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ANNUAL REPORT 2005
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Table of Contents: Annual Report 2005
Board of Directors 2
Leadership 3
Letter to Our Shareholders 4
Appendix: Cerner’s Business Model and Financial Assessment 12
10K BusinessandIndustryOverview 20
Properties 29
SelectedFinancialData 32
Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations 33
IndependentAuditor’sReport 47
Financial Statements and Discussion BalanceSheet 49
IncomeStatement 50
ConsolidatedStatementsofChangesinEquity 51
StatementofCashFlows 52
SummaryofSignificantAccountingPolicies 53
BusinessAcquisitions 58
Receivables 59
PropertyandEquipment 60
Indebtedness 60
InterestIncome(Expense) 61
StockOptions,WarrantsandEquity 61
AssociateStockPurchasePlan 63
FoundationsRetirementPlan 63
IncomeTaxes 63
RelatedPartyTransactions 64
Commitments 64
SegmentReporting 65
QuarterlyResults 66
Corporate Information 68
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Board of DirectorsNeal L. Patterson •ChairmanoftheBoardandChiefExecutiveOfficer,CernerCorporation
Clifford W. Illig •ViceChairman,CernerCorporation
Gerald E. Bisbee Jr., Ph.D. •Chairman,PresidentandChiefExecutiveOfficer,ReGenBiologics,Inc.,FranklinLakes,NJ
The Honorable John C. Danforth •Partner,BryanCaveLLP,St.Louis,MO •AmbassadortotheUnitedNations,June2004–January2005 •U.S.Senator-Missouri,1976-1995
The Honorable Nancy-Ann DeParle •SeniorAdvisortoJPMorganPartners,LLC •AdjunctProfessorofHealthCareSystemsattheWhartonSchooloftheUniversityofPennsylvania •Administrator,CentersforMedicareandMedicaidServices,1997-2000
Michael E. Herman •GeneralPartner,HermanFamilyTradingCompany,KansasCity,Mo. •President,KansasCityRoyalsBaseballClub,1992-2000
William B. Neaves, Ph.D. •PresidentandChiefExecutiveOfficer,TheStowersInstituteforMedicalResearch,KansasCity,Mo.
William D. Zollars •PresidentandChiefExecutiveOfficer,YRCWorldwide,Inc.
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Americas Client OrganizationCerner MidwestJudeG.Dieterman•VicePresident,CernerCorporationandPresident,CernerMidwest
AmyD.Amick•VicePresident,Services
MichaelJ.Supple•VicePresident,Sales
Cerner North AtlanticMichaelL.Fiorito•VicePresident,CernerCorporationand
President,CernerNorthAtlantic
SantoA.Cugliotta,Jr.•VicePresident,Sales
DougP.Rempfer•VicePresident,Services
Cerner SoutheastJohnT.Peterzalek•VicePresident,CernerCorporationandPresident,CernerSoutheast
GaryA.Pederson•VicePresident,Sales
PaulJ.Sinclair•SeniorVicePresident,Services
Cerner WestMichaelC.Neal•VicePresident,CernerCorporationandPresident,CernerWest
MitchellClark•VicePresident,Sales
TylerW.Viernow•VicePresident,Services
Cerner CanadaRobertJ.Shave•VicePresident,CernerCorporationandPresident,CernerCanada
Europe, Middle East and Asia Pacific Client OrganizationAsia PacificRobertL.Wilhelm•GeneralManager
France and SpainBrunoN.Slosse•VicePresidentandGeneralManager
Germany/AustriaSteffenZander•GeneralManager
Middle EastAmrMostafaGad•GeneralManager
United KingdomDavidW.Sides•VicePresidentandGeneralManager
MarcosGarcia•VicePresident,U.K.NationalProgrammes
Intellectual Property OrganizationDouglasS.McNair,M.D.&Ph.D.•SeniorVicePresident,KnowledgeandDiscovery
JohnP.Fingado•VicePresident,SolutionSalesOperations
J.BryanInce•VicePresident,KnowledgeandDiscovery
LisaA.LaBau•VicePresident,CernerTransitions
DavidP.McCallie,Jr.,M.D.•VicePresident,MedicalInformatics
RajneeshBajaj•ManagingDirector,CernerIndia
LeadershipCerner Executive Cabinet
NealL.Patterson•ChairmanoftheBoardandChiefExecutiveOfficer
CliffordW.Illig•ViceChairman
EarlH.“Trace”Devanny,III•President
PaulM.Black•ExecutiveVicePresidentandChiefOperatingOfficerJeffreyA.Townsend•ExecutiveVicePresident
ZaneM.Burke•SeniorVicePresident,CernerCorporation
PaulN.Gorup•SeniorVicePresidentandChiefofInnovation
DouglasM.Krebs•SeniorVicePresidentandGeneralManager,CernerEurope,MiddleEastandAsiaPacificOrganization
MarcG.Naughton•SeniorVicePresidentandChiefFinancialOfficer
MichaelR.Nill•SeniorVicePresident,TechnicalArchitecture andCernerWorksManagedServices
MikeValentine•SeniorVicePresidentandGeneralManager,U.S.ClientOrganization
ShelleeK.Spring•VicePresident,PowerWorks
JuliaM.Wilson•VicePresidentandChiefPeopleOfficer
JackA.Newman,Jr.•ExecutiveVicePresident
WilliamM.Dwyer•SeniorVicePresident
JohnB.Landis•SeniorVicePresident,SalesandServicesOperations
RobertJ.Campbell•VicePresidentandChiefLearningOfficer
GayM.Johannes•VicePresidentandChiefQualityOfficer
JayE.Linney•VicePresident,StateandRegionalGrids
RichardH.Miller,Jr.•VicePresidentandChiefInformationOfficer
WilliamJ.Miller•VicePresident,CernerTechnologies
CatherineE.Mueller•VicePresident,ClientCare
J.RandallNelson•VicePresident,LifeSciences
EdwardJ.Schifman•VicePresident,DeviceInnovation
RandyD.Sims•VicePresident,ChiefLegalOfficerandSecretary
JacobP.Sorg•VicePresident,AcceleratedSolutionsCenter
DonaldD.Trigg•VicePresidentandChiefMarketingOfficer
CharlotteA.Weaver,R.N.&Ph.D.•VicePresidentandChiefNursingOfficer
Cerner Executive Management
To Cerner’s Shareholders, Clients and Associates: 2005wasthestartofCerner’ssecond25years.Itwasaverysolidyearbothstrategicallyandwithregardtoplanexecutionandresults.Itcontinueda
decadeinwhichCernerisbecomingpartoftheinfrastructureofhealthcaredeliveryaroundtheworld.Iofferthefollowing2005highlights:
Ourcompany’sannualrevenuesexceeded$1billionforthefirsttime,growing25percentin2005andanaverageof23percentoverthepastfive
years.
Ourearningspersharegrew27percentin2005andhavegrownanaverageof31percentoverthepastfiveyears.
Wecollectedmorethan$1billionincash,andourtotalassetsalsoexceeded$1billion,growing31percentin2005andanaverageof16percent
overthepastfiveyears.
Ourbacklog(contractedfuturerevenues)grewtobegreaterthan$2billion,a39percentincreasein2005andanaverageof28percentgrowth
overfiveyears.
Forthefirsttime,ourGlobalbusinessrepresented10percentofourtotalrevenues,growingmorethan75percentin2005andanaverageof34
percentoverfiveyears.
WehadanotherrecordyearinBookings,Backlog,Revenues,OperatingEarnings,NetEarnings,EarningsPerShare,CashCollectionsandCash
Flow.
Wealsoachievedoperationalandmarketingrecordsacrosstheboardincluding:numberofclientfacilitiesbroughtlivewithourCerner Millennium®
solutions,numberofcontractssigned,numberofclientvisitstoourVisionCenter,andnumberofrequestsforpricing.
We continued our track record of innovation, including our entry into the hardware businesswith the introduction of ourCareAware™ line of
medicationdispensingdevices.
Ouroutstandingresultsin2005ledtostrongshareholderreturns,withCerner’sstockpriceincreasing71percentduringtheyear,drivingourmarket
capitalizationtomorethan$3.5billionforthefirsttimeasourpre-splitstockpriceapproached$100pershare.Ifyou’venoticed,overtheyearsmany
ofourfinancialmetricscontinuedtoaddnewzerosontheend—agoodthing.Financialstrengthallowsustopursueourvisionandmission;itletsus
driveintothefuturewithconfidence.
In thesimplest termspossible,Cerner isasoftwarecompany thatprovidesa fullcomplementofservicesnecessary to implementandoperateour
software.Inour2003shareholderletter,IdiscussedCerner’sbusinessmodelandreceivedagreatdealofpositivefeedbackfromyouabouthowthis
additionaltransparencyimprovedyourunderstandingofhowCerner’sbusinessmodelworksandourfinancialstrategiesofcontinuingtogrowourtop
line,expandouroperatingmarginsandincreaseourfreecashflow.Lastyear,weoptedtokeepandupdatethisdetailedinformation,movingitintoan
appendixtotheshareholderletter.Thisyearwehavedonethesame.
ThisannualletteralsooffersanopportunitytocommunicatemoresubtlebutvitallyimportantaspectsaboutCerner.Shareholderswhojustwanttostudy
thenumberswillfindtheAppendixmoreenjoyablereadingthantherestofthisletter.ButIbelievethattheresultsareareflectionofanumberofother
decisions.Inlastyear’sletter,IdiscussedtheimportanceofinnovationtoCerner’scultureandgrowthpotentialasacompany.Inthisyear’sletter,I
wouldliketoreturntotheimportanttopicofhowthecomplexitiesofthehealthcareenvironmentandthemediumofinformationtechnologyinteract,how
Cernergaineditsuniquevaluepropositionforhealthcare,andwaysinwhichCernerstrivestoextenditscompetitiveadvantagewellintothefuture.In
doingthis,IwilltouchonthetrendsCerner’sexecutiveteamandIseeinourbusinessenvironmentandthekeystrategieswearepursuingasacompany
inordertocontinueourremarkablelong-termgrowthandcontributionstoimprovinghealthcaredeliverysystemsaroundtheworld.
CernerwentpubliconDecember5,1986,atasplit-adjustedpriceof$1.00pershare.FactsaboutCerner’shistoryasapubliccompanyinclude
thefollowing:
Cerner’sstockpricehasincreasedanaverageofmorethan20percentannuallysince1986comparedto10percentfortheNASDAQ
CompositeIndexand9percentfortheS&P500Index.
$10,000investedinCernerin1986wouldbeworthmorethan$460,000today.
Cerner’smarketcapitalizationisapproximately80timeslargerthanin1986,growingfrom$45millionin1986tomorethan$3.5billion
today.
Cernerhasgrownitsrevenueanaverageof25percentannually,from$17millionin1986tomorethan$1.1billionin2005.
Cernerhasbeenprofitableonaproformabasiseveryquartersincegoingpublic,growingearningsanaverageofmorethan20percent
annually.
Cernerhasinvestedmorethan$1.3billioninresearchanddevelopmentsince1986andintendstoinvestasimilaramountinthenextfive
years.
Cernerhascreatednearly7,000high-qualityjobs,withapproximately4,000ofthemintheKansasCitymetropolitanarea.
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Healthcare & Information Technology Create Complexities, OpportunitiesCerner operates in two fast-paced industries, healthcare and information technology. A third industry derives from the convergence of these two,
healthcare information technology (HIT).WhileCernercompetesdailyagainstcompanies thathavea largeroverallpresence ineitherhealthcareor
informationtechnology,nocompetitorhasalargercommitmentthanourstothespacewherebothindustriesmeet.AtCerner,Iregardhealthcareas
ourenvironmentandinformationtechnologyasthemediumthroughwhichweimpactthatenvironment.Wherethetwointersect,avastamountofwork
remainstobedone.Asyouwillseeinthefollowingsections,thechallengesinthehealthcareenvironmentareconsiderable,andinformationtechnology
isperhapstheonlymediumwellsituatedtoaddressthechallenges.Bothourenvironmentandourmediumhavehadahistoryofrapidandrobustchange,
andvirtuallyallofCerner’sopportunitiesasacompanyhaveemergedoutofthesechanges.AschangecontinuestocreateopportunityforCerner,itwill
alsocreateadditionalcomplexitythatwemustsuccessfullymanage.
Inherent Challenges in the Healthcare EnvironmentThe Fragmented Nature of Healthcare Delivery
AstandardopeninglineofmanyhealthcareexecutiveswhentalkingaboutUnitedStateshealthcaredeliveryisthatthereisno“system”inthesystem.In
mostcommunities,apatchworkofindependentorganizationsformstheoverallentityweperceiveasaconnectedhealthcaredeliverysystem.Mostofus
inthecommunityviewourpersonalphysicianasourtrustedguidethroughthesystem,theprofessionalwhowillmanageourconditionsandsafeguard
ourpassagethroughitscomplexity.Practicingwithinthesystemtoday,however,aremorethan100typesofphysiciansspecializingandsubspecializing
indifferentmedicalfunctionsorconditions,andtheirconnectionswithoneanotheraretenuousatbest.Themovementtowardthesehighlyspecialized
nichesofcarehasbeennecessitatedbyanever-wideningsphereofknowledgeaboutourcomplexhumanbiology.Even if thisbodyofknowledge
stoppedincreasingtoday,nophysicianalivecouldlearnandretainallofit.Howmuchless,then,cananyonephysicianhopetoapprehendtheongoing,
acceleratingexplosionofmedicalknowledgeinalldisciplines?Specializationhasbeentheresponsetothisphenomenon.Specializationhasoccurred
throughoutthepastcentury,butithasincreasedinrecentdecadesasthediscoveryofmedicalknowledgehasaccelerated.
Frequently,specialistsarenot inmedicalpracticewithoneanother.Avisittoeachrequiresaseparateappointment,andveryfewspecialistshave
easyaccesstoaperson’spreviousmedicalrecords.Evenhospitalshaveseparatefacilitiescroppingupforthetreatmentofchildren,women,hearts,
orthopediccasesandcancer.Inmostcases,homehealth,hospice,medicalequipmentservices,thelaboratoryandpharmacyalsofunctionseparately.
Eachoperateswithinitsownsilo,and,typically,eachhasitsownsetofmedicalrecordsthatarenotdesignedtobeexchangedwiththeothers.In
mostcases,thevariouscliniciansinthe“system”aretrainedseparately,withoutcomprehensivemodelsforinteractingwithoneanother.Whenweas
consumersareinneedofcare,thisrealityhasadoubleedge.Specializedknowledgecanhelpuswhenwearepatientswithaknownailment,butitcan
alsoharm usbyitsinabilitytoviewusaswholepersonsinneedofalifetimeofdiagnosis,treatmentandprevention.
Paper,filmandmanualhumanprocesseseventuallyconnectedthepartsofthesystem,butthehand-offpointswere—andare—pronetoerror,variance,
waste,delayandfriction.ThisistheenvironmentCliff,PaulandIdiscoveredwhenweenteredbusinesstogetherin1979.As“systemsguys,”wecould
notfindthesystem.Whatwefoundwasthecomplexityofthehealthcaresystemandnumerousunmetneeds—anentrepreneurs’paradise.Pocketsof
profoundimprovementnotwithstanding,fragmentationisstillthenorminhealthcaretoday.ThisissomethingIamacutelyremindedofeachtimeIora
familymemberaccessthesystemforcare.Weneedtoputthe“system”intoourhealthcaresystem.
Healthcare’s Complexity Creates Quality Issues
At the verybeginningof thisdecade, information technologybecameamainstream topic forhealthcareexecutiveswhen the landmark Instituteof
Medicine(IOM)report,“ToErrIsHuman,”raisedpublicconcernoverthenumberofpreventablemedicalerrors.Thereportestimatedthatpreventable
medicalerrorscauseupto98,000deathseachyear—thisisequivalenttoajetcarrying270passengerscrashingeverydayoftheyear.Importantly,the
reportcalledfor“increasedunderstandingoftheuseofinformationtechnologytoincreasepatientsafety.”IntheUnitedStates,thefirstfiveyearsofthe
decadehaveseentheprogressive“wiring”ofhealthcaredelivery,innovationsandcompetitionbetweensuppliersofinformationtechnology,andtalkof
definingstandardsofinteroperabilitybetweensystemsthatare,forthemostpart,privatelyowned.
Healthcareasanindustryhasaunique,inherentlyintimaterelationshipwitheachofusasindividuals.Ourlivesandthelivesofourfamilies,friendsand
associateswilldependontheaccessibility,timelinessandqualityofthecareinourcommunities.
Financial Complexities Create Unnecessary Friction for All
Beyondthefragmentationcausedbyclinicalspecialization,healthcarefinancingisalsoabizarremazeoffundingcomingfrommultiplepublicandprivate
sources.Thefederalgovernment’sMedicareprogram,whichcoversthelargerportionofthecostsoftheover-65population(thedemographicsegment
abouttobeinvadedbytheBabyBoomers),andthestate-runMedicaidprogram,whichusesamixoffederalandstatefundstoprovideasafetynetfor
thepoor,combinetoaccountfornearly50percentofcurrenthealthcarefinancing.Privatesources,originallyprivateinsuranceprogramsfundedby
employers,haveconvertedtoself-insuredemployerplans.Out-of-pocketconsumerspendingfillsthegapsincoverage.Today,morethan40million
individualsintheUnitedStateshavenoformalsourceofhealthcarecoverageandlittleabilitytopayformajorservices,leavinghealthcareprovidersto
coverthecostsofcareforthispopulationfromothersourcesoffunds.
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Gettingpaidforpracticingmedicineasaphysicianorhospitalisincrediblyslowandcomplex.Smallphysicianpracticesandhospitalshavecontracts
withnumerouspayors,eachdefiningrulesthatmustbecompliedwithinordertosuccessfullysubmitaclaim.Amultitudeofplanvariationsspecify
preciselywhichpatients,procedures,services,conditionsandmedicationsareeligibleforreimbursement.Asconsumers,wearequicklyexposedto
thisrat’snestofrulesandregulationswhenthingsarenotcovered,creatingasenseofconfusionandpotentialconflictwithourphysiciansatthevery
timeweneedtofocuson“gettingwell.”
Theprevailing,incoherentincentiveinmostofthispaymentsystemisthatphysiciansandhospitalsonlygetpaidwhenpeoplearesick.Mostofuswould
likeasystemdesignedtokeepushealthyandreactquicklyandefficientlywhenwehappentobesick.Thefuturedirectionisclear;theconsumerwill
bemoreinvolvedinmakingeconomichealthcaredecisions,andweneedtoredesignhowcommerceworksinhealthcare,eliminatingthefriction.
Healthcare’s Rising Costs
Anydiscussionofhealthcarewouldbeincompletewithoutamentionofhealthcare’srisingcosts.Onaverage,therateofincrease ofnationalspending
onhealthcarehasexceededthegrowthoftheworld’snationaleconomiesby2percentperyearforthelast40years,creatinganunsustainablecourse.
IntheUnitedStates,whenthe2005figuresarefinalized,thenationalconsumptionofhealthcareisexpectedtohavetopped$2trillionor16.2percentof
theGrossDomesticProduct(GDP),morethananyothersector.Remarkably,thisequatestomorethan$6,600perperson(capita)intheUnitedStates.
Thefundamentalsarguethattherateofincreasewillclimbinthefuture.Thesefundamentalsincludetheagingofthepopulation;newsciencesthat
willextendtheyearsofourlives,addingmorepeopletotheMedicareenrollment;newentitlementprogramssuchastherecentMedicaredrugbenefit;
andmajoraddedcostsassociatedwithnewlifesavingandlife-prolongingproceduresandexpensivenewtechnologies. Anotherfundamental isthe
inevitableincreaseofconsumerisminhealthcaredecision-making.Althoughconsumerismsometimesactstoincreasequalitywhileloweringthecost
ofhealthcare,itcanalsoincreasetheexpectation—andprovision—ofinordinatemeasuresofcarethatcostmuchanddonotprolongyearsorimprove
qualityoflife.Insomecases,theriseisexplainedbythefinancialdislocationofthehealthcareconsumer.Whenthepersonorfamilyreceivingcareis
notpayingforthecare,thereislittleincentivetocontrolcosts.Buthealthcarecostsalsoriseforotherfundamentalreasonsthatarenoteasilyisolated
orcontrolled.
The twobiggestdifferences inhealthcaredeliverysystemsoutside theUnitedStatesare thatmostof themaresingle-payersystems inwhich the
governmentisthepayer,andthelevelofspendingasapercentofGDPisless.Theimplicationofthisdifferenceissignificant,puttingUnitedStates
employersatacompetitivedisadvantagewithothercountries.Still,thetrendisforhealthcarecoststoriseformanyofthesamereasonstheyrisein
theUnitedStates.
This trend has been long in the making, and policymakers have been reacting for decades. The 1980s saw shifts in the United States’ federal
reimbursementsystemfromaretrospective“replaceyourcosts”systemtoonethatofferedfixedpaymentpercaseusingdiagnosis-relatedgroups
(DRGs).The1990swasadecadeof“managedcare”designedtousetheintermediariesasactiveinterventionistsincaredecisions.Theirgoalswere
twofold:toreduceutilizationbyensuringmedicalnecessity,andtoimprovequality.Whilethereweresomebenefitssuchasreducedlength-of-stay
inhospitals,thiseraendedinawhimperandwithsomefairlyhealthymarketcapitalizationsofthetopfiveinsurancecompanies,whichtodayhavea
collectivemarketcapitalizationthatexceeds$180billion.Hospitalsrespondedbyhorizontalconsolidationaswellassomeverticalconsolidation,forming
IntegratedDeliveryNetworkstoincreasetheirpowertonegotiatewiththeintermediaries.ThefederalgovernmentusedtheBalancedBudgetActof1997
toattempttobreakthetrendofrisingcostsinthelatterhalfofthedecade.
AtCerner,wearesometimesimpactedbypolicymakers’attemptstocontrolrisingcosts.TheBalancedBudgetActslashedourclients’operatingmargins
andaffectedpurchasinginthelate1990s.Inthelongterm,however,risingcoststendtoworkinourfavorbecausetheybecomeakeyincentivetoinvest
ininformationtechnology.Thereturnoninvestmentthatusedtobeunprovenisquicklybecomingundeniable.Inthefallof2005,themulti-year,peer-
reviewedRANDstudyonhealthcareITwaspublishedinHealth Affairs,anditofferedsolidevidenceofwhatweatCernerhavebelievedforyears—that
informationtechnologyhasauniquevaluepropositionforhealthcare.ThestudyconcludedthattheUnitedStatescouldhaveanetsavingsof$162billion
peryear,orapproximately10percentofthetotalcostofhealthcare,throughthewidespreadadoptionofIT.Irefertothisas“thefirst10percent,”
becauseIbelievetheRANDstudyisconservativeinitsscope.Iwanttobeonrecordassayingthatwebelieveourindustry’struevaluetoUnitedStates
healthcarewillbea30percentreductionincostaswellasprofoundimprovementsinsafetyandquality.
Capitalizing on the Opportunities Using Information Technology as a Medium Information Technology – The Medium for Mission-Critical Change
Cliff,PaulandIstartedthinkingaboutwhatwouldbecomeCerneronSundayafternoonmeetingsinaKansasCityparkin1979.Ourday-oneconcept
evenbeforewestartedCernerwastocreate“mission-critical”systemsforamajor,information-drivenindustry.Intheearlysurvivaldays,wediscussed
andevendabbledinanumberofindustries,butwhenwesignedourfirsthealthcareclient,alaboratory,itwascleartoallofus,wehadfoundthe
industrythatwaseverythingwewantedandmore.Healthcarewasbig.Itwascomplex.Itwaspropelledatitsheartbyinformation.Beforelong,we
werehooked.
Itdidn’ttaketoolongforustogetexposedtomoreofthecomplexitiesofthehealthcareenvironment—theintricacyofhumanbiology,thefragmented
illusionofa“system,”themisalignedfinancialincentivesandthetreacherouscostpressures.Ateverystepalongtheway,wefoundthatinformation
technologyhadthecapacitytoextendclinicians’abilities,toconnectacrosscarevenues,togainefficienciesandtoremoveneedlesscosts.Beforewe
weredonebuildingPathNet®,ourfirstlaboratoryapplication,wehadavisionforconnectingthemission-criticalinformationinhealthcareonacommon
informationplatform.Ourpicnic-tableconceptofbeing“mission-critical”tookonacrispnewmeaninginourchosenhealthcareindustry:itmeantbeing
clinical—thatis,beingdirectlyorindirectlyinvolvedinthediagnosis,treatmentandmonitoringofapersonwhoneedsmedicalcare.Duringthe1970s
andcontinuingthroughthe1990s,mosthealthcareITsystemswereanythingbutclinical.Thethen-dominantcompanieshadmadefinancialsystemsthe
centeroftheirinformationstrategiesandarchitectures.Atthattime,clinicallybasedsystemsexistedonlyindepartmentssuchaslaboratory,pharmacy
andradiology.Hence,thesethreedepartmentswerethefirstsetofsolutionsdevelopedbyCerner.
Ifyouhappentohaveacollector’seditionofCerner’sIPOprospectusyouwillseeourstrategyofautomatingthecoreclinicalcareprocessesaswe
describeourfirst-generationHealth Network Architecture®(HNA)platform.HNAwasagoodandpopulararchitecturethataccomplishedmanyofour
original goals, but over timeourgrowing vision forhealthcare ledus toanew, scalablearchitecturebuilt around theperson. In time, ourCerner Millenniuminformationarchitecturewouldincludeapplicationsthatshareinformationacrossalmosteveryvenueofcare,fromtheoperatingroomto
theboardroomtothelivingroom.Today,theCerner Millenniumsuiteisthebroadestanddeepestsetofrichapplicationswithacommonarchitecture
anywhereintheworld.Andeachyear,wedeepenitscapabilitiesandbroadenitsreachwithnewapplications.
Healthcarecontinuestopresentmanyunsolvedproblems,manyofthembasedontheinherentchallengesinthehealthcareenvironment.AtCerner,we
continuetoidentifynewopportunitiestogrowourcompanyorganically.Inotherindustries,ourentrepreneurialculturemaybeadisadvantage.Inthis
industry,ithasbeenanadvantageinthepast,andIbelieveitwillcontinuetobeabigadvantageoverthenextdecade.
Competitive Trends in HIT
Cernerisnotaloneinrecognizingtheopportunitiesinthisindustry.Thecompetitivelandscapecontinuestochange.Thishealthyenvironmentcreates
arobustcompetitivelandscapeintheHITindustry.Itcontinuestoattracttheworld’slargestcompanies,withGEHealthcareexpandingtheirpresence
with the acquisition of IDX Systems. The overall competitive landscape continues to have three basic types of competitors. The first type is the
entrepreneuriallydrivencompany.ThisincludesCerneraswellasahostofsmallernichecompaniestryingtogrowintothenextCernerintheindustry.
Thesecondtypeisthelargemultinationalconglomerate.ThisincludesGEandSiemens,whoseegrowthopportunitiesandsynergieswiththeirother
businesses.Thethirdtypeisthefinanciallyengineered“rollup”businessthatbuiltabusinessandgeneratesgrowththroughaseriesofacquisitionsof
weakercompanies.Averygoodbusinessenvironmentwillcontinuetoattractincreasedcompetitorsofalltypes.
Cerner Strategies Driving Our GrowthStrategymaybethemostusedbusinesstermwiththegreatestvarianceindefinition.Everybusinessleaderultimatelyusesittodefinehowtheirfirm
isorwillbeobtainingcompetitiveadvantage.Webelievethatgoodcorporatestrategieshavelonglifecyclesbecausetheyarethepathtosolvecomplex
changes.Somestrategiesarewellthoughtthroughatthebeginningofalongpath.Beingmission-critical(clinical),andhavingonearchitecturethat
spansthecontinuumofcareareCernerstrategiesthathavedecades-longrelevance,becausetheyaddresstheessentialmissionofhealthcareandoneof
itsbiggestchallenges.Likewise,creatingorganicgrowththroughinnovationisalsoastrategythathasbeenpresentwithCernerfromdayone.Itispart
ofthefabricofourcompanytoreiterateavirtuouscycleoftakingaconceptfrom“visiontovalue,”andweexpectthistocontinue.Inreality,however,
manystrategiesarediscoveredalongtheway,eitherasadjustmentsthatresultfromdifficultiesorasdiscoveriesofthingsthatjusthappentoworkwell.
BelowaresomekeystrategiesweareusingtogrowandimproveCerneratthestartof2006.
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Using Size and Scale to Our Advantage
WhenCliff,PaulandIsatatthatparkpicnictableastwenty-somethingscreatingastart-up,therewasnowayweforesawsizeasastrategy.In2005,
wepassedthe$1billionrevenuemark,reachednearly7,000Cernerassociates,andoperatedthelargestHITdevelopmentandconsultingorganizations
intheworld.Sizehasbecomeoneofourstrengths.Clientswanttoknowthatthecompanytheychoosetobuildonwillbearoundformorethana
fewyears.Governmentsarestartingtocontractforbusiness,andtheywantacompanywithsubstantialresourcesontheothersideofthecontract.
Ourrelativesizehasbecomeanadvantageinthisera.Wehavethetalent,resourcesandtechnologytotakeonanyhealthcareinformationjobinthe
world.
Ininformationtechnology,theconceptofscalabilitymeansthatthearchitecturecanaccommodatemore(withmoreresources)withoutdegradingin
performance.WedevelopedCerner Millenniumasacontemporary,n-tieredarchitecturedesignedaroundtheperson,notaroundasingleorganization.
Weenvisionedacommunitymodelandknewweneededanarchitecturethatwouldscaleupwardtohandletheinformationneedsofmillionsofpeople
whilerunningasasinglesystem.Today,theCerner Millenniumarchitectureisproventorunlargeenterprisesandevencountries.Thisisclearlya
Cernercompetitiveadvantage.
Healthcare is Global, Cerner is Global
OurfirstforayintotheGlobalmarketwasin1986.Werecognizedthenthatthemarketforoursolutionswasaglobalone.Becauseourfocusbegan
intheclinicalarena,mostofourapplicationsrequiredlittleenhancementtomeettherequirementsofmarketsofothercountries.Clinicalmedicineis
practicedsimilarlyandwiththesamemedicaltechnologyaroundtheworld.Howhospitalsanddoctorsarepaiddiffersfromplacetoplace,butdisease
anditsimpactonhumanlifedonot.
TwentyyearsofCernerAnnualReportstellthestoryofCerner’sgrowingpresenceinEurope,NorthAmerica,theMiddleEast,AustraliaandAsia.Wenow
havesystemsinusein17countriesandhaveofficesin13countries(seethebackcoverofthisAnnualReportfordetails).HIThasbecomehealthcare
policy,withfederalgovernmentspromotingandinsomecasesacquiringclinicallybasedsystems.ThiswasabreakoutyearforourGlobalorganization,
withsuccessesaroundtheworld,includingthenationalcontracttoimplementCerner Millenniumsolutionsinmorethan20percentofEnglandasthe
softwaresupplierfortheFujitsuconsortium.Twoyearsago,wewereeliminatedfromconsiderationfromthissameprocurement,butthestrugglesofa
competitorallowedusthechancetogobackinanddeliveroursolutions.Cernerisglobal.
Combining Biology & Information Technology – Millennium Helix
Justfiveyearsaftertheinitialdraftofthefirsthumangenomesequencingwascompletedforanestimatedcostof$300million(thefinaldraftandallthe
technologythatmadeitpossiblecameinnear$3billion),theheadlineinSciencemagazinereads,“TheRaceforthe$1000Genome.”Thisyearalone,
thecostofsequencingamammaliangenomeisexpectedtodeclinefrom$22milliontoamere$100,000,andisexpectedtofallfurtherwithinashort
time.Althoughhavingyourowngenomesequencedtodaywouldbeconsideredaveryexpensivenovelty,newdiscoveriesarebeingmadeonaweekly
basisthatwillmakesequencinglessofanoveltyandmoreofapracticalbenefittoyourhealth.ThedecliningcostofDNAsequencingtriggerseven
morediscoveries.ItisundeniablethatfuturebestmedicaldecisionswillbebasedonyouractualDNA.Yourphysicianstandsnervouslyinbetweenthe
potentialbenefittoyouofthenewscientifictechnologyandthepotentialburdenofusingitfully.
AtCerner,wesawthistrendcomingseveralyearsagoandhavedesigned,builtandimplementedtheMillennium Helix™solutionaspartofourinformation
platform. In thisworkwehave defined a newnomenclature, the Clinical Bioinformatics Ontology™, to classify and store the vast amount ofDNA
informationcontainedinthehumangenome.Recently,theNationalCancerInstituteadoptedandispublishingthisnomenclatureinitsMetathesaurus
forotherresearchersaroundtheworldtouse.
HavingyourowngenomeaspartofyourPersonalHealthRecordcreatestheplatformforanincreasingpercentageofyourfuturemedicaldecisionstobe
personalizedtoyou,usheringinaneweraof“personalizedmedicine.”Thephysiciankeepingabreastofrecentgenomicadvancessensesthetsunamiof
informationheadingtowardtheirprofessionalpractice.Weseetheupcomingpostgenomicsea-changeasasignificantopportunityforCernertoemerge
asthevehicleforhealthcareinformationinthenewworld.
Providing Our Clients the Necessary Technology Infrastructure and Management Skills to Operate Millennium – CernerWorks CernerWorks (formerly Cerner Managed Services) has quietly become the third leg of Cerner, standing strong alongside the Client and Intellectual
Propertyorganizations.Ourstrategyistoreducetotalcostofownershipforourclientswhileweincreasethevaluetheapplicationsdeliver.Cernerhas
theopportunitytousethe“economyofscale”ofhostingourclients’Cerner Millennium applicationsatacostlowerthanwhatclientsincurinsidetheir
ownorganizations.ItalsomovesthecapitalexpendituresrequiredforthenecessarytechnologyinfrastructurefromtheclienttoCerner,reducingthe
start-upcashrequirement.Inmostcases,wehavealsobeenabletoimprovethereliabilityandavailabilityofthesystemtotheendusers.Weprovide
a99.9%uptimeguaranteetoourCernerWorksclients,whileworkingonmakingoursystemsavailable100%ofthetime.Overall,thevalueproposition
toourclientsisstrongandaccountsforthelargegrowthinthispartofCerner.
Creating an Information Utility for Physicians – PowerWorks
Themajorityofphysiciansare insmallpracticesof20or fewerphysicians. Theseare truesmallbusinessorganizations,and they lackaccess to
muchofthecapital,managementandinformationtechnologyassetsandtalentenjoyedbylargerorganizations.Cerneriscommittedtobringingthese
organizationsworld-classsolutionsandserviceswithouttheburdenofinvestinginandmanagingtheenablingtechnologyplatform.Historically,Cerner Millenniumsolutionsandserviceshavenotbeenaffordableforthesmallestofphysicianpractices.In2005,wemadesignificantstridesinadvancinga
strategytoprovidelow-cost,high-valueservicesdirectlytothelow-endphysicianofficemarket.Offeringalarge-scale,utility-likesolutionthatmakes
useofasharedoperatingenvironmentallowsustolowercostsandconnectphysicianswitheachotherandwiththepeopletheyserve.Thebeautyof
theutilitymodelisthegreaterthenumberofphysicianswhoconnect,thegreaterthebenefittoall.Welaunchedthisstrategyatthebeginningof2005
withtheacquisitionoftheMedicalBusinessDivisionofVitalWorks,Inc.,whichbroughtmorethan30,000physiciansin3,500physicianpracticesto
Cernerandwasthelargestacquisitioninourcompany’shistory.Thebusinessmodelisamonthlysubscriptionthatvariesbasedontheserviceschosen,
muchlikesubscribingtocableTVservice.
Coordinating Care across Communities with Health Information Networks
Oneofthelargesystemicissuesinhealthcareistheneedtocoordinatecareacrossallpartsofthefragmentedhealthcaredeliverysystem.Itisclear
thatinformationtechnologywillbeamajorconstructinthesolutionoftheseissues.Itislessclearbywhomandhowthesesolutionswillbedeveloped
anddeliveredintheUnitedStates.Inothercountries,thefederalorprovincial/stategovernmentsaresteppingintoprovidethenecessaryinfrastructure.
Cernerhastakenthoughtleadershipinthiscriticalarea.InthestateofTennesseewithourpartnerSharedHealth,wedevelopedandimplementeda
communityhealthrecordforeachofthemembersofthestate-wideTennCareMedicaidprogram.Today,morethan1millioncitizensofTennessee
haveavailableacommunityhealthrecordthatisaccessibletotheirpersonalphysiciansandemergencydepartmentsinthestate,andweexpectmore
than1.5millioncitizenstohavecommunityhealthrecordsavailablebythemiddleof2006.BuildingonwhathasbeenaccomplishedinTennessee,the
stateofKansasisintheearlystagesofadoptingasimilarprogramfeaturingacommunityhealthrecordforthestate’sMedicaidpopulationinSedgwick
Countyandnotablyaddingtothatvaluablee-prescribingdata,allenabledbyCerner.Inadditiontothesestate-basedinitiatives,Cernerin2005also
facilitatedthecreationofafirst-of-its-kind,employer-drivenapproachtocarecoordinationinKansasCity.AmericanCenturyInvestments,Applebee’s
International,SprintNextelandYRCWorldwideareamongtheprivate-sectoremployerswhohavecommittedtojoinHealtheMid-America.Indoingso,
theywillprovidetheiremployeesaportablepersonalhealthrecordthatholdsthepromiseofimprovingthequalityandcompletenessofcaretheyreceive
invenuesacrossthemetropolitanarea.
Taking a New Approach to Managing Type I Diabetes
Fragmentation’sbiggestimpactinthehealthcaresystemismostvisiblewhenyouaremanagingchronicmedicalconditions.Thereislittledoubtthat
informationtechnologywillplayalargepartinsolvingchallengesfacedbypopulationswithchronicillnesses.Cernerhastakenaleadershiprolethrough
ournationalprogramtoconnectthechildrenandyouthintheUnitedStateswhohaveType1(juvenile)diabeteswiththeirdoctors.Todate,wehave
implementedthisofferingwithmorethan40participatinghealthcareorganizations,whohaveinturnregisteredmorethan6,000childrentothesystem,
withnumbersincreasingweekly.Whileweareprovidingtheservicefreeofcharge,webelievethatthisisaneffectivedemonstrationprojectforother
condition-basedutilities,andthereareseveralopportunitiesforsuccessfulbusinessmodelsfromthistypeofservice.
Entering a New Device Market with CareAware RxStation
Aselectronicmedicalrecords(EMRs)becomethesinglesourceoftruthforproviders,the“context”ofalmostallmedicaldecisionswillresideintheEMR.
Thissamecontextdrivesalmostalloftheclinicalprocesses.Thehealthcaredeviceindustryishuge,rangingfromthefamiliarstethoscopetoimplantable
devicesforcontrollingyourheartrate.
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Mosthealthcaredevicesinexistencetodayareeithertoo“smart”ortoo“dumb”tofitthecapabilitiesoftherapidlyevolvinghealthcareinformation
infrastructure. Either theyareover-engineeredandoverlycomplex,or theyare lackingadequate technology to takeadvantageofavailableclinical
information. Anewgenerationofhealthcaredevices isneeded. Cernerrecognizedthis largeopportunityand, in lessthanoneyear,designedand
manufacturedtheprototypesofanewlineofmedicationdispensingdevicescalledCareAware RxStation™.OurintroductionoftheCareAwarelineat
therecentHIMSSconventionwasamajorsuccess.Hundredsofpeopleattendedprivatedemonstrations,andforthoseIwitnessed,itwasa“blink”
momentforeachofthem.Theyinstantlygot itandlovedthattheirCerner MillenniumEMRisthesinglesourceoftruthforthecomplexphysician-
pharmacist-nurseinteractionthatoccursduringthemedicationprocessofordering,dispensingandadministration.Thisprocessoftenincludesmultiple
modificationsandchangesinorderstatusascliniciansinteracttoprovidethebestcarefortheirpatient.BecauseofitsconnectiontoCerner Millennium,
eachCareAware RxStationdeviceisatalltimesawareoftherightperson,drug,dose,routeofadministrationandtimeforamedicationorder,aswell
aswhoisassignedtoadministerthemedication.Ourcompetitors’devicesrequireacumbersomeworkflowforthehospitalstaffanddualmaintenance
offormularyinformation,apotentialsourceoferroranddelay.Afterthe“blink”moment,mostclinicianswhoseetheCareAwaredeviceswanttheir
organizationstobuythem.
2005ishistory.Itwasagoodyear.WeimprovedCerner’sfinancialperformancesignificantlyandmovedourboundariesasacompany.Itwastheyear
inwhichCernerbecametrulyglobal,announcedcommercialavailabilityoftheworld’sfirstgenome-enabledsystem,advancedournewbusiness“utility”
modeltomeettheneedsofthesmallerphysicianpractice,grewtheCernerWorkssegmentintothethirdlegofourbusiness,successfullyconnected
largepopulationsofpeopletotheircareprovidersatthecommunitylevel,anddesigned,developedandintroducedourfirsthealthcaredevice,CareAware RxStation.
IbelieveitisgoingtobebothfascinatingandexcitingtowatchCernerevolveoverthenext10years,toseewhatCernerbecomesin2015.Ibelieve
theseedsarebeingplantednowforourcontinuedsuccessasaleaderindrivingthefutureconfigurationofhealthcareintheUnitedStatesandaround
theglobe.Thereismuchworktobedone.Theroadaheadwillhaveitsshareofbumpsandafewdetours.However,healthcareremainsanindustry
drivenbyinformation,andthefundamentalchallengesthatexistedwhenweenteredthisindustryin1979stillexistinagreatpercentageofthemarket
today.Ourindustryismaturing,andhealthcareprovidersarebecomingwisebuyersofIT.Thisnext10yearswillseparatetheHITcompaniescapable
ofinvestingwiselytosolvetomorrow’sneedsfromthosewhoareheretomeettoday’sneedsonly.Itwillseparatethosewhoproduceresultsfromthose
whocannot.Cernerwillcontinueourroleofleveragingourkeystrategiesandusinginnovationtocreatenewsolutionsthatmakehealthcaredelivery
safer,moreefficientandofhigherquality.
WarrenBuffettsaysthekeytoinvestingis“determining the competitive advantage of any given company and, above all, the durability of that advantage.
The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.”
WhereisCerner’smoat?ItisclearlyinourIntellectualProperty—Cerner Millenniumarchitecture,applicationsoftware,medicalcontent,algorithms,
empiricaldataandmethodologies—and in the IntellectualCapitalofourassociatesand theirexperiences. Only timewill tellhowwide,deepand
enduringourmoatis.WehavetriedtogiveyousomeideasinthisletterofwhereweareinvestingtoimproveCerner’smoat.Webelievethatthebusy
intersectionofhealthcareandinformationtechnologyhasasizeable,importantandincreasingroletoplayinoursociety.
OnbehalfoftheentireCernerteam, Iwould liketothankyouforsupportingourvisionandmission. Wewillcontinuetoworkhardtorewardyour
confidencebyimprovinghealthcaredeliveryaroundtheworld.
NEALL.PATTERSONFOUNDERChairman&ChiefExecutiveOfficer
CLIFFORDW.ILLIGFOUNDERViceChairman
EARLH.DEVANNY,IIIPresident
PAULM.BLACKExecutiveVicePresident&ChiefOperatingOfficer
MARCG.NAUGHTONSeniorVicePresident&ChiefFinancialOfficer
JEFFREYA.TOWNSENDExecutiveVicePresident
JULIAM.WILSONVicePresident&ChiefPeopleOfficer
PAULN.GORUPFOUNDERSeniorVicePresidentandChiefofInnovation
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Appendix: Cerner’s Business Model and Financial Assessment INTRODUCTIONForthepasttwoyearswehaveincludedadetaileddiscussionofourbusinessmodelandfinancialperformanceaspartofourshareholderletterorinanappendixtotheshareholderletter.Wearecontinuingthattraditionthisyearwithadiscussionofourcurrentbusinessmodel,2005financialperformance,andstrategyforachieving20%operatingmargins.
THE CERNER BUSINESS MODELThecoreofCerner’sbusinessmodelisthecreationofintellectualproperty(IP)intheformofsoftwareandotherformsofdigitalcontent.Oursoftwareisbundledwithothertechnologiesandservicestocreatecompleteclinicalandbusinesssolutionsforhealthcareproviders.Inshort,webuildit,sellit,deliverit,andsupportitforhealthcareproviderorganizationsaroundtheworld(“it”inthiscontextreferstothesolutionsCernercreatesforhealthcareorganizations).Inouropinion,wehaveahealthybusinessmodeland,undertherightcircumstances,webelieveitwillcontinuetoimproveoverthenextseveralyears.BelowisagraphicalrepresentationofCerner’sbusinessmodelshowingatop-to-bottomflowofhowCernerconvertsnewbusinessopportunitiesandourbacklogintorevenueandearnings.
AtthetopofourmodelisourSales Pipelineofpotentialfuturebusiness opportunities we have identified in the marketplace.Our pipeline has increased substantially over the past severalyears,reflectingbothastrongmarketforoursolutionsandourleadership position in the healthcare information technologymarketplace.
During each quarter, we sign new contracts to deliver oursolutions to clients. These contract signings are reported asNew Contract Bookings and become part of our contractbacklog.Atypicalnewcontractwillimpactourrevenuesinthecurrentquarterandforthenextseveralquarters,orevenyears,dependingonhowthelicenses,technologyresale,subscriptions/transactions,managedservices,andprofessional servicesaredelivered
AlmostallofourclientcontractswillalsocontainprovisionsforSupport Contracts inwhichCerneragreestoprovideabroadsetofservicesthatsupportourclients’useofoursolutionsindemanding clinical settings. This support includes addressingtechnicalissuesrelatedtooursoftwareandprovidingaccesstofuturereleasesoflicensedsoftware.
Continuing with our top-down business model flow, the valueof the new contract bookings and support contracts rolls intoourContract BacklogandSupport Backlog,respectively.Eventhoughalmostallofoursystemsareinservicefordecades,ourreportedSupportBacklogonlyincludestheexpectedvalueforoneyearofsupportrevenueforallofourclientsupportcontracts.Wehavehistoricallyreportedthevalueofthesebacklogsbecausewe believe they are important to our shareholders’ ability tointerpret the overall health of our business. Our total backlog(signedcontractswithunrecognizedrevenuesandoneyearofsupportforallsupportcontracts)ended2005atapproximately$2.14billionandgrewathealthycompoundedannualratesof29percent,28percentand29percentoverthepastthree,fiveand10years.
At thecoreofourbusinessmodelareourvarious revenuestreamsand thecontributioneachstreammakes toward theprofitabilityofCerner.Thecontributionisstatedastherecognizedrevenuelessthedirectcosttoproducethatrevenue.Onourbusinessmodel,wehavedepictedsixrevenuecategoriesthatrollintothetworevenuelineitemsonourincomestatement.Licensed Software,Technology Resale,andSubscriptions/Transactions makeuptheSystem Saleslineofourincomestatement,andProfessional Services,Managed Services,andSupport & MaintenancemakeuptheServices, Support & Maintenanceline.Hereisadescriptionofeachrevenuestream:
CheCk for spaCing here
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Licensed Software.WedevelopandlicenseIP(ourarchitectures,applicationsoftware,executableandreferentialknowledge,dataandalgorithms)toourclients.Ourstandardlicenseisperpetual—providingourclientspermanentrightstousethesoftwaretheypurchase.Thisapproachcontrastswiththeapproachofmostofourcompetitorswhoarealwaystryingtosell“upgrades”totheirclients.Webelieveourapproachispartofthereasonforourleadershippositionandthereasonwehavesomanylong-termclientrelationships—somelongerthan20years.Werecognizerevenuesfromlicensedsoftwareasweachievepredefinedclientengagementmilestones,suchasdeliveryandinstallationofoursoftware.In2005,thistypeofrevenuerepresented21percentofourtotalrevenueswithaprofitcontributionof85percent.
Technology Resale.Webundlelicensedsoftwarewithothercompanies’IP(e.g.,thatofHP,IBM,Microsoft,Oracle)intheformofsublicensesinordertocreatecompletetechnologysolutionsforourclients.Wealsoresellbundledcomputerequipment(hardware)fromtechnologycompaniestocreateacompletelyfunctionalsystem.Werecognizerevenuesfromtechnologyresaleastheequipmentisdeliveredtoourclients.In2005,theserevenuesrepresentedapproximately13percentofourtotalrevenuewithaprofitcontributionof13percent.Theprofitcontributionrealizedin2005isdownfrom20percentin2004duetoamuchhighervolumeoflowermarginhardware.Evenatthelowermargins,technologyresaleisstillavitalcomponentofourbusiness,asitisadriverofotherhighmargin,highvisibilityrevenue,suchastechnicalservices,sublicensedsoftwaresupport,andequipmentmaintenance.
Subscriptions/Transactions.Anothermethodbywhichweprovide IPisbasedonasubscriptionmodelthathasaperiodicusagecharge.Thisistheprimarywaywepackageandprovidemedicalknowledge,whichchanges based on research and can be updated independently fromthe software in which it is embedded. Also included in this categoryofrevenueisourElectronicDataInterchange(EDI)transactionrevenue.EDIistheelectronictransferofdatabetweenhealthcareprovidersandpayers.Boththesubscriptionandtransactionmodelrevenuestreamsaregenerallyrecognizedmonthly,andin2005theyrepresented5percentofourtotalrevenueswithaprofitcontributionof37percent.
Professional Services.Weprovideawiderangeofprofessionalservicestoassist our clients in the implementationof our information systemsintheirorganizations.Theseservicesareintheformofprojectmanagement,technicalandapplicationexpertise,andeducationandtrainingofourclients’staffstoassistintheconstructionandimplementationofoursystems.Werecognizerevenuesassociatedwiththeseengagementactivitiesastheyareprovidedtoourclients.In2005,theserevenuesrepresentedapproximately26percentofourtotalrevenuewithaprofitcontributionof27percent.Wehaveanumberofinitiativesinplaceinordertoimprovethefundamentalprofitabilityofthiselementofourbusiness.Ourtargetprofitcontributionis33percentby2008.
Managed Services.Therearesomeservicesthat,incertaincircumstances,wecanperformbetterandmoreeconomicallythanourclientscanforthemselves.Overthepastseveralyears,wehavebeguntoofferanumberofsuchserviceswecallCernerWorksManagedServices.WecurrentlyofferasetoftechnicalservicesthatincludeRemoteHosting,ApplicationManagementServicesandDisasterRecovery.RemoteHostingisthelargestoftheseofferings,anditinvolvesCernerbuying(outofcashflows)thenecessaryequipment,installingitinoneofourdatacenters,andoperatingtheentiresystemontheclient’sbehalf.Therevenuesforthisserviceandourchargefortheequipmentarerecognizedmonthlyasweprovidetheservices.Mostofourclientschoosetoowntheirownsoftwarelicense,sothatportionoftherevenueisunchanged.Cernerownstheequipment,however,insteadofsellingitupfronttotheclient;thisimpactsthetechnologyresaleportionoftherevenue.ManagedServicesrepresented7percentofourtotalrevenuein2005.Theprofitabilityofthispartofourbusinessiscurrentlyat25percentandshouldincreaseaswegrowthisbusinessandspreadthefixedcostsacrossalargerrevenuestream.
Support & Maintenance. Thefinalportionofourrevenuecomesfromtheongoingsupportandmaintenanceservicesweprovideafteroursystemsareinusebyourclientorganizations.Almostallofourclientscontractfortheseservices.Clientsonsupportcontractsget24x7accesstoourImmediateResponseCenter,whichservesasour“emergencyroom”,aswellasaccesstoaveryknowledgeablebaseofassociatesinourImmediateAnswerCenterforlessurgentissues.Inaddition,ourclients’supportpaymentsgivethemongoingaccesstothelatestreleasesofourIP.Cerneralsoprovidessupportforsublicensedsoftwareandmaintenanceforthird-partyhardware.In2005,supportandmaintenancerevenuesrepresentedapproximately25percentoftotalrevenuewithastrongprofitcontributionof62percent.
Notethatalloftherevenuecategoriesdiscussedaboveadduptoapproximately97percentoftotalrevenue.Theremaining3percentisrevenuefromreimbursedtravelexpensesrelatedtoCernerassociatestravelingtoclientlocations.Thisrevenuehasazeromarginasitissimplyapass-throughofourclient-relatedtravelexpensesthatarebilledtoourclients,butwhichwearerequiredtoreportasrevenue.
ThetwolargeindirectexpensesinourbusinessmodelarethecostsofourResearch and Development (R&D),whichwasequalto18percentofrevenuein2005,andtheindirectportionofSelling, General and Administrative (SG&A)activities,whichrepresented15percentofrevenuein2005.CernerhasalonghistoryofinvestingheavilyinR&Dandusingthatinvestmenttosystematicallyexpandmarketstocreateorganicgrowth.Weexpecttoinvestatleast$1billioninR&Dfrom2005-2010,aninvestmentwebelieveisunmatchedinourindustry.Overthenextseveralyears,weexpecttheindustrialstrengthofourCerner MillenniumarchitectureandtheenactmentofseveralinitiativesdesignedtoleverageourR&Dinvestmentstoslowtherateof
Managed Services7%
Reimbursed Travel3%
Licensed Software21%
TechnologyResale13%
Professional Services26%
Maintenance& Support
25%
Subscriptions/Transactions
5%
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increaseinR&Dspendingwhilecontinuingourstrongrecordofinnovationandorganicgrowth.Similarly,weexpectto,andhavealreadybegunto,takeadvantageofamorescalablebusinessinfrastructuretoreducetherateofincreaseinSG&Aspendingtobelowourrevenuegrowthrate.Weexpectthisleveragetohelpimproveoperatingmarginswithoutimpactingourabilitytodevelopanddelivernewsolutionstoourclients.
In2005,ouroveralloperatingmarginof$147millionwas13percentofrevenue.Theremainingexpensesinourbusinessmodelaretaxesandinterestexpense,whichtotaled$61millionin2005,leaving$85millionofnetearnings,or$1.09ofearningspershare.
ASSESSMENT OF 2005 FINANCIAL RESULTSWecontinuedtofocusonthreekeyfinancialobjectivesin2005:growingthetopline,expandingoperatingmarginsandgeneratingfreecashflow.
Growing the Top Line
Cerner has consistently delivered strong long-term revenue growth. Both ournewbusinessbookingsandrevenuehavegrownatcompoundannualratesof20percentormoreoverthepastfive-andten-yeartimehorizons.In2005,wegrewour revenueat25percent (18percentexcluding revenue fromouracquisitionoftheMedicalDivisionofVitalWorks,Inc.thatclosedatthebeginningof2005).Ourstronggrowthin2005cameondoubledigitgrowthinbothU.S.andglobalrevenue.Notably,ourglobalbusinesshadabreakoutyearwithrevenuegrowing78percentandincreasingfrom7percentto10percentoftotalrevenue.OurreplacementofacompetitorintheSouthernregionofEnglandwasapartofourglobalsuccessin2005,withthiscontractcontributing$14millionofrevenue.However,otherregionsinourglobalbusinessalsohadstrongyears.OnstrengthintheMiddleEast,AsiaPacific,FranceandCanada,globalrevenuegrewmorethan50percentexcludingrevenuefromourcontractintheUnitedKingdom.
In2006,webelievewecancontinuegainingmarketsharebyleveragingourprovensolutions.Wearealsofocusedoncross-sellingintoourinstalledbaseasourclients’needsgrowovertime.Onaverage,anexistingclienthasjustoverfivesolutionsinstalledfromamongthenearly60potentialCerner Millenniumsolutionsthatareavailable.Evenaftertheaforementionedstronggrowthinourglobalbusiness,wecontinuetoseesignificantopportunitiesglobally.Also,asdiscussedinourshareholderletter,wecontinuetocreatenewareasofgrowthsuchasourCareAwarehospitaldeviceinitiative,stateandregionalcommunityhealthrecordinitiatives,andourphysicianpracticestrategy.
Expanding Operating Margins
InFebruaryof2004,wemappedoutourpathfromthe2003levelof9percentoperatingmarginstoourtargetof20.Wemadeverygoodprogressduringthefirstyearofthispath,withouroperatingmarginexpanding310basispointsin2004to12.4percent.In2005,therateofourmarginexpansionslowed,withoperatingmarginsincreasing20basispointsto12.6percent.Theprimarycauseofthelowerlevelofmarginexpansionin2005wasthatwesoldmorehardwarethanexpectedandthosehardwaresaleswereatlowerthannormalmargins.Toalesserextent,ouroperatingmarginswereimpactedbyourcontractwithFujitsuintheSouthernregionofEngland,whichisbeingaccountedforatzeromargins(equalamountsofrevenueandexpense)untilallelementsofsoftwarehavebeendelivered,whichisexpectedsometimein2008.Despitetheimpactthelow-marginhardwaresalesandourcontractinEnglandhadonouroperatingmarginasapercentofrevenue,westillgrewoperatingearningsnearly30percentin2005becauseofstronglevelsofsoftwaresalesandmarginexpansioninourprofessionalservices,managedservices,subscriptions,transactionprocessing,andsupportandmaintenancebusinessmodels.
InFebruaryof2006,weupdatedourpathto20percentoperatingmargins.Belowisadescriptionofthekeyelementsofourpathtoachieving20percentoperatingmargins.Notethatthe‘basecase’pathdiscussedbelowleadstoapproximately19percentoperatingmarginsforthefull-year2008,whichwouldequatetoanoperatingmarginof20percentormoreinthefourthquarterof2008.ThispathassumesforcomparativepurposesthattherevenuefromourcontractwithFujitsuwillremainatzeromarginthrough2008eventhoughweexpecttobeginrecognizingmarginonthatcontractsometimein2008.Itisalsoimportanttonotethatourmanagementteamhasamoreaggressivetargettoachieve20percentoperatingmarginsbythefourthquarterof2007and21percentoperatingmarginsforthefull-year2008.Thegraphshowingthemarginexpansiontargetsreflectsthismanagementtargetandaviewthatexcludesthezero-marginFujitsucontractrevenuefromthebasecase.Finally,itisimportanttorealizethatourmarginexpansionpathisbasedontheassumptionthatwewillgrowourrevenuebyapproximately14percentin2006and10-12percentin2007and2008.
Improving Professional Services Margins from 2� percent in 2005 to �� percent by 200�.Weexpectthistocontributemorethan130basispointstoCerner’soperatingmargin.Wemadealotofprogressatexpandingmarginsinthisorganizationin2005,andwebelievetherearestillmoreopportunitiestoenhanceproductivity.AkeydriverwillbecontinuingtoleverageourAcceleratedSolutionsCenter,whichhashighermarginsthantraditionalprojectsandaccountedforapproximately20percentofconversionsin2005.ThenextlevelofproductivityisexpectedtobeachievedthroughaninitiativecalledBedrock™,whichisawizard-liketechnologythatautomatesmuchoftheimplementationandmanagementofourCerner Millenniuminformationplatform.TheBedrocktechnologyhasthepotentialtosignificantlyreducetheimplementationcostforbothCernerandourclients,allowingformarginexpansionandacompetitiveadvantageinthemarketplace.
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2000 2001 2002 2003 2004 2005
Operating Cash Flow Free Cash Flow
Leverage R&D investments, bringing R&D as a percentage of revenue down from 1� percent to 1� percent by 200�.Weexpectthistocontributeover130basis points to Cerner’s operating margin. The opportunity to generate marginexpansionbyhoningandhardeningCerner Millenniumarchitectureandsolutionsinorder toreapthefullbenefitofoursignificantpast IP investments is in focus.Takingadvantageofourcommonplatformshouldallowustocontinueourrecordof innovationwhilegrowingR&Dspendingata rate that isslower thanour top-linegrowthrate.ThekeytodoingthiswillbeourabilitytoextendMillenniumtonew revenue opportunities, such as the global marketplace, without significantincrementalcosts.OurcertificationandtestingoperationsinIndiawillalsocontributetoourabilitytocontroltherateofR&Dgrowth.
Leverage Sales, General, and Administrative expenses. We expect this tocontribute over 170 basis points to Cerner’s operating margin. We have built ascalablebusiness infrastructurethatshouldallowustokeepourSG&Aspendinggrowthratelowerthanourtop-linegrowthrate.
Expand Margins and grow revenue in Managed Services and Subscription / Transaction business models. We expect these to contribute over 50 basispointstoCerner’soperatingmargin.Bothofthesebusinessmodelsarerelativelyimmature,but theyareexperiencingstronggrowth,andweexpect thembothtobecomemoreprofitableastheygrowandthefixedcostsassociatedwithsupportingthemarespreadoverahigherrevenuebase.
Increase profitability of Technology Resale. Weexpectthistocontributenearly40basispoints toCerner’soperatingmargin. Theprimarydriverof thiswill befocusingongettingbettermarginsonhardwaresalesand increasing themixofhighermarginsublicensedsoftwareasapercentoftotaltechnologyresale.
Increase profitability of Support and Maintenance.Weexpectthistocontributenearly100basispointstoCerner’soperatingmargin.AswehavecontinuedtohardentheCerner Millenniumplatform,ourincrementalcosttosupporteachadditionalclienthasdeclined.Weexpectthistocontinue,whichwillallowustoexpandtheprofitabilityofthishighlyvisiblerevenuestream.
Akeypointregardingourmarginexpansionstrategyisthatweareexecutingitwhileourbusinessmodelistransitioningtomorevisibleandrecurringrevenuecomponents.Forexample,in2000,approximately55percentofCerner’srevenuecamefromwhatweconsidervisibleorrecurringsourcessuchasProfessionalServices,ManagedServices,Subscriptions/Transactions,andSupport&Maintenance.In2005,66percentofourrevenuecamefromthesesources,andby2008,weestimatethat70percentofourrevenuewillbecomingfromthesesources.
Earnings Growth
Becauseofourstrongtop-linegrowthandstrongmargincontributionfromallareasofourbusinessexcepthardwaresales,wegrewourearningsover30percentin2005.Ourthree-andfive-yearcompoundannualearningsgrowthratesof18percentand33percent,respectively,reflectourabilitytodrive long-termearningsgrowth.Goingforward,ourtop-linestrategiescoupledwithcontinuedfocusonproductivityenhancementsandmarginexpansionpositionuswelltogrowearnings20to25percentannually.
Generating Free Cash Flow
Ahealthybusinessgeneratescashflow.Perhapsourmostsignificantimprovementover the past few years has been in our cash flow performance. In 2005, weincreasedoperatingcashflow36percentto$229millionandincreasedfreecashflow (operating cash flow less capital expenditures and capitalized software) 25percentto$66million.
Stock Price
We manage Cerner, not the stock price. In the short term, the stock price canbeinfluencedbymanyfactorsbeyondourcontrol,butwebelieveinthelongtermit will closely reflect the quality of our decisions. We believe it is important forourshareholdersthatwefocusondeliveringstronglong-termresults,butwealsounderstandtheimportanceofdeliveringconsistentlyagainstshort-termtargets.Wecontinue to deliver strong short-term and long-term results, and our stock pricereflectsthis.In2005,Cerner’sstockpriceincreased71percentcomparedtoa1percentincreaseintheNASDAQCompositeIndex.Thethree-,five-,andten-yearcompoundannualgrowthratesforourstockpriceare43percent,15percent,and16percent,respectively—morethandoublethereturnfortheNASDAQmarketineachtimehorizon.
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ANNUAL REPORT 200510-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington,D.C.20549
FORM 10-K(MarkOne)
( X ) ANNUAL REPORT PURSUANT TO SECTION 1� or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1��� ForthefiscalyearendedDecember31,2005
OR( )TRANSITION REPORT PURSUANT TO SECTION 1� OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1��� [NO FEE REQUIRED]
Forthetransitionperiodfrom_____________to___________
CommissionFileNumber0-15386
CERNERCORPORATION(ExactnameofRegistrantasspecifiedinitscharter)
Delaware 43-1196944 (Stateorotherjurisdiction (I.R.S.Employer ofincorporationororganization) IdentificationNumber)
2800RockcreekParkway,NorthKansasCity,Missouri64117(816)221-1024
(Addressofprincipalexecutiveoffices,includingzipcode;Registrant’stelephonenumber,includingareacode)
SecuritiesregisteredpursuanttoSection12(b)oftheAct:NONE
SecuritiesregisteredpursuanttoSection12(g)oftheAct:CommonStock,parvalue$.01pershare
PreferredStockPurchaseRights(TitleofClass)
Indicatebycheckmarkiftheregistrantisawell-knownseasonedissuer,asdefinedinRule405oftheSecuritiesAct. YesX No_____
IndicatebycheckmarkiftheregistrantisnotrequiredtofilereportspursuanttoSection13orSection15(d)oftheExchangeAct. YesX No_____
Indicatebycheckmarkwhethertheregistrant(1)hasfiledallreportsrequiredtobefiledbySection13or15(d)oftheSecuritiesExchangeActof1934duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtofilesuchreports),and(2)hasbeensubjecttosuchfilingrequirementsforthepast90days. YesX No_____
IndicatebycheckmarkifdisclosureofdelinquentfilerspursuanttoItem405ofRegulationS-Kisnotcontainedherein,andwillnotbecontained,tothebestofregistrant’sknowledge,indefinitiveproxyorinformationstatementsincorporatedbyreferenceinPartIIIofthisForm10-KoranyamendmenttothisForm10-K. []
Indicatebycheckmarkwhethertheregistrantisalargeacceleratedfiler,anacceleratedfiler,oranon-acceleratedfiler.Seedefinitionof“acceleratedfilerandlargeacceleratedfiler”inRule12b-2oftheExchangeAct. LargeacceleratedfilerX Acceleratedfiler_____ Non-acceleratedfiler_____
Indicatebycheckmarkwhethertheregistrantisashellcompany(asdefinedinRule12b-2oftheExchangeAct). Yes_____ NoX
AsofJuly2,2005,theaggregatemarketvalueoftheregistrant’scommonstockheldbynon-affiliatesoftheregistrantwas$2,063,790,353basedontheclosingsalepriceasreportedontheNASDAQStockMarket.
Indicatethenumberofsharesoutstandingofeachoftheissuer’sclassesofcommonstock,asofthelatestpracticabledate.
Class OutstandingatFebruary25,2006 [CommonStock,$.01parvaluepershare] 78,649,164shares
DOCUMENTS INCORPORATED BY REFERENCE Document PartsIntoWhichIncorporatedProxyStatementfortheAnnualMeetingofShareholderstobeheldMay26,2006(ProxyStatement) PartIII
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PART 1 Item 1. BusinessOverviewCernerCorporation(“Cerner”orthe“Company”)isaDelawarebusinessincorporatedin1980.TheCompany’scorporateheadquartersarelocatedat2800RockcreekParkway,NorthKansasCity,Mo.64117.Itstelephonenumberis(816)221-1024.TheCompany’sWebsiteaddressiswww.cerner.com.TheCompanymakesavailablefreeofcharge,onorthroughitsWebsite,itsannualreportonForm10-K,quarterlyreportsonForm10-Q,currentreportsonForm8-KandallamendmentstothosereportsassoonasreasonablypracticableaftersuchmaterialiselectronicallyfiledwithorfurnishedtotheSecuritiesandExchangeCommission.
Cerner is takingthepaperoutofhealthcare,eliminatingerror,varianceandwastefromthecareprocess.Withmorethan1,500clientsworldwide,Cernerisaleadingsupplierofhealthcareinformationtechnology(HIT)andhealthcaredevicesthatuniquelyconnectphysicianoffices,hospitals,clinics,laboratories,pharmaciesandconsumers’homestotimely,relevanthealthcareinformation.
Cerner’sunifiedarchitecture,end-to-endsolutionandserviceportfolioandprovenresults,combinedwithitscommitmenttoforminglong-term,alignedclientrelationships,arecentraltooptimizinghealthcareoutcomes.Alltogether,theCompany’s6,830associates,includingalmost900clinicians,helpclientorganizationsofeverysizeincreasesafety,improveefficiencyandimpactthebottomlineviaHIT.
Cerner®solutionsaredesignedtoimprovethesafety,qualityandefficiencyofhealthcaredeliverybyprovidingtherightinformationtotherightpersonattherighttimeandplacetoachievetheoptimalhealthoutcome.Withanelectronicmedicalrecordatthecoreofsolutionscreatedtomeetspecificneedsacrossthecontinuumofcare,Cernersolutionsprovidesecureaccesstoclinical,administrativeandfinancialdatainrealtime.CernerservicesenableclientstostreamlineinformationtechnologymanagementandmaintenancetorealizethegreatestreturnsontheirHITinvestments.
Cernersolutionsaredesignedanddevelopedontheunified,person-centricCerner Millennium®architecture.TheCerner Millenniumarchitectureisastate-of-the-arttechnologyinfrastructurethatseamlesslycombinesclinical,financialandmanagementinformationsystems.Itprovidesaccesstoanindividual’selectronicmedicalrecordatthepointofcareandorganizesandproactivelydeliversinformationtomeetthespecificneedsofthephysician,nurse,laboratorytechnician,pharmacistorothercareprovider,front-andback-officeprofessionals,andevenconsumers.
The Cerner Vision
Cerner’svisionhasevolvedfromafundamentalthought:Healthcareshouldnotbeorganizedaroundanencounter;itshouldrevolvearoundtheindividual.ThisconceptledtoCerner’sCommunityHealthModelandthecreationoftheperson-centricCernerMillenniumarchitecture—atrulyunified,enterprise-widearchitecture.TheCommunityHealthModelencompassesfoursteps:
Automate the Care Process
Cerneroffersalongitudinal,person-centricelectronicmedicalrecord,givingcliniciansfingertipaccesstotherightinformationattherighttimeandplacetoachievetheoptimalhealthoutcome.
Connect the Person
Cerner isdedicated tobuildingapersonalhealthsystem.Medical informationandcare regimensaccessible fromhomeempowerconsumers toeffectivelymanagetheirconditionsandadheretotreatmentplans,creatinganewmediumbetweenphysiciansandindividuals.
Structure the Knowledge
Cerner is dedicated to building systems that bring the best science to every medical decision by structuring, storing and studying the contentsurroundingeachcareepisodetoachieveoptimalclinicalandfinancialoutcomes.
Close the Loop
Today,thegapbetweenmedicaldiscoveryanditsincorporationintodailypracticecanbeaslongas10years.Cernerisdedicatedtobuildingsystemsthat implementevidence-basedmedicine,reducingtheaveragetimefromthediscoveryofanimprovedmethodtothechangeinthestandardofcare.
The Cerner Strategy
KeyelementsoftheCompany’sbusinessstrategyinclude:
LeveragetheprovenCerner MillenniumarchitectureandthedepthandbreadthofCernersolutionstocontinueexpandingmarketshareintheUnitedStatesandabroad
Increasepenetrationofbothlargehealthsystemsandindependenthospitals
Furtherpenetrateexistingclientbasebycross-sellingadditionalCernersolutionsandservices
Increasepenetrationofphysicianpracticesbyofferingahigh-valuesuiteofsolutionswithlowupfrontandrecurringcosts
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ContinuetodevelopinnovativesolutionsandservicesthatleveragetheCompany’sexistingtechnologyandhumancapitalexpertiseandthatdrivecontinuedorganicrevenuegrowth
Stateandregionalcommunityhealthrecordinitiatives
Healthcaredeviceinnovation
Clinicalprocessoptimization
Moreefficientmethodsoftransactinghealthcare
Offermoreefficientandpredictable implementationsandsystems thatcanbeoperatedat lowercosts to reduce total costofownership for theCompany’sclients,whileallowingforexpandedprofitabilityforCerner
Cerner Bedrock™isaninnovativetechnologyforautomatingtheimplementationandmanagementoftheCerner Millenniuminformationplatform
CernerWorks™managedservicesallowCernertomanagecomplexityandtechnologyrisksforclientswhileprovidingmorereliabilityandlowercosts
DelivertheoptimalclientexperiencethatwillallowcriticalrelationshipwiththeCompany’sclientstocontinuegrowing
World-classsupportservices
Predictableandefficientimplementationsandupgrades
Lowertotalcostofownership
Commitmenttoresearchanddevelopment
Solution and Service Highlights
Cernerofferssome57solutionsenablingimprovementstoclinical,financialandoperationalhealthcareprocesses,aswellassupportingcommunityhealthneedsandknowledgedeliveryfunctions.AcomprehensivemanagedservicesofferingcomplementstheCompany’ssoftware,hardware,sublicensedsoftware andprofessional services, ensuring clients derivemaximumvalue from their systems.Continuing to broaden anddeepen theCompany’ssolutionandserviceportfolio,Cernerintroducedoradvancedthefollowingselectedinnovationsin2005:
Physician Solutions
Thenextgenerationof PowerChart®electronicmedicalrecordisanextensionoftheprovenCerner Millenniumarchitecture.Therefinementsstemfromclientfeedbackandencompassanenhancedvisualinterface,streamlinedprocessesandworkflowintuitivetoclinicianneeds.
PowerWorks®isafullsuiteofclinicalandpracticemanagementsolutionsdesignedtoprovideeverythingneededtorunadoctor’soffice.Deliveredonasubscriptionbasis, PowerWorksisavailableforalowmonthlyfee.Cernerhoststhedatafor PowerWorksclients,keepingtheinformationsafe,secureandavailabletotheappropriatepeopleattheappropriatetime.
Nursing Solutions
Cernersolutionshelpmakeevidence-basednursingpracticearealityby incorporatingbestpracticesat thepointofcareandaccessingnursing-specificcontentforfrequentlydiagnosedconditions.Cerner’scollaborationwithTheUniversityof Iowa,AuroraHealthCare, Inc.andUniversityofWisconsin-Milwaukeeinthisspaceenablesthebenefitsofevidence-basednursing,helpingclients:
Deliverprovenevidencetothepointofdecision
Reducethegapbetweenscientificdiscoveryandincorporationintodailypractice
Improvecarequalitywithconsistentuseofbest-practicecareguidelines
Optimizenursingresourcestohavethemaximumeffectonpatientoutcomes
Healthcare Devices
Cerner isapplyingmorethan26yearsofhealthcaretechnologyexpertisetothehealthcaredevicemarketplacewiththeCerner CareAware™deviceconnectivityarchitectureandstrategyfordeliveringhealthcaredevicesinfusedwithknowledgeofthecareprocess.
Initially,theCareAwareofferingisfocusedonimprovingthemedicationprocess,specificallyautomateddispensingmachines(ADM)andtheirsupportingsystems.TheCareAware RxStation™ isa familyofpharmacyautomationdevicesdesigned tobringgreaterefficiencyandsafety to themedicationandcareprocess throughappropriatelypriced,scaledand integrateddevices thatextend theCerner Millennium investment.Cernerannounced theCareAwarehealthcaredevicefamilyofsolutionsearlyin2006.During2006,theCompanywillbeworkingwithalphaclientsonRxStation,withbroaderavailabilityexpectedlaterin2006.TheCompanywillinitiallytargetclientswhoarealreadyusingCerner Millennium PharmNet®,theCompany’spharmacysolution.
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Implementation and Support Services
Cerner’sevidence-basedrapiddeliverymodel isanevent-based,metric-drivenmethodologyemphasizingrecommendedpracticesforpredictableoutcomes.Itwasresponsibleforapproximately20percentoftheCompany’simplementationsin2005andenablestheimplementationof,onaverage,11solutionsin12months.
Cerner Bedrock is the Company’s innovative automation technology for implementation and management of the Cerner Millennium informationplatform.TheearlyclientusersofthissolutionexperiencedsignificantreductionsineffortbytheirownteamsaswellasCernerteamsduringthedesignandbuildportionsoftheir implementations.TheBedrocksolutionhasthepotential toremove30percentto50percentoftheworkefforttypicallyassociatedwithsuchprojects, thereby reducing implementation times toas littleassixmonths fora typicalhospitalandmuchshortertimeframesforphysicianpractices.
CernerWorksisaportfolioofhostedandmanagedservicesdesignedtohelpclientsmakethemostoftheirCernerinvestments.WithCernerWorks services,Cernerstrivestohelpclientslowercostswhilemaximizingavailability,performanceandsecurity,aswellasprovidingaccesstostate-of-the-artintellectualandtechnologyresources.
Selected Differentiating Solutions
Cernerunderstandsthecomplexityoftheemergencydepartment,surgeryandICUanddeliversseamlesslyconnectedHigh-Acuity Solutionstomeettheseuniqueandcomplexcross-venueneeds.Cerner’ssolutions for thesedepartmentsenableclinical,financialandoperationaladvantages,bycapturing,structuringandclearlypresentingdataforoptimaldecision-making.
CernerKnowledge Solutions & Outcomesguidecliniciansinidentifyingandapplyingthebestsciencetoeverymedicaldecision.Cernerleveragesworld-classcontent,developedfromanaggressiveannualinvestmentandinpartnershipwithleadingresearchinstitutions.Cernerinfusesknowledgeintothecareprocess,proactivelypushingtimely,relevantinformationintoindividualworkflowsintheformoftheExecutable Knowledge®contentderived from literature,empiricaldata, scientificmethodologiesand recommendedpractices.Cerner’sapproach isgeared towardhelpinghealthorganizationsrealizeoutcomes-basedpractice.
Cerner’sPoint-of-Care Solutionsreducemedicalerrorsatthebedsideandhighlightpatientsafetyinthebar-codingarena.Cernerprovidesstand-alonepoint-of-caresolutionsaswellasthosethatunifywiththe Cerner Millenniumarchitecture.
Cerner Millennium Lighthouse™ is theCompany’sapproach towardclinicalprocessoptimization.Millennium Lighthouse isacomprehensiveandadaptivesystemforachievingandsustainingprocessimprovementsthatoptimizeclinicalandfinancialoutcomes.TheMillennium Lighthousesystemisintendedtoimprovethequality,deliveryandcostofhealthcare,andisbuiltondecisionsupportmodelingandtheunderstandingofkeyobjectivesatadetailedlevelinthecontextofthecondition,venue,processandrolesinvolved.
WiththeseandthemanyothersolutionsandservicesintheCernerportfolio,theCompany,togetherwithclients,isdrivingerror,wasteandvariancefromhealthcareprocesses.
The Healthcare and Healthcare IT Industry
Aroundtheworld,2005sawhealthcarecostscontinuetoriseashealthcareprofessionalsworkedtosimultaneouslycontrolthemwhileupholdingqualitystandards.Theongoingtrendimpactedemployersandconsumers,oftenincreasingthecostburdenonemployers,andinmanycases,increasingthetransferofthosehighercostsdirectlytoemployees.Forexample,GeneralMotors’chairman,inaspeechtotheEconomicClubofChicago(Feb.2005),revealedthathiscompanyspendsmorethan$1,500inemployeemedicalexpensesforeverynewcaritsells.
These increasinghealthcarecostburdenshelpedbring increasedvisibility tohealthcare information technology (HIT)asoneof theopportunities forachievingmeaningfulandsustainablehealthcareimprovements.IntheUnitedStates,regionalhealthinformationorganizations(RHIOs),describedfurtherbelow,arereceivingmoreinterestandgeneratingmoreactivity.Overseas,HITisbeingputtousetoimprovequalityandgainefficiencies.OneexampleofgrowingglobaluseofHITistheNationalHealthServices’efforttoconnectEngland’shealthcareprovidersandcitizens.In2003,CernerwasawardedthestrategicChooseandBookelectronicschedulingportionoftheeffort,andin2005,CernerjoinedforceswithFujitsu,servingasthesoftwareproviderinanefforttoautomateclinicalprocessesanddigitizemedicalrecordsinthesouthernregionofEngland.
HIT Earns Broad Government Recognition
In2005,HITcontinuedtoreceiverecognitionasapartofthesolutiontotheproblemsfacingtheU.S.healthcaresystem.ItsadvocatesincludeU.S.PresidentGeorgeBush,whociteditspotentialinyetanotherStateoftheUnionaddress(Feb.1,2006).Intheaddress,thePresidenthighlightedthefactthatthefirstof78millionbabyboomersturn60in2006,puttingunprecedentedstrainsonthefederalgovernment.WithinthecontextofanationalconversationonMedicareandMedicaid,meaningfulactiononHIThasbecomeanimportantgoalatthefederallevel.HITisreceivingbipartisansupport,withnumerouspolicymakersembracingitasaprimaryopportunityforimprovingthecostandqualityofthenation’shealthcaredelivery.
RAND Study Identifies Dramatic HIT-Enabled Cost Savings
OnemilestoneeventthatsupportedthebeliefthatHITcanimprovethecostandqualityofhealthcaredeliverycameintheformoftheresultsofatwo-yearstudybyRANDCorporation,anon-profitthinktank.ThestudysoughttoexamineHIT’spotentialtosavelivesanddollarsifwidelyembracedintheUnited
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States.Theresults,publishedintheleadingacademicjournalHealth Affairs(Sept.2006),identifiedapossible$162billioninannualsavingsrelatedtoincreasedefficiencies,reducedadversedrugeventsandimprovedhealthqualityviapreventionanddiseasemanagement.Thestudy,whichadditionallyrevealedthepotentialpreventionof2.2millionavoidablemedicalerrors,alsopointedtotheelevatedrolethefederalgovernmentmustplayinhelpingrealizethepotentialsavingsidentified.
InkeepingwithRAND’sidentificationofimproveddiseasemanagementasameanstobetterclinicalandfinancialoutcomes,Cerneritselfcontributedtotheincreasingadoptionofthepersonalhealthrecordacrosscommunities.TheCompanycelebratedthefirstanniversaryofitsdiabetesinitiative,throughwhichitisprovidingapersonalhealthrecordtoeveryU.S.childwithtype1diabetesatnocost.Attheendof2005,theCernerinitiativehadconnected30hospitals,550cliniciansandnearly6,000childrenforimproveddiseasemanagement.
Regional Health Information Organizations
2005alsosawincreasedvisibilityandactivityrelatedtothecreationofregionalhealthinformationorganizations(RHIOs)withthepurposeofimprovingthesafetyandefficiencyofhealthcareprocessesacrosspopulations.Forexample,SharedHealthinTennessee,apayor-sponsoredRHIO,nowhasacommunityhealthrecordandclinicaldocumentationfor1.1millionTennCaremembersthatcanbeaccessedbymorethan2,500usersat500sites.UsingCernersoftwaresolutions,SharedHealthhasrealizeddiversebenefitsspanningtheareasofcarequality,medicationuseandsafety,efficiency,andtheavoidanceoffraudandabuse.Ofequalnote,KansasGovernorKathleenSebeliusrecentlycommittedtoasimilarinitiativewithCernerfortheMedicaidpopulationinWichita,Kansas.
Inanothersimilareffort,Cernerisengagedinfacilitatinganemployer-drivenRHIOintheKansasCitymetropolitanarea.CalledHealtheMid-America,itwillbeafirst-in-the-nationemployer-drivenRHIO.Nationallyrecognizedprivate-sectoremployers,includingAmericanCenturyInvestments,Applebee’s,SprintNextelandYRCWorldwide,havecommittedtojoiningHealthe.TheseemployersanticipatethatHITcanbepartofanapproachthatbringsbetterhealthoutcomes,elevatedefficiencyandincreasedpredictabilitytotheirhealthcarespending.
Influencers Come Together in Pursuit of Interoperability Standards
Providingfurthervalidationontheconceptofbetterconnectingcommunitiesandgeographies,2005sawincreasedvisibilityfortheNationalAllianceforHealthcareInformationTechnology.Amongotherobjectives,theAlliancetookonthecausetopromotetheidentificationandadoptionofnationalinteroperability standards. The organization made great strides in securing widespread industry agreement on the definition for interoperability inhealthcare,acrucialsteptoensuringthathundredsofthousandsofHITsystemswillonedayseamlesslyexchangecriticalpatientdata.Morethan37organizationsrepresentingeverysectorofhealthcare,includingtheJointCommissiononAccreditationofHealthcareOrganizations,BlueCrossBlueShieldAssociation,GeneralMotors,Oracle,theAmericanHospitalAssociationandCerner,tonamejustafew,agreedthat“Inhealthcare,interoperabilityistheabilityofdifferentinformationtechnologysystemsandsoftwareapplicationstocommunicate;toexchangedataaccurately,effectivelyandconsistently;andtousetheinformationthathasbeenexchanged.”
Hospital and Physician Practice Market Conditions
In2005,Moody’sreportedthathospitalbondratingupgradesoutnumbereddowngradesforthefirsttimesince1997.Andwhilesomeprovidersaredealingwithissuessuchasanunfavorablepayormixandtheresponsibilitytoserveagrowinguninsuredpopulation,USATodayindicatedinJanuary2006 thathospitalprofitmargins reachedasix-yearhighof5.2percent in2004. Several industryanalystsbelieve thatan inflectionpointmaybeapproachingthatwillacceleratetheadoptionofelectronicmedicalrecordswithinphysicianofficepracticesandthatphysiciansincreasinglybelievethatthereisademonstrablereturnoninvestmentassociatedwithHIT.Health Affairsreportedthatphysicians’evolvingcareenvironmentsincreasinglydemandsuchcapabilitiesase-prescribingtobettermanagethecurrenthealthcarelandscape.Overseas,numerousdrivers—includingmanagingthecostofhealthcaredelivery;improvingpatientsafety,patientsatisfactionandtheoverallpatientexperience;andtheneedtooptimizeresourceutilization—arealsoincreasingthevisibilityandusageofHIT.
Software Development Cernercommitssignificantresourcestodevelopingnewhealthinformationsystemsolutions.AsofDecember31,2005,approximately2,422associateswereengagedfull-timeinsoftwaresolutiondevelopmentactivities.TotalexpendituresforthedevelopmentandenhancementoftheCompany’ssoftwaresolutionswereapproximately$226,238,000,$188,264,000and$179,999,000duringthe2005,2004and2003fiscalyears,respectively.Thesefiguresincludebothcapitalizedandnon-capitalizedportionsandexcludeamountsamortizedforfinancialreportingpurposes.
TheCompanyexpectstocontinueinvestmentanddevelopmenteffortsforitscurrentandfuturesolutionofferings.Asnewclinicalandmanagementinformationneedsemerge,Cernerintendstoenhanceitscurrentsoftwaresolutionslineswithnewversionsreleasedtoclientsonaperiodicbasis.Inaddition,Cernerplansto:expanditscurrentsoftwaresolutionlinesbydevelopingadditionalinformationsystemsforclinical,financial,operationaland/orconsumeruse;continuetosupportsimultaneoususeofCerner’ssolutionsacrossmultiplefacilities;and,continuetoexpandintheglobalmarketplace.
TheCompanyiscommittedtomaintainingopenattributesinitssystemarchitecturetoachieveoperabilityinadiversesetoftechnicalandapplicationenvironments.TheCompanystrivestodesignitssystemstoco-existwithdisparateapplicationsdevelopedandsupportedbyothersuppliers.ThiseffortisexemplifiedbyCerner’s Open Engine Application Gateway™,Open Port Interface™andMillenniumObjects®offerings.
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Sales and Marketing ThemarketsforCerner’sHITsolutionsincludeintegrateddeliverynetworks,physiciangroupsandnetworks,managedcareorganizations,hospitals,medicalcenters,free-standingreferencelaboratories,homehealthagencies,bloodbanks,imagingcenters,pharmacies,pharmaceuticalmanufacturers,employercoalitionsandpublichealthorganizations.Todate,asubstantialportionofsystemsaleshasbeeninclinicalsolutionsinhospital-basedproviderorganizations.The Cerner Millenniumarchitectureishighlyscalable,withsolutionsbeingusedinorganizationsrangingfromseveral-doctorphysicianpracticestocommunityhospitalstocomplexintegrateddeliverynetworkstoentirecountries.AllCerner MillenniumsolutionsaredesignedtooperateonHPorIBMplatforms,therebyallowingCernertobepricecompetitiveacrossthefullsizeandorganizationalstructurerangeofhealthcareproviders.Thesaleofahealthinformationsystemusuallytakesapproximatelynineto18months,fromthetimeofinitialcontacttothesigningofacontract.
TheCompany’sexecutivemarketingmanagementislocatedinitsNorthKansasCity,Missouri,headquarters,whileitsclientrepresentativesaredeployedacrosstheUnitedStatesandglobally. Inadditionto theUnitedStates, theCompany, throughsubsidiariesand jointventures,hassalesstaffand/orofficesinAustralia,Canada,France,Germany,HongKong,India,Singapore,Malaysia,Spain,theUnitedKingdomandtheUnitedArabEmirates.Cerner’sconsolidatedrevenuesincludeforeignsalesof$113,314,000,$63,622,000and$54,191,000forthe2005,2004and2003fiscalyears,respectively.
TheCompanysupportsitssalesforcewithtechnicalpersonnelwhoperformdemonstrationsofCernersolutionsandassistclientsindeterminingtheproperhardwareandsoftwareconfigurations.TheCompany’sprimarydirectmarketingstrategyistogeneratesalescontactsfromitsexistingclientbaseandthroughpresentationsatindustryseminarsandtradeshows.Cernerutilizestelemarketingprimarilyforsalestophysicianpractices.CerneralsomarketsitsPowerWorkssolution,offeredonasubscriptionbasis,directlytothephysicianpracticemarket.Cernerattendsanumberofmajortradeshowseachyearandsponsorsexecutiveuserconferences,whichfeatureindustryexpertswhoaddresstheHITneedsoflargehealthcareorganizations.
Client Services SubstantiallyallofCerner’sclientsenterintosoftwaremaintenanceagreementswithCernerforsupportoftheirCerner systems.Inadditiontoimmediatesoftwaresupport intheeventofproblems,theseagreementsallowclientstheuseofnewreleasesoftheCernersolutionscoveredbymaintenanceagreements.Eachclienthas24-houraccesstotheclientsupportstafflocatedatCerner’sworldheadquartersinNorthKansasCity,MissouriandtheCompany’sglobalsupportorganizationintheUnitedKingdom.MostofCerner’sclientsalsoenterintohardwaremaintenanceagreementswithCerner.Thesearrangementsnormallyprovideforafixedmonthlyfeeforspecifiedservices.Inthemajorityofcases,Cernersubcontractshardwaremaintenancetothehardwaremanufacturer.Cerneralsooffersasetofmanagedservicesthatincluderemotehosting,applicationmanagementservicesanddisasterrecovery.
BacklogAtDecember31,2005,Cernerhadacontractbacklogofapproximately$1,724,583,000ascomparedtoapproximately$1,191,170,000atJanuary1,2005.Suchbacklogrepresentssystemsalesfromsignedcontracts,whichhadnotyetbeenrecognizedasrevenue.TheCompanyrecognizesrevenueonapercentofcompletionbasis,basedoncertainmilestoneconditions,foritssoftwaresolutions.AtDecember31,2005,theCompanyhadapproximately$100,717,000ofcontractsreceivable,whichrepresentsrevenuesrecognizedunderthepercentageofcompletionmethodbutnotyetbillableunderthetermsofthecontract.AtDecember31,2005,Cernerhadasoftwaresupportandmaintenancebacklogofapproximately$415,681,000ascomparedtoapproximately$347,662,000atJanuary1,2005.Suchbacklogrepresentscontractedsoftwaresupportandhardwaremaintenanceservicesforaperiodof12months.TheCompanyestimatesthatapproximately45percentoftheaggregatebacklogatDecember31,2005of$2,140,264,000willberecognizedasrevenueduring2006.
Competition ThemarketforHITsolutionsandservicesisintenselycompetitive,rapidlyevolvingandsubjecttorapidtechnologicalchange.TheCompany’sprincipalexistingcompetitors include:EclipsysCorporation,EpicSystemsCorporation,GEHealthcareTechnologies, iSoftCorporation,McKessonCorporation,Medical InformationTechnology, Inc. (“Meditech”),MisysHealthcareSystemsandSiemensMedicalSolutionsHealthServicesCorporation, eachofwhichoffersasuiteofsoftwaresolutionsandservicesthatcompetewithmanyoftheCompany’ssoftwaresolutionsandservices.OthercompetitorsfocusononlyaportionofthemarketthatCerneraddresses.Forexample,competitorssuchasAllscriptsHealthcareSolutions,Inc.,QualitySystems,Inc.andEmdeonCorporationoffersolutionstothephysicianpracticemarketbutdonotcurrentlyhaveasignificantpresenceinthehealthsystemsandindependenthospitalmarket.Inaddition,theCompanyexpectsthatmajorsoftwareinformationsystemscompanies,largeinformationtechnologyconsultingserviceproviders,system integrators,managedcarecompaniesandothersspecializing in thehealthcare industrymayoffercompetitivesoftwaresolutionsorservices. ThepaceofchangeintheHITmarket israpidandtherearefrequentnewsoftwaresolution introductions,softwaresolutionenhancementsandevolvingindustrystandardsandrequirements.TheCompanybelievesthattheprincipalcompetitivefactorsinthismarketincludethebreadthandqualityofsystemandsoftwaresolutionofferings,thestabilityoftheinformationsystemsprovider,thefeaturesandcapabilitiesoftheinformationsystems,theongoingsupportforthesystemandthepotentialforenhancementsandfuturecompatiblesoftwaresolutions.
Number of Employees (“Associates”)AsofDecember31,2005,theCompanyemployed6,830associatesworldwide.
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Item 1A. Risk FactorsRisks Related to Cerner CorporationWe may be subject to product-related liabilities. Manyofoursoftwaresolutionsprovidedataforusebyhealthcareprovidersinprovidingcaretopatients.Althoughnosuchclaimshavebeenbroughtagainstustodateregardinginjuriesrelatedtotheuseofoursoftwaresolutions,suchclaimsmaybemadeinthefuture.Althoughwemaintainproductliabilityinsurancecoverageinanamountthatwebelieveissufficientforourbusiness,therecanbenoassurancethatsuchcoveragewillcoveraparticularclaimthatmaybebroughtinthefuture,provetobeadequateorthatsuchcoveragewillcontinuetoremainavailableonacceptableterms,ifatall.Asuccessfulclaimbroughtagainstus,whichisuninsuredorunder-insured,couldmateriallyharmourbusiness,resultsofoperationsandfinancialcondition.
We may be subject to claims for system errors and warranties.Oursystems,particularlytheCernerMillenniumversions,areverycomplex.Aswithcomplexsystemsofferedbyothers,oursystemsmaycontainerrors,especiallywhenfirstintroduced.Althoughweconductextensivetesting,wehavediscoveredsoftwareerrorsinoursoftwaresolutionsaftertheirintroduction.Oursystemsareintendedforuseincollectinganddisplayingclinicalinformationusedinthediagnosisandtreatmentofpatients.Therefore,usersofoursoftwaresolutionshaveagreatersensitivitytosystemerrorsthanthemarketforsoftwareproductsgenerally.Ouragreementswithclientstypicallyprovidewarrantiesagainstmaterialerrorsandothermatters.Failureofaclient’ssystemtomeetthesecriteriacouldconstituteamaterialbreachundersuchcontractsallowingtheclienttoterminatethecontractandobtainarefundand/ordamages,orcouldrequireustoincuradditionalexpenseinordertomakethesystemmeetthesecriteria.Ourclientcontractsgenerallylimitourliabilityarisingfromsuchclaimsbutsuchlimitsmaynotbeenforceableincertainjurisdictionsorcircumstances.Asuccessfulclaimbroughtagainstus,whichisuninsuredorunder-insured,couldmateriallyharmourbusiness,resultsofoperationsandfinancialcondition.
We may experience interruption at our data centers or client support facilities.Weperformdatacenterand/orhostingservicesforcertainclients,includingthestorageofcriticalpatientandadministrativedata.Inaddition,weprovidesupportservicestoourclientsthroughvariousclientsupportfacilities. Wehaveredundancies,suchasmultiplebackupgeneratorsandredundant telecommunications lines,built intoouroperations topreventdisruptions.However,completefailureofallgeneratorsorimpairmentofalltelecommunicationslinesorseverecasualtydamagetothebuildingorequipmentinsidethebuildingshousingourdatacentersorclientsupportfacilitiescouldcauseadisruptioninoperationsandnegativelyimpactclientswhodependonusfordatacenterandsystemsupportservices.Anyinterruptioninoperationsatourdatacentersand/orclientsupportfacilitiescoulddamageourreputation,causeustoloseexistingclients,hurtourabilitytoobtainnewclients,resultinrevenueloss,causepotentialliabilitytoourclients,andincreaseinsuranceandotheroperatingcosts.
Our proprietary technology may be subjected to infringement claims or may be infringed upon.Werelyuponacombinationoflicenseagreements,confidentialityprocedures,employeenondisclosureagreements,confidentialityagreementswiththirdpartiesandtechnicalmeasurestomaintaintheconfidentialityandtradesecrecyofourproprietaryinformation.Wealsorelyontrademarkandcopyrightlawstoprotectourintellectualpropertyrights.Wehaveinitiatedapatentprogrambutcurrentlyhavealimitedpatentportfolio.Asaresult,wemaynotbeabletoadequatelyprotectagainstcopying,reverse-engineeringorunauthorizeduseordisclosureofourintellectualproperty.
Inaddition,wecouldbesubject toadditional intellectualproperty infringementclaimsas thenumberofcompetitorsandpatents in thehealthcareinformationtechnologymarketgrowsandthefunctionalityofoursoftwaresolutionsandservicesexpands.Theseclaims,evenifnotmeritorious,couldbeexpensivetodefend.Ifwebecomeliabletothirdpartiesforinfringingtheirintellectualpropertyrights,wecouldberequiredtopayasubstantialdamageaward,andtodevelopnoninfringingtechnology,obtainalicenseand/orceasesellingthesoftwaresolutionsandservicesthatcontainorrelyupontheinfringingintellectualproperty.
We are subject to risks associated with our global operations. Wemarket,sellandserviceoursoftwaresolutionsglobally.Wehaveestablishedofficesaroundtheworld,includingintheAmericas,Europe,intheMiddleEastandintheAsiaPacificregion.Wewillcontinuetoexpandourglobaloperationsandenternewglobalmarkets.Thisexpansionwillrequiresignificantmanagementattentionandfinancialresourcestodevelopsuccessfuldirectand indirectglobalsalesandsupportchannels.Ourbusiness isgenerally transacted in the local functionalcurrency. Insomecountries,oursuccesswilldependinpartonourabilitytoformrelationshipswithlocalpartners.Thereisariskthatwemaysometimeschoosethewrongpartner.Forthesereasons,wemaynotbeabletomaintainorincreaseglobalmarketdemandforoursoftwaresolutions.
Globaloperationsaresubjecttoinherentrisks,andourfutureresultscouldbeadverselyaffectedbyavarietyofuncontrollableandchangingfactors.Theseinclude,butarenotlimitedto:
Greaterdifficultyincollectingaccountsreceivableandlongercollectionperiods
Difficultiesandcostsofstaffingandmanagingglobaloperations
Theimpactofglobaleconomicconditions
Certificationorregulatoryrequirements
Unexpectedchangesinregulatoryrequirements
Reducedprotectionofintellectualpropertyrightsinsomecountries
Potentiallyadversetaxconsequences
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Differentoradditionalfunctionalityrequirements
Tradeprotectionmeasures
Serviceproviderandgovernmentspendingpatterns
Naturaldisasters,warorterroristacts
Poorselectionofapartnerinacountry
Politicalconditionswhichmayimpactsalesorthreatenthesafetyofassociatesorourcontinuedpresenceinthesecountries
Our success depends upon the recruitment and retention of key personnel. Toremaincompetitiveinthehealthcareinformationtechnologyindustry,wemustattract,motivateandretainhighlyskilledmanagerial,sales,marketing,consultingandtechnicalpersonnel,includingexecutives,consultants,programmersandsystemsarchitectsskilledinthehealthcareinformationtechnologyindustryandthetechnicalenvironmentsinwhichoursolutionsoperate.Competitionforsuchpersonnelinthisindustryisintense.Ourfailuretoattractadditionalqualifiedpersonnelcouldhaveamaterialadverseeffectonourprospectsforlong-termgrowth.Oursuccessisdependenttoasignificantdegreeonthecontinuedcontributionsofkeymanagement,sales,marketing,consultingandtechnicalpersonnel.Wehavesuccessionplansinplace;however,theunexpectedlossofkeypersonnelcouldhaveamaterialadverseimpacttoourbusinessandresultsofoperations,andcouldpotentiallyinhibitsolutiondevelopmentandmarketshareadvances.
We significantly rely on third party suppliers.Welicenseorpurchaseintellectualpropertyandtechnology(suchassoftware,hardwareandcontent)fromthirdparties,includingsomecompetitors,andincorporateitintoorsellitinconjunctionwithoursoftwaresolutionsandservices,someofwhichiscriticaltotheoperationofoursolutions.Ifanyofthethirdpartysuppliersweretochangeproductofferings,increasepricesorterminateourlicensesorsupplycontracts,wemightneedtoseekalternativesuppliersandincuradditionalinternalorexternaldevelopmentcoststoensurecontinuedperformanceofoursolutions.Suchalternativesmaynotbeavailableonattractiveterms,ormaynotbeaswidelyacceptedoraseffectiveastheintellectualpropertyortechnologyprovidedbyourexistingsuppliers.Ifthecostoflicensing,purchasingormaintainingthesethirdpartyintellectualpropertyortechnologysolutionssignificantly increases,ourgrossmargin levelscouldsignificantlydecrease. Inaddition, interruption infunctionalityofoursolutionscouldadverselyaffectfuturesalesofsolutionsandservices.
We intend to continue strategic business acquisitions which are subject to inherent risks. Inorder toexpandoursolutionsandservicesandgrowourmarketandclientbase,wemaycontinuetoseekandcompletestrategicbusinessacquisitionsthatwebelievearecomplementarytoourbusiness.Acquisitionshaveinherentriskswhichmayhaveamaterialadverseeffectonourbusiness,financialcondition,operatingresultsorprospects,including,butnotlimitedto:1)failuretosuccessfullyintegratetheoperations,services,solutionsorpersonneloftheacquiredbusiness;2)diversionofmanagement’sattentionfromotherbusinessconcerns;3)entryintomarketsinwhichwehavelittleornodirectpriorexperience;4)failuretoachieveprojectedsynergiesandperformancetargets;5)lossofclientsorkeypersonneloftheacquiredbusiness;6)incurrenceofdebtand/orassumptionofknownandunknownliabilities;7)write-offofsoftwaredevelopmentcostsandamortizationofexpensesrelatedtointangibleassets;and,8)dilutiveissuancesofequitysecurities.Ifwefailtosuccessfullyintegrateacquiredbusinessesorfailtoimplementourbusinessstrategieswithrespecttotheseacquisitions,wemaynotbeabletoachieveprojectedresultsorsupporttheamountofconsiderationpaidforsuchacquiredbusinesses.
Risks Related to the Healthcare Information Technology IndustryThe healthcare industry is highly regulated and is subject to changing political, economic and regulatory influences. Forexample,theBalancedBudgetActof1997(PublicLaw105-32)containedsignificantchangestoMedicareandMedicaidandhadanimpactforseveralyearsonhealthcareproviders’abilitytoinvestincapitalintensivesystems.Inaddition,theHealthInsurancePortabilityandAccountabilityActof1996(HIPAA)ishavingadirectimpactonthehealthcareindustrybyrequiringidentifiersandstandardizedtransactions/codesetsandnecessarysecurityandprivacymeasuresinorder toensure theprotectionofpatienthealth information.These regulatory factorsaffect thepurchasingpracticesandoperationofhealthcareorganizations.FederalandstatelegislatureshaveperiodicallyconsideredprogramstoreformoramendtheU.S.healthcaresystematboththefederalandstate leveland tochangehealthcarefinancingandreimbursementsystems. Theseprogramsmaycontainproposals to increasegovernmentalinvolvementinhealthcare,lowerreimbursementratesorotherwisechangetheenvironmentinwhichhealthcareindustryparticipantsoperate.Healthcareindustryparticipantsmayrespondbyreducingtheirinvestmentsorpostponinginvestmentdecisions,includinginvestmentsinoursoftwaresolutionsandservices.
Manyhealthcareprovidersareconsolidatingtocreateintegratedhealthcaredeliverysystemswithgreatermarketpower.Theseprovidersmaytrytousetheirmarketpowertonegotiatepricereductionsforoursoftwaresolutionsandservices.Asthehealthcareindustryconsolidates,ourclientbasecouldbeeroded,competitionforclientscouldbecomemoreintenseandtheimportanceofacquiringeachclientbecomesgreater.
The healthcare industry is highly regulated at the local, state and federal level. Wearesubject toasignificantandwide-rangingnumberofregulationsbothwithintheUnitedStatesandelsewhere,suchasregulationsintheareasof:healthcarefraud,e-prescribing,claimsprocessingandtransmission,medicaldevicesandthesecurityandprivacyofpatientdata.
Healthcare Fraud. FederalandstategovernmentscontinuetostrengthentheirpositionsandscrutinyoverpracticesinvolvinghealthcarefraudaffectinghealthcareproviderswhoseservicesarereimbursedbyMedicare,Medicaidandothergovernmenthealthcareprograms.Healthcareproviderswhoareourclientsaresubjecttolawsandregulationsonfraudandabusewhich,amongotherthings,prohibitthedirectorindirectpaymentorreceiptofany
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remunerationforpatientreferrals,orarrangingfororrecommendingreferralsorotherbusinesspaidforinwholeorinpartbythesefederalorstatehealthcareprograms.Federalenforcementpersonnelhavesubstantialfunding,powersandremediestopursuesuspectedfraudandabuse.Theeffectofthisgovernmentregulationonourclientsisdifficulttopredict.Whilewebelievethatweareinsubstantialcompliancewithanyapplicablelaws,manyoftheregulationsapplicabletoourclientsandthatmaybeapplicabletous,arevagueorindefiniteandhavenotbeeninterpretedbythecourts.Theymaybeinterpretedorappliedbyaprosecutorial,regulatoryorjudicialauthorityinamannerthatcouldbroadentheirapplicabilitytousorrequireourclientstomakechangesintheiroperationsorthewaythattheydealwithus.Ifsuchlawsandregulationsaredeterminedtobeapplicabletousandifwefailtocomplywithanyapplicablelawsandregulations,wecouldbesubjecttosanctionsorliability,includingexclusionfromgovernmenthealthprograms,whichcouldhaveamaterialadverseeffectonourbusiness,resultsofoperationsorfinancialcondition.
E-Prescribing.Theuseofoursolutionsbyphysicians forelectronicprescribing,electronic routingofprescriptions topharmaciesanddispensing isgovernedbystateandfederallaw.Stateshavedifferingprescriptionformatrequirements,whichwehaveprogrammedintooursoftware.Inaddition,inNovember2005,theDepartmentofHealthandHumanServicesannouncedregulationsbytheCentersforMedicare&MedicaidServices(CMS)relatedto“E-PrescribingandthePrescriptionDrugProgram”(“E-PrescribingRegulations”).TheseE-PrescribingRegulationsweremandatedbytheMedicarePrescriptionDrug,Improvement,andModernizationActof2003(“MMA”).TheE-PrescribingRegulationssetforthstandardsforthetransmissionofelectronicprescriptions.ThefinalregulationsadoptedtwostandardseffectiveJanuary2006.AsecondandfinalsetofrequiredstandardsaretobepublishednolaterthanApril1,2008andimplementednolaterthanApril1,2009.Thesestandardsaredetailedandsignificant,andcovernotonlytransactionsbetweenprescribersanddispensersforprescriptionsbutalsoelectroniceligibilityandbenefitsinquiriesanddrugformularyandbenefitcoverage information. Ourefforts toprovide that our solutions enableour clients to complywith these regulationscouldbe time-consumingandexpensive.
Claims Transmissions.Certainofoursolutionsassistourclientsinsubmittingclaimstopayers,whichclaimsaregovernedbyfederalandstatelaws.Oursolutionsarecapableofelectronicallytransmittingclaimsforservicesanditemsrenderedbyaphysiciantomanypatients’payersforapprovalandreimbursement.Federallawprovidescivilliabilitytoanypersonthatknowinglysubmitsaclaimtoapayer,including,forexample,Medicare,Medicaidandprivatehealthplans,seekingpaymentforanyservicesoritemsthathavenotbeenprovidedtothepatient.Federallawmayalsoimposecriminalpenaltiesforintentionallysubmittingsuchfalseclaims.Wehavepoliciesandproceduresinplacethatwebelieveresultintheaccurateandcompletetransmissionofclaims,providedthattheinformationgiventousbyourclientsisalsoaccurateandcomplete.TheHIPAAsecurity,privacyandtransactionstandards,asdiscussedbelow,willalsohaveapotentiallysignificanteffectonourclaimstransmissionservices,sincethoseservicesmustbestructuredandprovidedinawaythatsupportsourclients’HIPAAcomplianceobligations.
Regulation of Medical Devices. TheUnitedStatesFoodandDrugAdministration(the“FDA”)hasdeclaredthatcertainofoursolutionsaremedicaldevicesthatareactivelyregulatedundertheFederalFood,DrugandCosmeticAct(“Act”)andamendmentstotheAct.Asaconsequence,wearesubjecttoextensiveregulationbytheFDAwithregardtothosesolutionsthatareactivelyregulated.Othercountrieshavesimilarregulationsinplacerelatedtomedicaldevices,thatnowormayinthefutureapplytocertainofoursolutions.IfotherofoursolutionsaredeemedtobeactivelyregulatedmedicaldevicesbytheFDAorsimilarregulatoryagenciesincountrieswherewedobusiness,wecouldbesubjecttoextensiverequirementsgoverningpre-andpost-marketingrequirements includingpre-marketnotificationclearanceprior tomarketing. Complyingwith thesemedicaldeviceregulationsonaglobalperspectiveistimeconsumingandexpensive.Further,itispossiblethattheseregulatoryagenciesmaybecomemoreactiveinregulatingsoftwarethatisusedinhealthcare.
TherehavebeensevenFDAinspectionssince1998atvariousCernersites.Inspectionsconductedatourworldheadquartersin1999andourHoustonfacilityin2002eachresultedintheissuanceofanFDAForm483thatwerespondedtopromptly.TheFDAhastakennofurtheractionwithrespecttoeitheroftheForm483sthatwereissuedin1999and2002.TheremainingfiveFDAinspections,includinganinspectionatourworldheadquartersin2004, resulted inno issuanceofaForm483. Weremainsubject toperiodicFDA inspectionsandwecouldbe required toundertakeadditionalactionstocomplywiththeActandanyotherapplicableregulatoryrequirements.OurfailuretocomplywiththeActandanyotherapplicableregulatoryrequirementscouldhaveamaterialadverseeffectonourabilitytocontinuetomanufactureanddistributeoursolutions.TheFDAhasmanyenforcementtoolsincludingrecalls,seizures,injunctions,civilfinesand/orcriminalprosecutions.Anyoftheforegoingcouldhaveamaterialadverseeffectonourbusiness,resultsofoperationsorfinancialcondition.
Security and Privacy of Patient Information. Stateandfederallawsregulatetheconfidentialityofpatientrecordsandthecircumstancesunderwhichthoserecordsmaybereleased.Theseregulationsgovernboththedisclosureanduseofconfidentialpatientmedicalrecordinformationandrequiretheusersofsuchinformationtoimplementspecifiedsecuritymeasures.Regulationscurrentlyinplacegoverningelectronichealthdatatransmissionscontinuetoevolveandareoftenunclearanddifficulttoapply.
TheHealthInsurancePortabilityandAccountabilityActof1996(“HIPAA”)requiresnationalstandardsforsometypesofelectronichealthinformationtransactionsandthedataelementsusedinthosetransactions,securitystandardstoensuretheintegrityandconfidentialityofhealthinformationandstandardstoprotecttheprivacyofindividuallyidentifiablehealthinformation.CoveredentitiesunderHIPAA,whichincludehealthcareorganizationssuchasourclients,wererequiredtocomplywiththeprivacystandardsbyApril2003,thetransactionregulationsbyOctober2003andthesecurityregulationsbyApril2005.Asabusinessassociateofthecoveredentities,we,inmostinstances,mustalsoensurecompliancewiththeHIPAAregulationsasitpertainstoourclients.
TheeffectofHIPAAonourbusinessisdifficulttopredict,andtherecanbenoassurancesthatwewilladequatelyaddressthebusinessriskscreatedbyHIPAAanditsimplementation,orthatwewillbeabletotakeadvantageofanyresultingbusinessopportunities.Furthermore,weareunabletopredict
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whatchangestoHIPAA,ortheregulationsissuedpursuanttoHIPAA,mightbemadeinthefutureorhowthosechangescouldaffectourbusinessorthecostsofcompliancewithHIPAA.EvolvingHIPAA-relatedlawsorregulationscouldrestricttheabilityofourclientstoobtain,useordisseminatepatientinformation.Thiscouldadverselyaffectdemandforoursolutionsiftheyarenotre-designedinatimelymannerinordertomeettherequirementsofanynewregulationsthatseektoprotecttheprivacyandsecurityofpatientdataorenableourclientstoexecutenewormodifiedhealthcaretransactions.Wemayneedtoexpendadditionalcapital,researchanddevelopmentandotherresourcestomodifyoursolutionstoaddresstheseevolvingdatasecurityandprivacyissues.
We operate in an intensely competitive and dynamic industry, and our ability to successfully compete and continue to grow our business depends on our ability to respond quickly to market changes and changing technologies and to bring competitive new solutions, features and services to market in a timely fashion. Themarketforhealthcareinformationsystemsisintenselycompetitive,dynamicallyevolvingandsubjecttorapidtechnologicalchange.Developmentofnewproprietarytechnologyorservicesiscomplex,entailssignificanttimeandexpenseandmaynotbesuccessful.Wecannotguaranteethatwewillbeabletointroducenewsolutionsorservicesonschedule,oratall,norcanweguaranteethat,despiteextensivetesting,errorswillnotbefoundinournewsolutionreleasesbeforeoraftercommercialrelease,whichcouldresultinsolutionredevelopmentcostsandlossof,ordelayin,marketacceptance.
Webelievethattheprincipalcompetitivefactors inthismarket includetheeaseof implementation,thebreadthandqualityofsystemandsoftwaresolutionofferings,thestabilityoftheinformationsystemsprovider,theongoingsupportforthesystemandthepotentialforenhancementsandfuturecompatiblesoftwaresolutions.Certainofourcompetitorshavegreaterfinancial,technical,productdevelopment,marketingandotherresourcesthanusandsomeofourcompetitorsoffersoftwaresolutionsthatwedonotoffer.Ourprincipalexistingcompetitorsinclude:EclipsysCorporation,EpicSystemsCorporation,GEHealthcareTechnologies,iSoftCorporation,McKessonCorporation,MedicalInformationTechnology,Inc.(“Meditech”),MisysHealthcareSystemsandSiemensMedicalSolutionsHealthServicesCorporation,eachofwhichoffersasuiteofsoftwaresolutionsthatcompetewithmanyofoursoftwaresolutionsandservices.Thereareothercompetitorsthatofferamorelimitednumberofcompetingsoftwaresolutionsandservices,including,withoutlimitation:AllscriptsHealthcareSolutions,Inc.,EmdeonCorporationandQualitySystems,Inc.
In addition, we expect that major software information systems companies, large information technology consulting service providers and systemintegrators,Internet-basedstart-upcompaniesandothersspecializinginthehealthcareindustrymayoffercompetitivesoftware/solutionsorservices.Thepaceofchangeinthehealthcareinformationsystemsmarketisrapidandtherearefrequentnewsoftwaresolutionintroductions,softwaresolutionenhancementsandevolvingindustrystandardsandrequirements.Asaresult,oursuccesswilldependuponourabilitytokeeppacewithtechnologicalchangeandtointroduce,onatimelyandcost-effectivebasis,newandenhancedsoftwaresolutionsandservicesthatsatisfychangingclientrequirementsandachievemarketacceptance.
Risks Related to the Company’s StockOur quarterly operating results may vary which could adversely affect our stock price. Ourquarterlyoperatingresultshavevariedinthepastandmaycontinuetovaryinfutureperiods,including,variationsfromguidance,expectationsorhistoricalresultsortrends.Quarterlyoperatingresultsmayvaryforanumberofreasonsincludingaccountingpolicychanges,demandforoursolutionsandservices,ourlongsalescycle,potentiallylonginstallationandimplementationcyclesforlarger,morecomplexandhigher-pricedsystemsandotherfactorsdescribedinthissectionandelsewhereinthisreport.AsaresultofhealthcareindustrytrendsandthemarketforourCerner Millenniumsolutions,alargepercentageofourrevenuesaregeneratedbythesaleandinstallationoflarger,morecomplexandhigher-pricedsystems.Thesalesprocessforthesesystemsislengthyandinvolvesasignificanttechnicalevaluationandcommitmentofcapitalandotherresourcesbytheclient.Salesmaybesubjecttodelaysduetochangesinclients’ internalbudgets,proceduresforapprovinglargecapitalexpenditures,competingneedsforothercapitalexpenditures,availabilityofpersonnelresourcesandbyactionstakenbycompetitors.Delaysintheexpectedsale,installationorimplementationoftheselargesystemsmayhaveasignificantimpactonouranticipatedquarterlyrevenuesandconsequentlyourearnings,sinceasignificantpercentageofourexpensesarerelativelyfixed.
Werecognizerevenueuponthecompletionofstandardmilestoneconditionsandtheamountofrevenuerecognizedinanyquarterdependsuponourandourclient’sabilitytomeetprojectmilestones.Delaysinmeetingthesemilestoneconditionsormodificationofthecontractcouldresultinashiftofrevenuerecognitionfromonequartertoanotherandcouldhaveamaterialadverseeffectonresultsofoperationsforaparticularquarter.
Ourrevenuesfromsystemsaleshistoricallyhavebeenlowerinthefirstquarteroftheyearandgreaterinthefourthquarteroftheyear,primarilyasaresultofclients’year-endeffortstomakeallfinalcapitalexpendituresforthethen-currentyear.
Our sales forecasts may vary from actual sales in a particular quarter.Weusea“pipeline”system,acommonindustrypractice,toforecastsalesandtrendsinourbusiness.Oursalesassociatesmonitorthestatusofallsalesopportunities,suchasthedatewhentheyestimatethataclientwillmakeapurchasedecisionandthepotentialdollaramountofthesale.Theseestimatesareaggregatedperiodicallytogenerateasalespipeline.Wecomparethispipelineatvariouspointsintimetoevaluatetrendsinourbusiness.Thisanalysisprovidesguidanceinbusinessplanningandforecasting,butthesepipelineestimatesarebytheirnaturespeculative.Ourpipelineestimatesarenotnecessarilyreliablepredictorsofrevenuesinaparticularquarteroroveralongerperiodoftime,partiallybecauseofchangesinthepipelineandinconversionratesofthepipelineintocontractsthatcanbeverydifficulttoestimate.Anegativevariationintheexpectedconversionrateortimingofthepipelineintocontracts,orinthepipelineitself,couldcauseourplanorforecasttobeinaccurateandtherebyadverselyaffectbusinessresults.Forexample,aslowdownininformationtechnologyspending,adverseeconomicconditionsoravarietyofotherfactorscancausepurchasingdecisionstobedelayed,reducedinamountorcancelled,whichwouldreducetheoverallpipelineconversionrateinaparticularperiodoftime.Becauseasubstantialportionofourcontractsarecompletedinthelatterpartofaquarter,we
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maynotbeabletoadjustourcoststructurequicklyenoughinresponsetoarevenueshortfallresultingfromadecreaseinourpipelineconversionrateinanygivenfiscalquarter(s).
The trading price of our common stock may be volatile.Themarketforourcommonstockmayexperiencesignificantpriceandvolumefluctuationsinresponsetoanumberoffactorsincludingactualoranticipatedquarterlyvariationsinoperatingresults,rumorsaboutourperformanceorsolutions,changesinexpectationsoffuturefinancialperformanceorestimatesofsecuritiesanalysts,governmentalregulatoryaction,healthcarereformmeasures,clientrelationshipdevelopments,changesoccurringinthesecuritiesmarketsingeneralandotherfactors,manyofwhicharebeyondourcontrol.Asamatterofpolicy,wedonotgenerallycommentonourstockpriceorrumors.
Furthermore,thestockmarketingeneral,andthemarketforsoftware,healthcareandinformationtechnologycompaniesinparticular,hasexperiencedextremevolatilitythatoftenhasbeenunrelatedtotheoperatingperformanceofparticularcompanies.Thesebroadmarketandindustryfluctuationsmayadverselyaffectthetradingpriceofourcommonstock,regardlessofactualoperatingperformance.
Our Directors have authority to issue preferred stock and our corporate governance documents contain anti-takeover provisions.OurBoardofDirectorshastheauthoritytoissueupto1,000,000sharesofpreferredstockandtodeterminethepreferences,rightsandprivilegesofthoseshareswithoutanyfurthervoteoractionbytheshareholders.Therightsoftheholdersofcommonstockmaybeharmedbyrightsgrantedtotheholdersofanypreferredstockthatmaybeissuedinthefuture.
Inaddition,someprovisionsofourCertificateofIncorporationandBylawscouldmakeitmoredifficultforapotentialacquirertoacquireamajorityofouroutstandingvotingstock.Thisincludes,butisnotlimitedto,provisionsthatprovideforaclassifiedboardofdirectors,prohibitshareholdersfromtakingactionbywrittenconsentandrestricttheabilityofshareholderstocallspecialmeetings.WehavealsoenteredintoaRightsAgreementwhichcoulddiscourageorpreventathirdpartyfrompursuingatakeoverproposalthatisnotsupportedbyourBoardofDirectors.WearealsosubjecttoprovisionsofDelawarelawthatprohibitusfromengaginginanybusinesscombinationwithanyinterestedshareholderforaperiodofthreeyearsfromthedatethepersonbecameaninterestedshareholder,unlesscertainconditionsaremet,whichcouldhavetheeffectofdelayingorpreventingachangeofcontrol.
Item 2. PropertiesThe Company’s world headquarters offices are located in a Company-owned office park in North Kansas City, Missouri, containing approximately858,170grosssquarefeetofuseablespace(the“Campus”),inclusiveofthenewbuildingdescribedbelow.AsofDecember31,2005,theCompanywasusingapproximately854,483squarefeetofsuchcampusspaceandsubstantiallyalloftheremainderwasleasedtoExecutiveTravel,thetravelmanagementcompanyhistoricallyusedbytheCompany’sassociatesforbusiness-relatedtravel.In2005,theCompanybeganconstructingabuildingtohouseHealtheClinic,asubsidiarywhichwillprovideprimarycareservicesfortheCompany’sassociatesandtheirfamilymembers.ThebuildingwascompletedinFebruary2006.
In2004,theCompanypurchasedapproximately12acresofunimprovedrealestateadjacenttotheCernerworldheadquartersforcampusexpansion.Anaccessroadhasbeenbuiltthroughthepropertyandplansareunderwayforfurtherdevelopment.InJune2005,theCompanypurchased263,512grosssquarefeetofpropertylocatedat3315NorthOakTrafficwayinKansasCity,Missouri.Theofficespace,knownastheCernerOaksCampus,housesassociatesfromtheCernerWorksandCernerTechnologiesgroupsandassociatesofCerner’swholly-ownedsubsidiary,HEALTHeExchange.
TheCompanyalsoownspropertylocatedalongthenorthriverbankoftheMissouriRiver,approximatelytwomilesfromtheCompany’sCampus.Thispropertyconsistsofa96,318grosssquarefootbuildinganda1,300-carparkinggarage.Thebuildinghasbeenrenovatedforuseasacorporatetraining,meetingandeventcenterfortheCompanyandthirdparties.TheCompanyhasalsomadeuseoftheparkinggaragetomeetoverflow-parkingdemandsontheCompany’sCampus.
AsofMarch2006,theCompanyalsoleasedofficespacein:Birmingham,Alabama;BeverlyHills,California;SolonaBeach,California;Denver,Colorado;DaytonaBeach,Florida;OverlandPark,Kansas;Waltham,Massachusetts;BelAir,Maryland;Minneapolis,Minnesota;Rochester,Minnesota;KansasCity,Missouri;Charlotte,NorthCarolina;Beaverton,Oregon;andVienna,Virginia.TheCompanyoperatesitsprimarysolutionscenter(ordatacenter)inleasedspaceinLee’sSummit,Missouri.Globally,theCompanyalsoleasesofficespacein:SydneyandMelbourne,Australia;Brussels,Belgium;London-Ontario,Canada;Paris,France;AachenandIdstein,Germany;HongKong;Bangalore,India;KualaLumpur,Malaysia;NgeeAnnCity,Singapore;BarcelonaandMadrid,Spain;and,LondonandSlough,UnitedKingdom.In2005,theCompany’sAlpharetta,Georgia;Houston,Texas;andSantiago,ChileofficeswereclosedastheCompanyrelocatedmanyassociatesand/orthenecessarybusinessfunctionstootherCompanyoffices.
Item �. Legal ProceedingsTheCompanyhasnomaterialpendinglitigation.
Aspreviouslydisclosed,eightshareholderclassactionlawsuitswerefiledagainstCernerandfiveofitsofficersintheUnitedStatesDistrictCourtfortheWesternDistrictofMissouriafteradeclineintheCompany’sstockpricefollowingtheCompany’sannouncementonApril3,2003thattheCompanywouldnotmeetrevenueandearningsestimatesforthefirstquarterof2003.TheselawsuitswereconsolidatedunderCaseNo.03-CV-00296-DW.OnDecember1,2003,theleadplaintifffiledaConsolidatedClassActionComplaintallegingthatduringaclassperiodcommencingasofJuly17,2002andendingApril2,2003,theCompanyandindividuallynameddefendantsmisrepresentedorfailedtodisclosecertainfactors,whichtheyallegeimpactedtheCompany’sbusinessandanticipatedrevenueandearnings,allallegedlyinviolationofSections10(b)and20(a)oftheSecuritiesExchangeActof1934andRule10b-5thereunder.
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OnJune16, 2004 theDistrict Court granted theCompany’s and the individual defendants’Motion toDismiss and ordered theConsolidatedClassActionComplaintdismissedwithprejudiceagainstre-filing.OnOctober6,2005,theEighthCircuitaffirmedtheDistrictCourt’sdismissaloftheclassactionclaimsagainstCernerandtheindividualdefendantsandtheplaintiffsfailedtoseekreconsiderationorappealofthatdecisionwithintherequireddeadlines.
Item �. Submission of Matters to a Vote of Security HoldersNomattersweresubmittedtoavoteoftheshareholdersoftheCompanyduringthefourthquarterofthefiscalyearendedDecember31,2005.
Item �A. Executive Officers of the CompanyThefollowingtablesetsforththenames,ages,positionsandcertainotherinformationregardingtheCompany’sexecutiveofficersasofMarch9,2006.OfficersareelectedannuallyandserveatthediscretionoftheBoardofDirectors.
Name Age Positions
NealL.Patterson 56 ChairmanoftheBoardofDirectorsandChiefExecutiveOfficer
CliffordW.Illig 55 ViceChairmanoftheBoardofDirectors
EarlH.Devanny,III 54 President
PaulM.Black 47 ExecutiveVicePresidentandChiefOperatingOfficer
DouglasM.Krebs 48 SeniorVicePresidentCernerandGeneralManagerofCernerEurope,MiddleEastandAsiaPacificOrganization
MarcG.Naughton 51 SeniorVicePresidentandChiefFinancialOfficer
JeffreyA.Townsend 42 ExecutiveVicePresident
MikeValentine 37 SeniorVicePresidentandGeneralManagerofU.S.ClientOrganization
RandyD.Sims 45 VicePresident,ChiefLegalOfficerandSecretary
JuliaM.Wilson 43 VicePresidentandChiefPeopleOfficer
NealL.PattersonhasbeenChairmanoftheBoardofDirectorsandChiefExecutiveOfficeroftheCompanyformorethanfiveyears.Mr.PattersonalsoservedasPresidentoftheCompanyfromMarchof1999untilAugustof1999.
CliffordW.IllighasbeenaDirectoroftheCompanyformorethanfiveyears.HealsoservedasChiefOperatingOfficeroftheCompanyformorethanfiveyearsuntilOctober1998andasPresidentoftheCompanyformorethanfiveyearsuntilMarchof1999.Mr.IlligwasappointedViceChairmanoftheBoardofDirectorsinMarchof1999.
EarlH.Devanny,IIIjoinedtheCompanyinAugustof1999asPresident.Mr.DevannyalsoservedasinterimPresidentofCernerSoutheastfromJanuary2003throughJuly2003.PriortojoiningtheCompany,Mr.DevannyservedaspresidentofADACHealthcareInformationSystems,Inc.PriortojoiningADAC,Mr.DevannyservedasaVicePresidentoftheCompanyfrom1994to1997.Priortothathespent17yearswithIBMCorporation.
PaulM.BlackjoinedtheCompanyinFebruaryof1994asaRegionalVicePresident.HewaspromotedinJune1998toSeniorVicePresidentandinJanuary1999toChiefSalesOfficerandtoExecutiveVicePresidentinSeptemberof2000.InJanuaryof2003Mr.BlackwasnamedExecutiveVicePresidentoftheU.S.ClientOrganization.InFebruary2005Mr.BlackwasnamedChiefOperatingOfficer.PriortojoiningtheCompany,hespent12yearswithIBMCorporation.
DouglasM.KrebsjoinedtheCompanyinJune1994asaRegionalVicePresident.HewaspromotedtoSeniorVicePresidentandAreaManagerinApril1999.InFebruary2000,Mr.KrebswasappointedasPresidentofCernerGlobalandinJanuary2005,Mr.KrebswasappointedGeneralManageroftheCompany’sEurope,MiddleEastandAsiaPacificOrganization.PriortojoiningCerner,hespent15yearswithIBMCorporation.
MarcG.NaughtonjoinedtheCompanyinNovember1992asManagerofTaxes.InNovember1995hewasnamedChiefFinancialOfficerandinFebruary1996hewaspromotedtoVicePresident.HewaspromotedtoSeniorVicePresidentinMarch2002.
JeffreyA.TownsendjoinedtheCompanyinJune1985.SincethattimehehasheldseveralpositionsintheIntellectualPropertyOrganizationandwaspromotedtoVicePresidentinFebruary1997.HewasappointedChiefEngineeringOfficerinMarch1998,promotedtoSeniorVicePresidentinMarch2001andpromotedtoExecutiveVicePresidentinMarch2005.
MikeValentinejoinedtheCompanyinDecember1998asDirectorofTechnology.HewaspromotedtoVicePresidentin2000andtoPresidentofCernerMidAmericainJanuaryof2003.InFebruary2005,hewasnamedGeneralManageroftheU.S.ClientOrganizationandwaspromotedtoSeniorVicePresidentinMarch2005.PriortojoiningtheCompany,Mr.ValentinewaswithAccentureConsulting.
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RandyD.SimsjoinedtheCompanyinMarch1997asVicePresidentandChiefLegalOfficer.PriortojoiningtheCompany,Mr.SimsworkedatFarmlandIndustries,Inc.forthreeyearswhereheservedmostrecentlyasAssociateGeneralCounsel.PriortoFarmland,Mr.Simswasin-houselegalcounselatTheMarleyCompanyforsevenyears,holdingthepositionofAssistantGeneralCounselwhenhelefttojoinFarmland.
JuliaM.WilsonjoinedtheCompanyinNovember1995.Sincethattime,shehasheldseveralpositionsintheFunctionalGroupOrganization.ShewaspromotedtoVicePresidentandChiefPeopleOfficerinAugust2003.
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PART IIItem 5. Market for the Registrant’s Common Stock and Related Security Holder MattersTheCompany’scommonstocktradesonThe NASDAQ Stock Market®underthesymbolCERN.Thefollowingtablesetsforththehigh,lowandlastsalespricesforthefiscalquartersof2005and2004asreportedbyThe NASDAQ National Market System.Thesequotationsrepresentpricesbetweendealersanddonotincluderetailmark-up,mark-downorcommissions,anddonotnecessarilyrepresentactualtransactions.
2005 200� High Low Last High Low Last Firstquarter $ 27.48 23.60 26.04 23.82 18.68 22.41 Secondquarter 34.74 25.69 33.86 23.63 19.95 21.37 Thirdquarter 43.72 34.03 43.47 23.47 20.69 22.31 Fourthquarter 49.26 40.76 45.46 26.80 21.99 26.59
AtMarch1,2006,therewereapproximately1,600ownersofrecord.Todate,theCompanyhaspaidnodividendsanditdoesnotintendtopaydividendsintheforeseeablefuture.Managementbelievesitisintheshareholders’bestinterestfortheCompanytoreinvestfundsintheoperationofthebusiness.
OnDecember15,2005, theCompany issued2,251shares (pre-stocksplit)of itsoutstandingstocktoUniversityofPittsburghMedicalCenteruponexerciseofawarrantgrantedin2000.Theaggregateexercisepricewas$101,717.06,or$45.1875(pre-stocksplit)pershare.TheshareswereissuedbytheCompanywithoutregistrationinrelianceontheexemptionprovidedbySection4(2)oftheSecuritiesAct.
Additionally,andaspreviouslydisclosed in theCompany’squarterly reportonForm10-Qfor thequarterendedJuly2,2005,onApril6,2005, theCompanyissued72,536shares(pre-stocksplit)ofitsoutstandingstocktoUniversityofPittsburghMedicalCenteruponexerciseofawarrantgrantedin2000.Theaggregateexercisepricewas$3,277,720.50,or$45.1875(pre-stocksplit)pershare.TheshareswereissuedbytheCompanywithoutregistrationinrelianceontheexemptionprovidedbySection4(2)oftheSecuritiesAct.
Item �. Selected Financial Data 2005 200� 200� 2002 2001 (2)(3) (4)(5) (6)(7)(8)(9)(10) (In thousands, except per share data)
Statements of Earnings Data:
Revenues $ 1,160,785 926,356 839,587 780,262 560,802
Operatingearnings 140,436 111,464 78,097 90,820 61,350
Earnings(loss)beforeincometaxesandcumulativeeffect
ofachangeinaccountingprinciple 135,244 107,920 71,222 80,625 (63,314)
Cumulativeeffectofachangeinaccountingforgoodwill,
netof$486incometaxbenefit - - - (786) -
Netearnings(loss) 86,251 64,648 42,791 48,022 (42,366)
Earnings(loss)pershare:(Note1)
Basic 1.16 .90 .61 .68 (.61)
Diluted 1.10 .86 .59 .65 (.61)
Weightedaveragesharesoutstanding:(Note1)
Basic 74,144 72,174 70,710 70,916 69,814
Diluted 78,090 75,142 72,712 74,100 69,814
BalanceSheetData:
Workingcapital $ 391,541 310,229 246,412 282,135 189,488
Totalassets 1,303,629 982,265 854,252 779,279 712,302
Long-termdebt,net 194,265 108,804 124,570 136,636 92,132
Shareholders’equity 760,533 597,485 494,680 441,244 394,839
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(1) Reflectstheeffectofa2-for-1stocksplitdistributedonJanuary9,2006.
(2) Includesataxbenefitof$4.8millionrelatingtothecarrybackofacapitallossgeneratedbythesaleofZynxHealthIncorporatedinthefirstquarterof2004.Theimpactofthisrefundclaimisa$4.8millionincreaseinnetearningsandanincreaseindilutedearningspershareof$.06for2005.
(3) IncludesachargeforthewriteoffofacquiredinprocessresearchanddevelopmentrelatedtotheacquisitionofthemedicalbusinessdivisionofVitalWorks,Inc.Theimpactofthischargeisa$3.9milliondecrease,netof$2.4milliontaxbenefit,innetearningsandadecreasetodilutedearningspershareof$.05for2005.
(4) IncludesagainonthesaleofZynxHealthIncorporated.Theimpactofthisgainisa$3.0millionincreaseinnetearningsandincreasetodilutedearningspershareof$.04for2004.
(5) Includesachargeforvacationaccrualof$3.3millionincludedingeneralandadministrative.Theimpactofthischargeisa$2.1milliondecrease,netof$1.2milliontaxbenefit,innetearningsandadecreasetodilutedearningspershareof$.03for2004.
(6) IncludesagainonthesaleofsharesofWebMDcommonstock.Theimpactofthisgainisa$3.3million,netof$1.9milliontaxexpense,increaseinnetearningsandanincreasetodilutedearningspershareof$.05for2002.
(7) Includesachargeforimpairmentofinvestments.Theimpactofthischargeisa$6.3million,netof$3.6milliontaxbenefit,decreaseinnetearningsandadecreasetodilutedearningspershareof$.09for2002.
(8) Includesthecumulativeeffectofachangeinaccountingforgoodwill.Theimpactofthischangeisa$.8million,netof$.5milliontaxbenefit,decreaseinnetearningsandadecreasetodilutedearningspershareof$.01for2002.
(9) IncludesagainonthesettlementoftheWebMDperformancewarrants.Theimpactofthisgainisa$4.8million,netof$2.7milliontaxexpense,increaseinnetearningsandanincreasetodilutedearningspershareof$.07for2001.
(10) IncludesachargeontheadjustmentofthecarryingvalueoftheWebMDshares.Theimpactofthischargeisan$81.4million,netof$46.1milliontaxbenefit,decreaseinnetearningsandadecreasetodilutedearningspershareof$1.11for2001.
Item �. Management’s Discussion and Analysis of Financial Condition and Results of OperationsIntroductionCernerCorporation(“Cerner”orthe“Company”)isheadquarteredinNorthKansasCity,Missouri.TheCompanyderivesrevenuebyselling,implementingandsupportingsoftwaresolutionsandhardwarethatgivehealthcareproviderssecureaccesstoclinical,administrativeandfinancialdatainrealtime,allowingthemtoimprovethequality,safetyandefficiencyinthedeliveryofhealthcare.Cernerimplementsthesesolutionsasstand-alone,combinedorenterprise-widesystems.CernerMillennium®softwaresolutionscanbemanagedbytheCompany’sclientsorintheCompany’sdatacenterviaamanagedservicesmodel.
Results Overview
The Company delivered very strong results in 2005. Total revenues for 2005 were $1,160,785,000, an increase of 25%, over 2004 revenues of$926,356,000.NetEarningsfor2005were$86,251,000,anincreaseof33%over2004revenuesof$64,648,000.Totalnewbusinessbookings,whichreflectthevalueofexecutedcontractsforsoftware,hardware,servicesandmanagedservices(hostingofsoftwareintheCompany’sdatacenter),wereatrecordlevelsat$1,354,977,000in2005,anincreaseof48%comparedto$917,367,000in2004.
TheCompany’soperationalperformancewasalsostrongin2005.TheCompanybroughtmorethan1,000Cerner Millenniumsolutionslive in2005,bringing the cumulative number of solutions implemented to over 4,800 at over 925 client facilities. These results included significant progress inimplementingcomputerizedphysicianorderentry(CPOE),whichisthesolutiongeneratingthehighestlevelofindustryattention.
TheCompany’sstrongoperationalperformanceisalsoreflectedinitscashflowresults.In2005,theCompanygenerated$228,865,000ofcashflowfromoperations,withrecordcashcollectionsofapproximately$1,200,595,000anddayssalesoutstanding(DSO)decreasingfrom104daysattheendof2004to89daysattheendof2005.
Healthcare Information Technology Market
2005continuedatrendofpositivedevelopmentsinthehealthcareinformationtechnology(HIT)marketplaceandfortheCompany.Overall,theacutecarehospitalmarketplaceisingoodfinancialcondition.AsMoody’sreportedinJanuary2006,hospitalbondratingupgradesbeatdowngradesforthefirsttimesince1997.Andwhilesomeprovidersaredealingwithissuessuchasanunfavorablepayormixandtheresponsibilitytoserveagrowinguninsuredpopulation,USATodayindicatedinJanuary2006thathospitalprofitmarginsreachedasix-yearhighof5.2percentin2004.
NationalpolicymakerscontinuelookingtoHIT.2005sawmeaningfulprogresstowardsabipartisanconsensusonCapitalHillaroundtheviewthatHITcandeliversignificantreturns.TheRANDCorporationstudypublishedinHealth Affairshelpedshapethatperspectivebydetailingpotentialsavingsof$162billionperyearthrougherrorreduction,elevatedefficiencyandimprovedconditionmanagement.
Forthethirdconsecutiveyear,PresidentBushusedtheStateoftheUnionaddressinJanuary2006toexpresshissupportforelectronichealthrecords.ThePresidentalsohighlightedthefactthatthefirstof78millionBabyBoomersturn60in2006,puttingstrainsonthehealthcaresystemandthefederalgovernmentastheneedforcareoftheBabyBoomersincreases.
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Results of OperationsYear Ended December 31, 2005, Compared to Year Ended January 1, 2005
TheCompany’snetearningsincreased33%to$86,251,000in2005comparedto$64,648,000in2004.Netearningsfor2005includedanadjustmentinthethirdquarterof2005relatedtoapriorperiodforataxbenefitfromthecarrybackofacapitallossgeneratedbythesaleofZynxHealthIncorporated(Zynx)of$4,749,000andthewriteoffofacquiredin-processresearchanddevelopmentinthefirstquarterof2005of$3,941,000,netofa$2,441,000taxbenefit.Includedin2004netearningsareanadjustmentinthethirdquarterof2004relatedtoapriorperiodvacationpayaccrualthatreducednetearningsby$2,076,000,netof$1,270,000oftax,andagainonthesaleofZynx,inthefirstquarterof2004thatincreasednetearningsby$3,023,000.Excludingthesefouritems,2005netearningswouldhaveincreased34%to$85,443,000comparedto2004netearningsof$63,701,000.
Revenues - TheCompany’srevenuesincreased25%to$1,160,785,000in2005from$926,356,000in2004.Revenuesfor2005includedrevenuesfromtheacquiredmedicalbusinessdivisionofVitalWorks,Inc.(VitalWorks),whichclosedonJanuary3,2005.ExcludingtherevenuefromthemedicalbusinessdivisionofVitalWorks,2005 revenues increased18%over2004. The revenuecomposition for2005was$449,734,000 insystemsales,$296,716,000insupportandmaintenance,$380,948,000inservicesand$33,387,000inreimbursedtravel.
Systemsalesincreased28%to$449,734,000in2005from$351,861,000in2004.Includedinsystemsalesarerevenuesfromthesaleofsoftware,hardwareandsublicensedsoftware,installationfees,transactionprocessingandsubscriptions,witheachcomponentgrowingatleast12%in2005.ThisincreaseisdueprimarilytoanincreaseinnewbusinessbookingsandtheinclusionofrevenuefromthemedicalbusinessdivisionofVitalWorksin2005.ExcludingrevenuefromthemedicalbusinessdivisionofVitalWorks,systemsaleswouldhaveincreased17%.
Support,maintenanceandservicerevenuesincreased25%to$677,664,000in2005from$542,414,000in2004.Supportandmaintenancerevenueswere$296,716,000and$241,439,000in2005and2004,respectively.Servicesrevenueswere$380,948,000and$300,975,000in2005and2004,respectively. Includedinsupport,maintenanceandservicerevenuesaresupportandmaintenanceofsoftwareandhardware,professionalservicesexcludinginstallation,andmanagedservices.TheseincreasesweredrivenbystrongperformanceindeliveringCerner MillenniumsolutionstoclientsandtheinclusionofrevenuefromtheacquiredmedicalbusinessdivisionofVitalWorks.ExcludingrevenuefromthemedicalbusinessdivisionofVitalWorks,support,maintenanceandservicesaleswouldhaveincreased19%.
Contractbacklog,whichreflectsnewbusinessbookingsthathavenotyetbeenrecognizedasrevenue, increased45%in2005comparedto2004.Thisincreaseisduetoanincreaseinnewbusinessbookingsin2005comparedto2004.AtDecember31,2005,theCompanyhad$1,724,583,000incontractbacklogand$415,681,000insupportandmaintenancebacklog,comparedto$1,191,170,000incontractbacklogand$347,662,000insupportandmaintenancebacklogattheendof2004.
Cost of Revenues -Thecostof revenues includes thecostof reimbursed travelexpense, thirdpartyconsultingservicesandsubscriptioncontent,computerhardwareandsublicensedsoftwarepurchasedfromhardwareandsoftwaremanufacturersfordeliverytoclients.Italsoincludesthecostofhardwaremaintenanceandsublicensedsoftwaresupportsubcontractedtothemanufacturers.Thecostofrevenueswas22%oftotalrevenuesin2005,and21%oftotalrevenuesin2004.Suchcosts,asapercentofrevenues,typicallyhavevariedasthemixofrevenue(software,hardware,servicesandsupport)componentscarryingdifferentmarginrateschangesfromperiodtoperiod.Theincreaseinthecostofrevenueasapercentoftotalrevenuesresultedprincipallyfromhigherlevelsofhardwaresalesatlowerthanhistoricallevelsofmarginforhardware.
Sales and Client Service -Salesandclientserviceexpensesincludesalariesofclientservicepersonnel,communicationsexpensesandunreimbursedtravelexpenses.Alsoincludedaresalesandmarketingsalaries,travelexpenses,tradeshowcostsandadvertisingcosts.Theseexpensesasapercentoftotalrevenueswere40%and41%in2005and2004,respectively.Theincreaseintotalsalesandclientserviceexpensesto$466,206,000in2005from$383,628,000in2004isprimarilyduetoanincreaseinpersonnel,personnelrelatedexpensesandincreasedpresenceintheglobalmarket.ThedecreaseinthisspendingasapercentoftotalrevenuereflectstheCompany’sabilitytogetbetterutilizationofitsresourcesandleveragethisspendingoveralargerrevenuestream.
Software Development - Softwaredevelopmentexpensesincludesalaries,documentationandotherdirectexpensesincurredinsoftwaredevelopmentandamortizationofsoftwaredevelopmentcosts.Totalexpendituresforsoftwaredevelopment,includingbothcapitalizedandnoncapitalizedportions,for 2005 and 2004 were $226,238,000 and $188,264,000, respectively. These amounts exclude amortization. Capitalized software costs were$62,523,000and$58,912,000for2005and2004,respectively.Theincreaseinaggregateexpendituresinsoftwaredevelopmentin2005isduetocontinueddevelopmentofCerner Millenniumsolutions.
General and Administrative - General and administrative expenses include salaries for corporate, financial and administrative staffs, utilities,communicationsexpenses,professionalfeesandthetransactiongainsorlossesonforeigncurrency.Theseexpensesasapercentoftotalrevenueswere7%inboth2005and2004.Totalgeneralandadministrativeexpenseswere$81,620,000and$63,327,000for2005and2004,respectively.Generalandadministrativeexpensesfor2004includeanadjustmenttoincreasethevacationpayaccrualof$3,346,000,relatedtopriorperiods.Excludingtheadjustmenttoincreasethevacationpayaccrual,generalandadministrativeexpensesasapercentofrevenueswere6%in2004.TheCompanyhadnettransactiongainsonforeigncurrencyof$2,700,000for2005comparedtonettransactionlossesonforeigncurrencyof$479,000for2004.
Thewrite-offofin-processresearchanddevelopmentin2005isanexpenseresultingfromtheacquiredmedicalbusinessdivisionofVitalWorks.
Interest Expense, Net -Interestincomewas$3,871,000in2005comparedto$3,022,000in2004.Thisincreaseisdueprimarilytohigherinterestrates,andahighercashbalancefedbycashcollections.Interestexpensewas$9,729,000in2005comparedto$9,174,000in2004.
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Other Income, Net -Otherincomewas$666,000in2005comparedto$2,608,000in2004.Otherincomein2004includedagainonthesaleofZynx.Alsoincludedinotherincomearerevenuesfromofficespaceleasedtothirdparties.
Income Taxes-TheCompany’seffectivetaxratewas36%and40%in2005and2004,respectively.Taxexpensefor2005includesanadjustmentthatreducedtaxexpenserelatedtoapriorperiodforataxbenefitfromthecarrybackofacapitallossgeneratedbythesaleofZynxof$4,749,000.Excludingthisadjustment,theCompany’seffectivetaxratewas40%for2005.
Operations by Segment
Inthefourthquarterof2005,theCompanychangeditsreportablesegmentstoreflecthowthechiefoperatingdecisionmakercurrentlyreviewstheCompany’sresultsintermsofallocatingresourcesandassessingperformance.ThischangeeffectivelypresentstheCompany’soperatingresultsbyitstwogeographicaloperatingsegments,DomesticandGlobal.Asaresult,thepriorperiodshavebeenretroactivelyadjustedtoreflectthechangeinreportablesegments.
Thefollowingtablepresentsasummaryoftheoperatinginformationfor2005and2004(inthousands):
OperatingSegments
2005 Domestic Global Other Total
Revenues $1,046,180 $ 113,314 $ 1,290 $1,160,785
Costofrevenues 231,977 16,981 5,728 254,686
Operatingexpenses 209,747 47,691 508,224 765,663
Totalcostsandexpenses 441,724 64,672 513,952 1,020,349
Operatingearnings $ 604,456 $ 48,642 $(512,662) $ 140,436
OperatingSegments
2004 Domestic Global Other Total
Revenues $ 858,945 $ 63,622 $ 3,789 $ 926,356
Costofrevenues 183,266 7,809 5,273 196,348
Operatingexpenses 156,888 38,411 423,245 618,544
Totalcostsandexpenses 340,154 46,220 428,518 814,892
Operatingearnings $518,791 $ 17,402 $(424,729) $ 111,464
OperatingearningsintheDomesticsegmentincreased17%fortheyearendedDecember31,2005comparedtotheyearendedJanuary1,2005.TotalDomesticsegmentrevenuesincreased22%inthe2005periodcomparedtothe2004perioddrivenbystrongbookingsgrowth.Costofrevenueswerebasicallyunchangedat22%and21%oftotalDomesticsegmentrevenuesfortheyearended2005and2004,respectively.Domesticsegmentrevenues,costofrevenuesandoperatingexpensesfor2005includedrevenuesfromtheacquiredmedicalbusinessdivisionofVitalWorks,whichclosedonJanuary3,2005.Domesticsegmentoperatingexpensesin2005increased34%comparedtothe2004periodasaresultofhiringadditionalpersonnelandtheinclusionofexpensesfromthemedicalbusinessdivisionofVitalWorks.
OperatingearningsintheGlobalsegmentincreased180%fortheyearendedDecember31,2005comparedtotheyearendedJanuary1,2005.Totalrevenuesincreased78%inthe2005periodcomparedtothe2004period.TheCompany’sreplacementofacompetitorintheSouthernregionofEnglandwasabigpartofitsglobalsuccessin2005,withthiscontractcontributingmorethan$14millionofrevenue.Otherregionsinourglobalbusinessalsohadanoutstandingyear.OnstrengthintheMiddleEast,AsiaPacific,FranceandCanada,Globalsegmentrevenuegrewmorethan50percentexcludingrevenuefromtheCompany’sUnitedKingdomcontract.Costofrevenueswere15%and12%oftotalGlobalsegmentrevenuesfortheyearended2005and2004,respectively.Operatingexpensesinthe2005periodincreased24%comparedtothe2004periodduetohiringpersonnelforthehigherlevelofactivityoutsidetheUnitedStates.
OperatinglossesinOtherincreased21%fortheyearendedDecember31,2005comparedtotheyearendedJanuary1,2005.IncludedinOtherarerevenuesandexpensesnottrackedbygeographicsegment.Operatingexpensesincreased20%inthe2005periodcomparedtothe2004period.Thisincreaseinoperatingexpensesisduetoanincreaseinexpensessuchassoftwaredevelopment,marketing,generalandadministrativeanddepreciationinthe2005periodcomparedtothe2004period.Operatingexpensesinthe2005periodincludesthewrite-offofacquiredin-processresearchanddevelopmentof$6,382,000.
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Year Ended January 1, 2005, Compared to Year Ended January 3, 2004
TheCompany’srevenuesincreased10%to$926,356,000in2004from$839,587,000in2003.TheCompanyhadnetearningsof$64,648,000in2004comparedto$42,791,000in2003.Includedin2004netearningsareanadjustmentinthethirdquarterof2004relatedtoapriorperiodvacationpayaccrualthatreducednetearningsby$2,076,000,netof$1,270,000oftax,andagainonthesaleofZynx,inthefirstquarterof2004thatincreasednetearningsby$3,023,000.Excludingthesetwoitems,2004netearningswouldhavebeen$947,000lower,or$63,701,000.
Revenues - In 2004, revenues increased due to an increase in system sales, support of installed systems and an increase in services. Support,maintenanceandservicerevenuesincreased14%to$542,414,000in2004from$476,795,000in2003.Supportandmaintenancerevenueswere$241,439,000 and $209,876,000 in 2004 and 2003, respectively. Service revenues were $300,975,000 and $266,918,000 in 2004 and 2003,respectively.Includedinsupport,maintenanceandservicerevenuesaresupportandmaintenanceofsoftwareandhardware,managedservicesandprofessionalservices,excludinginstallation.TheincreaseinsupportandmaintenancerevenuewasdueprimarilytotheincreaseintheCompany’sinstalledandconvertedclientbase,thatwasdrivenbybringingarecordnumberofCernerMillenniumsolutionslivein2003and2004.Theincreaseinservicerevenuewasdrivenbyincreasedprofessionalservicesbillablehoursandastrongincreaseinmanagedservices.
Systemsalesincreased6%to$351,861,000in2004from$332,349,000in2003.Includedinsystemsalesarerevenuesfromthesaleofsoftware,hardwareandsublicensedsoftware. This increaseisdueprimarilytoanincreasein licensedsoftwaresalesthatwaspartiallyoffsetbydeclines inhardwaresales.
At January 1, 2005, the Company had $1,191,170,000 in contract backlog and $347,662,000 in support and maintenance backlog, compared to$938,221,000incontractbacklogand$312,887,000insupportandmaintenancebacklogattheendof2003.
Cost of Revenues -Thecostof revenues includes thecostof reimbursed travelexpense, thirdpartyconsultingservicesandsubscriptioncontent,hardwareandsublicensedsoftwarepurchasedfromhardwareandsoftwaremanufacturersfordeliverytoclients.Italsoincludesthecostofhardwaremaintenanceandsublicensedsoftwaresupportsubcontractedtothemanufacturers.Thecostofrevenueswas21%oftotalrevenuesin2004,and23%oftotalrevenuesin2003.Suchcosts,asapercentofrevenues,typicallyhavevariedasthemixofrevenue(software,hardware,servicesandsupport)componentscarryingdifferentmarginrateschangesfromperiodtoperiod.Thedecreaseinthecostofrevenueasapercentoftotalrevenuesresultedprincipallyfromadecreaseinthepercentofrevenuefromhardwareandsublicensedsoftware,whichcarryahighercostofrevenuepercentage.
Sales and Client Service -Salesandclientserviceexpensesincludesalariesofclientservicepersonnel,communicationsexpensesandunreimbursedtravelexpenses.Alsoincludedaresalesandmarketingsalaries,travelexpenses,tradeshowcostsandadvertisingcosts.Theseexpensesasapercentoftotalrevenueswere41%and42%in2004and2003,respectively.Theincreaseintotalsalesandclientserviceexpensesto$383,628,000in2004from$352,728,000in2003isprimarilyduetoanincreaseinpersonnelandpersonnelrelatedexpenses.ThedecreaseinthisspendingasapercentoftotalrevenuereflectstheCompany’sabilitytogetbetterutilizationofitsresourcesandleveragethisspendingoveralargerrevenuestream.
Software Development - Softwaredevelopmentexpensesincludesalaries,documentationandotherdirectexpensesincurredinsoftwaredevelopmentandamortizationofsoftwaredevelopmentcosts.Totalexpendituresforsoftwaredevelopment,includingbothcapitalizedandnoncapitalizedportions,for2004and2003were$188,264,000and$179,999,000,respectively.Theseamountsexcludeamortization.Capitalizedsoftwarecostswere$58,912,000and $58,736,000 for 2004 and 2003, respectively. The increase in aggregate expenditures in software development in 2004 is due to continueddevelopmentofCerner Millenniumsolutions.
General and Administrative - General and administrative expenses include salaries for corporate, financial and administrative staffs, utilities,communicationsexpenses,foreigncurrencytransactiongainsandlossesandprofessionalfees.Theseexpensesasapercentoftotalrevenueswere7%inboth2004and2003.Totalgeneralandadministrativeexpenseswere$63,327,000and$58,236,000for2004and2003,respectively.Generalandadministrativeexpensesfor2004includethevacationpayaccrualadjustmentof$3,346,000,whichismorefullydescribedinnote14totheconsolidatedfinancialstatements.Excludingtheadjustmenttoincreasethevacationpayaccrual,generalandadministrativeexpensesasapercentofrevenueswere6%in2004.TheCompanyhadnettransactionlossesonforeigncurrencyof$479,000for2004comparedtonettransactiongainsonforeigncurrencyof$1,376,000for2003.
Interest Expense, Net -Interestincomewas$3,022,000in2004comparedto$1,219,000in2003.Thisincreaseisdueprimarilytohigherinterestrates,andahighercashbalancefedbycashcollections.Interestexpensewas$9,174,000in2004comparedto$8,236,000in2003.
Other Income, Net -Otherincomeincreasedfrom$142,000in2003to$2,608,000in2004.ThisincreaseisdueprimarilytoagainonthesaleofZynx.Alsoincludedinotherincomearerevenuesfromofficespaceleasedtothirdparties.
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Operations by Segment
Thefollowingtablepresentsasummaryoftheoperatinginformationfor2004and2003(inthousands):
OperatingSegments
2004 Domestic Global Other Total
Revenues $858,945 $63,622 $ 3,789 $926,356
Costofrevenues 183,266 7,809 5,273 196,348
Operatingexpenses 156,888 38,411 423,245 618,544
Totalcostsandexpenses 340,154 46,220 428,518 814,892
Operatingearnings $ 518,791 $ 17,402 $(424,729) $ 111,464
OperatingSegments
2003 Domestic Global Other Total
Revenues $ 782,434 $ 54,191 $ 2,963 $ 839,587
Costofrevenues 180,681 13,450 159 194,290
Operatingexpenses 134,177 35,814 397,209 567,200
Totalcostsandexpenses 314,858 49,264 397,368 761,490
Operatingearnings $467,576 $ 4,927 $(394,405) $ 78,097
OperatingearningsintheDomesticsegmentincreased11%fortheyearendedJanuary1,2005comparedtotheyearendedJanuary3,2004.TotalrevenuesfortheDomesticsegmentincreased10%inthe2004periodcomparedtothe2003period.Costofrevenueswere21%and23%oftotalDomesticsegmentrevenuesduetothedeclineinthirdpartycosts.Domesticsegmentoperatingexpenseswere18%and17%oftotalDomesticsegmentrevenuesfor2004and2003,respectively.
OperatingearningsintheGlobalsegmentincreased253%fortheyearendedJanuary1,2005comparedtotheyearendedJanuary3,2004.Thislargeincreaseisduetothesmallbasein2003comparedto2004.Totalrevenuesincreased17%in2004comparedto2003.Theincreaseintotalrevenuesisdueprimarilytoanincreaseinprofessionalservicesin2004comparedto2003.Costofrevenueswere12%and25%oftotalGlobalsegmentrevenues.Operatingexpensesincreased7%in2004comparedto2003.Theseincreasesaredueprimarilytoanincreasedpresenceintheglobalmarket.
OperatinglossesinOtherincreased8%fortheyearendedJanuary1,2005comparedtotheyearendedJanuary3,2004.Thisincreaseisduetoanincreaseintotalcostsandexpensesof8%in2004comparedto2003.Theincreaseinoperatingexpensesisduetoanincreaseinexpensessuchassoftwaredevelopment,marketing,generalandadministrativeanddepreciationin2004comparedto2003.
Liquidity and Capital ResourcesTheCompany’sliquidityisinfluencedbymanyfactors,includingtheamountandtimingoftheCompany’srevenues,itscashcollectionsfromitsclientsandtheamountstheCompanyinvestsinsoftwaredevelopment,acquisitionsandcapitalexpenditures.
TheCompany’sprincipalsourceofliquidityisitscash,cashequivalentsandshort-terminvestments.ThemajorityoftheCompany’scashandcashequivalentsconsistofU.S.GovernmentFederalAgencySecurities,short-termmarketablesecuritiesandovernightrepurchaseagreements.AtDecember31,2005theCompanyhadcashandcashequivalentsof$113,057,000,short-terminvestmentsof$161,230,000andworkingcapitalof$391,541,000comparedtocashandcashequivalentsof$189,784,000andworkingcapitalof$310,229,000atJanuary1,2005.
TheCompanygeneratedcashof$228,865,000,$168,304,000and$134,150,000fromoperationsin2005,2004and2003,respectively.Cashflowfromoperationsincreasedin2005dueprimarilytoastrongerperformanceinnetearningsandincreasedcollectionsofreceivables.TheCompanyhasperiodicallyprovidedlong-termfinancingoptionstocreditworthyclientsthroughthirdpartyfinancinginstitutionsandhasonoccasiondirectlyprovidedextendedpaymenttermsfromcontractdate.Someofthesepaymentstreamshavebeenassignedonanon-recoursebasistothirdpartyfinancinginstitutions.TheCompanyhasprovided itsusualandcustomaryperformanceguarantees to the thirdpartyfinancing institutions inconnectionwithitson-goingobligationsundertheclientcontract.During2005and2004,theCompanyreceivedtotalclientcashcollectionsof$1,200,595,000and$937,600,000,respectively,ofwhich7%and6%werereceivedfromthirdpartyclientfinancingarrangementsandnon-recoursepaymentassignments.Dayssalesoutstandingdecreasedfrom104daysattheendof2004to89daysattheendof2005.Revenuesprovidedundersupportandmaintenance
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agreementsrepresentrecurringcashflows.Supportandmaintenancerevenuesincreased23%in2005and15%in2004,andtheCompanyexpectstheserevenuestocontinuetogrowasthebaseofinstalledsystemsgrows.
Cash used in investing activities consisted primarily of the purchase of short-term investments of $161,230,000, the acquisition of businesses of$119,683,000in2005andcapitalizedsoftwaredevelopmentcostsof$62,523,000and$58,912,000andpurchasesofcapitalequipment, landandbuildingsof$100,583,000and$56,490,000in2005and2004,respectively.TheCompanycompletedthesaleofZynxinthefirstquarterof2004for$12,000,000.
TheCompany’sfinancingactivitiesfor2005primarilyconsistedofproceedsfromtheissuanceof long-termdebtof$111,827,000andtheexerciseofoptionsof$51,744,000,repaymentofarevolvinglineofcreditandlong-termdebtof$91,817,000andproceedsfromarevolvinglineofcreditof$70,000,000. In2004 theCompany’sfinancingactivitiesconsistedprimarilyof the repaymentofdebtof$24,879,000and theproceeds from theexerciseofstockoptionsof$25,717,000.
InNovember2005,theCompanycompleteda£65,000,000($112,002,000atDecember31,2005)privateplacementofdebtat5.54%pursuanttoaNoteAgreement.TheNoteAgreementispayableinsevenequalannualinstallmentsbeginninginNovember2009.TheproceedswereusedtorepaytheoutstandingamountundertheCompany’screditfacilityandforgeneralcorporatepurposes.TheNoteAgreementcontainscertainnetworthandfixedchargecoveragecovenantsandprovidescertainrestrictionsontheCompany’sabilitytoborrow,incurliens,sellassetsandpaydividends.TheCompanywasincompliancewithallcovenantsatDecember31,2005.
InDecember2002,theCompanycompleteda$60,000,000privateplacementofdebtpursuanttoaNoteAgreement.TheSeriesASeniorNotes,witha$21,000,000principalamountat5.57%,arepayableinthreeequal installmentsbeginninginDecember2006.TheSeriesBSeniornotes,witha$39,000,000principalamountat6.42%,arepayableinfourequalannualinstallmentsbeginningDecember2009.TheproceedswereusedtorepaytheoutstandingamountundertheCompany’screditfacilityandforgeneralcorporatepurposes.TheNoteAgreementcontainscertainnetworthandfixedchargecoveragecovenantsandprovidescertainrestrictionsontheCompany’sabilitytoborrow,incurliens,sellassetsandpaydividends.TheCompanywasincompliancewithallcovenantsatDecember31,2005.
InMay2002,theCompanyexpandeditscreditfacilitybyenteringintoanunsecuredcreditagreementwithagroupofbanksledbyUSBank.Thisagreementprovidesforacurrentrevolvinglineofcreditforworkingcapitalpurposes.Thecurrentrevolvinglineofcreditisunsecuredandrequiresmonthlypaymentsofinterestonly.InterestispayableattheCompany’soptionataratebasedonprime(7.25%atDecember31,2005)orLIBOR(4.39%atDecember31,2005)plus2%.Theinterestratemaybereducedbyupto1.15%ifcertainnetworthratiosaremaintained.Theagreementcontainscertainnetworth,currentratio,andfixedchargecoveragecovenantsandprovidescertainrestrictionsontheCompany’sabilitytoborrow,incurliens,sellassets,andpaydividends.Acommitmentfeeof3/10%to1/2%ispayablequarterlybasedontheusageoftherevolvinglineofcredit.TherevolvinglineofcreditmaturesonMay31,2007.AtDecember31,2005,theCompanyhadnooutstandingborrowingsunderthisagreementandhad$90,000,000availableforworkingcapitalpurposes.OnJanuary10,2005,theCompanydrewdown$35,000,000fromitsrevolvinglineofcreditinconnectionwiththeacquisitionofthemedicalbusinessdivisionofVitalWorks.(SeeNote2totheconsolidatedfinancialstatements.)ThisamountwaspaidinfullasofDecember31,2005.TheCompanywasincompliancewithallcovenantsatDecember31,2005.
InApril1999,theCompanycompleteda$100,000,000privateplacementofdebtpursuanttoaNoteAgreement.TheSeriesASeniorNotes,witha$60,000,000principalamountat7.14%,arepayable infiveequalannual installmentsthatbegan inApril2002. TheSeriesBSeniorNotes,witha$40,000,000principalamountat7.66%,arepayableinsixequalannualinstallmentswhichcommencedinApril2004.TheproceedswereusedtoretiretheCompany’sexisting$30,000,000ofdebt,andtheremainingfundswereusedforcapitalimprovementsandtostrengthentheCompany’scashposition.TheNoteAgreementcontainscertainnetworth,currentratio,andfixedchargecoveragecovenantsandprovidescertainrestrictionsontheCompany’sabilitytoborrow,incurliens,sellassets,andpaydividends.TheCompanywasincompliancewithallcovenantsatDecember31,2005.
TheCompanybelievesthatitspresentcashposition,togetherwithcashgeneratedfromoperationsand,ifnecessary,itslineofcredit,willbesufficienttomeetanticipatedcashrequirementsduring2006.
ThefollowingtablerepresentsasummaryoftheCompany’scontractualobligationsandcommercialcommitments,excludinginterest,asofDecember31,2005,exceptshort-termpurchaseordercommitmentsarisingintheordinarycourseofbusiness.
Paymentsduebyperiod
2011 and ContractualObligations(inthousands) 200� 200� 200� 200� 2010 thereafter Total
Long-TemDebtObligations 25,667 19,507 13,960 32,417 25,750 100,341 217,642
LeaseObligations 3,076 1,565 720 5 - - 5,366
Acquisition/DivestitureRelatedCommitments 17,605 12,418 11,348 7,288 5,661 29,026 83,346
SupplierSoftwarePurchaseCommitments 13,339 2,493 - - - - 15,832
Other 1,800 100 25 - - - 1,925
Total 61,487 36,083 26,053 39,710 31,411 129,367 324,111
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TheCompanyiscurrentlyplanningtoconstructanewdatacenteronitscampusinNorthKansasCityatanapproximatecostof$60,000,000,whichamountisnotincludedabove.TheconstructionisexpectedtostartinMay2006andtobecompletedin2007.
TheeffectsofinflationontheCompany’sbusinessduring2005,2004and2003werenotsignificant.
Recent Accounting PronouncementsInDecember2004,theFASBissuedStatementofFinancialAccountingStandards(“SFAS”)No.123(revised2004),ShareBasedPayments(“SFASNo.123(R)”)whichreplacesSFAS123,AccountingforStock-BasedCompensation,andsupersedesAPBOpinionNo.25,“AccountingforStockIssuedtoEmployees.”SFASNo.123(R)addressestheaccountingforshare-basedpaymentstransactionswithemployeesandotherthirdparties,eliminatestheabilitytoaccountforshare-basedcompensationtransactionsusingAPB25andrequiresthatthecompensationcostsrelatingtosuchtransactionsberecognizedintheconsolidatedstatementofearnings.InApril2005,theSecuritiesandExchangeCommissionannouncedtheadoptionofanewrulethatamendedtheeffectivedateofSFAS123(R).TheeffectivedateofthenewstandardunderthesenewrulesfortheCompany’sconsolidatedfinancialstatementswasJanuary1,2006.TheCompanyhaselectedtoadoptthestandardusingthemodifiedprospectiveapplicationunderthebi-nomialmethodandiscurrentlyassessingtheimpactthattheStatementwillhaveonitsconsolidatedfinancialstatements.
Critical Accounting PoliciesTheCompanybelievesthatthereareseveralaccountingpoliciesthatarecriticaltounderstandingtheCompany’shistoricalandfutureperformance,asthesepoliciesaffectthereportedamountofrevenueandothersignificantareasinvolvingmanagement’sjudgmentsandestimates.Thesesignificantaccountingpoliciesrelate torevenuerecognition,softwaredevelopment,concentrations,allowancefordoubtfulaccountsandpotential impairmentsofgoodwill.ThesepoliciesandtheCompany’sproceduresrelatedtothesepoliciesaredescribedindetailbelowandunderspecificareaswithinthis“ManagementDiscussionandAnalysisofFinancialConditionandResultsofOperations.”Inaddition,Note1totheconsolidatedfinancialstatementsexpandsupondiscussionoftheCompany’saccountingpolicies.
Revenue Recognition
TheCompanyrecognizesitsmultipleelementarrangements,includingsoftwareandsoftware-relatedservices,usingtheresidualmethodunderSOP97-2,“SoftwareRevenueRecognition,”asamendedbySOPNo.98-4,SOP98-9andclarifiedbyStaffAccountingBulletin’s(SAB)101“RevenueRecognitioninFinancialStatements”andSABNo.104“RevenueRecognition”andEmergingIssuesTaskForce00-21“AccountingforRevenueArrangementswithMultipleDeliverables”(“EITF00-21”).KeyfactorsintheCompany’srevenuerecognitionmodelaremanagement’sassessmentsthatinstallationservicesareessentialtothefunctionalityoftheCompany’ssoftwarewhereasimplementationservicesarenot.IftheCompany’sbusinessmodelweretochangesuchthatimplementationservicesbecameessentialtothefunctionalityoftheCompany’ssoftware,theperiodoftimeoverwhichtheCompany’slicensedsoftwarerevenueweretoberecognizedwouldlengthen.TheCompanygenerallyrecognizesrevenuefromthesaleofitslicensedsoftwareovertwokeymilestones,deliveryandinstallation,basedonpercentagesthatreflecttheunderlyingeffortfromplanningtoinstallation.Additionally,ifthetimetoachievetheCompany’sdeliveryandinstallationmilestonesforitslicensedsoftwareweretobeacceleratedordecelerated,itsmilestoneswouldbeadjustedandthetimingofrevenuerecognitionforitslicensedsoftwarecouldmateriallychange.
Software Development Costs
Costs incurred internally increatingcomputer softwaresolutionsareexpenseduntil technological feasibilityhasbeenestablisheduponcompletionofadetailedprogramdesign.Thereafter,allsoftwaredevelopmentcostsarecapitalizedandsubsequentlyreportedatthelowerofamortizedcostornetrealizablevalue.Capitalizedcostsareamortizedbasedoncurrentandexpectedfuturerevenueforeachsoftwaresolutionwithminimumannualamortizationequaltothestraight-lineamortizationovertheestimatedeconomiclifeofthesoftwaresolution.TheCompanyisamortizingcapitalizedcostsoverfiveyears.
TheCompany expects thatmajor software information systems companies, large information technology consulting service providers and systemsintegratorsandothersspecializinginthehealthcareindustrymayoffercompetitiveproductsorservices.Thepaceofchangeinthehealthcareinformationtechnologymarketisrapidandtherearefrequentnewproductintroductions,productenhancementsandevolvingindustrystandardsandrequirements.Asaresult,thecapitalizedsoftwaresolutionsmaybecomelessvaluableorobsoleteandcouldbesubjecttoimpairment.
Concentrations
SubstantiallyalloftheCompany’sclientsareintegrateddeliverynetworks,hospitalsandotherhealthcarerelatedorganizations.Ifsignificantadversemacro-economicfactorsweretoimpacttheseorganizationsitcouldmateriallyadverselyaffecttheCompany.TheCompany’saccesstocertainsoftwareandhardwarecomponentsisdependentuponsingleandsolesourcesuppliers.TheinabilityofanysuppliertofulfillsupplyrequirementsoftheCompanycouldaffectfutureresults.
Allowance for Doubtful Accounts
IfthecreditworthinessoftheCompany’sclientsweretoweakenortheCompany’scollectionsresultsrelativetohistoricalexperienceweretodecline,itcouldhaveamaterialadverseimpactonoperationsandcashflows.
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Goodwill
TheCompanyaccountsforitsgoodwillundertheprovisionsofStatementofFinancialAccountingStandards(SFAS)No.142,“GoodwillandOtherIntangibleAssets.”Asaresult,goodwillandintangibleassetswithindefinitelivesarenolongeramortizedbutareevaluatedforimpairmentannuallyorwheneverthereisanimpairmentindicator.Allgoodwillisassignedtoareportingunit,whereitissubjecttoanimpairmenttestbasedonfairvalue.TheCompanyagainassesseditsgoodwillforimpairmentinthesecondquartersof2005and2004andconcludedthatnogoodwillwasimpaired.TheCompanyusedadiscountedcashflowanalysistodeterminethefairvalueofthereportingunitsforallperiods.TheCompanycompletedeightacquisitionsandonedivestituresubsequenttoJune30,2001,whichresultedinapproximately$97millionofgoodwillthatwasnotamortizedinaccordancewithSFAS142.Goodwillamountedto$116,142,000and$54,600,000atDecember31,2005andJanuary1,2005,respectively.Iffuture,anticipatedcashflowsfromtheCompany’sreportingunitsthatrecognizedgoodwilldonotmaterializeasexpectedtheCompany’sgoodwillcouldbeimpaired,whichwouldresultinsignificantwrite-offs.
Factors that may Affect Future Results of Operations, Financial Condition or Business Statementsmadeinthisreport,theAnnualReporttoShareholdersinwhichthisreportismadeapart,otherreportsandproxystatementsfiledwiththeSecuritiesandExchangeCommission,communicationstoshareholders,pressreleasesandoralstatementsmadebyrepresentativesoftheCompanythatarenothistoricalinnature,orthatstatetheCompany’sormanagement’sintentions,hopes,beliefs,expectationsorpredictionsofthefuture,mayconstitute“forward-lookingstatements”withinthemeaningofSection21EoftheSecuritiesandExchangeActof1934,asamended(the“ExchangeAct”).Forward-lookingstatementscanoftenbeidentifiedbytheuseofforward-lookingterminology,suchas“could,”“should,”“will,”“intended,”“continue,”“believe,”“may,”“expect,”“hope,”“anticipate,”“goal,”“forecast,”“plan,”“guidance”or“estimate”orthenegativeofthesewords,variationsthereoforsimilarexpressions.Forward-lookingstatementsarenotguaranteesoffutureperformanceorresults.Theyinvolverisks,uncertaintiesandassumptions.Itisimportanttonotethatanysuchperformanceandactualresults,financialconditionorbusiness,coulddiffermateriallyfromthoseexpressedinsuchforward-lookingstatements.Factorsthatcouldcauseorcontributetosuchdifferencesinclude,butarenotlimitedto,thosediscussedinItem1A.RiskFactorsandelsewherehereinorinotherreportsfiledwiththeSecuritiesandExchangeCommission.Otherunforeseenfactorsnotidentifiedhereincouldalsohavesuchaneffect.TheCompanyundertakesnoobligationtoupdateorreviseforward-lookingstatementstoreflectchangedassumptions,theoccurrenceofunanticipatedeventsorchangesinfutureoperatingresults,financialconditionorbusinessovertime.
Item �A. Quantitative and Qualitative Disclosures about Market RiskAtDecember31,2005,theCompanyhada£65,000,000notepayableoutstandingthroughaprivateplacementwithaninterestrateof5.54%.ThenoteispayableinsevenequalinstallmentsbeginninginNovember2009.Becausetheborrowingisdenominatedinpounds,theCompanyisexposedtomovementsintheforeigncurrencyexchangeratebetweentheU.S.dollarandtheGreatBritainpound.A1%changeintheforeigncurrencyexchangeratebetweentheU.S.dollarandtheGreatBritainpoundatDecember31,2005wouldhavehadanapproximate$1,118,000changeinthebalanceofthereportedamountofthenotepayableinU.S.dollars.
Item �. Financial Statements and Supplementary DataTheFinancialStatementsandNotesrequiredbythisItemaresubmittedasaseparatepartofthisreport.
Item �. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.
Item �.A. Controls and Proceduresa)Evaluationofdisclosurecontrolsandprocedures.TheCompany’sChiefExecutiveOfficer(CEO)andChiefFinancialOfficer(CFO)haveevaluatedtheeffectivenessoftheCompany’sdisclosurecontrolsandprocedures(asdefinedintheExchangeActRules13a-15(e)and15d-15(e))asoftheendoftheperiodcoveredbytheAnnualReport(the“EvaluationDate”).Theyhaveconcludedthat,asoftheEvaluationDate,thesedisclosurecontrolsandprocedureswereeffectivetoensurethatmaterialinformationrelatingtotheCompanyanditsconsolidatedsubsidiarieswouldbemadeknowntothembyotherswithinthoseentitiesandwouldbedisclosedonatimelybasis.
b)TherewerenochangesintheCompany’sinternalcontrolsoverfinancialreportingduringthequarterendedDecember31,2005thathavemateriallyaffected,orarereasonablylikelytomateriallyaffect,itsinternalcontrolsoverfinancialreporting.
c) TheCompany’smanagement, including itsCEOandCFO, cannotprovidecompleteassurance that itsdisclosurecontrols andproceduresor theCompany’s internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide onlyreasonable,notabsolute,assurancethattheobjectivesofthecontrolsystemaremet.Further,thedesignofacontrolsystemmustreflectthefactthatthereareresourceconstraints,andthebenefitsofcontrolsmustbeconsideredrelativetotheircosts.Becauseoftheinherentlimitationsinallcontrolsystems,noevaluationofcontrolscanprovideabsoluteassurancethatallcontrolissuesandinstancesoffraud,ifany,withintheCompanyhavebeendetected.
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Management’s Report on Internal Control over Financial Reporting
TheCompany’smanagementisresponsibleforestablishingandmaintainingadequateinternalcontroloverfinancialreporting(asdefinedinRule13a-15(f)undertheSecuritiesExchangeActof1934,asamended).TheCompany’smanagementassessedtheeffectivenessoftheCompany’sinternalcontroloverfinancialreportingasofDecember31,2005.Inmakingthisassessment,theCompany’smanagementusedthecriteriasetforthbytheCommitteeofSponsoringOrganizationsof theTreadwayCommission (“COSO”) in its InternalControl-IntegratedFramework. TheCompany’smanagementhasconcludedthat,asofDecember31,2005,theCompany’sinternalcontroloverfinancialreportingiseffectivebasedonthesecriteria.TheCompany’sindependentregisteredpublicaccountingfirmthatauditedtheconsolidatedfinancialstatementsincludedintheannualreporthasissuedanauditreportontheCompany’sassessmentofitsinternalcontroloverfinancialreporting,whichisincludedhereinunder“ReportofIndependentRegisteredPublicAccountingFirm”.
Item �.B. Other InformationNone.
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PART IIIItem 10. Directors and Executive Officers of the RegistrantTheRegistrant’sProxyStatementtobeusedinconnectionwiththeAnnualMeetingofShareholderstobeheldonMay26,2006,willcontainunderthecaption“ElectionofDirectors”certaininformationrequiredbyItem10ofForm10-Kandsuchinformationisincorporatedhereinbythisreference.TheinformationrequiredbyItem10ofForm10-KastoexecutiveofficersissetforthinItem4AofPartIhereof.
TheRegistrant’sProxyStatementtobeusedinconnectionwiththeAnnualMeetingofShareholderstobeheldonMay26,2006,willcontainunderthecaption“CompliancewithSection16(a)oftheSecuritiesExchangeActof1934”certaininformationrequiredbyItem10ofForm10-Kandsuchinformationisincorporatedhereinbythisreference.
Audit Committee Financial Expert
TheBoardofDirectorshasdeterminedthatGeraldE.Bisbee,Jr.,Ph.D.,amemberoftheCompany’sAuditCommittee,isanauditcommitteefinancialexpertasthattermisdefinedunderItem401(h)ofRegulationS-K.
Code of Conduct; Corporate Governance Guidelines and Committee Charters
TheBoardofDirectorsoftheCompanyhasadoptedaCodeofConductthatappliestotheCompany’sprincipalexecutiveofficer,principalfinancialofficer,controllerandallotherassociatesoftheCompany,includingitsdirectorsandotherofficers.TheCompanyhaspostedthetextoftheCodeofConductonitsWebsiteatwww.cerner.comunder“AboutCerner/Investors/CorporateGovernance.”
TheBoardofDirectorsoftheCompanyhasalsoadoptedCorporateGovernanceGuidelines,whicharepostedontheCompany’sWebsiteatwww.cerner.comunder“AboutCerner/Investors/CorporateGovernance.”
ThechartersfortheAuditCommittee,theCompensationCommitteeandtheNominating,Governance&PublicPolicyCommitteearealsoavailableontheCompany’sWebsiteatwww.cerner.comunder“AboutCerner/Investors/CorporateGovernance.”
Aprintedcopyof theCodeofConductand theCorporateGovernanceGuidelinesarealsoavailable to thepublicatnochargebywriting toCernerCorporation,Attn.HumanResources,2800RockcreekParkway,NorthKansasCity,Missouri,64117,orcallingtheCompany’sheadquartersat(816)221-1024.
Item 11. Executive CompensationTheRegistrant’sProxyStatementtobeusedinconnectionwiththeAnnualMeetingofShareholderstobeheldonMay26,2006,willcontainunderthecaption“ExecutiveCompensation”theinformationrequiredbyItem11ofForm10-Kandsuchinformationisincorporatedhereinbythisreference.
Item 12. Security Ownership of Certain Beneficial Owners and ManagementTheRegistrant’sProxyStatementtobeusedinconnectionwiththeAnnualMeetingofShareholderstobeheldonMay26,2006,willcontainunderthecaption“VotingSecuritiesandPrincipalHoldersThereof”theinformationrequiredbyItem12ofForm10-Kandsuchinformationisincorporatedhereinbythisreference.
Item 1�. Certain Relationships and Related TransactionsTheRegistrant’sProxyStatementtobeusedinconnectionwiththeAnnualMeetingofShareholderstobeheldonMay26,2006,willcontainunderthecaption“CertainTransactions”theinformationrequiredbyItem13ofForm10-Kandsuchinformationisincorporatedhereinbythisreference.
Item 1�. Principal Accountant Fees and ServicesTheRegistrant’sProxyStatementtobeusedinconnectionwiththeAnnualMeetingofShareholderstobeheldonMay26,2006,willcontainunderthecaption“AuditandNon-AuditFees”theinformationrequiredbyItem14ofForm10-Kandsuchinformationisincorporatedhereinbythisreference.
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PART IVItem 15. Exhibits and Financial Statement Schedules (a)FinancialStatementsandExhibits.
(1) ConsolidatedFinancialStatements: ReportsofIndependentRegisteredPublicAccountingFirm
ConsolidatedBalanceSheets- December31,2005andJanuary1,2005
ConsolidatedStatementsofOperations- YearsEndedDecember31,2005,January1,2005andJanuary3,2004
ConsolidatedStatementsofChangesinEquity YearsEndedDecember31,2005,January1,2005andJanuary3,2004
ConsolidatedStatementsofCashFlows YearsEndedDecember31,2005,January1,2005andJanuary3,2004
NotestoConsolidatedFinancialStatements
(2) ThefollowingfinancialstatementscheduleandReport ofIndependentRegisteredPublicAccountingFirmofthe Registrantforthethreeyearperiodended December31,2005areincludedherein:
ScheduleII-ValuationandQualifyingAccounts,
ReportofIndependentRegisteredPublicAccountingFirm
All other schedules are omitted, as the required information is inapplicable or the information is presented in the consolidated financialstatementsorrelatednotes.
(3) Theexhibitsrequiredtobefiledbythisitemaresetforthbelow:
Number Description
3(a) SecondRestatedCertificateofIncorporationoftheRegistrant,datedDecember5,2003(filedasexhibit3(a)toRegistrant’sAnnualReportonForm10-KfortheyearendedJanuary3,2004andincorporatedhereinbyreference).
3(b) AmendedandRestatedBylaws,datedMarch9,2001(filedasExhibit4.2toRegistrant’sFormS-8filedonSeptember26,2001andincorporatedhereinbyreference).
4(a) AmendedandRestatedRightsAgreement,datedasofMarch12,1999,betweenCernerCorporationandUMBBank,n.a.,asRightsAgents,whichincludestheFormofCertificateofDesignation,PreferencesandRightsofSeriesAPreferredStockofCernerCorporation,asExhibitA,andtheFormofRightsCertificate,asExhibitB(filedasanExhibittoRegistrant’scurrentreportonForm8A/AdatedMarch31,1999andincorporatedhereinbyreference).
4(b) Specimenstockcertificate(filedasExhibit4(a)toRegistrant’sRegistrationStatementonFormS8(FileNo.3315156)datedApril10,1997andincorporatedhereinbyreference).
4(c) CreditAgreementbetweenCernerCorporationandU.S.BankNationalAssociationasadministrativeagentandheadarranger,andLaSalleBankNationalAssociation,asdocumentagent,datedasofMay31,2002(filedasExhibit4(a)toRegistrant’sQuarterlyReportonForm10-QforthequarterendedJune29,2002,andincorporatedhereinbyreference).
4(d) FirstAmendmenttoCreditAgreementbetweenCernerCorporationandU.S.BankNationalAssociationasadministrativeagentandheadarranger,andLaSalleBankNationalAssociation,asdocumentationagent,datedasofJuly22,2002(filedasExhibit4(d)toRegistrant’sAnnualReportonForm10-KfortheyearendedDecember28,2002,andincorporatedhereinbyreference).
4(e) SecondAmendmenttoCreditAgreementbetweenCernerCorporationandU.S.BankNationalAssociationasadministrativeagentandheadarranger,andLaSalleBankNationalAssociation,asdocumentationagent,datedasofApril30,233(filedasExhibit4(f)toRegistrant’sQuarterlyReportonForm10-QforthequarterendedMarch29,2003andincorporatedhereinbyreference).
4(f) ThirdAmendmenttoCreditAgreementbetweenCernerCorporationandU.S.BankNationalAssociationasadministrativeagentandheadarranger,andLaSalleBankNationalAssociation,asdocumentationagent,datedasofSeptember1,2004(filedasExhibit99.1toRegistrant’sForm8-KfiledonSeptember8,2004,andincorporatedhereinbyreference).
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4(g) FourthAmendmenttoCreditAgreementbetweenCernerCorporationandU.S.BankNationalAssociationasadministrativeagentandheadarranger,andLaSalleBankNationalAssociation,asdocumentationagent,datedasofDecember28,2004(filedasExhibit99.1toRegistrant’sForm8-KfiledonJanuary4,2005,andincorporatedhereinbyreference).
4(h) FifthAmendmenttoCreditAgreementbetweenCernerCorporationandU.S.BankNationalAssociationasadministrativeagentandheadarranger,andLaSalleBankNationalAssociation,asdocumentationagent,datedasofDecember28,2005(filedasExhibit99.1toRegistrant’sForm8-KfiledonJanuary4,2006,andincorporatedhereinbyreference).
4(i) CernerCorporationNoteAgreementdatedasofApril1,1999amongCernerCorporation,PrincipalLifeInsuranceCompany,PrincipalLifeInsuranceCompany,onbehalfofoneormoreseparateaccounts,CommercialUnionLifeInsuranceCompanyofAmerica,NipponLifeInsuranceCompanyofAmerica,JohnHancockMutualLifeInsuranceCompany,JohnHancockVariableLifeInsuranceCompany,andInvestorsPartnerLifeInsuranceCompany(filedasExhibit4(e)toRegistrant’sForm8-KdatedApril23,1999,andincorporatedhereinbyreference).
4(j) Note Purchase Agreement between Cerner Corporation and the purchasers therein, dated December 15, 2002 (filed as Exhibit 10(x) toRegistrant’sAnnualReportonForm10-KfortheyearendedDecember28,2002,andincorporatedhereinbyreference).
4(k) CernerCorporationNotePurchaseAgreementdatedasofNovember1,2005amongCernerCorporation,asissuer,andAIGAnnuityInsuranceCompany,AmericanGeneralLifeInsuranceCompanyandPrincipalLifeInsuranceCompany,aspurchasers,(filedasExhibit99.1toRegistrant’sForm8-KfiledonNovember7,2005,andincorporatedhereinbyreference).
10(a) IncentiveStockOptionPlanCofRegistrant(filedasExhibit10(f)toRegistrant’sAnnualReportonForm10-KfortheyearendedDecember31,1993,andincorporatedhereinbyreference).*
10(b) IndemnificationAgreementsbetweentheRegistrantandNealL.Patterson,CliffordW.IlligandGeraldE.Bisbee,Jr.,Ph.D.datedJune1,1987,June1,1987andFebruary9,1988,respectively(filedasExhibit10(i)toRegistrant’sAnnualreportonForm10-KfortheyearendedDecember31,1992,andincorporatedhereinbyreference).*
10(c) IndemnificationAgreementbetweenMichaelE.HermanandRegistrantdatedMay16,1995(filedasExhibit10(i)(a)toRegistrant’sQuarterlyReportonForm10-QfortheyearendedJune29,1996andincorporatedhereinbyreference).*
10(d) IndemnificationAgreementbetweenJohnC.DanforthandRegistrantdatedMay14,1996(filedasExhibit10(i)(b)toRegistrant’sQuarterlyReportonForm10-QfortheyearendedJune29,1996andincorporatedhereinbyreference).*
10(e) IndemnificationAgreementbetweenJohnC.DanforthandRegistrantdatedFebruary3,2005(filedasExhibit99.1totheRegistrant’sForm8-KdatedFebruary3,2005andincorporatedhereinbyreference).*
10(f) IndemnificationAgreementbetweenJeffC.Goldsmith,Ph.D.andRegistrantdatedNovember18,1999(filedasExhibit10(e)toRegistrant’sAnnualReportonForm10-KfortheyearendedJanuary1,2000andincorporatedhereinbyreference).*
10(g) IndemnificationAgreementbetweenWilliamB.Neaves,Ph.D.andNancy-AnnDeParleandRegistrantbothdatedSeptember20,2001(filedasExhibits10.1and10.2toRegistrant’sForm10-QforthequarterendedSeptember29,2001andincorporatedhereinbyreference).*
10(h) IndemnificationAgreementbetweenWilliamD.ZollarsandRegistrantdatedMay27,2005(filedasExhibit99.1toRegistrant’sForm8-KonJune3,2005andincorporatedhereinbyreference).*
10(i) AmendedStockOptionPlanDofRegistrantasofDecember8,2000(filedasExhibit10(f)toRegistrant’sAnnualReportonForm10-KfortheyearendedDecember30,2000,andincorporatedhereinbyreference).*
10(j) AmendedStockOptionPlanEofRegistrantasofDecember8,2000(filedasExhibit10(g)toRegistrant’sAnnualReportonForm10-KfortheyearendedDecember30,2000,andincorporatedhereinbyreference).*
10(k) CernerCorporationExecutiveStockPurchasePlandatedApril23,1999(filedasExhibit4(g)toRegistrant’sRegistrationStatementonFormS-8(FileNo.333-77029)andincorporatedhereinbyreference).*
10(l) FormofStockPledgeAgreement forCernerCorporationExecutiveStockPurchasePlan (filedasExhibit 4(h) toRegistrant’sRegistrationStatementonFormS-8(FileNo.333-77029)andincorporatedhereinbyreference).*
10(m) FormofPromissoryNoteforCernerCorporationExecutiveStockPurchasePlan(filedasExhibit4(i)toRegistrant’sRegistrationStatementonFormS-8(FileNo.333-77029)andincorporatedhereinbyreference).*
10(n) EmploymentAgreementofEarlH.Devanny,IIIdatedAugust13,1999(filedasExhibit10(q)toRegistrant’sAnnualReportonForm10-KfortheyearendedJanuary1,2000,andincorporatedhereinbyreference).*
10(o) EmploymentAgreementofNealL.PattersondatedNovember10,2005(filedasExhibit99.1toRegistrant’sForm8-KonNovember17,2005andincorporatedhereinbyreference).*
10(p) CernerCorporation2001Long-Term IncentivePlanF (filedasAnnex I toRegistrant’s2001ProxyStatement and incorporatedhereinbyreference).*
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10(q) CernerCorporation2004Long-TermIncentivePlanG(filedasExhibit4.5toRegistrant’sRegistrationStatementonFormS-8(FileNo.333-125492)onJune3,2005andincorporatedhereinbyreference).*
10(r) CernerCorporation2001AssociateStockPurchasePlan (filedasAnnex IIRegistrant’s2001ProxyStatementand incorporatedhereinbyreference).*
10(s) Qualified Performance-Based Compensation Plan (filed as Exhibit 10(v) to Registrant’s Annual Report on Form 10-K for the year endedDecember30,2000,andincorporatedhereinbyreference).*
10(t) 2006 Executive Compensation Plan (filed as Exhibit 99.2 to Registrant’s Form 8-K on March 10, 2006 and incorporated herein byreference).*
10(u) CernerCorporationExecutiveDeferredCompensationPlan(filedasExhibit10(y)toRegistrant’sAnnualReportonForm10-KfortheyearendedDecember28,2002,andincorporatedhereinbyreference).
10(v) CernerCorporation2005EnhancedSeverancePayPlanasAmendedandRestateddatedSeptember12,2005(filedasExhibit10.1onForm8-KfiledonSeptember12,2005andincorporatedhereinbyreference).*
10(w) CernerCorporation2001Long-TermIncentivePlanFNonqualifiedStockOptionAgreement(filedasExhibit10(v)toRegistrant’sAnnualReportonForm10-KfortheyearendedJanuary1,2005,andincorporatedhereinbyreference).*
10(x) CernerCorporation2001Long-TermIncentivePlanFNonqualifiedStockOptionGrantCertificate(filedasExhibit10(a)toRegistrant’sQuarterlyReportonForm10-QforthequarterendedOctober1,2005,andincorporatedhereinbyreference).*
10(y) CernerCorporation2001Long-Term IncentivePlanFNonqualifiedStockOptionDirectorAgreement (filedasExhibit10(x) toRegistrant’sAnnualReportonForm10-KfortheyearendedJanuary1,2005,andincorporatedhereinbyreference).*
10(z) CernerCorporation2001Long-TermIncentivePlanFDirectorRestrictedStockAgreement(filedasExhibit10(w)toRegistrant’sAnnualReportonForm10-KfortheyearendedJanuary1,2005,andincorporatedhereinbyreference).*
10(aa) CernerCorporation2004Long-TermIncentivePlanGNonqualifiedStockOptionGrantCertificate(filedasExhibit10(b)toRegistrant’sQuarterlyReportonForm10-QforthequarterendedOctober1,2005,andincorporatedhereinbyreference).*
* ManagementcontractsorcompensatoryplansorarrangementsrequiredtobeidentifiedbyItem15(a)(3)(b)
11 ComputationofRegistrant’sEarningsPerShare.(Exhibitomitted.Informationcontainedinnotestoconsolidatedfinancialstatements.)
21 SubsidiariesofRegistrant.
23 ConsentofIndependentRegisteredPublicAccountingFirm.
31.1 CertificationofNealL.Patterson,ChairmanoftheBoardandChiefExecutiveOfficer,pursuanttoSection302oftheSarbanes-OxleyActof2002.
31.2 CertificationofMarcG.Naughton,ChiefFinancialOfficer,pursuanttoSection302oftheSarbanes-OxleyActof2002.
32.1 Certificationpursuantto18U.S.C.Section.1350,asadoptedpursuanttoSection906oftheSarbanes-OxleyActof2002.
32.2 Certificationpursuantto18U.S.C.Section.1350,asadoptedpursuanttoSection906oftheSarbanes-OxleyActof2002.
(b) Exhibits.
TheresponsetothisportionofItem15issubmittedasaseparatesectionofthisreport.
(c) FinancialStatementSchedules.
TheresponsetothisportionofItem15issubmittedasaseparatesectionofthisreport.
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SIGNATURESPursuanttotherequirementsofSection13or15(d)oftheSecuritiesExchangeActof1934,theregistranthasdulycausedthisreporttobesignedonitsbehalfbytheundersigned,thereuntodulyauthorized.
CERNERCORPORATION
Dated:March16,2006 By:_/s/NealL.Patterson
NealL.Patterson
ChairmanoftheBoardand ChiefExecutiveOfficer
Pursuant to the requirementsof theSecuritiesExchangeActof1934, this reporthasbeensignedbelowby the followingpersonsonbehalfof theregistrantandinthecapacitiesandonthedatesindicated:
SignatureandTitle Date
____/s/NealL.Patterson March16,2006
NealL.Patterson,ChairmanoftheBoardand
ChiefExecutiveOfficer(PrincipalExecutiveOfficer)
____/s/CliffordW.Illig March16,2006
CliffordW.Illig,ViceChairmanandDirector
____/s/MarcG.Naughton March16,2006
MarcG.Naughton,SeniorVicePresidentand
ChiefFinancialOfficer(PrincipalFinancialandAccountingOfficer)
____/s/MichaelE.Herman March16,2006
MichaelE.Herman,Director
____/s/GeraldE.Bisbee March16,2006
GeraldE.Bisbee,Jr.,Ph.D.,Director
____/s/JohnC.Danforth March16,2006
JohnC.Danforth,Director
____/s/WilliamB.Neaves March16,2006
WilliamB.Neaves,Ph.D.,Director
____/s/Nancy-AnnDeParle March16,2006
Nancy-AnnDeParle,Director
____/s/WilliamD.Zollars March16,2006
WilliamD.Zollars,Director
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Report of Independent Registered Public Accounting Firm TheBoardofDirectorsandStockholders
CernerCorporation:
Wehaveauditedmanagement’sassessment,includedintheaccompanyingManagement’sReportonInternalControloverFinancialReportingappearingin Item 9.A. Controls and Procedures, that Cerner Corporation (the Corporation) maintained effective internal control over financial reporting as ofDecember31,2005,basedoncriteriaestablishedinInternal Control—Integrated FrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(COSO).TheCorporation’smanagementisresponsibleformaintainingeffectiveinternalcontroloverfinancialreportingandforitsassessmentoftheeffectivenessofinternalcontroloverfinancialreporting.Ourresponsibilityistoexpressanopiniononmanagement’sassessmentandanopinionontheeffectivenessoftheCorporation’sinternalcontroloverfinancialreportingbasedonouraudit.
WeconductedourauditinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhethereffectiveinternalcontroloverfinancialreportingwasmaintainedinallmaterialrespects.Ourauditincludedobtaininganunderstandingofinternalcontroloverfinancialreporting,evaluatingmanagement’sassessment,testingandevaluatingthedesignandoperatingeffectivenessofinternalcontrol,andperformingsuchotherproceduresasweconsiderednecessaryinthecircumstances.Webelievethatourauditprovidesareasonablebasisforouropinion.
Acompany’sinternalcontroloverfinancialreportingisaprocessdesignedtoprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples.Acompany’sinternalcontroloverfinancialreportingincludesthosepoliciesandproceduresthat(1)pertaintothemaintenanceofrecordsthat,inreasonabledetail,accuratelyandfairlyreflectthetransactionsanddispositionsoftheassetsofthecompany;(2)providereasonableassurancethattransactionsarerecordedasnecessarytopermitpreparationoffinancialstatementsinaccordancewithgenerallyacceptedaccountingprinciples,andthatreceiptsandexpendituresof the companyare beingmadeonly in accordancewith authorizations ofmanagement anddirectors of the company; and (3) provide reasonableassuranceregardingpreventionortimelydetectionofunauthorizedacquisition,use,ordispositionofthecompany’sassetsthatcouldhaveamaterialeffectonthefinancialstatements.
Becauseofitsinherentlimitations,internalcontroloverfinancialreportingmaynotpreventordetectmisstatements.Also,projectionsofanyevaluationofeffectivenesstofutureperiodsaresubjecttotheriskthatcontrolsmaybecomeinadequatebecauseofchangesinconditions,orthatthedegreeofcompliancewiththepoliciesorproceduresmaydeteriorate.
Inouropinion,management’sassessmentthatCernerCorporationmaintainedeffectiveinternalcontroloverfinancialreportingasofDecember31,2005,isfairlystated,inallmaterialrespects,basedoncriteriaestablishedin Internal Control—Integrated FrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(COSO).Also,inouropinion,CernerCorporationmaintained,inallmaterialrespects,effectiveinternalcontroloverfinancialreportingasofDecember31,2005,basedoncriteriaestablishedinInternal Control—Integrated FrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(COSO).
Wealsohaveaudited,inaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates),theconsolidatedbalancesheetsofCernerCorporationandsubsidiariesasofDecember31,2005andJanuary1,2005,andtherelatedconsolidatedstatementsofoperations,changes inequity,andcashflowsforeachof theyears in the three-yearperiodendedDecember31,2005,andour reportdatedMarch16,2006expressedanunqualifiedopiniononthoseconsolidatedfinancialstatements.
(signed)KPMGLLP
KansasCity,Missouri
March16,2006
Report of Independent Registered Public Accounting Firm TheBoardofDirectorsandStockholders
CernerCorporation:
WehaveauditedtheaccompanyingconsolidatedbalancesheetsofCernerCorporationandsubsidiaries(theCorporation)asofDecember31,2005andJanuary1,2005,andtherelatedconsolidatedstatementsofoperations,changesinequity,andcashflowsforeachoftheyearsinthethree-yearperiodendedDecember31,2005.Theseconsolidatedfinancialstatementsaretheresponsibilityof theCorporation’smanagement.Ourresponsibility is toexpressanopinionontheseconsolidatedfinancialstatementsbasedonouraudits.
WeconductedourauditsinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatement.Anauditincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements.Anauditalsoincludesassessingthe
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accountingprinciplesusedandsignificantestimatesmadebymanagement,aswellasevaluatingtheoverallfinancialstatementpresentation.Webelievethatourauditsprovideareasonablebasisforouropinion.
Inouropinion,theconsolidatedfinancialstatementsreferredtoabovepresentfairly,inallmaterialrespects,thefinancialpositionofCernerCorporationandsubsidiariesasofDecember31,2005andJanuary1,2005,andtheresultsoftheiroperationsandtheircashflowsforeachoftheyearsinthethree-yearperiodendedDecember31,2005,inconformitywithU.S.generallyacceptedaccountingprinciples.
Wealsohaveaudited,inaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates),theeffectivenessofCernerCorporation’sinternalcontroloverfinancialreportingasofDecember31,2005,basedoncriteriaestablishedin Internal Control—Integrated FrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(COSO),andourreportdatedMarch16,2006expressedanunqualifiedopiniononmanagement’sassessmentof,andtheeffectiveoperationof,internalcontroloverfinancialreporting.
(signed)KPMGLLP
KansasCity,Missouri
March16,2006
Management’s ReportThemanagementofCernerCorporationisresponsiblefortheconsolidatedfinancialstatementsandallotherinformationpresentedinthisreport.ThefinancialstatementshavebeenpreparedinconformitywithU.S.generallyacceptedaccountingprinciplesappropriatetothecircumstances,and,therefore,includedinthefinancialstatementsarecertainamountsbasedonmanagement’sinformedestimatesandjudgments.Otherfinancialinformationinthisreportisconsistentwiththatintheconsolidatedfinancialstatements.TheconsolidatedfinancialstatementshavebeenauditedbyCernerCorporation’sindependentregisteredpublicaccountantsandhavebeenreviewedbytheauditcommitteeoftheBoardofDirectors.
Consolidated Balance SheetsDecember31,2005andJanuary1,2005
2005 200� (In thousands except shares and per share data) Assets CurrentAssets: Cashandcashequivalents $ 113,057 189,784 Short-terminvestments 161,230 - Receivables,net 316,965 282,199 Inventory 9,585 7,373 Prepaidexpensesandother 42,685 30,117 Deferredincometaxes 8,109 - Totalcurrentassets 651,631 509,473 Propertyandequipment,net 292,608 230,440 Softwaredevelopmentcosts,net 172,548157,765 Goodwill,net 116,142 54,600 Intangibleassets,net 60,448 22,690 Otherassets 10,252 7,297
TotalAssets $ 1,303,629 982,265
LiabilitiesandStockholders’Equity CurrentLiabilities: Accountspayable $ 65,377 37,008 Currentinstallmentsoflong-termdebt 28,743 21,908 Deferredrevenue 79,890 77,445 Deferredincometaxes - 430 Accruedpayrollandtaxwithholdings 66,002 55,819 Otheraccruedexpenses 20,078 6,634 Totalcurrentliabilities 260,090 199,244 Long-termdebt 194,265 108,804 Deferredincometaxes 72,922 69,863 Deferredrevenue 14,533 5,703 Minorityowners’equityinterestinsubsidiary 1,286 1,166 Stockholders’Equity: Commonstock,$.01parvalue,150,000,000sharesauthorized, 78,514,463and74,776,763sharesissuedin2005and 2004,respectively 785 748 Additionalpaid-incapital 325,119 243,956 Retainedearnings 430,262 344,011 Accumulatedothercomprehensiveincome: Foreigncurrencyeffectsoncashandcashequivalents 4,367 8,770 Totalstockholders’equity 760,533 597,485
Commitments Totalliabilitiesandstockholders’equity $ 1,303,629 982,265
Seenotestoconsolidatedfinancialstatements.
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50
Consolidated Statement of OperationsFortheyearsendedDecember31,2005,January1,2005andJanuary3,2004
2005 200� 200� (Inthousands,exceptpersharedata) Revenues Systemsales $ 449,734 351,861 332,349Support,maintenanceandservices 677,664 542,414 476,795Reimbursedtravel 33,387 32,081 30,443 Totalrevenues 1,160,785 926,356 839,587 CostsandexpensesCostofsystemsales 171,073 115,803 111,256 Costofsupport,maintenanceandservices 50,226 48,464 52,591Costofreimbursedtravel 33,387 32,081 30,443Salesandclientservice 466,206 383,628 352,728Softwaredevelopment 211,455 171,589 156,236Generalandadministrative 81,620 63,327 58,236Write-offofinprocessresearchanddevelopment 6,382 - - Totalcostsandexpenses 1,020,349 814,892 761,490
Operatingearnings 140,436 111,464 78,097 Otherincome(expense): Interestexpense,net (5,858) (6,152) (7,017)Otherincome,net 666 2,608 142 Totalotherexpense,net (5,192) (3,544) (6,875) Earningsbeforeincometaxes 135,244 107,920 71,222 Incometaxes (48,993) (43,272) (28,431) Netearnings $ 86,251 64,648 42,791 Basicearningspershare $ 1.16 0.90 0.61 Dilutedearningspershare $1.10 0.86 0.59
Seenotestoconsolidatedfinancialstatements.
Consolidated Statements of Changes In EquityFortheyearsendedDecember31,2005,January1,2005andJanuary3,2004
Accumulated Additional Other CommonStock paid-in Retained Comprehensive Comprehensive Shares Amount capital Earnings Income Income (Inthousands) BalanceatDecember28,2002 71,962 $720 199,767 236,572 (1,744) Exerciseofoptions 649 6 6,695 - - -Purchaseoftreasuryshares - - - - - -Non-employeestockoptioncompensationexpense - - 34 - - -Taxbenefitfromdisqualifyingdispositionofstockoptions - - 1,876 - - -Associatestockpurchaseplandiscounts - - (604) - - -Thirdpartywarrants - - 2,052 - - -Foreigncurrencytranslationadjustment - - - - 6,438 6,438Unrealizedgainonavailable-for-saleequity securities,netofdeferredbenefitof$14 - - - - 76 76Netearnings - - - 42,791 - 42,791Comprehensiveincome 49,305 BalanceatJanuary3,2004 72,611 $726 209,820 279,363 4,770 Exerciseofoptions 2,166 22 25,524 - - -Employeestockoptioncompensationexpense - - 173 - - -Taxbenefitfromdisqualifyingdispositionofstockoptions - - 9,191 - - -Associatestockpurchaseplandiscounts - -(752) - - -Foreigncurrencytranslationadjustment - - - - 4,000 4,000Netearnings - - - 64,648 - 64,648Comprehensiveincome 68,648 BalanceatJanuary1,2005 74,777 $748 243,956 344,011 8,770 Exerciseofoptions 3,737 37 50,926 - - -Employeestockoptioncompensationexpense - - 780 - - -Taxbenefitfromdisqualifyingdispositionofstockoptions - - 30,289 - - -Associatestockpurchaseplandiscounts - -(832) - - -Foreigncurrencytranslationadjustment - - - - (4,403) (4,403)Netearnings - - - 86,251 - 86,251Comprehensiveincome 81,848 BalanceatDecember31,2005 78,514 $785 325,119 430,262 4,367
Seenotestoconsolidatedfinancialstatements.
51
Consolidated Statements of Cash FlowsFortheyearsendedDecember31,2005,January1,2005andJanuary3,2004
2005 200� 200�(Inthousands) CASHFLOWSFROMOPERATINGACTIVITIES Netearnings $ 86,251 64,648 42,791Adjustmentstoreconcilenetearningsto netcashprovidedbyoperatingactivities: Depreciationandamortization 114,055 90,802 69,330Gainonsaleofbusiness - (3,023) -Write-offofacquiredinprocessresearchanddevelopment 6,382 - -Non-employeestockoptioncompensationexpense - - 34Provisionfordeferredincometaxes (6,874) 295 21,317Taxbenefitfromdisqualifyingdispositionsofstockoptions 30,289 9,191 1,876Changesinoperatingassetsandliabilities(netofbusinessesacquired): Receivables,net(22,502) (24,747) 20,723Inventory (2,078) 3,924 (3,393)Prepaidexpensesandother(18,781) (20,743) (201)Accountspayable 14,382 9,474 (30,663)Accruedincometaxes 13,594 15,919 (5,187)Deferredrevenue 949 16,055 22,561Othercurrentliabilities 13,198 6,509 (5,038)Totaladjustments 142,614 103,656 91,359Netcashprovidedbyoperatingactivities 228,865 168,304 134,150CASHFLOWSFROMINVESTINGACTIVITIES Purchaseofcapitalequipment (64,785) (44,214) (26,831)Purchaseofland,buildings,andimprovements (35,798) (12,276) (56,752)Acquisitionofbusinesses,netofcashreceived (119,683) (1,957) (6,380)Proceedsfromthesaleofbusiness - 12,000 -Netincreaseinshort-terminvestments (161,230) - -Repaymentofnotesreceivable 51 1,977 651Capitalizedsoftwaredevelopmentcosts (62,523) (58,912) (58,736)Netcashusedininvestingactivities (443,968) (103,382) (148,048)CASHFLOWSFROMFINANCINGACTIVITIES Proceedsfromissuanceoflong-termdebt 111,827 - 320Proceedsfromrevolvinglineofcredit 70,000 - -Repaymentofrevolvinglineofcreditandlong-termdebt (91,848) (24,879) (13,238)Proceedsfromthirdpartywarrants - - 2,052Purchaseoftreasuryshares - - (5,930)Proceedsfromexerciseofoptions 51,744 25,717 6,703Associatestockpurchaseplandiscounts (832) (752) (604)Netcashprovidedby(usedin)financingactivities 140,891 86 (10,697)Effectofexchangeratechangesoncash (2,515) 2,937 3,740Increaseincashfromtheconsolidationofavariableinterestentity - - 151Netincrease(decrease)incashandcashequivalents (76,727) 67,945 (20,704)Cashandcashequivalentsatbeginningofyear 189,784 121,839 142,543Cashandcashequivalentsatendofyear $ 113,057 189,784 121,839Supplementaldisclosuresofcashflowinformation Cashpaidduringtheyearfor: Interest $ 8,157 8,614 7,984Incometaxes,netofrefund 13,591 21,865 10,426Noncashinvestingandfinancingactivities Issuanceofnotepayableforunusedsoftwarecredits $ - 7,500 -Acquisitionofequipmentthroughcapitalleases 89 2,075 9,811Non-cashchangesresultingfromacquisitions Increaseinaccountsreceivable 11,621 1,019 298Increaseinpropertyandequipment,net 2,355 65 431Increaseingoodwillandintangibles 124,921 2,187 6,234Increaseindeferredrevenue (10,979) (1,004) 485Increaseinlongtermdebt (3,111) (5) -Decreaseinotherworkingcapitalcomponents (5,124) (305) (1,068)Total $ 119,683 1,957 6,380
Seenotestoconsolidatedfinancialstatements.52
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Notes to Consolidated Financial Statements
1 Summary of Significant Accounting Policies(a) Principles of Consolidation -TheconsolidatedfinancialstatementsincludetheaccountsofCernerCorporationanditswholly-ownedsubsidiaries(the“Company”).Allsignificantintercompanytransactionsandbalanceshavebeeneliminatedinconsolidation.
(b) Nature of Operations - TheCompanydesigns,develops,markets,installs,hostsandsupportssoftwareinformationtechnologyandcontentsolutionsforhealthcareorganizationsandconsumers.TheCompanyalsoimplementsthesesolutionsasindividual,combinedorenterprise-widesystems.
(c) Revenue Recognition -Revenuesarederivedprimarilyfromthesaleofclinical,financialandadministrativeinformationsystemsandsolutions.The components of the system sales revenues are the licensing of computer software, installation, subscription content and the sale of computerhardwareandsublicensedsoftware.Thecomponentsofsupport,maintenanceandservicerevenuesaresoftwaresupportandhardwaremaintenance,remotehostingandmanagedservices,training,consultingandimplementationservices.TheCompanyprovidesseveralmodelsfortheprocurementof its clinical, financial and administrative information systems. The predominant method is a perpetual software license agreement, project-relatedinstallationservices,implementationandconsultingservices,softwaresupportandeitherremotehostingservicesorcomputerhardwareandsublicensedsoftware.
TheCompanyrecognizesrevenueinaccordancewiththeprovisionsofStatementofPosition(SOP)97-2,“SoftwareRevenueRecognition,”asamendedbySOP98-4,SOP98-9andclarifiedbyStaffAccountingBulletin’s(SAB)101“RevenueRecognitioninFinancialStatements”andSABNo.104“RevenueRecognition”andEmergingIssuesTaskForceIssueNo.00-21“AccountingforRevenueArrangementswithMultipleDeliverables”(“EITF00-21”).SOP97-2,asamended,generallyrequiresrevenueearnedonsoftwarearrangementsinvolvingmultiple-elementstobeallocatedtoeachelementbasedontherelativefairvaluesofthoseelementsiffairvaluesexistforallelementsofthearrangement.PursuanttoSOP98-9,theCompanyrecognizesrevenuefrommultiple-elementsoftwarearrangementsusing the residualmethod. Under the residualmethod, revenue is recognized inamultiple-elementarrangementwhenCompany-specificobjectiveevidenceof fairvalueexists forallof theundeliveredelements in thearrangement (i.e.professionalservices,softwaresupport,hardwaremaintenance,hardwareandsublicensedsoftware),butdoesnotexistforoneormoreofthedeliveredelementsinthearrangement(i.e.softwaresolutionsincludingproject-relatedinstallationservices).TheCompanyallocatesrevenuetoeachundeliveredelementinamultiple-elementarrangementbasedontheelement’srespectivefairvalue,withthefairvaluedeterminedbythepricechargedwhenthatelementissoldseparately.Specifically,theCompanydeterminesthefairvalueofthesoftwaresupportandmaintenanceportionofthearrangementbasedontherenewalpriceofthesoftwaresupportandmaintenancechargedtoclients;professionalservicesportionofthearrangement,otherthaninstallationservices, based on hourly rates which the Company charges for these services when sold apart from a software license; and, the hardware andsublicensedsoftware,basedonthepricesfortheseelementswhentheyaresoldseparatelyfromthesoftware.Theresidualamountofthefeeafterallocatingrevenuetothefairvalueoftheundeliveredelementsisattributedtothesoftwaresolution,includingproject-relatedinstallationservices.Ifevidenceofthefairvaluecannotbeestablishedfortheundeliveredelementsofalicenseagreement,theentireamountofrevenueunderthearrangementisdeferreduntiltheseelementshavebeendeliveredorobjectiveevidencecanbeestablished.
TheCompanyprovidesproject-relatedinstallationservices,whichincludeproject-scopingservices,conductingpre-installationauditsandcreatinginitialenvironments.Becauseinstallationservicesaredeemedtobeessentialtothefunctionalityofthesoftware,theCompanyrecognizesthesoftwarelicenseandinstallationservicesfeesoverthesoftwareinstallationperiodusingthepercentageofcompletionmethodpursuanttoStatementofPosition81-1(SOP81-1),Accounting for Performance of Construction-Type and Certain Production-Type Contracts,asprescribedbySOP97-2.TheCompanymeasuresthepercentageofcompletionbasedonoutputmeasureswhichreflectdirectlaborhoursincurred,beginningatsoftwaredeliveryandculminatingatcompletionofinstallation.Theinstallationservicesprocesslengthisdependentuponclientspecificfactorsandcanoccurinashortperiodoftimeorrangeuptooneyearinlength.
TheCompanyalsoprovidesimplementationandconsultingservices,whichincludeconsultingactivitiesthatfalloutsideofthescopeofthestandardinstallationservices. Theseservicesvarydependingonthescopeandcomplexityrequestedbytheclient. Examplesofsuchservicesmay includeadditionaldatabaseconsulting,systemconfiguration,projectmanagement,testingassistance,networkconsulting,postconversionreviewandapplicationmanagementservices.Implementationandconsultingservicesgenerallyarenotdeemedtobeessentialtothefunctionalityofthesoftware,andthusdoesnotimpactthetimingofthesoftwarelicenserecognition,unlesssoftwarelicensefeesaretiedtoimplementationmilestones.Inthoseinstances,theportionofthesoftwarelicensefeetiedtoimplementationmilestonesisdeferreduntiltherelatedmilestoneisaccomplishedandrelatedfeesbecomebillableandnon-forfeitable.Implementationfeesarerecognizedovertheserviceperiod,whichmayextendfromninemonthstothreeyearsformulti-phasedprojects.
Managedservicesaremarketedunderlong-termarrangementsgenerallyoverperiodsoffiveto10years.TheseservicesaretypicallyprovidedtoclientsthathaveacquiredaperpetuallicenseforlicensedsoftwareandhavecontractedwiththeCompanytohostthesoftwareinitsdatacenter.Underthesearrangements,theclienthasthecontractualrighttotakepossessionofthelicensedsoftwareatanytimeduringthehostingperiodwithoutsignificantpenaltyanditisfeasiblefortheclienttoeitherrunthesoftwareonitsownequipmentorcontractwithanotherpartyunrelatedtotheCompanytohostthesoftware.Assuch,theCompanyaccountsforthesearrangementsunderSOP97-2,asprescribedbyEITFIssueNo.00-3,ApplicationofAICPAStatementofPosition97-2 toArrangementsThat Include theRight toUseSoftwareStoredonAnotherEntity’sHardware. Becausevendor-specificobjectiveevidenceforhostingandmanagedservicesisestablishedthroughrenewalratesinthearrangements,theCompanyusestheresidualmethodtorecognizerevenueforthesoftwareelement.Thehostingandmanagedservicesarerecognizedastheservicesareperformed.
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TheCompanyalsooffersitssolutionsonanapplicationserviceprovider(“ASP”)oratermlicensebasis,makingavailableCompanysoftwarefunctionalityonaremoteprocessingbasisfromtheCompany’sdatacenters.Thedatacentersprovidesystemandadministrativesupportaswellasprocessingservices.RevenueonsoftwareandservicesprovidedonanASPortermlicensebasisisrecognizedonamonthlybasisoverthetermofthecontract.TheCompanycapitalizesrelateddirectcostsconsistingofthird-partycostsanddirectsoftwareinstallationandimplementationcosts.Thesecostsareamortizedoverthetermofthearrangement.
Softwaresupportfeesaremarketedunderannualandmulti-yeararrangementsandarerecognizedasrevenueratablyoverthecontractedsupportterm.Hardwaremaintenancerevenuesarebilledandrecognizedmonthlyoverthecontractedmaintenanceterm.
Subscriptionandcontentfeesaregenerallymarketedunderannualandmulti-yearagreementsandarerecognizedratablyoverthecontractedterms.
Hardwareandsublicensedsoftwaresalesaregenerallyrecognizedwhentitlepassestotheclient.
WheretheCompanyhascontractuallyagreedtodevelopneworcustomizedsoftwarecodeforaclientasasingleelementarrangement,theCompanyutilizespercentageofcompletionaccountinginaccordancewithSOP81-1.Ifacontractincludesmultipleelements,includingoneormoreundeliveredelement,oriftheagreementincludescontingentrevenue(asdefinedinEITF00-21),theCompanycomplieswiththeprovisionsofEITF00-21anddelaysrevenuerecognitionuntilundeliveredelementsaredeliveredandrevenuecontingenciesexpire.Whenrevenueisdeferredalldirectandincrementalcostsassociatedwiththearrangementarecapitalizedandamortizedoverthecontractualtermoncerevenuerecognitioncommences.
IntheUnitedKingdomtheCompanyhascontractedwithathirdpartytocustomizesoftwareandprovideimplementationandsupportservicesunderalongtermarrangement(nineyears).Becausethearrangementrequirescustomizationanddevelopmentofsoftware,andfairvalueforthesupportservices does not exist in this arrangement, the entire arrangement is being accounted for as a single unit of accounting under SOP 81-1. Also,becausetheCompanybelievesitisreasonablyassuredthatnolosswillbeincurredunderthisarrangement,itisusingthezeromarginapproachofapplyingpercentage-of-completionaccountinguntilthesoftwarecustomizationanddevelopmentservicesarecompleted.Oncesoftwarecustomizationanddevelopment servicesarecompleted, the remainingunrecognizedportionof the feewill be recognized ratablyover the remaining termof thearrangement.AsofDecember31,2005,$14,181,000ofrevenueandexpensehavebeenrecognizedintheaccompanyingConsolidatedStatementofOperations.
Deferredrevenueiscomprisedofdeferralsforlicensefees,support,maintenanceandotherservicesforwhichpaymenthasbeenreceivedandforwhichtheservicehasnotyetbeenperformedandrevenuehasnotbeenrecognized.Long-termdeferredrevenueatDecember31,2005,representsamountsreceivedfromlicensefees,maintenanceandotherservicestobeearnedorprovidedbeginninginperiodsonorafterDecember31,2006.
TheCompanyincursout-of-pocketexpensesinconnectionwithitsclientserviceactivities,primarilytravel,whicharereimbursedbyitsclients.Theamountsof”out-of-pocket”expensesandequalamountsofrelatedreimbursementswere$33,387,000,$32,081,000and$30,443,000fortheyearsendedDecember31,2005,January1,2005andJanuary3,2004,respectively.
TheCompany’sarrangementswithclientstypicallyincludeadepositdueuponcontractsigninganddate-basedlicensedsoftwarepaymenttermsandpaymentsbasedupondeliveryforservices,hardwareandsublicensedsoftware.TheCompanyhasperiodicallyprovidedlong-termfinancingoptionstocreditworthyclientsthroughthirdpartyfinancinginstitutionsandhasonoccasiondirectlyprovidedextendedpaymenttermsfromcontractdate.Certainofthesereceivableshavebeenassignedonanon-recoursebasistothirdpartyfinancinginstitutions.TheCompanyaccountsfortheassignmentofthesereceivablesas“truesales”asdefinedinFASBStatementNo.140,AccountingforTransfersandServicingofFinancialAssetsandExtinguishmentsofLiabilities.Providedallrevenuerecognitioncriteriahavebeenmet,theCompanyrecognizesrevenueforthesearrangementsunderitsnormalrevenuerecognitioncriteria,netofanypaymentdiscountsfromfinancingtransactions.
ThetermsoftheCompany’ssoftwarelicenseagreementswithitsclientsgenerallyprovideforalimitedindemnificationofsuchintellectualpropertyagainst losses,expensesand liabilitiesarising from third-partyclaimsbasedonalleged infringementby theCompany’s solutionsofan intellectualproperty rightofsuch thirdparty.The termsofsuch indemnificationoften limit thescopeofandremedies forsuch indemnificationobligationsandgenerallyincludearighttoreplaceormodifyaninfringingsolution.Todate,theCompanyhasnothadtoreimburseanyofitsclientsforanylossesrelatedtotheseindemnificationprovisionspertainingtothird-party intellectualproperty infringementclaims.Forseveralreasons, includingthelackofpriorindemnificationclaimsandthelackofamonetaryliabilitylimitforcertaininfringementcasesunderthetermsofthecorrespondingagreementswithitsclients,theCompanycannotdeterminethemaximumamountofpotentialfuturepayments,ifany,relatedtosuchindemnificationprovisions.
(d) Fiscal Year - TheCompany’sfiscalyearendsontheSaturdayclosesttoDecember31.Fiscalyear2003consistedof53weeksandfiscalyears2005and2004consistedof52weekseach.Allreferencestoyearsinthesenotestoconsolidatedfinancialstatementsrepresentfiscalyearsunlessotherwisenoted.
(e) Software Development Costs -Costsincurredinternallyincreatingcomputersoftwareproductsareexpenseduntiltechnologicalfeasibilityhasbeenestablisheduponcompletionofadetailedprogramdesign.Thereafter,allsoftwaredevelopmentcostsarecapitalizedandsubsequentlyreportedatthelowerofamortizedcostornetrealizablevalue.Capitalizedcostsareamortizedbasedoncurrentandexpectedfuturerevenueforeachproductwithminimumannualamortizationequaltothestraight-lineamortizationovertheestimatedeconomiclifeoftheproduct.TheCompanyisamortizingcapitalizedcostsoverfiveyears.During2005,2004and2003,theCompanycapitalized$62,523,000,$58,912,000and$58,736,000,respectively,of totalsoftwaredevelopmentcostsof$226,238,000,$188,264,000and$179,999,000,respectively. Amortizationexpenseofcapitalizedsoftwaredevelopment costs in 2005, 2004 and 2003 was $47,740,000, $42,237,000 and $34,973,000, respectively, and accumulated amortization was$255,122,000,$207,382,000and$165,145,000,respectively.
(f) Cash Equivalents - Cashequivalentsconsistofshort-termmarketablesecuritieswithoriginalmaturitieslessthanninetydays.
(g) Short-term Investments - TheCompany’sshort-terminvestmentsareprimarilyinvestedinauctionratesecuritieswhicharedebtandpreferredstockinstrumentshavinglonger-dated(inmostcases,manyyears)legalmaturities,butwithinterestratesthataregenerallyresetevery28-49daysunderanauctionsystem. Becauseauctionratesecuritiesare frequentlyre-priced, theytrade in themarketonpar-in,par-outbasis. BecausetheCompanyregularlyliquidatesitsinvestmentsinthesesecuritiesforreasonsincluding,amongothers,changesinmarketinterestratesandchangesintheavailabilityofandtheyieldonalternativeinvestments,theCompanyhasclassifiedthesesecuritiesasavailable-for-salesecurities.Asavailable-for-salesecurities,theseinvestmentsarecarriedatfairvalue,whichapproximatescost.Despitetheliquidnatureoftheseinvestments,theCompanycategorizesthemasshort-terminvestmentsinsteadofcashandcashequivalentsduetotheunderlyinglegalmaturitiesofsuchsecurities.However,theyhavebeenclassifiedascurrentassetsastheyaregenerallyavailabletosupporttheCompany’scurrentoperations.Therehavebeennorealizedgainsorlossesontheseinvestments.
(h) Inventory -Inventoryconsistsprimarilyofcomputerhardwareandsub-licensedsoftwareheldforresaleandisrecordedatthelowerofcost(first-in,first-out)ormarket.
(i) Property and Equipment - Property,equipmentandleaseholdimprovementsarestatedatcost.Depreciationofpropertyandequipmentiscomputedusingthestraight-linemethodoverperiodsoftwoto50years.Amortizationofleaseholdimprovementsiscomputedusingastraight-linemethodovertheshorteroftheleasetermsortheusefullives,whichrangefromperiodsoftwoto15years.
(j) Earnings per Common Share - Basicearningspershare(EPS)excludesdilutionandiscomputedbydividingincomeavailabletocommonstockholdersbytheweighted-averagenumberofcommonsharesoutstandingfortheperiod.DilutedEPSreflectsthepotentialdilutionthatcouldoccurifsecuritiesorothercontractstoissuestockwereexercisedorconvertedintocommonstockorresultedintheissuanceofcommonstockthatthensharedintheearningsoftheCompany.Areconciliationofthenumeratorsandthedenominatorsofthebasicanddilutedper-sharecomputationsisasfollows:
(In thousands, except per share data)
2005 200� 200�
Earnings Shares Per-Share Earnings Shares Per-Share Earnings Shares Per-Share (Numerator) (Denominator) Amount (Numerator)(Denominator) Amount (Numerator)(Denominator) Amount
Basicearningspershare
Incomeavailableto commonstockholders $86,251 74,144 1.16 $64,648 72,174 $0.90 $42,791 70,710 $0.61 Effectofdilutivesecurities stockoptions - 3,946 - 2,968 - 2,002 Dilutedearningspershare
Incomeavailabletocommon
stockholdersincluding
assumedconversions $86,251 78,090 1.10 $64,648 75,142 $0.86 $42,791 72,712 $0.59
Options to purchase166,000, 3,138,000 and6,108,000 shares of common stock at per share prices ranging from$38.32 to $136.86, $22.50 to$136.86and$16.25to$287.41,wereoutstandingattheendof2005,2004and2003,respectively,butwerenotincludedinthecomputationofdilutedearningspersharebecausetheoptions’exercisepricewasgreaterthantheaveragemarketpriceofthecommonsharesfortheperiodandthuswereantidilutive.
(k) Foreign Currency -Assetsand liabilitiesof foreignsubsidiarieswhose functionalcurrency is the localcurrencyare translated intoU.S.dollarsatexchangeratesprevailingatthebalancesheetdate.Revenuesandexpensesaretranslatedataverageexchangeratesduringtheyear.Thenetexchangedifferencesresultingfromthesetranslationsarereportedinaccumulatedothercomprehensiveincome.Gainsandlossesresultingfromforeigncurrency transactionsare included in theconsolidatedstatementsofoperations. Thenetgain (loss) resulting fromforeigncurrency transactions isincludedingeneralandadministrativeexpensesintheconsolidatedstatementsofoperationsandamountedto$2,700,000,($479,000)and$1,376,000in2005,2004and2003,respectively.
(l) Income Taxes - Deferredtaxassetsandliabilitiesarerecognizedforthefuturetaxconsequencesattributabletodifferencesbetweenthefinancialstatementcarryingamountsofexistingassetsand liabilitiesand their respective taxbases. Deferred taxassetsand liabilitiesaremeasuredusingenactedtaxratesexpectedtoapplytotaxableincomeintheyearsinwhichthosetemporarydifferencesareexpectedtoberecoveredorsettled.
(m) Goodwill and Other Intangible Assets - TheCompanyaccountsforgoodwillundertheprovisionsofStatementofFinancialAccountingStandards(SFAS)No.142,“GoodwillandOther IntangibleAssets.” Asaresult,goodwilland intangibleassetswith indefinite livesarenot amortizedbutare
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evaluatedforimpairmentannuallyorwheneverthereisanimpairmentindicator.Allgoodwillisassignedtoareportingunit,whereitissubjecttoanimpairmenttestbasedonfairvalue.TheCompanyassessesitsgoodwillforimpairmentinthesecondquarterofitsfiscalyear.Therewasnoimpairmentofgoodwillin2005and2004.TheCompanyusedadiscountedcashflowanalysistodeterminethefairvalueofthereportingunitsforallperiodstested.TheCompany’sintangibleassets,otherthangoodwillorintangibleassetswithindefinitelives,areallsubjecttoamortizationandaresummarizedasfollows:
(Inthousands)
December �1, 2005 January 1, 2005
Weighted Average Gross Gross Amortization Carrying Accumulated Carrying Accumulated Period(Yrs) Amount Amortization Amount Amortization Purchasedsoftware 5.0 $ 53,307 29,690 40,966 20,792
Customerlists 5.0 45,642 10,514 3,700 2,240
Patents 14.0 1,556 133 1,080 109
Non-competeagreements 5.0 382 102 125 40
Total 5.14 $ 100,887 40,439 45,871 23,181
Amortizationexpensewas$17,258,000,$6,679,000and$6,592,000fortheyearsended2005,2004and2003,respectively.
Estimatedaggregateamortizationexpenseforeachofthenextfiveyearsisasfollows:
Foryearended: 2006 $ 17,359
2007 13,731
2008 13,466
2009 11,740
2010 860
Thechangesinthecarryingamountofgoodwillforthe12monthsendedDecember31,2005areasfollows:
BalanceasofJanuary1,2005 $ 54,600
Goodwillacquired 62,278
Foreigncurrencytranslationadjustmentandother (736)
BalanceasofDecember31,2005 $ 116,142
AtDecember31,2005andJanuary1,2005,goodwillof$111,036,000and$50,701,000hasbeenallocatedtotheDomesticsegmentrespectively.The2005and2004amountsofgoodwillallocatedtotheGlobalsegmentwas$5,106,000and$3,899,000,respectively.
(n) Use of Estimates - Thepreparationoffinancialstatements inconformitywithaccountingprinciplesgenerallyaccepted in theUnitedStatesofAmericarequiresmanagementtomakeestimatesandassumptionsthataffectthereportedamountsofassetsandliabilitiesanddisclosureofcontingentassetsandliabilitiesatthedateofthefinancialstatementsandthereportedamountsofrevenuesandexpensesduringthereportingperiod.Actualresultscoulddifferfromthoseestimates.
(o) Concentrations -SubstantiallyalloftheCompany’scashandcashequivalentsandshort-terminvestments,areheldatthreemajorU.S.financialinstitutions.ThemajorityoftheCompany’scashequivalentsconsistofU.S.GovernmentFederalAgencySecurities,short-termmarketablesecurities,andovernightrepurchaseagreements. Depositsheldwithbanksmayexceedtheamountof insuranceprovidedonsuchdeposits. Generallythesedepositsmayberedeemedupondemandand,therefore,bearminimalrisk.
SubstantiallyalloftheCompany’sclientsareintegrateddeliverynetworks,hospitalsandotherhealthcarerelatedorganizations.Ifsignificantadversemacro-economicfactorsweretoimpacttheseorganizationsitcouldmateriallyadverselyaffecttheCompany.TheCompany’saccesstocertainsoftwareandhardwarecomponentsisdependentuponsingleandsolesourcesuppliers.TheinabilityofanysuppliertofulfillsupplyrequirementsoftheCompanycouldaffectfutureresults.
(p) Accounting for Stock Options - TheCompanyappliestheintrinsic-value-basedmethodofaccountingprescribedbyAccountingPrinciplesBoard
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(APB)OpinionNo.25,“AccountingforStockIssuedtoEmployees,”andrelatedinterpretationsincludingFASBInterpretationNo.44,”AccountingforCertainTransactionsinvolvingStockCompensation,aninterpretationofAPBOpinionNo.25,”issuedinMarch2000,toaccountforitsfixed–planstockoptions.Underthismethodforfixedawards,compensationexpenseisrecordedonthedateofgrantonlyifthecurrentmarketpriceoftheunderlyingstockexceededtheexerciseprice.StatementofFinancialAccountingStandardsNo.123,“AccountingforStock-BasedCompensation,”establishedaccountinganddisclosurerequirementsusingafair-value-basedmethodofaccountingforstock-basedemployeecompensationplans.AsallowedbySFASNo.123,theCompanyhaselectedtocontinuetoapplytheintrinsic-value-basedmethodofaccountingdescribedabove,andhasadoptedonlythedisclosurerequirementsofSFASNo.123.ThefollowingisareconciliationofreportednetearningstoadjustednetearningshadtheCompanyrecordedcompensationexpensebasedonthefairvalueatthegrantdateforitsstockoptionsunderSFAS123fortheyearsended2005,2004and2003.
(Inthousands,exceptpersharedata)
2005 200� 200�
Reportednetearnings $ 86,251 64,648 42,791
Less:stock-basedcompensationexpensedetermined
underfair-value-basedmethodforallawards,netoftax (10,971) (7,903) (13,392)
Adjustednetearnings 75,280 56,745 29,399
Basicearningspershare:
Reportednetearnings $ 1.16 .90 .61
Less:stock-basedcompensationexpensedetermined
underfair-value-basedmethodforallawards,netoftax (.14) (.11) (.19)
Adjustednetearnings 1.02 .79 .42
Dilutedearningspershare:
Reportednetearnings $ 1.10 .86 .59
Less:stock-basedcompensationexpensedetermined
underfair-value-basedmethodforallawards (.14) (.11) (.18)
Adjustednetearnings .96 .75 .41
ProformanetearningsreflectonlyoptionsgrantedsinceJanuary1,1995.Therefore,thefullimpactofcalculatingcompensationexpenseforstockoptionsunderFAS123isnotreflectedintheproformanetearningsamountspresentedabove,becausecompensationcostisreflectedovertheoptions’vestingperiod.CompensationexpenseforoptionsgrantedpriortoJanuary1,1995isnotconsidered.
InDecember2004,theFASBissuedStatementofFinancialAccountingStandards(“SFAS”)No.123(revised2004),ShareBasedPayments(“SFASNo.123(R)”)whichreplacesSFAS123,AccountingforStock-BasedCompensation,andsupersedesAPBOpinionNo.25,“AccountingforStockIssuedtoEmployees.”SFASNo.123(R)addressestheaccountingforshare-basedpaymentstransactionswithemployeesandotherthirdparties,eliminatestheabilitytoaccountforshare-basedcompensationtransactionsusingAPB25andrequiresthatthecompensationcostsrelatingtosuchtransactionsberecognizedintheconsolidatedstatementofearnings.InApril2005,theSecuritiesandExchangeCommissionannouncedtheadoptionofanewrulethatamendedtheeffectivedateofSFAS123(R).TheeffectivedateofthenewstandardunderthesenewrulesfortheCompany’sconsolidatedfinancialstatementswasJanuary1,2006.TheCompanyhaselectedtoadoptthestandardusingthemodifiedprospectiveapplicationunderthebi-nomialmethodandiscurrentlyassessingtheimpactthattheStatementwillhaveonitsconsolidatedfinancialstatements.
(q) Reclassifications – Certainprioryearamountshavebeenreclassifiedtoconformtothecurrentyearconsolidatedfinancialstatementpresentation.
(r) Accounting for Variable Interest Entities - OnSeptember27,2003,theCompanyadoptedFinancialAccountingStandardsBoardInterpretationNo.46(“FIN46”)asamendedbyFIN46R,“ConsolidationofVariableInterestEntitiesanInterpretationofAPBNo.51.”TheInterpretationprovidesguidanceontheidentificationofentitiesforwhichcontrolisachievedthroughmeansotherthanthroughvotingrights(“variableinterestentities’”or“VIEs”)andhowtodeterminewhenandwhichbusinessenterprisesshouldconsolidatetheVIE(the“primarybeneficiary”).
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2 Business Acquisitions and DivestitureDuringthethreeyearsendedDecember31,2005,theCompanycompletedsixacquisitions,whichwereaccountedforunderthepurchasemethodofaccounting.
OnJanuary3,2005,theCompanycompletedthepurchaseofassetsofthemedicalbusinessdivisionofVitalWorks,Inc.forapproximately$100,000,000,whichwasfundedwithexistingcashofapproximately$65,000,000andborrowingsontherevolvinglineofcreditofapproximately$35,000,000.Themedicalbusinessconsistsofdeliveringandsupportingphysicianpracticemanagement, electronicmedical record, electronicdata interchangeandemergencydepartmentinformationsolutionsandrelatedproductsandservicestophysicianpractices,hospitalemergencydepartments,managementserviceorganizationsandotherrelatedentities. TheacquisitionofVitalWorks’medicaldivisionexpandedtheCompany’spresence in thephysicianpracticemarket.$6,382,000ofthepurchasepricewasallocatedtoin-processresearchanddevelopmentthathadnotreachedtechnologicalfeasibilityandisreflectedasachargetoearningsin2005.Theallocationofthepurchasepricetotheestimatedfairvaluesoftheidentifiedtangibleandintangibleassetsacquiredand liabilitiesassumed, resulted ingoodwill of$55,166,000and$43,450,000 in intangibleassets thatwill beamortizedoverfiveyears.
TheunauditedfinancialinformationinthetablebelowsummarizesthecombinedresultsofoperationsofCernerCorporationandthemedicalbusinessdivisionofVitalWorks,Inc.,onaproformabasis,asthoughthecompanieshadbeencombinedasofthebeginningoftheperiodspresented.TheproformafinancialinformationispresentedforinformationalpurposesonlyandisnotindicativeoftheresultsofoperationsthatwouldhavebeenachievediftheacquisitionandborrowingsundertheCompany’srevolvinglineofcredithadtakenplaceatthebeginningoftheperiodpresented.Theproformafinancialinformationfortheperiodpresentedincludesthepurchaseaccountingeffectofamortizationchargesfromacquiredintangibleassets,interestexpenseontheborrowingontherevolvinglineofcredit,andthechargeforthewriteoffofacquiredinprocessresearchanddevelopmentof$3,941,000,netofa$2,441,000taxbenefit.
(inthousands,exceptpersharedata) Twelvemonthsended January1,2005 Totalrevenues $997,449
NetIncome $64,578
Basicearningspershare $.89
Dilutedearningspershare $.86
ProformaresultsofoperationshavenotbeenpresentedforanyoftheotherfiveacquisitionsbecausetheeffectsoftheseacquisitionswerenotmaterialtotheCompanyoneitheranindividualoranaggregatebasis.TheresultsofoperationsofeachacquisitionareincludedintheCompany’sconsolidatedstatementofoperationsfromthedateofeachacquisition.
OnMarch15,2004theCompanysoldthereferentialcontentportionofZynxHealthIncorporated(Zynx)for$12,000,000.TheCompanyretainedthelifesciencesportionofthebusiness,whichisengagedinsellinglifesciencesdatatopharmaceuticalcompaniesforuseinresearch,andtheCompanyretainedtherightstousetheZynxcontentinitssolutionsgoingforward.ThesaleofZynxresultedinagainof$3,023,000,andhasbeenincludedinOtherIncome,netintheaccompanyingconsolidatedstatementsofoperations.
InconnectionwithfilingtheCompany’s2004incometaxreturn,managementdeterminedthatthesaleofZynxinthefirstquarterof2004resultedinataxcapitalloss.Thistaxcapitallosswascarriedbackagainstcapitalgainspreviouslyrealizedresultingintaxbenefitsof$4,794,000.Thetaxbenefitwasnotrecordedinthe2004consolidatedfinancialstatements.
Thetaxbenefit,ifproperlyrecordedin2004,wouldhaveincreased2004netearningsby$4,794,000.Astheimpacttoprioryear’sannualconsolidatedfinancialstatementswasnotmaterial,theCompanyrecordedthistaxbenefitof$4,794,000inthethirdquarterof2005(anincreaseto2005netearningsof$0.06pershareonadilutedbasisfortheyearendedDecember31,2005.)
AsummaryoftheCompany’spurchaseacquisitionsforthethreeyearsendedDecember31,2005,isincludedinthefollowingtable(inmillions,exceptshareamounts):
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Entity Name, Description of Business Acquired, Goodwill Developed Form of and Reason Business Acquired Date Consideration (Tax Basis) Intangibles Technology Consideration
Fiscal 2005 Acquisitions
BridgeMedical,Inc. 7/05 $11 $5.4 $5.5 $2.9 $11cash
Leaderinpoint-of-caresoftwaremarket ($5.4)
IntegratetechnologyintoCerner Millennium
DKESARL(AxyaSystemes) 5/05 $5.2 $1.2 $1.8 $1.5 $5.2cash
Financial,Administrative,andClinical SolutionsinEurope (0)
IntegratetechnologyintoCernerMillennium
MedicalDivisionofVitalWorks,Inc. 1/05 $100 $55.2 $35.1 $8.4 $100cash
PhysicianPracticeSolutions ($55.2)
IntegratetechnologyintoCernerMillennium
Fiscal 2004 Acquisitions
ProjectIMPACTCCM,Inc. 2/04 $.3 $.7 - $.6 $.3cash
ICUperformanceanalysisandbenchmarking (0)
IntegratetechnologyintoCerner Millennium
GajemaSoftware,LLC 8/04 $1.5 $.6 - $.8 $1.5cash
Laboratoryinformationmanagementandlogistics ($.6)
IntegratetechnologyintoCerner Millennium
Fiscal 2003 Acquisition
BeyondNowTechnologies(a) 9/03 $7.5 $3.0 - $3.2 $7.5cash
Homecaretechnologies (0)
IntegratetechnologyintoCerner Millennium
Amountsallocatedtointangiblesareamortizedonastraight-linebasisoverfivetosevenyears.Amountsallocatedtosoftwareareamortizedbasedoncurrentandexpectedfuturerevenuesforeachproductwithminimumannualamortizationequaltothestraight-lineamortizationovertheestimatedeconomiclifeoftheproduct.
(a) The assets and liabilities of the acquired companies at the date of acquisition are as follows:
Bridge Axya MedicalDivision ProjectIMPACT Gajema BeyondNow Medical,Inc. Systemes ofVitalWorks,Inc. CCM,Inc. Software TechnologiesCurrentAssets 1,172,000 2,680,000 11,404,000 644,000 72,000 1,977,000
TotalAssets 15,802,000 7,209,000 120,175,000 1,867,000 1,551,000 8,170,000
CurrentLiabilities 4,748,000 2,244,000 17,064,000 1,050,000 51,000 714,000
TotalLiabilities 4,783,000 2,483,000 19,877,000 1,201,000 51,000 714,000
� ReceivablesReceivablesconsistofaccountsreceivableandcontractsreceivable.Accountsreceivablerepresentrecordedrevenuesthathavebeenbilled.ContractsreceivablerepresentrecordedrevenuesthatarebillablebytheCompanyatfuturedatesunderthetermsofacontractwithaclient.Billingsandotherconsideration receivedon contracts in excessof related revenues recognizedare recordedasdeferred revenue. A summaryof receivables is asfollows:
(Inthousands) 2005 200�
Accountsreceivable,netofallowance $ 216,248 185,290
Contractsreceivable 100,717 96,909
Totalreceivables,net $ 316,965 282,199
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SubstantiallyallreceivablesarederivedfromsalesandrelatedsupportandmaintenanceoftheCompany’sclinical,administrativeandfinancialinformationsystemsandsolutionstohealthcareproviderslocatedthroughouttheUnitedStatesandincertainforeigncountries.Includedinreceivablesattheendof2005and2004areamountsduefromhealthcareproviderslocatedinforeigncountriesof$32,533,000and$33,304,000respectively.Consolidatedrevenuesincludeforeignsalesof$113,314,000,$63,622,000and$54,191,000during2005,2004and2003,respectively.Consolidatedlong-livedassetsattheendof2005and2004includeforeignlong-livedassetsof$9,723,000and$5,176,000respectively.Revenuesandlong-livedassetsfromanyoneforeigncountryarenotmaterial.
TheCompanyperformsongoingcreditevaluationsof itsclientsandgenerallydoesnotrequirecollateralfromitsclients.TheCompanyprovidesanallowanceforestimateduncollectibleaccountsbasedonspecificidentification,historicalexperienceandmanagement’sjudgment.Attheendof2005and2004theallowanceforestimateduncollectibleaccountswas$18,855,000and$17,583,000,respectively.
� Property and EquipmentAsummaryofproperty,equipment,andleaseholdimprovementsstatedatcost,lessaccumulateddepreciationandamortization,isasfollows:
(Inthousands) Depreciable lives 200� 200�
Furnitureandfixtures 5-12yrs $ 42,458 46,567
Computerandcommunicationsequipment 2-5yrs 246,973 197,352
Leaseholdimprovements 2-15yrs 69,633 61,190
Capitalleaseequipment 3-5yrs 14,705 14,836
Land,buildings,andimprovements 12-50yrs 126,195 95,029
OtherEquipment 5-20yrs 3,310 5,551
503,274 420,525
Lessaccumulateddepreciationandamortization 210,666 190,085
Totalpropertyandequipment,net $ 292,608 230,440
DepreciationexpensefortheyearsendedDecember31,2005,January1,2005andJanuary3,2004was$49,057,000,$41,886,000,and$27,765,000respectively.
5 IndebtednessInNovember2005,theCompanycompleteda£65,000,000($112,002,000atDecember31,2005)privateplacementofdebtat5.54%pursuanttoaNoteAgreement.TheNoteAgreementispayableinsevenequalannualinstallmentsbeginninginNovember2009.TheproceedswereusedtorepaytheoutstandingamountundertheCompany’screditfacilityandforgeneralcorporatepurposes.TheNoteAgreementcontainscertainnetworthandfixedchargecoveragecovenantsandprovidescertainrestrictionsontheCompany’sabilitytoborrow,incurliens,sellassetsandpaydividends.TheCompanywasincompliancewithallcovenantsatDecember31,2005.
InDecember2002,theCompanycompleteda$60,000,000privateplacementofdebtpursuanttoaNoteAgreement.TheSeriesASeniorNotes,witha$21,000,000principalamountat5.57%,arepayableinthreeequal installmentsbeginninginDecember2006.TheSeriesBSeniornotes,witha$39,000,000principalamountat6.42%,arepayableinfourequalannualinstallmentsbeginningDecember2009.TheproceedswereusedtorepaytheoutstandingamountundertheCompany’screditfacilityandforgeneralcorporatepurposes.TheNoteAgreementcontainscertainnetworthandfixedchargecoveragecovenantsandprovidescertainrestrictionsontheCompany’sabilitytoborrow,incurliens,sellassetsandpaydividends.TheCompanywasincompliancewithallcovenantsatDecember31,2005.
InMay2002,theCompanyexpandeditscreditfacilitybyenteringintoanunsecuredcreditagreementwithagroupofbanksledbyUSBank.Thisagreementprovidesforacurrentrevolvinglineofcreditforworkingcapitalpurposes.Thecurrentrevolvinglineofcreditisunsecuredandrequiresmonthlypaymentsofinterestonly.InterestispayableattheCompany’soptionataratebasedonprime(7.25%atDecember31,2005)orLIBOR(4.39%atDecember31,2005)plus2%.Theinterestratemaybereducedbyupto1.15%ifcertainnetworthratiosaremaintained.Theagreementcontainscertainnetworth,currentratio,andfixedchargecoveragecovenantsandprovidescertainrestrictionsontheCompany’sabilitytoborrow,incurliens,sellassets,andpaydividends.Acommitmentfeeof3/10%to1/2%ispayablequarterlybasedontheusageoftherevolvinglineofcredit.TherevolvinglineofcreditmaturesonMay31,2007.AtDecember31,2005,theCompanyhadnooutstandingborrowingsunderthisagreementandhad$90,000,000availableforworkingcapitalpurposes.OnJanuary10,2005,theCompanydrewdown$35,000,000fromitsrevolvinglineofcreditinconnectionwiththeacquisitionofthemedicalbusinessdivisionofVitalWorks,Inc.(SeeNote2totheconsolidatedfinancialstatements.)ThisamounthasbeenpaidinfullasofDecember31,2005.
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InApril1999,theCompanycompleteda$100,000,000privateplacementofdebtpursuanttoaNoteAgreement.TheSeriesASeniorNotes,witha$60,000,000principalamountat7.14%,arepayable infiveequalannual installmentsthatbegan inApril2002. TheSeriesBSeniorNotes,witha$40,000,000principalamountat7.66%,arepayableinsixequalannualinstallmentswhichcommencedinApril2004.TheproceedswereusedtoretiretheCompany’sexisting$30,000,000ofdebt,andtheremainingfundswereusedforcapitalimprovementsandtostrengthentheCompany’scashposition.TheNoteAgreementcontainscertainnetworth,currentratio,andfixedchargecoveragecovenantsandprovidescertainrestrictionsontheCompany’sabilitytoborrow,incurliens,sellassets,andpaydividends.TheCompanywasincompliancewithallcovenantsatDecember31,2005.
InMarch2004,theCompanyissueda$7,500,000promissorynotetoCedars-SinaiMedicalCenterofwhich$2,500,000wasrepaidinOctober2004.ThebalanceofthenotewillbepayableonApril30,2007.
TheCompanyalsohascapitalleaseobligationsamountingto$5,366,000,payableoverthenextfouryears.
TheaggregatematuritiesfortheCompany’slong-termdebt,includingcapitalleaseobligations,isasfollows(inthousands):
2006 $ 28,743
2007 21,072
2008 14,680
2009 32,422
2010 25,750
2011andthereafter 100,341
$ 223,008
TheCompanyestimatesthefairvalueofitslong-term,fixed-ratedebtusingadiscountedcashflowanalysisbasedontheCompany’scurrentborrowingratesfordebtwithsimilarmaturities.ThefairvalueoftheCompany’slong-termdebtwasapproximately$206,904,000and$109,746,000atDecember31,2005andJanuary1,2005,respectively.
� Interest Income (Expense)Asummaryofinterestincomeandexpenseisasfollows:
(Inthousands) 2005 200� 200�
Interestincome $ 3,871 3,022 1,219
Interestexpense (9,729) (9,174) (8,236)
Interestexpense,net $ (5,858) (6,152) (7,017)
� Stock Options, Warrants and EquityAttheendof2005and2004,theCompanyhad1,000,000sharesofauthorizedbutunissuedpreferredstock,$.01parvalue.
Duringfiscalyear2005,theCompanyhadtwolong-termincentiveplansfromwhichitcouldissuegrants.
Underthe2001Long-TermIncentivePlanF,theCompanyisauthorizedtogranttoassociates,directorsandconsultants4,000,000sharesofcommonstockawardstakingintoaccountthestock-spliteffectiveJanuary10,2006.Awardsunderthisplanmayconsistofstockoptions,restrictedstockandperformanceshares,aswellasotherawardssuchasstockappreciationrights,phantomstockandperformanceunitawardswhichmaybepayableintheformofcommonstockorcash.However,notmorethan1,000,000ofsuchshareswillbeavailabletograntinganytypesofgrantsotherthanoptionsorstockappreciationrights.OptionsunderPlanFareexercisableatapricenotlessthanfairmarketvalueonthedateofgrantandduringaperioddeterminedbytheStockOptionCommittee.OptionsunderthisplantypicallyvestoveraperiodoffiveyearsasdeterminedbytheStockOptionCommitteeandareexercisableforperiodsofupto25years.
Long-TermIncentivePlanGwasapprovedbytheCompany’sshareholdersonMay28,2004.Underthe2004Long-TermIncentivePlanG,theCompanyisauthorizedtogranttoassociatesanddirectors4,000,000sharesofcommonstockawardstakingintoaccountthestock-spliteffectiveJanuary10,2006.Awardsunderthisplanmayconsistofstockoptions,restrictedstockandperformanceshares,aswellasotherawardssuchasstockappreciationrights,phantomstockandperformanceunitawardswhichmaybepayableintheformofcommonstockorcash.OptionsunderPlanGareexercisableatapricenotlessthanfairmarketvalueonthedateofgrantandduringaperioddeterminedbytheStockOptionCommittee.OptionsunderthisplantypicallyvestoveraperiodoffiveyearsasdeterminedbytheStockOptionCommitteeandareexercisableforperiodsofupto12years.
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TheCompanygranted15,000sharesofrestrictedstockfromPlanFtomembersoftheBoardofDirectorsonJuly6,2004valuedat$21.16andvestingonMay26,2005.TheCompanymadeadditionalgrantsofrestrictedstockfromPlanFtomembersoftheBoardofDirectorsduring2005.5,000sharesofrestrictedstockweregrantedonApril4,2005valuedat$26.19,vestingasfollows:1,666onFebruary2,2006;1,666onFebruary2,2007;and,1,668onFebruary2,2008.25,000sharesofrestrictedstockweregrantedonJune3,2005valuedat$31.41,vestingonMay25,2006.TheCompanygranted5,000sharesofrestrictedstockfromPlanGtoamemberoftheBoardofDirectorsonJune3,2005valuedat$31.41,vestingasfollows:1,666onMay25,2006;1,666onMay24,2007;and,1,668onMay22,2008.AllgrantswerevaluedatthefairmarketvalueonthedateofgrantandvestprovidedtherecipienthascontinuouslyservedontheBoardofDirectorsthroughsuchdate.Theexpenseassociatedwiththesegrantsisbeingrecognizedovertheperiodfromthedateofgranttothevestingdate.TheCompanyrecognizedexpensesrelatedtotherestrictedstockof$780,000and$173,000in2005and2004,respectively.
TheCompanyhasalsogranted1,708,170othernon-qualifiedstockoptionsover time throughDecember31,2005,under separateagreements toemployeesandcertainthirdparties.Theseoptionsareexercisableatapriceequaltoorgreaterthanthefairmarketvalueonthedateofgrant.Theseoptionsvestoverperiodsofuptosixyearsandareexercisableforperiodsofupto10years.TheCompanyrecognizedexpensesrelatedtothenon-qualifiedstockoptionsof$34,000in2003.Noexpenserelatedtothenon-qualifiedstockoptionswasrecognizedin2004or2005becausetheoptionswerefullyvested.
AcombinedsummaryofthestatusoftheCompany’sfourfixedstockoptionplans(StockoptionPlansDandEwereineffectduring2003and2004,nograntswerepermittedtobeissuedfromPlansDandEafterJanuary1,2005pursuanttothetermsofthePlans)andotherstockoptionsattheendof2005,2004and2003,andchangesduringtheseyearsendedispresentedbelow:
2005 200� 200�
Weighted Weighted- Weighted Number average Number average Number average of exercise of exercise of exerciseFixedoption shares price shares price shares priceOutstandingatbeginningofyear 14,545,148 $16.25 16,287,228 $15.19 16,161,728 $15.64Granted 1,341,286 33.77 1,787,586 22.32 1,903,834 13.22
Exercised (4,272,960) 15.62 (2,165,034) 11.82 (649,244) 10.35
Forfeited (573,952) 18.18 (1,364,632) 18.03 (1,129,090) 20.58
Outstandingatendofyear 11,039,522 $18.51 14,545,148 $16.25 16,287,228 $15.19
Optionsexercisableatyear-end 4,813,058 $15.56 6,986,934 $15.72 6,479,172 $13.45
ThefollowingtablesummarizesinformationaboutfixedandotherstockoptionsoutstandingatDecember31,2005.
Options outstanding Options exercisable
Rangeof Number Weighted-average Number Exercise outstanding remaining Weighted-average exercisable Weighted-average Prices at1/1/05 contractuallife exerciseprice at1/1/05 exerciseprice $6.25-11.30 2,856,082 9.56years $9.06 1,393,448 $8.71
11.34-18.68 2,820,356 8.39 14.56 1,866,650 14.23
18.70-23.12 2,918,396 6.98 21.62 1,052,090 21.56
23.30-136.86 2,444,688 8.26 30.40 500,870 26.74
11,039,522 8.29 18.51 4,813,058 15.56
Thepershareweighted-averagefairvalueofstockoptionsgrantedduring2005,2004and2003was$17.86,$12.88and$7.67respectively,onthedateofgrantusingtheBlackScholesoption-pricingmodelwiththefollowingweighted-averageassumptions:
2005 200� 200�
Expectedyearsuntilexercise 6.6 4.7 4.7
Risk-freeinterestrate 4.3% 4.0% 3.8%
Expectedstockvolatility 45.4% 67.3% 71.2%
Expecteddividendyield 0% 0% 0%
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For2005,theCompanyincorporatedanelementofimpliedvolatilityinadditiontoitshistoricalvolatilitytodeterminetheexpectedstockvolatilitywhereasinprioryearstheCompanyutilizedonlyhistoricalvolatilityforthisassumption.
� Associate Stock Purchase PlanTheCompanyestablishedanAssociateStockPurchasePlan(ASPP)in2001,whichqualifiesunderSection423oftheInternalRevenueCode.Allfull-timeUSDpaidassociatesareeligibletoparticipate.Participantsmayelecttomakecontributionsfrom1%to20%ofcompensationtotheASPP,subjecttoannuallimitationsdeterminedbytheInternalRevenueService.ParticipantsmaypurchaseCompanyCommonStockata15%discountonthelastdayofthepurchaseperiod.UnderAPBNo.25theASPPqualifiesasanon-compensatoryplanandnocompensationexpensehasbeenrecognized.ThepurchaseoftheCompany’scommonstockismadethroughtheASPPontheopenmarketandsubsequentlyreissuedtotheassociates.
� Foundations Retirement PlanTheCernerCorporationFoundationsRetirementPlan(thePlan)isestablishedunderSection401(k)oftheInternalRevenueCode.Allassociatesworking20hoursperweekormore,overage18andnotamemberofanexcludedclassareeligibletoparticipate. Participantsmayelect tomakepretaxcontributionsfrom1%to80%ofcompensationtothePlan,subjecttoannuallimitationsdeterminedbytheInternalRevenueService.Participantsmaydirectcontributionsintomutualfunds,amoneymarketfund,oraCompanystockfund.TheCompanymakesmatchingcontributionstothePlan,onbehalfofparticipants,inanamountequalto33%ofthefirst6%oftheparticipant’ssalarycontribution.TheCompany’sexpensefortheplanamountedto$7,130,000,$5,994,000and$5,325,000for2005,2004and2003,respectively.
TheCompanyaddedadiscretionarymatchtothePlanin2000.Contributionsarebasedonattainmentofestablishedearningspersharegoalsfortheyearortheestablishedfinancialmetricfortheplan.OnlyparticipantsinthePlanareeligibletoreceivethediscretionarymatchcontribution.Fortheyearsended2005,2004and2003theCompanyexpensed$5,783,000,$5,186,000and$0fordiscretionarydistributions,respectively.
10 Income TaxesIncometaxexpense(benefit)fortheyearsended2005,2004and2003consistsofthefollowing:
(Inthousands) 2005 200� 200�
Current: Federal $ 47,499 37,524 9,808
State 7,549 6,756 1,790
Foreign 819 (1,303) (4,484)
Totalcurrentexpense 55,867 42,977 7,114
Deferred: Federal (2,964) 1,712 19,040
State (2,382) 174 2,806
Foreign (1,528) (1,591) (529)
Totaldeferredexpense(benefit) (6,874) 295 21,317
Totalincometaxexpense $ 48,993 43,272 28,431
Temporarydifferencesbetweenthefinancialstatementcarryingamountsandtaxbasisofassetsandliabilitiesthatgiverisetosignificantportionsofdeferredincometaxesattheendof2005and2004relatetothefollowing:
(Inthousands) 2005 200�
DeferredTaxAssets
Accruedexpenses $ 17,178 13,673
Separatereturnnetoperatinglosses 6,822 8,004
Other 3,633 3,754
Totaldeferredtaxassets 27,633 25,431
DeferredTaxLiabilities
Softwaredevelopmentcosts (65,885) (61,146)
Contractandservicerevenuesandcosts (7,433) (13,526)
Depreciationandamortization (17,389) (20,825)
Other (1,739) (227)
Totaldeferredtaxliabilities (92,446) (95,724)
Netdeferredtaxliability $ (64,813) (70,293)
Baseduponthelevelofhistoricaltaxableincomeandprojectionsforfuturetaxableincomeovertheperiodswhichthedeferredtaxassetsareexpectedtobedeductible,aswellasthescheduledreversalofdeferredtaxliabilities,managementbelievesitismorelikelythannottheCompanywillrealizethebenefitofthesedeductibledifferences.AtDecember31,2005,theCompanyhasnetoperatinglosscarryforwardssubjecttoSection382oftheInternalRevenueCodeforFederalincometaxpurposesof$17.8millionwhichareavailabletooffsetfutureFederaltaxableincome,ifany,through2024.
Theeffectiveincometaxratesfor2005,2004and2003were36%,40%and40%,respectively.Theseeffectiveratesdifferfromthefederalstatutoryrateof35%asfollows:
(Inthousands) 2005 200� 200�
Taxexpenseatstatutoryrates $ 47,335 37,772 24,928
Stateincometax,netoffederalbenefit 4,396 3,507 2,315
Zynxtaxbenefitadjustment (4,794) 1,551 395
Other,net 2,056 442 793
Totalincometaxexpense(benefit) $ 48,993 43,272 28,431
IncometaxespayablearereducedbythetaxbenefitresultingfromdisqualifyingdispositionsofstockacquiredundertheCompany’sstockoptionplans.The2005,2004and2003benefitsof$30,289,000,$9,191,000and$1,876,000,respectively,aretreatedasincreasestoadditionalpaid-incapital.
11 Related Party TransactionsTheCompanyleasesanairplanefromacompanyownedbyMr.NealL.PattersonandMr.CliffordW.Illig.Theairplaneisleasedonapermilebasiswithnominimumusageguarantee.Theleaserateisbelievedtoapproximatefairmarketvalueforthistypeofaircraft.During2005and2004,respectively,theCompanypaidanaggregateof$812,000and$574,000fortherentaloftheairplane.TheairplaneisusedprincipallybyMr.PaulBlackandMr.TraceDevannytomakeclientvisits.
12 CommitmentsTheCompanyleasesspacetounrelatedparties in itsNorthKansasCityheadquarterscomplexandinotherbusinesslocationsundernoncancelableoperatingleases.Includedinotherrevenuesisrentalincomeof$583,000,$63,000and$145,000in2005,2004and2003,respectively.
TheCompanyiscommittedunderoperatingleasesforofficespaceandcomputerequipmentthroughDecember2023.RentexpenseforofficeandwarehousespacefortheCompany’sregionalandglobalofficesfor2005,2004and2003was$9,056,000,$6,470,000and$5,345,000,respectively.Aggregateminimumfuturepayments(inthousands)underthesenoncancelableoperatingleasesareasfollows:
Aggregateminimum Years futurepayments
2006 $ 17,605
2007 12,418
2008 11,348
2009 7,288
2010 5,661
2011andthereafter 29,026
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1� Segment ReportingInthefourthquarterof2005,theCompanychangeditsreportablesegmentstoreflecthowthechiefoperatingdecisionmakercurrentlyreviewstheCompany’sresultsintermsofallocatingresourcesandassessingperformance.ThischangeeffectivelypresentstheCompany’soperatingresultsbyitstwogeographicaloperatingsegments,DomesticandGlobal.Asaresult,thepriorperiodshavebeenretroactivelyadjustedtoreflectthechangeinreportablesegments.
Revenuesarederivedprimarilyfromthesaleofclinical,financialandadministrativeinformationsystemsandsolutions.Thecostofrevenuesincludesthecostofthirdpartyconsultingservices,computerhardwareandsublicensedsoftwarepurchasedfromcomputerandsoftwaremanufacturersfordeliverytoclients.Italsoincludesthecostofhardwaremaintenanceandsublicensedsoftwaresupportsubcontractedtothemanufacturers.Operatingexpensesincurredby thegeographicbusinesssegmentsconsistofsalesandclientserviceexpenses includingsalariesofsalesandclientservicepersonnel,communicationsexpensesandunreimbursedtravelexpenses.Performanceofthesegmentsisassessedattheoperatingearningsleveland,therefore,thesegmentoperationshavebeenpresentedassuch. “Other” includesrevenuesnotgeneratedby theoperatingsegmentsandexpensessuchassoftwaredevelopment,marketing,generalandadministrativeanddepreciationthathavenotbeenallocatedtotheoperatingsegments.TheCompanydoesnottrackassetsbygeographicalbusinesssegment.
Accountingpoliciesforeachofthereportablesegmentsarethesameasthoseusedonaconsolidatedbasis.ThefollowingtablepresentsasummaryoftheoperatinginformationfortheyearsendedDecember31,2005andJanuary1,2005
OperatingSegments
2005 Domestic Global Other Total
Revenues $1,046,180 $ 113,314 $ 1,290 $1,160,785
Costofrevenues 231,977 16,981 5,728 254,686
Operatingexpenses 209,747 47,691 508,224 765,663
Totalcostsandexpenses 441,724 64,672 513,952 1,020,349
Operatingearnings $ 604,456 $ 48,642 $(512,662) $ 140,436
OperatingSegments
2004 Domestic Global Other Total
Revenues $ 858,945 $ 63,622 $ 3,789 $ 926,356
Costofrevenues 183,266 7,809 5,273 196,348
Operatingexpenses 156,888 38,411 423,245 618,544
Totalcostsandexpenses 340,154 46,220 428,518 814,892
Operatingearnings $518,791 $ 17,402 $(424,729) $ 111,464
OperatingSegments
2003 Domestic Global Other Total
Revenues $ 782,434 $ 54,191 $ 2,963 $ 839,587
Costofrevenues 180,681 13,450 159 194,290
Operatingexpenses 134,177 35,814 397,209 567,200
Totalcostsandexpenses 314,858 49,264 397,368 761,490
Operatingearnings $467,576 $ 4,927 $(394,405) $ 78,097
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1� Accrued Vacation Pay AdjustmentInconjunctionwithareviewoftheprocessforcalculatingtheliabilityforaccruedvacationpayattheendofthethirdquarterof2004,theCompanydeterminedthattheliabilityonthebalancesheetrelatingtoperiodspriorto2004wasunderstatedby$3,346,000.WhiletheCompanywasfullyaccruedforallvestedvacationthatwouldbesubjecttopayoutupontermination,theCompanyunderstatedtheliabilityforaccumulatedvacationthatcouldbeusedinsubsequentperiodsbyassociatesinexcessofthevestedamountpayableupontermination.
Theexpense, if properly recorded in2000 through2003,wouldhave increased2003net earningsby$0.1millionandwouldhavedecreasednetearningsby$0.4millionin2002,$0.6millionin2001,and$1.2millionin2000.Thecumulativeimpactonnetearningsisadecreaseof$2.1millionforthisfour-yearperiod.Theimpacton2004netearningsisapositive$8thousand.Astheimpacttoprioryear’sannualfinancialstatementswasnotmaterial,Cernerrecordedadditionalexpenseof$3,346,000,$2,076,000millionafter-tax,inthe2004thirdquartertoappropriatelyreflecttheliabilityasofOctober2,2004.TheCompanyhasreviseditsprocessforcalculatingtheliabilityforaccumulatedvacationtoaccuratelyreportthisinformationinthefuture.
15 Stock SplitOnDecember14,2005theCompany’sBoardofDirectorsannouncedatwo-for-onestocksplit,payableonJanuary9,2006intheformofaonehundredpercent(100%)stockdividendtostockholdersofrecordonDecember30,2005.Inconnectionwiththestocksplit,aportionofthedistributionofthestockdividendcamefrom1,502,999treasurysharespreviouslyreflectedintheconsolidatedbalancesheets.Allshareandpersharedatahavebeenretroactivelyadjustedforallperiodspresentedtoreflectthestocksplitincludingtheuseoftreasuryshares,asifthestocksplithadoccurredatthebeginningoftheearliestperiodpresented.
1� Quarterly Results (unaudited)Selectedquarterlyfinancialdatafor2005and2004issetforthbelow:
(Inthousands,exceptpersharedata) Basic Diluted Earnings Net earnings Earnings Revenues beforeincometaxes earnings pershare pershare 2005quarterlyresults: April2(1) $ 262,354 20,941 12,520 .17 .16
July2 277,815 32,889 19,803 .27 .26
October1(2) 294,622 36,149 26,556 .36 .34
December31 325,814 45,265 27,372 .36 .34
Total $ 1,160,785 135,244 86,251
2004quarterlyresults: April3(3) $ 218,728 23,412 14,129 .20 .19
July3 228,390 23,940 14,314 .20 .19
October2(4) 231,067 24,823 14,779 .20 .20
January1 248,171 35,745 21,426 .29 .28
Total $ 926,356 107,920 64,648
(1) IncludesachargeforthewriteoffofacquiredinprocessresearchanddevelopmentrelatedtotheacquisitionofthemedicalbusinessdivisionofVitalWorks,Inc.Theimpactofthischargeisa$3.9milliondecrease,netof$2.4milliontaxbenefit,innetearningsandadecreasetodilutedearningspershareof$.05forthefirstquarterand2005.
(2) Includesataxbenefitof$4.8millionrelatingtothecarrybackofacapitallossgeneratedbythesaleofZynxHealthIncorporatedinthefirstquarterof2004.Theimpactofthisrefundclaimisa$4.8millionincreaseinnetearningsandanincreaseindilutedearningspershareof$.06forthethirdquarterand2005.
(3) IncludesagainonthesaleofZynxHealthIncorporated.Theimpactofthisgainisa$3.0millionincreaseinnetearningsandincreasetodilutedearningspershareof$.04forthefirstquarterandfor2004.
(4) Includesachargeforvacationaccrualof$3.3millionincludedingeneralandadministrative.Theimpactofthischargewasa$2.1milliondecrease,netof$1.2milliontaxbenefit,innetearningsandadecreasetodilutedearningspershareof$.03forthethirdquarterandfor2004.
(5) Reflectstheeffectofa2-for-1stocksplitdistributedonJanuary9,2006.
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Annual Meeting of ShareholdersTheAnnualMeetingofShareholderswillbeheldat10:00a.m.onMay26,2006,atTheCernerRoundauditoriumintheCernerVisionCenter,locatedontheCernercampusat2850RockcreekParkway,NorthKansasCity,Missouri.AformalnoticeoftheMeeting,withaProxyStatementandProxyform,willbemailed,toeachshareholderofrecord,inApril2006.
Annual Report/10-K ReportPublicationsofinteresttocurrentandpotentialCernerinvestorsareavailableuponwrittenrequestorviaCerner’sWebsiteatwww.cerner.com.TheseincludeannualandquarterlyreportsandtheForm10-KfiledwiththeSecuritiesandExchangeCommission.Writtenrequestsshouldbemadeto:CernerCorporationInvestorRelations2800RockcreekParkwayNorthKansasCity,MO64117-2551Inquiresofanadministrativenaturerelatingtoshareholderaccountingrecords,stocktransfer,changeofaddress,andmiscellaneousshareholderrequestsshouldbedirectedtothetransferagentandregistrar,UMBBank,at(816)8607786.
Transfer Agent and RegistrarSecuritiesTransferDivisionUMBBankP.O.Box410064KansasCity,MO64141-0064(816)8607786
Stock ListingsCernerCorporation’scommonstocktradesonTheNASDAQStockMarketunderthesymbolCERN.
Independent AccountantsKPMGLLPKansasCity,MO