan. A copy of the Plan is incorporated herein by reference and all of the terms, conditions and provisions contained therein shall be deemed to be contained in this Agreement. 2. Grant of Option. Pursuant to the authorization of the Committee, and subject to the terms, conditions and provisions contained in this Agreement, the Company hereby grants to the Optionee an option (the "Option") to purchase from the Company all or any part of an aggregate of One Hundred Fifty Thousand (150,000) shares of Cerner Common Stock at the purchase price of twenty and one half ($20.50) per share. The number of shares of common stock subject to the Option and the purchase price per share shall be appropriately adjusted to reflect any stock dividends, stock splits, split ups or combinations of outstanding shares of common stock of the Company. The date first written above shall be deemed to be the granting date of this Option. This Option grant is made in conjunction with the role of Senior Vice President and Managing Director, Cerner 2000. The definition and responsibilities of this role will be based annually on the description incorporated in the then- current Incentive Plan documentation or comparable document. Future vesting of shares granted in this Option will be evaluated as explained in paragraph 4. 3. Exercise in Installments. This option shall become exercisable in installments ("Installment") as shown on Exhibit A with the first Installment becoming exercisable one year following the date of Associate's beginning employment with Cerner and each subsequent Installment on each of the succeeding nine anniversary dates of the first Installment, subject to the vesting provisions of Paragraph 4. If (i) one person or entity (other than one currently holding, directly or indirectly, fifteen percent or more of the Company's outstanding voting securities) acquires direct or indirect voting control of sixty five percent (65%) or more of the Company's outstanding voting securities (a "Change of Control"), or (ii) Neal L. Patterson and Clifford W. Illig are both no longer with the Company (a "Management Change"), (a) prior to the First Installment Date, 37,500 option shares shall become immediately exercisable by the Optionee, (b) if a Change of Control or Management Change occurs within the second year following the date of this agreement then 55,000 option shares shall become immediately exercisable and (c) if a Change of Control or Management Change occurs in the third through fifth year following the date of this agreement then, 75,000 option shares shall become immediately exercisable. 4. Option Vesting and Termination. The Optionee may purchase all or any portion of the shares subject to each Installment at any time on or after the exercise dates set forth on Exhibit A. This Option shall expire with respect to all shares of Cerner Common Stock subject hereto at the earlier of (a) twenty-five (25) years from the date first above written, (b) Associate reaching the age of seventy (70) years or at termination of the Associate's employment (other than retirement of Associate from the Company at or after the age of sixty-five) with the Company or any of its subsidiaries; provided, however, that (i) if such termination occurs by reason of the Optionee's death or disability, the Optionee, or Optionee's estate, shall have three hundred sixty five (365) calendar days following such date to exercise this Option as to the number of shares exercisable on such termination date and (ii) if such termination occurs by reason of the Optionee's death or disability or dismissal by the Company, other than dismissal resulting from a breach by the Associate of any of the provisions of Associate's Employment Agreement with the Company, the Associate's performance of illegal, fraudulent or criminal acts or the Associate's engaging in willful misconduct or gross negligence in regard to the performance of Associate's duties for the Company, this Option shall Vest as to the shares subject to the next Installment following the date of such termination and the Optionee, or Optionee's estate, shall have three hundred sixty five (365) calendar days following the date of such termination to exercise this Option as to such shares. Associate shall be deemed to be disabled if, in the opinion of the Board of Directors of the company, the Associate has been unable to perform Associate's assigned duties for a continuous period of one hundred eighty (180) days. This Option may be exercised by the Optionee delivering to the Company a written notice of exercise along with either a cash payment in the amount of the purchase price for such shares, shares of Cerner stock having a fair market value equal to the exercise price or by stating in the written notice of exercise that the Optionee wishes a "cashless" exercise. "Cashless" exercise means that only the net option shares being exercised will be issued by Cerner. The remainder will be treated as if they were sold at the current market price in order to satisfy the purchase price for the exercised shares. 5. Investment Purpose. By accepting this Option, the Optionee agrees that any and all shares of stock purchased upon the exercise of this Option will be purchased for investment purposes, and not with a view to any distribution thereof, and that each notice of the exercise of any portion of this Option shall be accompanied by a representation in writing signed by the Optionee (or by the person or persons entitled to exercise the Option in the event of the death of the Optionee) that the shares of stock are being purchased in good faith for personal investment purposes, and not with a view to any distribution thereof. When a registration statement filed with the Securities and Exchange Commission regarding the shares of common stock subject to this option agreement becomes effective, the investment representation contained in this paragraph will no longer be applicable. 6. Stock Restrictions. The Optionee further agrees that: (a) Each stock certificate issued pursuant to the exercise of the Option granted hereby shall bear a legend to the effect that the shares represented thereby have not been registered under the Securities Act of 1933, and may not be transferred except in accordance with the provisions of this Agreement. (b) The shares of the stock acquired upon the exercise of this Option may be transferred, in whole or in part, only if in the opinion of counsel for the Company such proposed transfer may be effected without registration under the Securities Act of 1933 and appropriate state securities laws or such registration has been effected. Prior to the transfer of any such shares the holder thereof shall furnish the Company written notice of the intention to effect such transfer, which notice shall include the manner and circumstances of the proposed transfer and such other matters as the Company may request. (c) The Optionee shall promptly comply with any request by the Company for information concerning any disposition by the Optionee of any shares acquired pursuant to this Option which the Company may need in connection with an income tax return or any other return or report which it may be required to file with any governmental agency. 7. Notices. Any notices or other communications required or allowed to be made or given to the Company under the terms of this Agreement shall be addressed to the Company in care of its Secretary at its offices at 2800 Rockcreek Parkway, North Kansas City, Missouri 64117, and any notice to be given to the Optionee shall be addressed to the Optionee at the address given beneath the signature hereto. Either party hereto may from time to time change the address to which notices are to be sent to such party by giving written notice of such change to the other party. Any notice hereunder shall be deemed to have been duly given if and when addressed as aforesaid, registered and deposited, postage and registry fee prepaid, in a post office regularly maintained by the United States Government. 8. Binding Effect and Assignment. This Agreement shall bind the parties hereto but shall not be assignable by either party without the express written consent of the other. 9. Governing Law. This Agreement shall be construed in accordance with the laws of the State of Missouri. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its officers hereunto duly authorized and its corporate seal to be hereunto affixed, and the Optionee has hereunto set hand as of the day and year first above written. CERNER CORPORATION By:/s/Neal L. Patterson ------------------------ Neal L. Patterson, Chairman [CORPORATE SEAL] ATTEST: /s/Clifford W. Illig - ------------------------ Clifford W. Illig, President /s/Jack A. Newman, Jr. --------------------------- Optionee (signature) Address 12325 Catalina -------------------------- Leawood, Kansas 66209 -------------------------- EXHIBIT A Exercise Date Annual Amount of Shares - ------------- ----------------------- December 29, 1996 10,000 December 29, 1997 12,500 December 29, 1998 15,000 December 29, 1999 17,500 December 29, 2000 20,000 December 29, 2001 20,000 December 29, 2002 20,000 December 29, 2003 12,500 December 29, 2004 12,500 December 29, 2005 10,000 ------------ 150,000 ============ EX-10 3 PLAN D STOCK OPTION AGREEMENT - THOMAS C. TINSTMAN 10(Y) CERNER CORPORATION PLAN D STOCK OPTION AGREEMENT THIS AGREEMENT, made and entered into this twelfth day of January, 1996 (the "Granting Date"), by and between CERNER CORPORATION, a Delaware corporation (the "Company"), and Thomas C. Tinstman, M.D. (the "Optionee"), WITNESSETH: WHEREAS, the Stock Option Committee of the Board of Directors of the Company (the "Committee") has determined that the Optionee is eligible to receive an option to purchase shares of common stock of the Company under the Company's Non-Qualified Stock Option Plan (the "Plan"); NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained and other good and valuable consideration, the parties hereto do hereby agree as follows: 1. Incorporation of the Plan. A copy of the Plan is incorporated herein by reference and all of the terms, conditions and provisions contained therein shall be deemed to be contained in this Agreement. 2. Grant of Option. Pursuant to the authorization of the Committee, and subject to the terms, conditions and provisions contained in this Agreement, the Company hereby grants to the Optionee an option (the "Option") to purchase from the Company all or any part of an aggregate of One Hundred Thousand (100,000) shares of Cerner Common Stock at the purchase price of eighteen dollars and fifty cents ($18.50) per share. The number of shares of common stock subject to the Option and the purchase price per share shall be appropriately adjusted to reflect any stock dividends, stock splits, split ups or combinations of outstanding shares of common stock of the Company. The date first written above shall be deemed to be the granting date of this Option. This Option grant is made in conjunction with the role of Senior Vice President and Member of the Board of Directors, currently performed by the Optionee as of the granting date. The definition and responsibilities of this role will be based annually on the description incorporated in the then-current Incentive Plan documentation or comparable document. Future vesting of shares granted in this Option will be evaluated as explained in paragraph 4. Vesting will be contingent on continued performance of this role and other factors as determined by the President and Chairman of the Board of the Company. 3. Exercise in Installments. This Option shall become exercisable in installments ("Installment") as shown on Exhibit A with the first Installment becoming exercisable one year following the date of Associate's permanent relocation of residency to Kansas City ("First Installment Date") and each subsequent Installment on each of the succeeding nine anniversary dates of the first Installment, subject to the vesting provisions of paragraph 4. In the event that one person or entity (other than one currently holding, directly or indirectly, fifteen percent or more of the Company's outstanding voting securities) acquires direct or indirect voting control of sixty five percent (65%) or more of the Company's outstanding voting securities (a "Change of Control") prior to the First Installment Date, one third of the nonexercisable Installments (in the order of the Installments) shall become immediately exercisable, if a Change of Control occurs within one year following the First Installment Date two thirds of the nonexercisable Installments (in the order of the Installments) shall become immediately exercisable and if a Change of Control occurs after one year following the First Installment Date all nonexercisable Installments shall become immediately exercisable. 4. Option Vesting and Termination. The Optionee may purchase all or any portion of the shares subject to each Installment listed on Exhibit A at any time on or after the exercise dates listed on Exhibit A that have become "Vested". "Vested" means that (a) the Optionee has continued to perform the role noted in paragraph 2, or an equivalent or superior role as assigned by the Chairman of the Board and President of the Company, (b) that the Optionee's performance in the assigned role has been reviewed by the President and Chairman of the Board of the Company and such performance has been deemed satisfactory, and (c) that they have issued a written statement to the Optionee stating the amount of shares which are vested at each of the dates set forth on Exhibit A. All shares subject to this Option shall become Vested immediately if there occurs a Change of Control. This Option may not be exercised as to any shares that do not become Vested. This Option shall expire with respect to all shares of Cerner Common Stock subject hereto at the earlier of (a) twenty-five (25) years from the date first above written, (b) Associate reaching the age of seventy (70) years or (c) termination of the Associate's employment (other than retirement of Associate from the Company at or after the age of sixty-five) with the Company or any of its subsidiaries; provided, however, that (i) if such termination occurs by reason of the Optionee's death or disability, the Optionee, or Optionee's estate, shall have three hundred sixty five (365) calendar days following such date to exercise this Option as to the number of shares exercisable on such termination date and (ii) if such termination occurs by reason of the Optionee's death or disability or dismissal by the Company, other than dismissal resulting from a breach by the Associate of any of the provisions of Associate's Employment Agreement with the Company, the Associate's performance of illegal, fraudulent or criminal acts or the Associate's engaging in willful misconduct or gross negligence in regard to the performance of Associate's duties for the Company, this Option shall Vest as to the shares subject to the next Installment following the date of such termination and the Optionee, or Optionee's estate, shall have three hundred sixty five (365) calendar days following the date of such termination to exercise this Option as to such shares. Associate shall be deemed to be disabled if, in the opinion of the Board of Directors of the Company, the Associate has been unable to perform Associate's assigned duties for a continuous period of one hundred eighty (180) days. This Option may be exercised by the Optionee delivering to the Company a written notice of exercise along with either a cash payment in the amount of the purchase price for such shares, shares of Cerner stock having a fair market value equal to the exercise price or by stating in the written notice of exercise that the Optionee wishes a "cashless" exercise. "Cashless" exercise means that only the net option shares being exercised will be issued by Cerner. The remainder will be treated as if they were sold at the current market price in order to satisfy the purchase price for the exercised shares. 5. Investment Purpose. By accepting this Option, the Optionee agrees that any and all shares of stock purchased upon the exercise of this Option will be purchased for investment purposes, and not with a view to any distribution thereof, and that each notice of the exercise of any portion of this Option shall be accompanied by a representation in writing signed by the Optionee (or by the person or persons entitled to exercise the Option in the event of the death of the Optionee) that the shares of stock are being purchased in good faith for personal investment purposes, and not with a view to any distribution thereof. When a registration statement filed with the Securities and Exchange Commission regarding the shares of common stock subject to this option agreement becomes effective, the investment representation contained in this paragraph will no longer be applicable. 6. Stock Restrictions. The Optionee further agrees that: (a) Each stock certificate issued pursuant to the exercise of the Option granted hereby shall bear a legend to the effect that the shares represented thereby have not been registered under the Securities Act of 1933, and may not be transferred except in accordance with the provisions of this Agreement. (b) The shares of the stock acquired upon the exercise of this Option may be transferred, in whole or in part, only if in the opinion of counsel for the Company such proposed transfer may be effected without registration under the Securities Act of 1933 and appropriate state securities laws or such registration has been effected. Prior to the transfer of any such shares the holder thereof shall furnish the Company written notice of the intention to effect such transfer, which notice shall include the manner and circumstances of the proposed transfer and such other matters as the Company may request. (c) The Optionee shall promptly comply with any request by the Company for information concerning any disposition by the Optionee of any shares acquired pursuant to this Option which the Company may need in connection with an income tax return or any other return or report which it may be required to file with any governmental agency. 7. Notices. Any notices or other communications required or allowed to be made or given to the Company under the terms of this Agreement shall be addressed to the Company in care of its Secretary at its offices at 2800 Rockcreek Parkway, North Kansas City, Missouri 64117, and any notice to be given to the Optionee shall be addressed to the Optionee at the address given beneath the signature hereto. Either party hereto may from time to time change the address to which notices are to be sent to such party by giving written notice of such change to the other party. Any notice hereunder shall be deemed to have been duly given if and when addressed as aforesaid, registered and deposited, postage and registry fee prepaid, in a post office regularly maintained by the United States Government. 8. Binding Effect and Assignment. This Agreement shall bind the parties hereto but shall not be assignable by either party without the express written consent of the other. 9. Governing Law. This Agreement shall be construed in accordance with the laws of the State of Missouri. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its officers hereunto duly authorized and its corporate seal to be hereunto affixed, and the Optionee has hereunto set hand as of the day and year first above written. CERNER CORPORATION By: /s/Neal L. Patterson ---------------------------- Neal L. Patterson, Chairman [CORPORATE SEAL] ATTEST: /s/Clifford W. Illig - ----------------------- Clifford W. Illig, President /s/Thomas C. Tinstman, M.D. --------------------------------- Optionee (signature) Address 10311 Garnett --------------------------------- Overland Park, Kansas 66214 --------------------------------- EXHIBIT A Exercise Date Annual Amount of Shares - ------------- ----------------------- January 12, 1997 7,000 January 12, 1998 8,500 January 12, 1999 10,000 January 12, 2000 11,500 January 12, 2001 13,000 January 12, 2002 13,000 January 12, 2003 13,000 January 12, 2004 8,500 January 12, 2005 8,500 January 12, 2006 7,000 ----------- 100,000 =========== Based on First Installment Date of January 12, 1996 pursuant to paragraph 3. EX-10 4 1995 CERNER PERFORMANCE PLAN EXHIBIT 10(z) 1995 CERNER PERFORMANCE PLANS TABLE OF CONTENTS Overview* 1 Rewardable Events Specifications* 2 Plan Administration* 3 Component Plan Descriptions* 4 Sections included 1. Applicable Roles 2. Responsibility/Scope 3. Plan Goals 4. Plan Concepts 5. Incentive Compensation 6. Other Plan Considerations Rewardable Event Objectives* 5 Glossary of Terms* 6 Appendices 7 1. Payout Computation Examples* 2. Target Bonus Level Matrix 3. Master REO Control Sheet 4. TBL Control Sheet * denotes those sections distributed to each participant Overview (Section 1) Cerner Performance Plans are intended to provide additional, performance-based compensation opportunities to participating associates based on the attainment of corporate and individual performance goals. The amount of the compensation available is based on the associate's role and overall performance evaluation for the year. Payments under these plans are made on a quarterly basis. The Plan year for all plans begins April 1 and ends March 31. This document describes the structure common to all Cerner Performance Plans. Figure 1 provides a graphical representation of the architecture of the Plans. All plans within the performance plan architecture are assigned to one of the four major organizational units within Cerner - Product, Client, Functional or International. Within each group, one or more "Component Plans" have been defined with specific design elements common to all participants, such as objectives to be obtained, the incentives available and the criteria to participate. Further, the measurements applied within each Component Plan are determined by the role of the associate and, for presentation purposes, associate roles are structured into Staff, Management and Executive levels. Sections included later in this document define the specific attributes of the various Component Plans created under this Master Plan. CPP OBJECTIVES Cerner's Performance Plans create, within each participating associate's total compensation, a variable component which is based on quantifiable and measurable indicators related to performance, whether company, group, team or personal. These Plans are used to communicate clearly to the participants what is expected from them relative to the operation of Cerner. Further, they are intended to incent each associate to attain a higher level of team and individual performance. The performance plan approach provides the opportunity for additional earnings to the individual while also increasing his or her "motivation" to manage effectively. All associates are part of a team. Therefore, it is logical that individual performance as measured by compensation should be tied to team success. When the team does well, team associates should be rewarded commensurately. Likewise, when the team does not perform, each associate should share in the shortfall. By tying a portion of total compensation to team success, each associate will be more focused on how individual operations and management decisions impact not only day-to-day results, but also the long-term health of the organization. Cerner Performance Plans include elements of both team and individual performance. The available incentive amount in each plan and the "factors" which determine how much incentive is actually earned by each associate are determined by the component plan tied to the role of each associate. These "factors" are intended to provide common incentives to associates across the organization who are responsible for common goals and objectives. In addition, each associate directly impacts the actual incentive paid by the Plans through his or her personal effectiveness and performance. These factors serve to directly link overall corporate team performance and individual payments. There are two types of incentives available with the CPP architecture. Rewardable Event incentives are tied to the attainment of specific, pre-defined goals or objectives which are unique to each component plan. Marketing Incentives are earned based on the achievement of specific objectives related to the marketing of Cerner products and services. The incentives used in each plan are determined by the roles associated with the plan. In some cases, both rewardable event and marketing incentives are used; in others, only rewardable event incentives apply. These terms are defined in more detail in the following sections. ELIGIBILITY Eligibility to participate in a CPP is determined by the role of the associate. The effective dates for participation of eligible associates are as follows: Associates new to Cerner and participating in a staff-level plan first plan quarter after three full months of employment All other participants and plans (including transfers into plan roles) first plan quarter following employment (or assumption of role) For participants in plans with marketing incentives, eligibility for these incentives typically begins effective upon assumption of the role; rewardable event incentives are tied to the beginning of a quarter as noted above. CPP ARCHITECTURE All CPP plans have in common the elements of: - Rewardable Events, which define what is important ---- to Cerner's business operations; - Incentive Compensation Opportunities, which define how much -------- incentive compensation is available to each associate participating in a specific plan; - Annual Performance Evaluation, which is used in most plans to modify the potential payout available based on the associate's individual performance These elements are defined in more detail in the following paragraphs. Rewardable Events (REs) are objective metrics which are readily quantifiable and which define specific business outcomes, goals or targets tied to the annual Operating Plans of the Company. REs are defined across teams and are grouped within each component plan to provide a set of goal measurements unique to the roles of the associates on the team. The specific objective, or target, associated with each RE may differ from plan to plan, even though the definition of the RE remains constant. REs are generally evaluated on a defined frequency as a binary decision: the objective is achieved or it is not. In the case of marketing-related REs as defined in the following paragraphs, objectives are typically stated as quarterly or year-to-date targets. Figure 2, the Rewardable Event Weighting Matrix, identifies the REs assigned to each Component Plan and the weighting used within the plan for each RE. Section 2, Rewardable Event Specifications, provides a more detailed definition of each RE. The references for each RE are to the associated Component Plan Section and identify specific measurement techniques, responsibilities and other unique attributes of each RE. One subset of REs which requires further discussion is those which define specific product marketing objectives, or quotas over a period of time. Objectives are generally established as "opportunity margin" goals for each specific product group. They are also typically defined by associate within the component plan to reflect the overall corporate objectives established by product and by region. Attainment of these REs is measured monthly and has both monthly and year-to-date components. Specific rules are defined elsewhere in this plan document and the associated Component Plan documentation regarding payment of these incentives. INCENTIVE COMPENSATION available within CPP is based on one of two methodologies: Marketing-related REs have associated with them pre-defined incentive payments which are available to the associate if the related objective or target is achieved. These incentives are defined within the respective component plans. Incentives related to all other REs are tied to the role of the associate and the component plan in which he or she participates and are based on TARGET BONUS LEVEL (TBL). The TBL is a dollar amount expressed as an annual payout. TBLs are established for each component plan, for each role in the component plan and for each associate playing that role. TBLs are designed to recognize the importance of the role to Cerner and the associate's relative experience in the role. As responsibility increases, the potential TBL available increases. TBLs are defined for each role in a Component Plan and are documented separately for each participant. The TBL is factored by the ANNUAL PERFORMANCE EVALUATION (APE), the third element used in the computation of incentive payments under CPP. Subjective metrics are considered in the individual annual review process to determine an APE for each associate. The APE is used as an adjusting factor applied to the defined TBL within certain component plans to recognize the associate's personal contribution to team and corporate objectives. The APE is the result of the careful evaluation of performance of the associate by his or her manager and/or group executive. Performance in role is a major factor in determining the actual incentive payable under CPP. Performance is considered in the context of the plan year for which the associate is being evaluated, not an overall Cerner historical evaluation. It is focused on performance, not the performer. The APE is related to but not necessarily the same as the Career Performance Evaluation. A "pro forma" APE will be developed at the start of the plan year, separate in some cases from the associate's Career Performance Evaluation, which is tied to anniversary date. At the end of the plan year, the "actual" APE is established during a review of performance for the plan year and will be used as described in the following sections to adjust the CPP plan payment for the year. The APE is further defined by the following factors: Quality Your ability to develop quality processes, quality people and a quality organization. Team Player Your ability to work within your team and the larger Cerner team to help Cerner achieve its objectives. Enterprise Perspective Your ability to make decisions and to participate constructively in the operations and management processes, acting in the best interests of Cerner and its clients. Future Metrics We will continually evaluate potential metrics for incorporation into individual Cerner Performance Plans to ensure that the plans remain responsive to group and corporate goals. Annual Performance Evaluation Factor - ------------------------------------ As noted above, the TBL payable is increased or decreased based on the associate's APE. The APE will determine the APE Factor, a multiplier which clearly ties the available incentive to individual performance for the plan year. The APE Factor will be multiplied by the TBL to compute the maximum incentive available. The current factors are as follows:
Executive Plans All Other Plans Annual Performance Evaluation APE Factor APE Factor 9 130% 130% 8 120% 120% 7 95% 95% 6 80% 80% 5 50% 70% 4 25% 50% 3 10% 40% 2 0% 10% 1 0% 0%
INCENTIVE PAYMENT COMPUTATIONS Incentive payments are computed differently for each "class" of incentive. Marketing Incentives are computed based on the pre-defined objectives and associated incentives for each. RE incentives are generally computed by the following formula: Quarterly Payment = [% Attainment of Rewardable Events] x [ TBL x 25% ] x [APE Factor] where: - % Attainment of Rewardable Events is the sum of --------------------------------- the individually-weighted REs credited for the quarter - TBL x 25% is the Target Bonus Level for a --------- specific Component Plan and role, and 25% as a multiplier computes the quarterly maximum incentive available; - APE Factor, or Annual Performance Evaluation ---------- Factor, reflects the associate's personal performance evaluation for the Plan year. 1995 REWARDABLE EVENT WEIGHTING MATRIX Product Group Executive Mgt SR/Staff Special ----------------- ------------ ---------- ------- Rewardable Events Cycle PGE PLE GSM PLM PGM CMS PLBA ADI ----------------- ------------- ---------- ------- Quality Satisfaction 1 Associate Sat A 20% 10% 10% 10% 10% 2 Client Satisfaction- External Q 20% 20% 20% 20% 3 Client Satisfaction- Internal S 4 Project Satisfaction S 5 Product Satisfaction Q/S/A 20% 20% Service 6 Installation Cycle Q 20% 20% 7 Service Levels Q 30% Defects 8 Defects Q 20% Marketing 9 Bookings Q 20% 90% 20% 10 Marketing Incentive M Financial 11 Billings (Cash Flow) Q 20% 12 Accounts Receivable Q 13 Cost Control - Expenses Q 25% 14 Cost Control - Personnel Q 25% 15 Cost Control - Pers & Exps Q 20% 20% 16 Group Contribution Margin Q 30% 17 Operating Ratio Q 18 Cash Flow per Share Q 19 EPS-Region Q 20 EPS-Corporate Q 30% 30% Goals 21 Goal Attainment Q 20% 20% 30% 10% 20% 100% (2) Legend PGE Product Group Executive PLE Product Line Executive GSM Group Senior Management PLM Product Line Management PGM Product Group Management CMS Clinical Marketing Specialist PLBA Product Line Business Analyst ADI Advanced Development Initiative Notes: 2) Special plan for selected group staff - see documentation.
1995 REWARDABLE EVENT WEIGHTING MATRIX Client Group
Regional Organization -------------------------------------------------------------- Executive Mgt Sr/Staff --------------------------- ------------- ----------------- Rewardable Events Cycle CEGM RVP PE BE PhyE RMM CpAe AE CT TA TMS CIS --------------------------- ------------- ----------------- Quality Satisfaction 1 Associate Sat A 10% 5% 10% 10% 30% 2 Client Satisfaction- External Q 10% 10% 20% 30% 30% 50% 20% 20% 20% 3 Client Satisfaction- Internal S 4 Project Satisfaction S 30% 70% 10% 10% 10% 5 Product Satisfaction Q/S/A Service 6 Installation Cycle Q 15% 15% 15% 7 Service Levels Q Defects 8 Defects Q Marketing 9 Bookings Q 10 Marketing Incentive M (1) (1) (1) (1) (1) (1) (1) (1) (1) Financial 11 Billings (Cash Flow) Q 20% 20% 20% 20% 20% 12 Accounts Receivable Q 20% 15% 15% 15% 13 Cost Control- Expenses Q 20% 14 Cost Control- Personnel Q 15 Cost Control- Pers & Exps Q 15% 16 Group Contribution Margin Q 17 Operating Ratio Q 20% 30% 40% 50% 20% 20% 20% 18 Cash Flow per share Q 19 EPS-Region Q 25% 80% 20 EPS- Corporate Q 20% 10% Goals 21 Goal Attainment Q 20% 100% (3) Legend CEGM Client Executive - General Manager RVP Regional Vice President PE Project Executive (alt) BE Branch Executive PhysE Physician Executive RMM Regional Marketing Manager CpAE Account Executive (alt) AE Account Executive (alt) CT Client Team (CS,AS,SAS,CAS,TA,SA,SS SSS,PM,SPM,PA,SPA,AM,SAM) TA Technology Architect TMS Technology Marketing Specialist CIS Contracts Specialist Notes: 3) Actual weighting varies somewhat from the amounts shown for this plan
1995 REWARDABLE EVENT WEIGHTING MATRIX Client Group
Kansas City Organization -------------------------------------------------- Exec Mgt Sr/Staff ------- ------------------ -------------------- Rewardable Events Cycle PLE/T CGM CTMS CTMP TLS TLP WMR CWT ------- ------------------ -------------------- Quality Satisfaction 1 Associate Sat A 10% 10% 10% 2 Client Satisfaction- External Q 10% 20% 40% 20% 3 Client Satisfaction- Internal S 4 Project Satisfaction S 5 Product Satisfaction Q/S/A Service 6 Installation Cycle Q 20% 20% 7 Service Levels Q 30% 40% 30% Defects 8 Defects Q Marketing 9 Bookings Q 30% 10 Marketing Incentive M (1) Financial 11 Billings (Cash Flow) Q 30% 20% 50% 12 Accounts Receivable Q 13 Cost Control- Expenses Q 14 Cost Control- Personnel Q 15 Cost Control- Pers & Exps Q 10% 10% 10% 16 Group Contribution Margin Q 17 Operating Ratio Q 18 Cash Flow per Region Q 19 EPS-Region Q 30% 20 EPS- Corporate Q Goals 21 Goal Attainment Q 40% 60% 30% 30% 20% 70% (4) (4) Legend PLE/T Product Line Executive/Technologies CGM Client Group Management CTMS Cerner Technologies Mgt-Services CTMP Cerner Technologies Mgt-Products TLS Team Leader-Services TLP Team Leader-Products WMR Worksystem Marketing Representative CWT Client Worksystem Team Notes: 4) Goals may include one or more other REs
1995 REWARDABLE EVENT WEIGHTING MATRIX Functional and International Groups
Functional International ----------------------------- ------------------------ Executive Mgt/SR/Staff Executive Sr/Staff --------- ----------------- --------------- -------- Rewardable Events Cycle CE FGE FGM FT CBST IEGM IRE IOM PM --------- ----------------- --------------- -------- Quality Satisfaction 1 Associate Sat A 20% 20% 10% 10% 10% 10% 10% 15% 2 Client Satisfaction- External Q 20% 10% 10% 25% 3 Client Satisfaction- Internal S 20% 10% 10% 10% 4 Project Satisfaction S 40% 5 Product Satisfaction Q/S/A Service 6 Installation Cycle Q 7 Service Levels Q 10% Defects 8 Defects Q 10% Marketing 9 Bookings Q 35% 10 Marketing Incentive Q Financial 11 Billings (Cash Flow) Q 12 Accounts Receivable Q 13 Cost Control-Expenses Q 15% 14 Cost Control-Personnel Q 15% 15 Cost Control-Pers & Exps Q 10% 10% 10% 15% 20% 16 Group Contribution Margin Q 17 Operating Ratio Q 40% 18 Cash Flow Per Share Q 19 EPS-Region Q 25% 35% 20 EPS-Corporate Q 60% 30% 10% 10% 20% 10% Goals 21 Goal Attainment Q 60% 70% 40% 20% 60% (4) (4) (4) Legend Functional CE Corporate Executive FGE Functional Group Executive FGM Functional Group Management FT Functional Team CBST CBS Team International IEGM International Executive - General Manager IRE International Region Executive IOM International Operations Management PM Project Management Notes: 4) Goals may include one or more other REs
CERNER PERFORMANCE PLANS REWARDABLE EVENT SPECIFICATIONS
Rewardable Rewardable Measurement Measurement Event No. Event Responsibility Methodology Description - ----------------------------------------------------------------------------------------------------------------------- 1 Associate Satisfaction Human Resources Based on the annual measurement of overall career satisfaction of associates as determined by the annual Associate Survey. Several questions are combined to develop a composite view of satisfaction, including both short and long term perspectives. 2 Client Satisifaction - External Client Group Based on data obtained via periodic surveys of each installed client, specifically determined by the question on the survey asking overall satisfaction. A satisfaction index is computed by including all neutral and positive responses in the numerator and total responses in the denominator. A The summary of all branches will be added up and added up and averaged to come up with the total. B By region. C The summary of the International branches will be added up and averaged to come up with the total. D The branch executive client satisfaction is a combination of the annual client satisfaction survey and in-process client satisifaction. The weighting will be 2x in-process surveys and 1x annual client survey. E The summary of all Beckman clients will be added up and averaged to come up with the total. 3 Client Satisifaction - Internal Varies Varies Based on the periodic measurement of the "satisfaction" of associates with the service levels provided by the major Functional groups within Cerner: Administration, CBS, Finance and Properties. The metric takes into account both the attainment of defined service objectives as well as the perception of the services provided by each group or team. 4 Project Satisfaction Client Group Based on client survey once on the five-month anniversary of contract signing and again at conversion. Surveys will be mailed to the system manager and the Executive Project Sponsor. (BE will identify this person and be responsible for getting the name and address.) Project satisfaction will be measured on the Executive Project Sponsor survey only (based on their response to the overall satisfaction question at the end of the survey); 100% of the Executive Sponsor surveys must be returned to achieve the objective. 5 Product Satisfaction Product Group Based on survey of specific clients. Determined by the survey question asking overall satisfaction. No more than 10% of the clients surveyed can be dissatisfied for this metric to be met. 6 Installation Cycle Finance Determined by "wall clock" time from contract signing to conversion. (I.E. is a standalone pathnet deal signs in January, 199x, then the net must be converted by November, 199X. There are two different cycles: one for standalone Nets and one for Nets included in HNA. In the future, productivity measurements need to be factored into this metric. All contracts signed beginning Q493 will be counted in this metric. Conversion will be counted based upon the actual client conversion and having the FSI code installed in the warehouse. All line items in the contract must be converted for this metric to be achieved. Installation timeframes are listed below: PathNet - Discrete - 10 months RadNet - Discrete - 9 months PharmNet - Discrete - 8 months MedNet - Discrete - 7 months OCF - Discrete - 12 months PathNet - HNA - 12 months RadNet - HNA - 11 months PharmNet - HNA - 10 months MedNet - HNA - 9 months CareNet - HNA - 20 months ProNet - HNA - 16 months OCF - HNA - 14 months PathTrac - 3 months MSMEDS - 6 months (Note: Will be calculated based on deals signed July 1, 1994 and after.) 7 Service Levels Varies Where service levels have been defined for various services, whether internally or externally, then attainment of service levels becomes a rewardable event. For the Client Organization, levels have been established in the Catalog of Services. 8 Bookings Finance Based on margin on contract bookings. A Bookings margin by Net, contract only not add-ons. B Total contract bookings margin by region. C Total International contract bookings by country. D Bookings margin for Beckman, PathNet Worksystems and RadNet Worksystems. 9 Marketing Incentive Finance Based on the attainment of pre-defined Marketing objectives for per deal margin. 10 PIM Process Quality Product Group This metric is calculated by tracking the number of PIMs (Product Internal Memorandums) submitted by each product team within the quarter. Quality failures are tracked within the quarter. Quality failures are tracked within the quarter for both internal product certification failures and PIM failures occurring at the client site. The total number of failures occurring within the quarter are compared to the total number of PIMs submitted during the same period for each product team. If the number of failures in the period is greater than 10% of the total PIM submissions, the team did not meet their quality goals for the quarter. 11 Billings (Cash Flow) Finance Based on margin on invoices sent to clients. Acceptance billings are counted upon payment of invoice. A Billings margin by Region. B Billings margin for Beckman contracts. C Billings margin by International region. D Billings margin for hardware and sublicensed software. E Sum of all regions' billings margin, excluding Beckman, PathNet Worksystems and RadNet Worksystems. 12 Cost Control - Expenses Finance Actual expenses by organization must be less than or equal to budget. A Total Product Organization expenses excluding CBS, capitalized software and amortization. B Expenses related to specific groups within Functional Organization. 13 Cost Control - Personnel Finance Actual Personnel cost by organization must be less than or equal to budget. A Total Product Organization personnel costs excluding CBS, capitalized software and amortization. B Personnel cost related to specific groups within Functional Organization. 14 Cost Control Pers & Expenses Finance Actual expenses and personnel costs combined by organization must be less than or equal to budget. A Total Personnel costs and expenses related to specific groups within Product Organization. B Personnel costs and expenses related to specific groups within Client Organization. C Personnel costs and expenses related to specific groups within Functional Organization. D Personnel costs and expenses related to specific groups within International Organization. E Total personnel costs and expenses for the client services and sales organizations. 15 Group Contribution Margin Finance Computed by subtracting all group operations and group support expenses from the total margin on revenue. (per the Operating Statement) A Per Net - Operating Statement. 16 Operating Ratio Finance Computed as the ratio of the net operating margin divided by the straight-line project margin on revenue. Operating ratios have the advantage of flexing expenses based on the amount of margin being generated. Expenses are actual incurred by the group on behalf of the group. A Per Region - Operating ratio. B International - Operating ratio. C Beckman and Worksystems 17 EPS - Region Finance Computed by subtracting all unit operating expenses (Branch, Client and Sales) from the GAAP margin for each region. A U.S. by branch B International by Country (Region) C U.S. bonus will be divided equally between regions that associate is responsible for. D This "region" includes Beckman, PathNet Worksystems and RadNet Worksystems. 18 EPS - Corporate Finance Measured by the variance over or under the earnings per share objective for Cerner Consolidated. 19 Goal Attainment Varies Individual goals will be established on a quarterly basis. There should be no more than five (5) goals for any associate in a given quarter. Goals must be mutually established by the associate and his or her manager and approved by the group V.P. prior to the start of the applicable quarter.
PLAN ADMINISTRATION (Section 3) - ------------------- The following points further clarify the procedures for computing the incentive payment each quarter. REWARDABLE EVENT - QUARTERLY VS. YTD MEASUREMENT As noted in Section I, REs are binary factors: if the goal is achieved, the factor is applied; if the goal is not achieved, the factor is not applied. Therefore, if all goals are met, the multiplier for the target incentive is 100%, i.e., the maximum available incentive will be earned. In most cases, each of these factors is evaluated quarterly, based on achievement of a year to date goal. Therefore, it is possible to miss a goal, and the associated incentive payment, in one quarter and achieve the year to date goal and incentive in the next. However, incentive payments do not carry forward. If an incentive is not earned in the quarter in which it is available, it will not be available in future quarters, regardless of goal attainment. REWARDABLE EVENT - NON-QUARTERLY MEASUREMENTS Several REs are measured on other than a quarterly basis, e.g., Associate Satisfaction, Project Satisfaction, Internal Client Satisfaction. For these REs, the amount of incentive associated per the weight assigned is "held back" from the quarterly payments and included, in total, in the quarter in which the RE is measured. For example, with a TBL of $6,000 and a Project Satisfaction RE weighted at 20%, $300 per quarter for the first three quarters of the Plan year will not be available. In the fourth quarter, assuming the annual objective for Project Satisfaction is attained, the total available incentive for all four quarters of $1,200 will be paid. ADVANCE VS. FINAL INCENTIVE PAYMENTS FOR RE INCENTIVES The incentives payable for each of the first three quarters in the plan year are considered Advance Incentive Payments and will be computed using the pro forma APE for the plan year. For the fourth quarter, the Final Incentive Payment will be computed using the actual APE for the plan year. Advance Incentive Payments for the previous three quarters will be re-computed using this actual APE. Any differences between the Advance Incentive Payments and the actual incentive calculation, either positive or negative, resulting from a change in the APE will be included with the fourth quarter final incentive payment. If the net result of all incentives payable in the fourth quarter is less than zero, the negative amount will be carried forward for repayment from future incentives. PAYMENT CYCLES Bonus payments for a given quarter will be made by the 15th of the second month of the succeeding quarter. PLAN PARTICIPATION TERMINATION AND TRANSFERS If an associate's participation in a Cerner Performance Plan is terminated due to termination of employment or transfer to a non-Performance Plan role, the associate will be entitled to payment for any earned but not paid amounts. Payments are earned only for completed quarters; i.e, if participation is terminated in the middle of a plan quarter, no incentive will be paid for that quarter. Further, when determining the final amount to be paid, the associate's APE will be reviewed and updated as appropriate per normal plan procedures for end-of-plan-year processing. If an associate transfers from one Performance Plan-based role to another, participation in the previous plan will be "closed out" per normal end-of- plan-year processing under the provisions of the previous Plan, including final APE evaluation and RE analysis. 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. Glossary (Section 6) - -------- Add On Product Any product which cannot be installed standalone (e.g. CCL, Rules, CPP, Bar Code Systems, Service Management). Advance Incentive Payment Payments made under Cerner Performance Plans for Rewardable Events for the first three quarters of the plan year are considered Advance Incentive Payments because they are based on the Pro Forma APE. All Advance Incentive Payments will be re-computed at plan year-end using the Actual APE. Annual Performance Evaluation (APE) The APE represents assessment of performance during the current incentive plan year as developed by the responsible manager and/or group executive. This evaluation will relate to but not necessarily be the same as the Career Performance Evaluation. The APE is used to determine the APE Factor, which applies the APE to the computation of the maximum available incentive under the applicable incentive plan. The Pro Forma APE is determined at the beginning of the plan year and is used to compute Advance Incentive Payments. The Actual APE is determined retrospectively at the end of the plan year and is used to compute the Final Incentive Payment, including any necessary re-calculation of Advance Incentive Payments. APE Factor The APE Factor is determined by the APE and is used to factor the target incentive to consider the Annual Performance Evaluation. Like the APE, it will be determined on both a pro forma and an actual basis. Attainment Factor A percentage amount used to derive the incentive amount earned by an associate. The actual Attainment Percentage determines what Attainment Factor is used to multiply by the standard incentive amount to obtain the incentive earned. Attainment Percentage A measurement of margin performance (Year-to-date attainment) divided by a year-to-date marketing objective. This measurement determines what attainment factor is used to compute the earned incentive. Bookings Margin Bookings Margin equals total bookings revenue less the cost of hardware and sublicense software. Bookings Margin = Bookings Revenue - (Hardware Cost + Sublicense Software Cost) Career Performance Evaluation (CPE) The CPE is the evaluation developed in conjunction with the annual performance review and career planning discussion. It is intended to represent a long term view of performance, contribution and commitment to Cerner. It may not always be the same as the APE. Differences will arise based on particularly challenging assignments, outside issues which temporarily impact career focus, and significant changes in responsibility, which typically occur when an associate is promoted. Component Plan The Component Plan defines the unique attributes of a specific incentive plan for a role or group of roles. These plans identify the rewardable events which will be used for the participants, the objectives for each rewardable event, the weight assigned to each rewardable event, the Target Bonus Levels for participants, and any other considerations unique to the component plan. Enterprise An opportunity that includes at least ProNet Order Managment for supporting an enterprise. Final Incentive Payment This is the amount of incentive payable at the end of the plan year, considering achievement of rewardable events throughout the year and the actual APE for the year. Marketing Incentives Those incentives tied to objectives or activities focused on the marketing process. Multi-Net An opportunity that includes more than one 'domain' net (PathNet, RadNet, Pharmacy, MedNet, SurgiNet, MRNet). Net Extensions Any product which is part of a Net but can be installed standalone (i.e. Blood Bank Transfusion, Microbiology, Anatomic Pathology). Opportunity Quality Factor A measurement of the value of the opportunity based on the discount from list price. Opportunity Margin [Bookings Margin + 12 months of Support Margin (if Support is undiscounted)] * Opportunity Quality Factor (OQF) = Opportunity Margin. Plan Year The plan year for all CPP component plans is April 1 through March 31. Rewardable Events Rewardable Events are those objective metrics which determine the incentive payable under the plan. Rewardable events are pre-defined goals or objectives for specific business outcomes which have associated with them weights, or multipliers. These weights are applied to the target incentive on a binary basis. If the rewardable event goal or objective is achieved, the associated weight is applied to the target incentive. If the rewardable event goal or objective is not achieved, a weight of 0 is applied to the target incentive. Rewardable Events relate the incentive available under the plan to the achievement of clearly defined management goals. Rewardable Events are tied to objectives focused on projects and operations. Rewardable Event Objective The target established for the rewardable event for the period of measurement, e.g., EPS of $.30 for Q1, Client Satisfaction of 80% for Q3. Standalone An opportunity that includes on 'domain' net. Support Margin Support Margin equals 12 months of software support if the support was not discounted in the deal. If software support is discounted from the current Cerner Price List, then Support Margin equals zero. Support Margin continues to be a component of Deal Margin for the 1994-95 Sales Year. Target Bonus Level The Target Bonus Level is the potential amount of bonus available under the applicable incentive plan for each performance group for Rewardable Events. Appendix 1 (Section 7) EXAMPLES The following examples illustrate the computation of a Performance Plan incentive in two scenarios. All dollar amounts are rounded to the nearest whole dollar. Scenario 1 - Plan "A" Target Bonus Level - $6,000 Pro Forma APE and Factor - 7 (95%) Actual APE and Factor - 7 (95%) All REs are measured quarterly, with weights as indicated
Rewardable Events Achieved Gross Bonus RE1 RE2 RE3 RE4 RE5 Bonus Computation Earned PQ1 Y Y Y Y Y $6,000x95%x25%x[.10+.20+.25+.25+.20] $1,425 PQ2 Y N N Y Y $6,000x95%x25%x[.10+.00+.00+.25+.20] $ 784 PQ3 Y Y N N Y $6,000x95%x25%x[.10+.20+.00+.00+.20] $ 713 PQ4 Y Y Y Y Y $6,000x95%x25%x[.10+.20+.25+.25+.20] $1,425 ------ Total Gross Incentive Earned for Plan Year $4,347 No adjustment was required in PQ4 because the participant's Actual APE did not change from the Pro Forma APE.
Scenario 2-Plan "B" Target Bonus Level - $4,500 Pro Forma APE and Factor - 6 (80%) Actual APE and Factor - 7 (95%) RE 1 is measured annually; all others qtrly, with weights as indicated. Therefore, the weight of 20% assigned to RE1 results in $180 ($4,500/4 x 80% x 20%) per quarter being withheld in Q1 through Q3 for evaluation in Q4.
Rewardable Events Achieved Gross Bonus RE1 RE2 RE3 RE4 RE5 Bonus Computation Earned PQ1 - Y Y Y N $4,500x80%x25%x[.00+.20+.15+.15+.00] $ 450 PQ2 - N Y Y Y $4,500x80%x25%x[.00+.00+.15+.15+.30] $ 540 PQ3 - Y N N Y $4,500x80%x25%x[.00+.20+.00+.00+.30] $ 450 PQ4 - Y N Y Y $4,500x80%x25%x[.00+.20+.00+.15+.30] $ 585 ------ Total Gross Incentive Before Year-end Adjustment $2,025
plus re-computation of all quarters for Actual APE PQ1 $4,500x95%x25%x[.00+.20+.15+.15+.00] $ 534 PQ2 $4,500x95%x25%x[.00+.00+.15+.15+.30] $ 641 PQ3 $4,500x95%x25%x[.00+.20+.00+.00+.30] $ 534 PQ4 $4,500x95%x25%x[.00+.20+.00+.15+.30] $ 695 net of previous payments ($450+$540+$450+$585) -$2,025 $ 379 ------- ------ plus: Re-computation for attainment of annual RE1 PQ1 $4,500x95%x25%x[.20] $ 214 PQ2 $4,500x95%x25%x[.20] $ 214 PQ3 $4,500x95%x25%x[.20] $ 214 PQ4 $4,500x95%x25%x[.20] $ 214 Total $ 856 ------ Total Gross Incentive Earned for Plan Year $3,260 ------ The year end adjustment created by the change from the pro forma APE of "6" to the actual APE of "7" resulted in an additional $379 for Q1 through Q4. The attainment of the annual rewardable event resulted in achievement of an incentive payment of $856. Appendix 2 Patterson - $200,000 Illig - $175,000 REWARDABLE EVENT OBJECTIVES
Rewardable JUN95_Q SEP95_Q DEC95_Q MAR96_Q Measurement Event Weighting Cycle PP YTD PP YTD PP YTD PP YTD Methodology (1) Associate Satisfaction 20% A N/A N/A N/A 80% 1 (2) Client Satisfaction - External 20% Q 65% 65% 70% 95% 2 A (3) EPS - Corporate 60% Q 0.40 0.85 1.40 1.80 19
Runnion - $90,000 Reene - $90,000 Dietrich - $75,000 REWARDABLE EVENT OBJECTIVES
Rewardable JUN95_Q SEP95_Q DEC95_Q MAR96_Q Measurement Event Weighting Cycle PP YTD PP YTD PP YTD PP YTD Methodology (1) Associate Satisfaction 10% A N/A N/A N/A 80% 1 (2) Client Satisfaction - External 10% Q 65% 65% 70% 75% 2A (3) Cost Control - Pers & Exps 15% Q 12,166 14,324 36,864 49,890 14E (4) EPS Region 25% Q 17C BOS/WDC .21/.26 .40/.46 .66/.74 .85/.95 DET/KCM .20/.35 .41/.64 .70/.94 .94/1.20 ATL/DAL .23/.16 .48/.34 .73/.52 .94/.70 SEA/LAX .12/.17 .27/.37 .41/.55 .56/.69 (5) EPS Corporate 20% Q 0.40 0.85 1.40 1.80 18 (6) Goal Attainment 20% Q * * * * 21
Willett - $75,000 REWARDABLE EVENT OBJECTIVES
Rewardable JUN95_Q SEP95_Q DEC95_Q MAR96_Q Measurement Event Weighting Cycle PP YTD PP YTD PP YTD PP YTD Methodology (1) Associate Satisfaction 10% A N/A N/A N/A 85% 1 (2) Client Satisfaction - External 10% Q N/A N/A N/A 90% 2C (3) Cost Control - Pers & Exps 15% Q 1,979 3,729 5,512 7,322 14D (4) EPS - Region 25% Q (0.022) 0.007 0.044 0.095 17B (5) EPS - Corporate 20% Q 0.40 0.85 1.40 1.80 18 (6) Goals 20% Q * * * * 19
Whitcraft - $75,000 Margulies - $90,000 REWARDABLE EVENT OBJECTIVES
Rewardable JUN95_Q SEP95_Q DEC95_Q MAR96_Q Measurement Event Weighting Cycle PP YTD PP YTD PP YTD PP YTD Methodology (1) Associate Satisfaction 20% A N/A N/A N/A 80% 1 (2) Cost Control - Expenses 25% Q 1,857 3,685 5,555 7,546 12A (3) Cost Control - Personnel 25% Q 6,494 13,424 20,534 27,767 13A (4) EPS Corporate 30% Q 0.40 0.85 1.40 1.80 18
EX-11 5
Cerner Corporation Computation of Earnings per Common Share Fiscal Years ended ------------------------------------------ 1995 1994 1993 Net Earnings: $ 22,521,000 $ 19,501,000 $ 14,558,000 ============ ============ ============ Weighted average number of common and common stock equivalent shares: Weighted average number of outstanding common shares 29,844,760 27,651,104 26,286,702 Dilutive effect (excess of numberof shares issuable over number of shares assumed to be repurchased with the proceeds of exercised options and converted warrants based on the average market price during the period) 1,603,293 2,111,104 2,871,654 ----------- ----------- ------------ 31,448,053 29,762,208 29,158,356 Earnings per common and common stock equaivalent shares: $ 0.72 $ 0.66 $ 0.50 ============ ============ ============ Weighted average number of common and common stock equivalent shares assuming full diluting: Additional dilutive effect (reduction in number of shares assumed to be repurchased with the proceeds of exercised stock options and converted warrants based on the end of the period market price of the stock, if higher than the average price) 0 45,296 127,442 ------------ ------------ ------------ 31,448,053 29,807,504 29,285,798 ============ ============ ============ Earnings per common and common stock equivalent shares assuming full dilution: $ 0.72 $ 0.66 $ 0.50 ============ ============ ===========
EX-22 6 Exhibit 22 SUBSIDIARIES OF REGISTRANT Cerner Corporation PTY Limited Cerner Deutschland GmbH Cerner FSC, Inc. Cerner Health Connections, Inc. Cerner Health Facts, Inc. Cerner Health Resources Cerner HealthWise, Inc. Cerner International, Inc. Cerner Limited Cerner Performance Logistics, Inc. Cerner Properties, Inc. Cerner Singapore Limited EX-23 7 INDEPENDENT AUDITORS' CONSENT ----------------------------- The Board of Directors Cerner Corporation: We consent to incorporation by reference in the Registration Statements (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 10, 1996, relating to the consolidated balance sheets of Cerner Corporation as of December 30, 1995 and December 31, 1994, and the related consolidated statements of earnings, stockholders' equity, and cash flows and related schedule for each of the years in the three-year period ended December 30, 1995, which reports appear herein in the 1995 annual report on Form 10-K of Cerner Corporation. KPMG Peat Marwick LLP Kansas City, Missouri March 27, 1996 EX-27 8
5 12-MOS DEC-30-1995 DEC-30-1995 8,640,000 103,478,000 99,263,000 1,109,000 2,246,000 216,911,000 75,051,000 21,358,000 303,945,000 42,847,000 0 330,000 0 0 0 303,945,000 186,901,000 186,901,000 52,270,000 97,366,000 0 0 45,000 37,220,000 14,699,000 22,521,000 0 0 0 22,521,000 .72 .72
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