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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 29, 2007
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 0-15386
CERNER CORPORATION
(Exact name of registrant as specified in its charter)
     
Delaware   43-1196944
(State or other jurisdiction of   (I.R.S. Employer
Incorporation or organization)   Identification No.)
     
2800 Rockcreek Parkway    
North Kansas City, MO   64117
(Address of principal executive offices)   (Zip Code)
(816) 221-1024
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value per share
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes þ       No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes o       No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ       No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ       Accelerated filer o       Non-accelerated filer o       Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
As of June 30, 2007, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $3,109,189,402 based on the closing sale price as reported on the NASDAQ Global Market.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
     
Class   Outstanding at February 22, 2008
[Common Stock, $.01 par value per share]   80,432,828 shares
DOCUMENTS INCORPORATED BY REFERENCE
     
    Parts Into Which
Document   Incorporated
Proxy Statement for the Annual Shareholders’ Meeting to be held May 23, 2008 (Proxy Statement)
  Part III
 
 

 


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PART I
Item 1. Business
Item 1A. Risk Factors
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9.A. Controls and Procedures
Item 9.B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Item 15. Exhibits and Financial Statement Schedules
SIGNATURES
Bylaw Amendment No.1
Amended and Restated Executive Employment Agreement
2004 Long-Term Incentive Plan G
Qualified Performance-Based Compensation Plan
Executive Deferred Compensation Plan as Amended and Restated
2005 Enhanced Severance Pay Plan as Amended and Restated
2004 Long-Term Incentive Plan G Nonqualified Stock Option Grant Certificate
Subsidiaries of Registrant
Consent of Independent Registered Public Accounting Firm
Section 302 Certification
Section 302 Certification
Section 906 Certification
Section 906 Certification


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PART I.
Item 1. Business
Overview
Cerner Corporation (“Cerner” or the “Company”) is a Delaware business corporation formed in 1980. The Company’s corporate headquarters are located at 2800 Rockcreek Parkway, North Kansas City, Missouri 64117. Its telephone number is 816.221.1024. The Company’s Web site address is www.cerner.com. The Company makes available free of charge, on or through its Web site, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.
Cerner is a supplier of healthcare information technology (HIT) solutions, healthcare devices and related services. Organizations ranging from single-doctor practices, to hospitals, to corporations, to local, regional and national government agencies use Cerner ® solutions and services to make healthcare safer, more efficient and of higher quality.
The Company’s software solutions have been designed and developed on the unified Cerner Millennium ® architecture. This person-centric solution framework combines clinical, financial and management information systems. It provides secure access to an individual’s electronic medical record at the point of care and organizes and proactively delivers information to meet the specific needs of the physician, nurse, laboratory technician, pharmacist or other care provider, front- and back-office professionals and even consumers.
The Company’s CareAware device architecture is designed to bridge the gap between medical devices and patient information by connecting information from various devices to the clinician workflow and electronic medical record.
Cerner also offers a broad range of services, including implementation and training, remote hosting, operational management services, support and maintenance, healthcare data analysis, clinical process optimization, transaction processing for physician practices and employer health plan third party administrator (TPA) services.
The Healthcare and Healthcare IT Industry
There are several trends the Company believes create a positive market environment for HIT.
Healthcare spending continues to expand. The nonpartisan Congressional Budget Office projects that, if left unchecked, total spending on healthcare in the United States would rise from 16 percent of the gross national product in 2007 to 25 percent in 2025. HIT is one of the few answers. A study by RAND Corp. published in October 2005 found that widespread adoption of HIT could cut the total cost of healthcare by about 10 percent.
Problems in the quality of healthcare also drive interest in HIT. In July 2007, Health and Hospital Networks , a publication of the American Hospital Association, released its annual list of the nation’s 100 Most Wired Hospitals and Health Systems. Survey results indicate the hospitals with good quality results also are dedicated to HIT. These Most Wired Hospitals lead the nation in electronic ordering and bedside medication matching to reduce the number of potential medication errors. We believe these results provide incentive for more hospitals to adopt HIT.
Another factor we believe is favorable for the HIT industry in the United States is the continued focus by Centers for Medicare and Medicaid Services (CMS) and other payers on linking medical care payments to quality and safety, an approach commonly referred to as “pay for performance.” Some pay for performance plans offer additional reimbursement for healthcare providers that can demonstrate high levels of quality and safety. Based on CMS’ final rule for changes to the 2008 inpatient prospective payment system (IPPS), there will also be instances where providers are not paid for treatment of conditions acquired while in the hospital if the condition is deemed reasonably preventable through the application of evidence-based guidelines. This change, effective in October 2008, is positive for the HIT industry because ensuring compliance with evidence-based guidelines is easier for organizations with an HIT system. Additionally, an expected increase in the number of Diagnosis-Related Groups (DRGs) that are used to determine how much providers are reimbursed for providing care will also contribute to the need for HIT systems that can be used to more efficiently and accurately document and accurately submit care for reimbursement.

 


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As the United States enters the 2008 presidential election year, rising costs and varying quality have solidified healthcare as a tier-one issue. Presidential candidates in both parties favor using HIT to create efficiencies in the system and address the underlying issue of chronic illness. While there is bipartisan recognition of the benefits of HIT, we do not foresee a scenario in which the United States government would invest a significant amount of money directly in HIT, and we cannot predict how healthcare will be impacted by the upcoming election.
Increasing healthcare spending and challenges in the quality and efficiencies of care are not isolated to the United States. Most other countries are experiencing similar trends, a fact that creates a favorable environment internationally for HIT solutions and related services.
Reflective of these favorable national and global trends, the HIT market remains very competitive. The market could be impacted by factors such as changes in reimbursement rates to hospitals and physicians, a slowdown in adoption of HIT and changes in the political, economic and regulatory environment.
Cerner Vision
Cerner’s vision has evolved from a fundamental thought: Healthcare should revolve around the individual, not the encounter. This concept led to Cerner’s vision of a Community Health Model and the creation of the unified Cerner Millennium architecture, the Company’s person-centric, enterprise-wide architecture. The Community Health Model encompasses four steps:
Automate the Care Process
Cerner offers a longitudinal, person-centric electronic medical record, giving clinicians electronic access to the right information at the right time and place to achieve the optimal health outcome.
Connect the Person
Cerner is dedicated to building a personal health system. Medical information and care regimens accessible from home empower consumers to effectively manage their conditions and adhere to treatment plans, creating a new medium between physicians and individuals.
Structure the Knowledge
Cerner is dedicated to building systems that help bring the best science to every medical decision by structuring, storing and studying the content surrounding each care episode to achieve optimal clinical and financial outcomes.
Close the Loop
Incorporating a medical discovery into daily practice can take as long as 10 years. Cerner is dedicated to building systems that implement evidence-based medicine, reducing the average time from the discovery of an improved method to the change in the standard of care.
As more elements of this vision continue to evolve, Cerner expects medicine will become increasingly personalized and technology more accessible. As such, Cerner’s vision has evolved to include services that help large user communities:
    Connect all stakeholders in the healthcare system, including payers (employers, government), providers, and consumers
 
    Remove clinical, financial and administrative friction
 
    Create a secure, transparent, open network for data sharing to improve disease management and facilitate personalized medicine
Achieving this vision will require continued leverage of the Cerner Millennium architecture and ongoing expansion of our solutions and services, as discussed below under “Cerner Strategy and Execution.”
Cerner Strategy and Execution
Key elements of the Company’s business strategy include:
    Leverage the unified Cerner Millennium architecture and the depth and breadth of Cerner solutions to continue expanding market share
 
    Increase penetration of both large health systems and independent hospitals
 
    Cross-sell additional Cerner solutions and services to our existing client base

 


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    Increase penetration of physician practices by offering a high-value suite of solutions with low up-front and recurring costs
 
    Continue to expand presence in non-U.S. markets
 
    Use our extensive clinical databases to help pharmaceutical companies monitor safety and speed drug approval
 
    Reduce friction in healthcare through more efficient payment for services and by creating innovative solutions for employers
 
    Connect healthcare devices
To execute upon many of the strategy elements listed above, we intend to continue developing innovative solutions and services that leverage the Company’s technology and human capital expertise and drive continued organic revenue growth, such as:
    Health e SM employer services, innovative solutions for employers, such as employer health plan third party administrator services and employer-based primary care clinics.
 
    Healthcare device innovation, including Cerner’s CareAware device connectivity platform and RxStation ™ medication dispensing devices.
 
    Millennium Lighthouse ® clinical process optimization, a consulting practice that interacts with clients to determine previously unidentified and unconnected relationships among healthcare processes and outcomes.
 
    Solutions and services that leverage the clinical data being captured in the digital healthcare environment, such as Health Facts ® , a data warehouse of more than 35 million clinical encounters that can be used to help draw meaningful relationships between pharmaceutical therapies and resulting clinical outcomes.
 
    PowerWorks ® physician practice solutions, a low-cost, high-value suite of remote-hosted offerings for physician practices’ clinical and revenue cycle needs.
 
    Our new PACS (Picture Archiving Communication System) Cerner ProVision ® workstation that strengthens our unified enterprise-wide imaging offering and reduces our reliance on third parties.
We also remain focused on offering more efficient and predictable implementations and systems that can be operated at lower costs to reduce total cost of ownership for our clients. We are accomplishing this through:
    Bedrock ® technology, which automates the implementation and management of the Cerner Millennium information platform.
 
    CernerWorks SM managed services, which allow Cerner to manage complexity and technology risks for clients through remote hosting while providing increased availability, system security and predictable, lower cost of operations.
 
    Our MethodM ® implementation approach, which is our best practice methodology for working with clients to deliver value through implementation of Cerner Millennium solutions.
 
    Our Lights On Network SM surveillance system that identifies system performance issues in real time and has the ability to predict issues that could create system vulnerability. In the future, we plan for the Lights On Network system to include real-time clinical and revenue cycle dashboards and ultimately create a real-time, evidence-based network.
In summary, our business strategy is to deliver the optimal client experience and to pursue and deliver continued innovation that will allow our important relationships with existing clients to continue growing while also creating opportunities to establish new client relationships.
Software Development
Cerner continues to build upon the success of the Cerner Millennium 2007 software release that became generally available in late 2006. Our client base has been rapidly adopting the release, and based on feedback from clients, Cerner decided to leverage the Cerner Millennium 2007 platform for all future innovations and enhancements through the end of the decade. Understanding the effort involved with major release upgrades and the impact on our clients, this strategy will allow clients already using Cerner Millennium 2007 to take advantage of new enhancements and functionality without requiring a major code upgrade.

 


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We commit significant resources to developing new health information system solutions. As of December 29, 2007, approximately 2,600 associates were engaged in research and development activities. Total expenditures for the development and enhancement of our software solutions and RxStation medication dispensing devices were approximately $283,086,000, $262,163,000 and $225,606,000 during the 2007, 2006 and 2005 fiscal years, respectively. These figures include both capitalized and non-capitalized portions and exclude amounts amortized for financial reporting purposes.
As discussed above, continued investment in research and development remains a core element of Cerner’s strategy. This will include ongoing enhancement of our core solutions and development of new solutions and services.
The Company is committed to maintaining open attributes in its system architecture to achieve operability in a diverse set of technical and application environments. The Company strives to design its systems to co-exist with disparate applications developed and supported by other suppliers.
Sales and Marketing
The markets for Cerner HIT solutions, healthcare devices and services include integrated delivery networks, physician groups and networks, managed care organizations, hospitals, medical centers, free-standing reference laboratories, home health agencies, blood banks, imaging centers, pharmacies, pharmaceutical manufacturers, employers and public health organizations. To date, a substantial portion of system sales have been in clinical solutions in hospital-based provider organizations. The Cerner Millennium architecture is highly scalable. Organizations ranging from several-doctor physician practices, to community hospitals, to complex integrated delivery networks, to local, regional and national government agencies use our Cerner Millennium solutions.
We design all Cerner Millennium solutions to operate on HP or IBM platforms, allowing Cerner to be price competitive across the full size and organizational structure range of healthcare providers. The sale of a Cerner software health information system usually takes approximately nine to 18 months, from the time of initial contact to the signing of a contract.
Our executive marketing management is located in our North Kansas City, Missouri headquarters, while our client representatives are deployed across the United States and globally. In addition to the U.S., the Company, through subsidiaries and joint ventures, has sales associates and/or offices in Australia, Canada, England, France, Germany, China (Hong Kong), India, Ireland, Malaysia, Saudi Arabia, Singapore, Spain and the United Arab Emirates. Cerner’s consolidated revenues include non-U.S sales of $290,677,000, $207,367,000 and $113,317,000 for the 2007, 2006 and 2005 fiscal years, respectively.
The Company supports its sales force with technical personnel who perform demonstrations of Cerner solutions and services and assist clients in determining the proper hardware and software configurations. The Company’s primary direct marketing strategy is to generate sales contacts from its existing client base and through presentations at industry seminars and tradeshows. Cerner markets the PowerWorks solutions, offered on a subscription basis, directly to the physician practice market using telemarketing and through existing acute care clients that are looking to extend Cerner solutions to affiliated physicians. Cerner attends a number of major tradeshows each year and sponsors executive user conferences, which feature industry experts who address the HIT needs of large healthcare organizations.
Client Services
Substantially all of Cerner’s HIT software solutions clients enter into software maintenance agreements with us for support of their Cerner systems. In addition to immediate software support in the event of problems, these agreements allow clients the use of new releases of the Cerner solutions covered by maintenance agreements. Each client has 24-hour access to the client support team located at Cerner’s world headquarters in North Kansas City, Missouri and the Company’s global support organization in England.
Most Cerner clients who buy hardware through Cerner also enter into hardware maintenance agreements with Cerner. These arrangements normally provide for a fixed monthly fee for specified services. In the majority of cases, Cerner subcontracts hardware maintenance to the hardware manufacturer. Cerner also offers a set of managed services that include remote hosting, operational management services and disaster recovery.

 


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Backlog
At December 29, 2007, Cerner had a contract backlog of approximately $2,712,195,000 as compared to approximately $2,194,460,000 at December 30, 2006. Such backlog represents system sales and services from signed contracts that have not yet been recognized as revenue. At December 29, 2007, the Company had approximately $129,604,000 of contracts receivable compared to $132,748,000 at the end of 2006, which represents revenues recognized but not yet billable under the terms of the contract. At December 29, 2007, Cerner had a software support and maintenance backlog of approximately $541,095,000 as compared to approximately $469,473,000 at December 30, 2006. Such backlog represents contracted software support and hardware maintenance services for a period of 12 months. The Company estimates that approximately 39 percent of the aggregate backlog at December 29, 2007 of $3,253,290,000 will be recognized as revenue during 2008.
Competition
The market for HIT solutions, devices and services is intensely competitive, rapidly evolving and subject to rapid technological change. Our principal existing competitors in the healthcare solutions and services market include: Computer Programs and Systems, Inc., Eclipsys Corporation, Epic Systems Corporation, GE Healthcare Technologies, iSoft Corporation, McKesson Corporation, Medical Information Technology, Inc. (“Meditech”), Misys Healthcare Systems and Siemens Medical Solutions Health Services Corporation, each of which offers a suite of software solutions that compete with many of our software solutions and services. Other competitors focus on only a portion of the market that Cerner addresses. For example, competitors such as Cap Gemini, Computer Sciences Corp., Deloitte & Touche, IBM Corporation and Perot Systems offer HIT services that compete directly with our consulting services. Allscripts Healthcare Solutions, Inc., athenahealth, Inc., eClinicalWorks, Inc., Emdeon Corporation and Quality Systems, Inc. offer solutions to the physician practice market but do not currently have a significant presence in the health systems and independent hospital market. We view our principal competitors in the healthcare device market to include: Cardinal Health, Inc., McKesson Corporation, Omnicell, Inc. and Royal Philips Electronics; and we view our principal competitors in the healthcare transactions market to include: Accenture, Emdeon Corporation, McKesson Corporation, ProxyMed, Inc. and The TriZetto Group, Inc., with almost all of these competitors being substantially larger or having more experience and market share than us in their respective market. In addition, we expect that major software information systems companies, large information technology consulting service providers and system integrators, start-up companies, managed care companies and others specializing in the healthcare industry may offer competitive software solutions, devices or services. The pace of change in the HIT market is rapid and there are frequent new software solution, device or service introductions, enhancements and evolving industry standards and requirements. We believe that the principal competitive factors in this market include the breadth and quality of solution and service offerings, the stability of the solution provider, the features and capabilities of the information systems and devices, the ongoing support for the systems and devices and the potential for enhancements and future compatible software solutions and devices.
Number of Employees (“Associates”)
As of December 29, 2007, the Company employed 7,873 associates worldwide.
Operating Segments
Information about the Company’s operating segments may be found in Note 12 to the financial statements.
Geographic Areas
Information about the Company’s geographic areas may be found in Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operation below and in Note 12 to the financial statements.
Item 1A. Risk Factors
Risks Related to Cerner Corporation

 


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We may be subject to product-related liabilities. Many of our software solutions, healthcare devices or services (including life sciences/research services) provide data for use by healthcare providers in providing care to patients. No claims have been brought against us to date regarding injuries related to the use of our software solutions, healthcare devices or services (including life sciences/research services), but such claims may be made in the future. Although we maintain liability insurance coverage in an amount that we believe is sufficient for our business, there can be no assurance that such coverage will cover a particular claim that may be brought in the future, prove to be adequate or that such coverage will continue to remain available on acceptable terms, if at all. A successful material claim brought against us, if uninsured or under-insured, could materially harm our business, results of operations and financial condition.
We may be subject to claims for system errors and warranties. Our software solutions and healthcare devices, particularly the Cerner Millennium versions, are very complex. As with complex software solutions and devices offered by others, our software solutions and healthcare devices may contain coding or other errors, especially when first introduced. Although we conduct extensive testing, we have discovered errors in our software solutions and healthcare devices after their introduction. Our software solutions and healthcare devices are intended for use in collecting and displaying clinical information used in the diagnosis and treatment of patients. Therefore, users of our software solutions and healthcare devices have a greater sensitivity to errors than the market for software products and devices generally. Our client agreements typically provide warranties concerning material errors and other matters. Failure of a client’s Cerner software solutions and/or healthcare devices to meet these warranties could constitute a material breach under the client agreement, allowing the client to terminate the agreement and possibly obtain a refund and/or damages, or might require us to incur additional expense in order to make the software solution or healthcare device meet these criteria. Our client agreements generally limit our liability arising from such claims but such limits may not be enforceable in certain jurisdictions or circumstances. A successful material claim brought against us, if uninsured or under-insured, could materially harm our business, results of operations and financial condition.
We may experience interruption at our data centers or client support facilities. We perform data center and/or hosting services for certain clients, including the storage of critical patient and administrative data. In addition, we provide support services to our clients through various client support facilities. We have invested in many reliability features such as multiple power feeds, multiple backup generators and redundant telecommunications lines, as well as technical and physical security safeguards, and structured our operations to substantially reduce the likelihood of disruptions. However, complete failure of all generators, impairment of all telecommunications lines, severe damage (environmental, accidental, intentional or pandemic) to the buildings, the equipment inside the buildings housing our data centers, the client data contained therein and/or the personnel trained to operate such facilities could cause a disruption in operations and negatively impact clients who depend on us for data center and system support services. Any interruption in operations at our data centers and/or client support facilities could damage our reputation, cause us to lose existing clients, hurt our ability to obtain new clients, result in revenue loss, create potential liabilites for our clients and us and increase insurance and other operating costs.
Our proprietary technology may be subject to claims for infringement or misappropriation of intellectual property rights of others, or may be infringed or misappropriated by others. We rely upon a combination of license agreements, confidentiality procedures, employee nondisclosure agreements, confidentiality agreements with third parties and technical measures to maintain the confidentiality and trade secrecy of our proprietary information. We also rely on trademark and copyright laws to protect our intellectual property rights in the United States and abroad. We have initiated a patent program but currently have a limited patent portfolio in the United States and abroad. Despite our protective measures and intellectual property rights, we may not be able to adequately protect against copying, reverse-engineering, misappropriation, infringement or unauthorized use or disclosure of our intellectual property.
In addition, we could be subject to intellectual property infringement or misappropriation claims as the number of competitors, patents and patent enforcement organizations in the HIT market increases, the functionality of our software solutions and services expands, and we enter new markets such as healthcare device innovation, healthcare transactions and life sciences. These claims, even if not

 


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meritorious, could be expensive to defend. If we become liable to third parties for infringing or misappropriating their intellectual property rights, we could be required to pay a substantial damage award, develop alternative technology, obtain a license and/or cease using, selling, licensing, implementing and supporting the solutions, devices and services that violate the intellectual property rights.
We are subject to risks associated with our non-U.S. operations. We market, sell and service our solutions, devices and services globally. We have established offices around the world, including in: the Americas, Europe, the Middle East and the Asia Pacific region. We will continue to expand our non-U.S. operations and enter new global markets. This expansion will require significant management attention and financial resources to develop successful direct and indirect non-U.S. sales and support channels. Our business is generally transacted in the local functional currency. In some countries, our success will depend in part on our ability to form relationships with local partners. There is a risk that we may sometimes choose the wrong partner. For these reasons, we may not be able to maintain or increase non-U.S. market demand for our solutions, devices and services.
Non-U.S. operations are subject to inherent risks, and our future results could be adversely affected by a variety of uncontrollable and changing factors. These include, but are not limited to:
    Greater difficulty in collecting accounts receivable and longer collection periods
 
    Difficulties and costs of staffing and managing non-U.S. operations
 
    The impact of global economic conditions
 
    Unfavorable or changing foreign currency exchange rates
 
    Certification, licensing or regulatory requirements
 
    Unexpected changes in regulatory requirements
 
    Changes to or reduced protection of intellectual property rights in some countries
 
    Inability to obtain necessary financing on reasonable terms to adequately support non-U.S. operations and expansion
 
    Potentially adverse tax consequences
 
    Different or additional functionality requirements
 
    Trade protection measures
 
    Export control regulations
 
    Service provider and government spending patterns
 
    Natural disasters, war or terrorist acts
 
    Poor selection of a partner in a country
 
    Political conditions which may impact sales or threaten the safety of associates or our continued presence in these countries
Our failure to effectively hedge exposure to fluctuations in foreign currency exchange rates could unfavorably affect our performance. We utilize derivative instruments to hedge our exposure to fluctuations in foreign currency exchange rates. Some of these instruments and contracts may involve elements of market and credit risk in excess of the amounts recognized in the Consolidated Financial Statements. For additional information about risk on financial instruments, see Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operation under Market Risk. Further, our financial results from non-U.S. operations may decrease if we fail to execute or improperly hedge our exposure to currency fluctuations.
Our success depends upon the recruitment and retention of key personnel. To remain competitive in our industries, we must attract, motivate and retain highly skilled managerial, sales, marketing, consulting and technical personnel, including executives, consultants, programmers and systems architects skilled in the HIT, healthcare devices, healthcare transactions and life sciences industries and the technical environments in which our solutions, devices and services are needed. Competition for such personnel in our industries is intense in both the United States and abroad. Our failure to attract additional qualified personnel to meet our non-U.S. personnel needs could have a material adverse effect on our prospects for long-term growth. Our success is dependent to a significant degree on the continued contributions of key management, sales, marketing, consulting and technical personnel. The unexpected loss of key personnel could have a material adverse impact to our business and results of

 


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operations, and could potentially inhibit development and delivery of our solutions, devices and services and market share advances.
We rely significantly on third party suppliers. We license or purchase intellectual property and technology (such as software, hardware and content) from third parties, including some competitors, and incorporate software, hardware, and/or content into or sell it in conjunction with our solutions, devices and services, some of which are critical to the operation and delivery of our solutions, devices and services. If any of the third party suppliers were to change product offerings, significantly increase prices or terminate our licenses or supply contracts, we might need to seek alternative suppliers and incur additional internal or external development costs to ensure continued performance of our solutions, devices and services. Such alternatives may not be available on attractive terms, or may not be as widely accepted or as effective as the intellectual property or technology provided by our existing suppliers. If the cost of licensing, purchasing or maintaining the third party intellectual property or technology significantly increases, our gross margin levels could significantly decrease. In addition, interruption in functionality of our solutions, devices and services as a result of changes in third party suppliers could adversely affect future sales of solutions, devices and services.
We intend to continue strategic business acquisitions which are subject to inherent risks. In order to expand our solutions, device offerings and services and grow our market and client base, we may continue to seek and complete strategic business acquisitions that we believe are complementary to our business. Acquisitions have inherent risks which may have a material adverse effect on our business, financial condition, operating results or prospects, including, but not limited to: 1) failure to successfully integrate the business and financial operations, services, intellectual property, solutions or personnel of the acquired business; 2) diversion of management’s attention from other business concerns; 3) entry into markets in which we have little or no direct prior experience; 4) failure to achieve projected synergies and performance targets; 5) loss of clients or key personnel of the acquired business; 6) incurrence of debt and/or assumption of known and unknown liabilities; 7) write-off of software development costs, goodwill, client lists and amortization of expenses related to intangible assets; 8) dilutive issuances of equity securities; and, 9) accounting deficiencies that could arise in connection with, or as a result of, the acquisition of the acquired company, including issues related to internal control over financial reporting and the time and cost associated with remedying such deficiencies. If we fail to successfully integrate acquired businesses or fail to implement our business strategies with respect to these acquisitions, we may not be able to achieve projected results or support the amount of consideration paid for such acquired businesses.
Risks Related to the Healthcare Information Technology, Healthcare Device and Healthcare Transaction Industry
The healthcare industry is subject to changing political, economic and regulatory influences. For example, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) continues to have a direct impact on the healthcare industry by requiring identifiers and standardized transactions/code sets and necessary security and privacy measures in order to ensure the appropriate level of privacy of protected health information. These regulatory factors affect the purchasing practices and operation of healthcare organizations. Federal and state legislatures have periodically considered programs to reform or amend the U.S. healthcare system at both the federal and state level and to change healthcare financing and reimbursement systems. These programs may contain proposals to increase governmental involvement in healthcare, lower reimbursement rates or otherwise change the environment in which healthcare industry participants operate. Healthcare industry participants may respond by reducing their investments or postponing investment decisions, including investments in our solutions and services.
Many healthcare providers are consolidating to create integrated healthcare delivery systems with greater market power. These providers may try to use their market power to negotiate price reductions for our solutions and services. As the healthcare industry consolidates, our client base could be eroded, competition for clients could become more intense and the importance of landing new client relationships becomes greater.
The healthcare industry is highly regulated at the local, state and federal level. We are subject to a significant and wide-ranging number of regulations both within the U.S. and elsewhere, such as, without

 


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limitation, regulations in the areas of: healthcare fraud, e-prescribing, claims processing and transmission, medical devices, the security and privacy of patient data and interoperability standards.
Healthcare Fraud. Federal and state governments continue to strengthen their positions and scrutiny over practices involving healthcare fraud affecting healthcare providers whose services are reimbursed by Medicare, Medicaid and other government healthcare programs. Our healthcare provider clients are subject to laws and regulations on fraud and abuse which, among other things, prohibit the direct or indirect payment or receipt of any remuneration for patient referrals, or arranging for or recommending referrals or other business paid for in whole or in part by these federal or state healthcare programs. Federal enforcement personnel have substantial funding, powers and remedies to pursue suspected or perceived fraud and abuse. The effect of this government regulation on our clients is difficult to predict. While we believe that we are in substantial compliance with any applicable laws, many of the regulations applicable to our clients and that may be applicable to us, are vague or indefinite and have not been interpreted by the courts. They may be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that could broaden their applicability to us or require our clients to make changes in their operations or the way in which they deal with us. If such laws and regulations are determined to be applicable to us and if we fail to comply with any applicable laws and regulations, we could be subject to sanctions or liability, including exclusion from government health programs, which could have a material adverse effect on our business, results of operations and financial condition.
E-Prescribing. The use of our solutions by physicians for electronic prescribing, electronic routing of prescriptions to pharmacies and dispensing is governed by state and federal law. States have differing prescription format requirements, which we have programmed into our software. In addition, in November 2005, the Department of Health and Human Services announced regulations by CMS related to “E-Prescribing and the Prescription Drug Program” (“E-Prescribing Regulations”). These E-Prescribing Regulations were mandated by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. The E-Prescribing Regulations set forth standards for the transmission of electronic prescriptions. The final regulations adopted two standards effective January 2006. A second and final set of required standards are to be published no later than April 1, 2008 and implemented no later than April 1, 2009. These standards are detailed and significant, and cover not only transactions between prescribers and dispensers for prescriptions but also electronic eligibility and benefits inquiries and drug formulary and benefit coverage information. Our efforts to provide solutions that enable our clients to comply with these regulations could be time-consuming and expensive.
Claims Transmissions. Certain of our solutions assist our clients in submitting claims to payers, which claims are governed by federal and state laws. Our solutions are capable of electronically transmitting claims for services and items rendered by a physician to many patients’ payers for approval and reimbursement. Federal law provides civil liability to any person that knowingly submits a claim to a payer, including, for example, Medicare, Medicaid and private health plans, seeking payment for any services or items that have not been provided to the patient. Federal law may also impose criminal penalties for intentionally submitting such false claims. We have policies and procedures in place that we believe result in the accurate and complete transmission of claims, provided that the information given to us by our clients is also accurate and complete. The HIPAA security, privacy and transaction standards, as discussed below, also have a potentially significant effect on our claims transmission services, since those services must be structured and provided in a way that supports our clients’ HIPAA compliance obligations.
Regulation of Medical Devices. The United States Food and Drug Administration (the “FDA”) has declared that certain of our solutions are medical devices that are actively regulated under the Federal Food, Drug and Cosmetic Act (“Act”) and amendments to the Act. As a consequence, we are subject to extensive regulation by the FDA with regard to those solutions that are actively regulated. Other countries have similar regulations in place related to medical devices, that now or may in the future apply to certain of our solutions. If other of our solutions are deemed to be actively regulated medical devices by the FDA or similar regulatory agencies in countries where we do business, we could be subject to extensive requirements governing pre- and post-marketing requirements including pre-market notification clearance. Complying with these medical device regulations on a global perspective is time consuming and expensive. Further, it is possible that these regulatory agencies may become more active in regulating software that is used in healthcare.

 


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There have been nine FDA inspections since 1998 at various Cerner sites. Inspections conducted at our world headquarters in 1999 and our prior Houston, Texas facility in 2002 each resulted in the issuance of an FDA Form 483 that we responded to promptly. The FDA has taken no further action with respect to either of the Form 483s that were issued in 1999 and 2002. The remaining seven FDA inspections, including inspections at our world headquarters in 2006 and 2007, resulted in no issuance of a Form 483. We remain subject to periodic FDA inspections and we could be required to undertake additional actions to comply with the Act and any other applicable regulatory requirements. Our failure to comply with the Act and any other applicable regulatory requirements could have a material adverse effect on our ability to continue to manufacture and distribute our solutions. The FDA has many enforcement tools including recalls, seizures, injunctions, civil fines and/or criminal prosecutions. Any of the foregoing could have a material adverse effect on our business, results of operations and financial condition.
Security and Privacy of Patient Information. State and federal laws regulate the confidentiality of patient records and the circumstances under which those records may be released. These regulations govern both the disclosure and use of confidential patient medical record information and require the users of such information to implement specified security measures. Regulations currently in place governing electronic health data transmissions continue to evolve and are often unclear and difficult to apply.
HIPAA regulations require national standards for some types of electronic health information transactions and the data elements used in those transactions, security standards to ensure the integrity and confidentiality of health information and standards to protect the privacy of individually identifiable health information. Covered entities under HIPAA, which include healthcare organizations such as our clients, were required to comply with the privacy standards by April 2003, the transaction regulations by October 2003 and the security regulations by April 2005. As a business associate of the covered entities, we, in most instances, must also ensure compliance with the HIPAA regulations as it pertains to our clients.
We are unable to predict what interpretations of or changes to the regulations issued pursuant to HIPAA, might be issued or made in the future or how those interpretations or changes could affect our business or the costs of compliance with HIPAA. Evolving HIPAA-related laws or regulations could restrict the ability of our clients to obtain, use or disseminate patient information. This could adversely affect demand for our solutions if they are not re-designed in a timely manner in order to meet the requirements of any new interpretations or regulations that seek to protect the privacy and security of patient data or enable our clients to execute new or modified healthcare transactions. We may need to expend additional capital, software development and other resources to modify our solutions and devices to address these evolving data security and privacy issues.
Interoperability Standards . Our clients are concerned with and often require that our software solutions and healthcare devices be interoperable with other third party HIT suppliers. Market forces or governmental/regulatory authorities could create software interoperability standards that would apply to our solutions, and if our software solutions and/or healthcare devices are not consistent with those standards, we could be forced to incur substantial additional development costs to conform. Currently, the Certification Commission for Healthcare Information Technology (CCHIT) is developing a comprehensive set of criteria for the functionality, interoperability and security of various software modules in the HIT industry. Achieving CCHIT certification is becoming a competitive requirement, resulting in increased software development and administrative expense to conform to these requirements. If our software solutions and healthcare devices are not consistent with emerging standards, our market position and sales could be impaired and we may have to invest significantly in changes to our software solutions and healthcare devices.
We operate in intensely competitive and dynamic industries, 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, devices, features and services to market in a timely fashion. The market for healthcare information systems, healthcare devices, healthcare transactions and life sciences consulting services are intensely competitive, dynamically evolving and subject to rapid technological and innovative changes. Development of new proprietary technology or services is complex, entails significant time and expense and may not be

 


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successful. We cannot guarantee that we will be able to introduce new solutions, devices or services on schedule, or at all, nor can we guarantee that, despite extensive testing, errors will not be found in our new solution releases, devices or services before or after commercial release, which could result in solution, device or service delivery redevelopment costs and loss of, or delay in, market acceptance.
We believe that the principal competitive factors in the healthcare information market include: the breadth and quality of system and software solution offerings, the stability of the solution provider, the features and capabilities of the information systems and devices, the ongoing support for the systems and devices and the potential for enhancements and future compatible software solutions and devices. Certain of our competitors have greater financial, technical, product development, marketing and other resources than us and some of our competitors offer software solutions that we do not offer. Our principal existing competitors are set forth above Part 1, Item 1 Competition.
In addition, we expect that major software information systems companies, large information technology consulting service providers and system integrators, start-up companies and others specializing in the healthcare industry may offer competitive software solutions, devices or services. We face strong competitors and often face downward price pressure. Additionally, the pace of change in the healthcare information systems market is rapid and there are frequent new software solution introductions, software solution enhancements, device introductions, device enhancements and evolving industry standards and requirements. As a result, our success will depend upon our ability to: maintain a competitive pricing model, keep pace with technological change and introduce, on a timely and cost-effective basis, new and enhanced software solutions, devices and services that satisfy changing client requirements and achieve market acceptance. There are a limited number of hospitals and other healthcare providers in the U.S. HIT market. As costs fall, technology improves, and market factors continue to compel investment by healthcare organizations in solutions and services like ours, market saturation in the U.S. may change the competitive landscape in favor of larger, more diversified competitors with greater scale.
Risks Related to Our Stock
Our quarterly operating results may vary which could adversely affect our stock price. Our quarterly operating results have varied in the past and may continue to vary in future periods, including, variations from guidance, expectations or historical results or trends. Quarterly operating results may vary for a number of reasons including accounting policy changes, demand for our solutions, devices and services, the financial condition of our clients and potential clients, our long sales cycle, potentially long installation and implementation cycles for larger, more complex and higher-priced systems and other factors described in this section and elsewhere in this report. As a result of healthcare industry trends and the market for our Cerner Millennium solutions, a large percentage of our revenues are generated by the sale and installation of larger, more complex and higher-priced systems. The sales process for these systems is lengthy and involves a significant technical evaluation and commitment of capital and other resources by the client. Sales may be subject to delays due to changes in clients’ internal budgets, procedures for approving large capital expenditures, competing needs for other capital expenditures, availability of personnel resources and by actions taken by competitors. Delays in the expected sale, installation or implementation of these large systems may have a significant impact on our anticipated quarterly revenues and consequently our earnings, since a significant percentage of our expenses are relatively fixed.
We recognize software revenue upon the completion of standard milestone conditions and the amount of revenue recognized in any quarter depends upon our and our clients’ abilities to meet project milestones. Delays in meeting these milestone conditions or modification of the contract could result in a shift of revenue recognition from one quarter to another and could have a material adverse effect on results of operations for a particular quarter.
Our revenues from system sales historically have been lower in the first quarter of the year and greater in the fourth quarter of the year, primarily as a result of clients’ year-end efforts to make all final capital expenditures for the then-current year.
Our sales forecasts may vary from actual sales in a particular quarter. We use a “pipeline” system, a common industry practice, to forecast sales and trends in our business. Our sales associates monitor

 


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the status of all sales opportunities, such as the date when they estimate that a client will make a purchase decision and the potential dollar amount of the sale. These estimates are aggregated periodically to generate a sales pipeline. We compare this pipeline at various points in time to evaluate trends in our business. This analysis provides guidance in business planning and forecasting, but these pipeline estimates are by their nature speculative. Our pipeline estimates are not necessarily reliable predictors of revenues in a particular quarter or over a longer period of time, partially because of changes in the pipeline and in conversion rates of the pipeline into contracts that can be very difficult to estimate. A negative variation in the expected conversion rate or timing of the pipeline into contracts, or in the pipeline itself, could cause our plan or forecast to be inaccurate and thereby adversely affect business results. For example, a slowdown in information technology spending, adverse economic conditions or a variety of other factors can cause purchasing decisions to be delayed, reduced in amount or cancelled, which would reduce the overall pipeline conversion rate in a particular period of time. Because a substantial portion of our contracts are completed in the latter part of a quarter, we may not be able to adjust our cost structure quickly enough in response to a revenue shortfall resulting from a decrease in our pipeline conversion rate in any given fiscal quarter(s).
The trading price of our common stock may be volatile. The market for our common stock may experience significant price and volume fluctuations in response to a number of factors including actual or anticipated variations in operating results, rumors about our performance or solutions, devices and services, changes in expectations of future financial performance or estimates of securities analysts, governmental regulatory action, healthcare reform measures, client relationship developments, changes occurring in the securities markets in general and other factors, many of which are beyond our control. As a matter of policy, we do not generally comment on our stock price or rumors.
Furthermore, the stock market in general, and the markets for software, healthcare and information technology companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of particular companies. These broad market and industry fluctuations may adversely affect the trading price of our common stock, regardless of actual operating performance.
Our Directors have authority to issue preferred stock and our corporate governance documents contain anti-takeover provisions. Our Board of Directors has the authority to issue up to 1,000,000 shares of preferred stock and to determine the preferences, rights and privileges of those shares without any further vote or action by the shareholders. The rights of the holders of common stock may be harmed by rights granted to the holders of any preferred stock that may be issued in the future.
In addition, some provisions of our Certificate of Incorporation and Bylaws could make it more difficult for a potential acquirer to acquire a majority of our outstanding voting stock. This includes, but is not limited to, provisions that: provide for a classified board of directors, prohibit shareholders from taking action by written consent and restrict the ability of shareholders to call special meetings. We are also subject to provisions of Delaware law that prohibit us from engaging in any business combination with any interested shareholder for a period of three years from the date the person became an interested shareholder, unless certain conditions are met, which could have the effect of delaying or preventing a change of control.
Factors that May Affect Future Results of Operations, Financial Condition or Business
Statements made in this report, the Annual Report to Shareholders of which this report is made a part, other reports and proxy statements filed with the Securities and Exchange Commission, communications to shareholders, press releases and oral statements made by representatives of the Company that are not historical in nature, or that state the Company’s or management’s intentions, hopes, beliefs, expectations or predictions of the future, may constitute “forward-looking statements” within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements can often be identified by the use of forward-looking terminology, such as “could,” “should,” “will,” “intended,” “continue,” “believe,” “may,” “expect,” “hope,” “anticipate,” “goal,” “forecast,” “plan,” “guidance” or “estimate” or the negative of these words, variations thereof or similar expressions. Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. It is important to note that any such performance and actual results, financial condition or business, could differ materially from those expressed in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to,

 


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those discussed in this Item 1A. Risk Factors and elsewhere herein or in other reports filed with the SEC. Other unforeseen factors not identified herein could also have such an effect. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results, financial condition or business over time.
Item 2. Properties
World Headquarters
Our world headquarters offices are located in a Company-owned office park in North Kansas City, Missouri, containing approximately 992,877 gross square feet of useable space (the “Campus”), inclusive of the new data center and clinic buildings described below. As of December 29, 2007, we were using all of the useable space for our U.S. corporate headquarters operations.
In June 2007, the Company completed construction of the world headquarters Technology Center, a 135,161 square foot data center facility on the Campus. We deliver remote hosting, disaster recovery and other services to our clients from this facility.
In February 2006, we completed construction on the Campus of a 13,136 square foot addition to the 2901 Rockcreek Parkway building to house Health e Clinic, a wholly-owned subsidiary, which provides primary care medical services for our associates and their family members.
In 2004, we purchased approximately 12 acres of unimproved real estate adjacent to the Campus for campus expansion. This land was purchased to provide a secondary entry into the Campus and to provide for future building development as needed. The first phase of development was a roadway extension and second entry point into the Campus. The second phase of development is the data center facility described above. Future development of this land is undetermined at this time.
Other Properties
In February 2007, we entered into a long-term lease for 480,700 gross square feet of property located in Kansas City, Missouri. This office space, known as the Innovation Campus, houses associates from our intellectual property organizations. In April and August 2007, additional space was added to this lease so that the Innovation Campus now consists of 828,740 square feet, including the daycare facility listed below.
In July 2007, we entered into a lease for 36,800 gross square feet of property located in Kansas City, MO, near the Innovation Campus, which is the home for our Innovation Kids Learning Center, providing on-site daycare for Cerner associate families.
In June 2005, we purchased 263,512 gross square feet of property located in Kansas City, Missouri. The office space, known as the Cerner Oaks Campus, houses associates from the CernerWorks group and associates of Cerner’s wholly-owned subsidiary, Health e Exchange.
We also own property located along the north riverbank of the Missouri River, approximately two miles from the Campus. This property consists of a 96,318 gross square foot building and a 1,300-car parking garage. The building has been renovated for use as a corporate training, meeting and event center for the Company and third parties. We have also made use of the parking garage to meet overflow-parking demands on the Campus.
In February 2007, we acquired a lease for an additional office in Garden Grove, California, as part of the Etreby Computer Company, Inc. acquisition.
As of the end of February 2008, the Company leased office space in: Birmingham, Alabama; Beverly Hills and Garden Grove, California; Denver, Colorado; Overland Park, Kansas; Waltham, Massachusetts; Bel Air, Maryland; Minneapolis and Rochester, Minnesota; Kansas City, Missouri; Charlotte, North Carolina; Beaverton, Oregon; Blue Bell, Pennsylvania; and Vienna, Virginia. The Company operates one of its data centers in leased space in Lee’s Summit, Missouri. Globally, the Company also leases office space in: Brisbane, Sydney and Melbourne, Australia; Brussels, Belgium; London-Ontario, Canada; Hong Kong, China; Paris, France; Herzogenrath and Idstein, Germany; Bangalore, India; Dublin, Ireland; Kuala

 


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Lumpur, Malaysia; Ngee Ann City, Singapore; Barcelona and Madrid, Spain; London and Slough, England; and, Abu Dhabi and Dubai Internet City, United Arab Emirates.
In 2007, our Overland Park, Kansas office housing associates with our Cerner BeyondNow, Inc. subsidiary was closed as we relocated many associates to the Innovation Campus and/or the necessary business functions to other Company offices, and we entered into a new agreement for office space in Overland Park, Kansas for operations related to Cerner’s wholly-owned subsidiary, Cerner Innovation, Inc.
Also in 2007, our Sterling, Virginia office was closed as we relocated many associates and/or the necessary business functions to other Company offices.
Item 3. Legal Proceedings
We have no material pending litigation.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the shareholders of the Company during the fourth quarter of the fiscal year ended December 29, 2007.
PART II
Item 5.   Market for the Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s common stock trades on The NASDAQ Global Select Market SM under the symbol CERN. The following table sets forth the high, low and last sales prices for the fiscal quarters of 2007 and 2006 as reported by The Nasdaq Stock Market ® .
                                                 
    2007   2006
    High   Low   Last   High   Low   Last
First Quarter
  $ 56.25     $ 44.11     $ 54.45     $ 49.38     $ 40.33     $ 47.45  
Second Quarter
    60.43       52.20       55.47       47.99       34.70       37.20  
Third Quarter
    66.17       52.32       59.81       47.75       32.50       45.40  
Fourth Quarter
    65.92       53.50       57.58       50.58       44.11       45.50  
At February 22, 2008, there were approximately 1,169 owners of record . To date, the Company has paid no cash dividends and it does not intend to pay cash dividends in the foreseeable future. Management believes it is in the shareholders’ best interest for the Company to reinvest funds in the operation of the business.

 


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Item 6. Selected Financial Data
                                         
    2007   2006   2005   2004   2003
(In thousands, except per share data)   (1)(2)(3)(4)   (1)(4)(5)   (6)(7)   (8)(9)        
Statement of Earnings Data:
                                       
Revenues
  $ 1,519,877     $ 1,378,038     $ 1,160,785     $ 926,356     $ 839,587  
Operating earnings
    204,083       166,167       140,436       111,464       78,097  
Earnings before income taxes
    203,967       167,544       135,244       107,920       71,222  
Net earnings
    127,125       109,891       86,251       64,648       42,791  
 
                                       
Earnings per share:
                                       
Basic
    1.60       1.41       1.16       0.90       0.61  
Diluted
    1.53       1.34       1.10       0.86       0.59  
 
                                       
Weighted average shares outstanding:
                                       
Basic
    79,395       77,691       74,144       72,174       70,710  
Diluted
    83,218       81,723       78,090       75,142       72,712  
 
                                       
Balance Sheet Data:
                                       
Working capital
  $ 530,441     $ 444,656     $ 391,541     $ 310,229     $ 246,412  
Total assets
    1,689,956       1,496,433       1,303,629       982,265       854,252  
Long-term debt, excluding current installments
    177,606       187,391       194,265       108,804       124,570  
Shareholders’ equity
    1,132,428       922,294       760,533       597,485       494,680  
 
(1)   Includes share-based compensation expense recognized in accordance with Statement of Financial Accounting Standards No. 123R. The impact of including this expense is a $10.2 million decrease, net of $6.0 million tax benefit, in net earnings and a decrease to diluted earnings per share of $.12 in 2007 and a $11.7 million decrease, net of $7.3 million tax benefit, in net earnings and a decrease to diluted earnings per share of $.14 in 2006.
 
(2)   Includes a research and development write-off related to the RxStation medication dispensing devices. In connection with production and delivery of the RxStation medication dispensing devices, the Company reviewed the accounting treatment for the RxStation line of devices and determined that $8.6 million of research and development activities for the RxStation medication dispensing devices that should have been expensed was incorrectly capitalized. The impact of this charge is a $5.4 million decrease, net of $3.2 million tax benefit, in net earnings and a decrease to diluted earnings per share of $.06 in the year ended December 29, 2007, $2.1 million of this $5.4 million after tax amount recorded in 2007 related to periods prior to 2007.
 
(3)   Includes a $3.1 million tax benefit recorded in 2007 related to periods prior to 2007. The tax benefit relates to the over-expensing of state income taxes, which resulted in an increase to diluted earnings per share of $.04 in the year ended December 29, 2007.
 
(4)   Includes an adjustment to correct the amounts previously reported for the second quarter of 2007 for a previously disclosed out-of-period tax item relating to foreign net operating losses. The effect of this adjustment increases tax expense for the year ended December 29, 2007, by $4.2 million and increases January 1, 2005 retained earnings (Shareholders’ Equity) by the same amount.

 


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(5)   Includes a tax benefit of $2.0 million for adjustments relating to prior periods. This results in an increase to diluted earnings per share of $.02.
 
(6)   Includes a tax benefit of $4.8 million relating to the carry-back of a capital loss generated by the sale of Zynx Health Incorporated (“Zynx”) in the first quarter of 2004. The impact of this refund claim is a $4.8 million increase in net earnings and an increase in diluted earnings per share of $.06 for 2005.
 
(7)   Includes a charge for the write-off of acquired in process research and development related to the acquisition of the medical business division of VitalWorks, Inc. The impact of this charge is a $3.9 million decrease, net of $2.4 million tax benefit, in net earnings and a decrease to diluted earnings per share of $.05 for 2005.
 
(8)   Includes a gain on the sale of Zynx. The impact of this gain is a $3.0 million increase in net earnings and increase to diluted earnings per share of $.04 for 2004.
 
(9)   Includes a charge for vacation accrual of $3.3 million included in general and administrative. The impact of this charge is a $2.1 million decrease, net of $1.2 million tax benefit, in net earnings and a decrease to diluted earnings per share of $.03 for 2004.
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Cerner Corporation (“Cerner” or the “Company”). This MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to the financial statements (“Notes”).
Management Overview
Cerner primarily derives revenue by selling, implementing and supporting software solutions, clinical content, hardware, healthcare devices and services that give healthcare providers secure access to clinical, administrative and financial data in real time, allowing them to improve the quality, safety and efficiency in the delivery of healthcare. We implement the healthcare solutions as stand-alone, combined or enterprise-wide systems. Cerner Millennium software solutions can be managed by the Company’s clients or in the Company’s data center via a managed services model.
Our fundamental strategy has always centered on creating organic growth by investing in research and development (R&D) to create solutions and services for the healthcare industry. This strategy has driven strong growth over the long-term, with revenue growing at compound annual rates of more than 14% over the past three-, five- and ten-year periods. This growth has also created a very strategic client base of more than 6,000 hospital, health system, physician practice, clinic, laboratory and pharmacy client sites around the world. Selling additional solutions back into this client base is an important element of Cerner’s future revenue growth. We are also focused on driving growth through market share expansion by replacing competitors in healthcare settings that are looking to replace their current HIT suppliers or by creating new business relationships with those healthcare organizations that have not yet strategically aligned with a supplier. We also expect to drive growth through new initiatives that reflect our ongoing ability to innovate such as our CareAware healthcare device architecture and devices, Health e employer services, physician practice solutions and solutions and services for the pharmaceutical market. Finally, we expect continued strong revenue contributions from the sale of our solutions and services outside of the U.S. Many non-U.S. markets have a low penetration of HIT solutions and their governing bodies are in many cases prepared to purchase HIT solutions and services.
Beyond our strategy for driving revenue growth, we are also focused on earnings growth. Our net earnings have increased at more than 20% compound annual rates over three-, five- and ten-year periods. We believe we can continue driving strong levels of earnings growth by leveraging key areas to create operating margin expansion. The primary areas of opportunity for margin expansion include:

 


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    becoming more efficient at implementing our software by leveraging implementation support services and methodologies we have developed that can reduce the amount of effort required to implement our software;
 
    leveraging our investments in R&D by addressing new markets (i.e., non-U.S.) that do not require significant incremental R&D but can contribute significantly to revenue growth; and,
 
    leveraging our scalable business infrastructure to reduce the rate of increase in general and administrative spending to below our revenue growth rate.
We are also focused on increasing cash flow by growing earnings, reducing the use of working capital and controlling capital expenditures. While 2007 was a year of heavy capital investment because of investments in a new data center to support our rapidly growing hosting business and purchasing new buildings to accommodate growth in our associate base, we expect capital spending to decrease in 2008.
Results Overview
In 2007, we continued to execute on our core strategies to drive revenue growth, expand operating margins, grow earnings and generate good cash flow. The 2007 results included strong levels of bookings, earnings and cash flow. New business bookings revenue in 2007, which reflects the value of executed contracts for software, hardware, services and managed services (hosting of software in the Company’s data center) was $1.51 billion, which is an increase of 14% when compared to $1.32 billion in 2006. The 2007 and 2006 bookings exclude bookings related to the Company’s participation in the National Health Services (NHS) initiative to automate clinical processes and digitize medical records in England in the amount of $97.8 million and $154.2 million, respectively. Revenues for 2007 increased 10% to $1.52 billion compared to $1.38 billion in 2006, driven primarily by an increase in support, maintenance and services revenues.
The 2007 net earnings increased 16% to $127.1 million compared to $109.9 million in 2006. Diluted earnings per share increased 14% to $1.53 compared to $1.34 in 2006. The 2007 and 2006 net earnings and diluted earnings per share reflect the impact of accounting pursuant to Statement of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment,” which requires the expensing of stock options. The effect of accounting under SFAS 123R reduced the 2007 net earnings and diluted earnings per share by $10.2 million and $0.12, and the 2006 earnings and diluted earnings per share by $11.7 million and $0.14, respectively. The growth in net earnings and diluted earnings per share was driven primarily by continued progress with the Company’s margin expansion initiatives, particularly improving professional services margins and leveraging R&D investments. Our 2007 operating margin was 13%, and we remain on target with our desire to achieve our long term goal of 20% operating margins.
We had cash collections of receivables of $1.65 billion in 2007 compared to $1.46 billion in 2006, with the increase driven by increased billings. Days sales outstanding increased to 90 days for the quarter ended December 29, 2007 compared to 87 days for the quarter ended December 30, 2006. This increase was driven by an increase in billed receivables as opposed to unbilled items. Operating cash flows for 2007 were $274.6 million compared to $232.7 million in 2006.
This year also included progress on our strategic initiatives that, while not yet material to our current results, are an important part of our longer-term growth strategy.
In 2007, we made progress in selling and implementing our CareAware healthcare device connectivity platform that allows medical devices to be connected to an electronic medical record through a USB-like connection. During 2007, more than 20 clients purchased this solution, with several going live during the year. Initial sales have been to our existing clients, but our CareAware architecture gives us the ability to market outside of our installed base, which we expect to do in the future. In 2008, we also expect to continue expanding the number of devices supported by the CareAware architecture, which will increase our market opportunity.
We also delivered our first production CareAware RxStation medication dispensing devices in 2007. RxStation medication dispensing devices and solutions automate the medication process so both nursing and pharmacy can provide safer care and better management of the medication dispensing and

 


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administration process. In 2008, we expect to leverage our success with early adopter clients and increase marketing of the RxStation devices, with initial efforts focused inside our installed base.
In 2007, we also continued to make progress across our employer-focused initiatives that we call Health e employer services, which are targeted at employers looking to reduce health plan administrative costs and improve the health of their employees. In 2007, Cerner’s Health e Exchange became the third party administrator (TPA) for three employers representing more than 10,000 covered lives. Our TPA approach aims to help employers reduce healthcare friction, such as delays in billing statements and provider payments, resulting in lower costs. And our Health e Clinic was selected by a Fortune 500 technology company to provide a fully-automated employer-based clinic, modeled after our successful on-site clinic that has helped improve productivity of our workforce and provided cost savings to our health plan and the participants in the health plan.
Healthcare Information Technology Market Outlook
We have provided a detailed assessment of the healthcare information technology market Part 1, Item 1 The Healthcare and Healthcare IT Industry.
Results of Operations
Year Ended December 29, 2007, Compared to Year Ended December 30, 2006
The Company’s net earnings increased 16% to $127,125,000 in 2007 from $109,891,000 in 2006. The effects of SFAS No. 123R, which requires the expensing of stock options, decreased net earnings in 2007 and 2006 by $10,159,000, net of $6,030,000 tax benefit and $11,746,000, net of $7,275,000 tax benefit, respectively.
Revenues increased 10% to $1,519,877,000 in 2007, compared with $1,378,038,000 in 2006. The revenue composition for 2007 was $500,319,000 in system sales, $397,713,000 in support and maintenance, $585,067,000 in services and $36,778,000 in reimbursed travel.
    System sales revenues decreased 1% to $500,319,000 in 2007 from $505,743,000 in 2006. Included in system sales are revenues from the sale of software, hardware, sublicensed software, deployment period licensed software upgrade rights, installation fees, transaction processing and subscriptions. The slight decrease in system sales was primarily attributable to a decrease in software revenue, which was largely offset by an increase in hardware, sublicensed software, and subscriptions revenue. We believe the decline in software revenue was primarily caused by much of our client base being focused on upgrading to the Cerner Millennium 2007 release. Cerner generally sells a perpetual license, so our clients do not have to pay new license fees when they upgrade to a new version of our software, so the focus by much of our base on implementing the upgrade impacted our software sales. We believe this upgrade cycle will have a smaller impact going forward, and we expect software revenue to grow in 2008.
 
    Support, maintenance and services revenues increased 18% to $982,780,000 in 2007 from $833,244,000 in 2006. Included in support, maintenance and services revenues are support and maintenance of software and hardware, professional services excluding installation, and managed services. A summary of the Company’s support, maintenance and services revenues in 2007 and 2006 is as follows:
                 
(In thousands)   2007   2006
     
Support and maintenance revenues
  $ 397,713     $ 340,416  
Services revenue
    585,067       492,828  
     
Total support, maintenance, and services revenues
  $ 982,780     $ 833,244  
     

 


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    The $92,239,000, or 19%, increase in services revenue was attributable to growth in CernerWorks managed services and increased professional services utilization rates. The $57,297,000, or 17%, increase in support and maintenance revenues is attributable to continued success at selling Cerner Millennium applications, implementing them at client sites, and initiating billing for support and maintenance fees.
 
  Contract backlog, which reflects new business bookings that have not yet been recognized as revenue, increased 24% in 2007 compared to 2006. This increase was driven by growth in new business bookings during the past four quarters, including continued strong levels of managed services bookings that typically have longer contract terms. A summary of the Company’s total backlog for 2007 and 2006 follows:
                 
(In thousands)   2007   2006
     
Contract backlog
  $ 2,712,195     $ 2,194,460  
Support and maintenance backlog
    541,095       469,473  
     
Total backlog
  $ 3,253,290     $ 2,663,933  
     
The cost of revenues was 18% of total revenues in 2007 and 21% in 2006. The cost of revenues includes the cost of reimbursed travel expense, sales commissions, third party consulting services and subscription content, computer hardware and sublicensed software purchased from hardware and software manufacturers for delivery to clients. It also includes the cost of hardware maintenance and sublicensed software support subcontracted to the manufacturers. Such costs, as a percent of revenues, typically have varied as the mix of revenue (software, hardware, maintenance, support, services and reimbursed travel) carrying different margin rates changes from period to period. The decline in cost of revenues as a percent of revenue is primarily associated with lower commissions and third party costs on licensed software sales and a higher mix of support, maintenance and services revenues, which have a lower cost of revenue.
Total operating expenses, excluding cost of revenues, increased 12% to $1,035,684,000 in 2007 from $920,901,000 in 2006. Accounting pursuant to SFAS 123(R), which results in the expensing of share-based compensation, impacted expenses in 2007 and 2006 as indicated below:
                 
(In thousands)   2007   2006
     
Sales and client service expenses
  $ 9,518     $ 11,412  
Software development expense
    3,032       4,269  
General and administrative expenses
    3,639       3,340  
     
Total stock-based compensation expense
  $ 16,189     $ 19,021  
     
    Sales and client service expenses as a percent of total revenues were 43% and 42% in 2007 and 2006, respectively. These expenses increased 14% to $657,956,000 in 2007, from $578,050,000 in 2006. Sales and client service expenses include salaries of sales and client service personnel, communications expenses, unreimbursed travel expenses, expense for share-based payments, sales and marketing salaries and trade show and advertising costs. The increase was primarily attributable to growth in CernerWorks managed services business.
 
    Total expense for software development in 2007 increased 10% to $270,576,000, from $246,970,000 in 2006. The increase in aggregate expenditures for software development in 2007 was due to continued development and enhancement of the Cerner Millennium platform and software solutions and investments in new initiatives, such as RxStation medication dispensing devices. Included in 2007 software development expense is $8.6 million of research and development activities for the RxStation medical dispensing device. $3.4 million of this amount recorded in 2007 is related to periods prior to 2007. A summary of the Company’s total software development expense in 2007 and 2006 is as follows:

 


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(In thousands)   2007   2006
     
Software development costs
  $ 283,086     $ 262,163  
Capitalized software costs
    (64,789 )     (59,991 )
Capitalized costs related to share-based payments
    (1,196 )     (952 )
Amortization of capitalized software costs
    53,475       45,750  
     
Total software development expense
  $ 270,576     $ 246,970  
     
    General and administrative expenses as a percent of total revenues were 7% in 2007 and 2006. These expenses increased 12% to $107,152,000 in 2007 from $95,881,000 in 2006. This increase was due primarily to the growth of the Company’s core business and increased presence in the global market. General and administrative expenses include salaries for corporate, financial and administrative staff, utilities, communications expenses, professional fees, the transaction gains or losses on foreign currency and expense for share-based payments. The Company recorded a net transaction gain on foreign currency of $3,691,000 and $3,764,000 in 2007 and 2006, respectively.
Net interest income was $1,269,000 in 2007, compared with net interest expense of $697,000 in 2006. Interest income increased to $13,206,000 in 2007 from $11,877,000 in 2006, due primarily to higher yields on cash and short term investments. Interest expense decreased to $11,937,000 in 2007 from $12,574,000 in 2006, due primarily to a reduction in long-term debt.
Other expense was $1,385,000 in 2007, compared to other income of $2,074,000 in 2006. Included in 2006 other income is a gain recorded in the first quarter of 2006 related to the renegotiation of a supplier contract that eliminated a liability related to unfavorable future commitments due to that supplier. The Company was able to renegotiate the contract to eliminate certain minimum volume requirements and reduce pricing to market rates leading to the elimination of the previously recorded liability.
The Company’s effective tax rate was 38% and 34% in 2007 and 2006, respectively. The change in tax rate was principally related to the creation of a valuation allowance in a non-U.S. jurisdiction in 2007.
During the second quarter of 2007, the Company determined that due to a change in circumstances in the quarter, it is more likely than not that certain tax operating loss carry-forwards in a non-U.S. jurisdiction would not be realized resulting in the recognition of a valuation allowance totaling approximately $7,982,000.
Tax expense for 2007 and 2006 includes benefits of approximately $3,125,000 and $1,994,000, respectively for adjustments relating to prior periods.
Operations by Segment
The Company has two operating segments, Domestic and Global.
The following table presents a summary of the operating information for the years ended 2007 and
2006:

 


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2007   Operating Segments  
(In thousands)   Domestic     Global     Other     Total  
Revenues
  $ 1,227,434     $ 290,677     $ 1,766     $ 1,519,877  
 
                       
 
                               
Cost of revenues
    221,154       53,367       5,589       280,110  
Operating expenses
    331,124       151,355       553,205       1,035,684  
 
                       
Total costs and expenses
    552,278       204,722       558,794       1,315,794  
 
                       
 
                               
Operating earnings
  $ 675,156     $ 85,955     $ (557,028 )   $ 204,083  
 
                       
                                 
2006   Operating Segments  
(In thousands)   Domestic     Global     Other     Total  
Revenues
  $ 1,166,662     $ 207,367     $ 4,009     $ 1,378,038  
 
                       
 
                               
Cost of revenues
    251,574       39,224       172       290,970  
Operating expenses
    308,085       107,571       505,245       920,901  
 
                       
Total costs and expenses
    559,659       146,795       505,417       1,211,871  
 
                       
 
                               
Operating earnings
  $ 607,003     $ 60,572     $ (501,408 )   $ 166,167  
 
                       
Domestic Segment
The Company’s Domestic segment includes revenue contributions and expenditures associated with business activity in the United States.
Operating earnings increased 11% to $675,156,000 in 2007 from $607,003,000 in 2006.
    Revenues increased 5% to $1,227,434,000 in 2007 from $1,166,662,000 in 2006. This increase was primarily driven by growth in managed services and support and maintenance.
 
    Cost of revenues was 18% and 22% in 2007 and 2006, respectively. The decline was driven primarily by lower commissions and third party costs on licensed software sales, lower hardware sales, and a higher mix of support, maintenance and services revenues, which have a lower cost of revenue.
 
    Operating expenses increased 7% for the year ended December 29, 2007, as compared to the year ended December 30, 2006, due primarily to growth in managed services.
Global Segment
The Company’s global segment includes revenue contributions and expenditures linked to business activity in Australia, Austria, Belgium, Canada, Cayman Islands, China (Hong Kong), Egypt, England, France, Germany, India, Ireland, Malaysia, Puerto Rico, Saudi Arabia, Singapore, Spain Sweden, Switzerland and the United Arab Emirates.
Operating earnings increased 42% to $85,955,000 in 2007 from $60,572,000 in 2006.
    Revenues increased 40% to $290,677,000 in 2007 from $207,367,000 in 2006. Approximately one third of this increase was driven by an increase in revenue from the Company’s participation in the National Health Service (NHS) initiative to automate clinical processes and digitize medical

 


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      records in England. The increase in global revenue was also driven by growth in several other countries, including Malaysia, Australia, Egypt, France, Spain, and the United Arab Emirates. Revenue related to the NHS initiative that is being accounted for at zero margin totaled $96,000,000 and $71,000,000 for the 2007 and 2006 fiscal years, respectively. These revenues did not affect operating earnings as the Company is accounting for them at zero-margin using a zero-margin approach of applying percentage-of-completion accounting until either the software customization and development services are completed or the Company is able to determine fair value for the support services. The Company expects to recognize margin on the arrangements by 2009. The remaining unrecognized portion of the fee will be recognized over the remaining term of the arrangement, which expires in 2014.
 
    Cost of revenues was 18% and 19% in 2007 and 2006, respectively. The lower cost of revenues was driven by a slightly higher mix of support, maintenance and services revenues, which have a lower cost of revenue.
 
    Operating expenses for the year ended December 29, 2007 increased 41%, compared to the year ended December 30, 2006, primarily due to hiring personnel for the projects in England and supporting growth in other global regions.
Other Segment
The Company’s Other segment includes revenues and expenses which are not tracked by geographic segment. Operating losses increased 11% to $557,028,000 in 2007 from $501,408,000 in 2006. This increase was primarily due to an increase in operating expenses such as software development, marketing, general and administrative, share-based compensation expense and depreciation.
Year Ended December 30, 2006, Compared to Year Ended December 31, 2005
The Company’s net earnings increased 27% to $109,891,000 in 2006 compared to $86,251,000 in 2005. Net earnings for 2006 include adjustments for approximately $1,994,000 of tax benefit for items relating to prior periods. 2006 net earnings also reflect the impact of accounting pursuant to Statement of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment,” which requires the expensing of stock options. The effect of accounting under SFAS 123R reduced the 2006 net earnings by $11,746,000 (net of taxes). Net earnings for 2005 included an adjustment in the third quarter of 2005 related to a prior period for a tax benefit from the carry-back of a capital loss generated by the sale of Zynx of $4,794,000 and the write-off of acquired in-process research and development in the first quarter of 2005 of $3,941,000, net of a $2,441,000 tax benefit.
Revenues increased 19% to $1,378,038,000 in 2006 from $1,160,785,000 in 2005. The revenue composition for 2006 was $505,743,000 in system sales, $340,416,000 in support and maintenance, $492,828,000 in services and $39,051,000 in reimbursed travel.
    System sales increased 12% to $505,743,000 in 2006 from $449,734,000 in 2005. Included in system sales are revenues from the sale of software, hardware, sublicensed software, deployment period licensed software upgrade rights, installation fees, transaction processing and subscriptions. System sales growth in 2006 was driven by strong growth of software, hardware and subscriptions.
 
    Support, maintenance and service revenues increased 23% to $833,244,000 in 2006 from $677,664,000 in 2005. Included in support, maintenance and services revenues are support and maintenance of software and hardware, professional services excluding installation, and managed services. A summary of the Company’s support, maintenance and services revenues in 2006 and 2005 is as follows:

 


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(In thousands)   2006   2005
     
Support and maintenance revenues
  $ 340,416     $ 296,716  
Services revenue
    492,828       380,948  
     
Total support, maintenance, and services revenues
  $ 833,244     $ 677,664  
     
      The $111,880,000, or 29%, increase in services revenues was attributable to growth in professional services and CernerWorks managed services. The $43,700,000, or 15%, increase in support and maintenance revenues is attributable to continued success at selling Cerner Millennium applications, implementing them at client sites, and initiating billing for support and maintenance fees.
 
    Contract backlog, which reflects new business bookings that have not yet been recognized as revenue, increased 27% in 2006 compared to 2005. This increase is due to a strong increase in new business bookings in 2006 compared to 2005. A summary of the Company’s 2006 and 2005 total backlog follows:
                 
(In thousands)   2006   2005
     
Contract backlog
  $ 2,194,460     $ 1,724,583  
Support and maintenance backlog
    469,473       415,681  
     
Total backlog
  $ 2,663,933     $ 2,140,264  
     
The cost of revenues was 21% of total revenues in 2006 and 22% of total revenues in 2005. The cost of revenues includes the cost of reimbursed travel expense, sales commissions, third party consulting services and subscription content, computer hardware and sublicensed software purchased from hardware and software manufacturers for delivery to clients. It also includes the cost of hardware maintenance and sublicensed software support subcontracted to the manufacturers. Such costs, as a percent of revenues, typically have varied as the mix of revenue (software, hardware, maintenance, support, services and reimbursed travel) carrying different margin rates changes from period to period. The decrease in the cost of revenue as a percent of total revenues resulted principally from strong levels of software sales and strong growth in services that do not have a high level of associated third party costs.
Total operating expenses, excluding cost of revenues, increased 20% to $920,901,000 in 2006 from $765,663,000 in 2005. Accounting pursuant to SFAS 123(R), which results in the expensing of share-based compensation, impacted expenses as indicated below:
         
(In thousands)   2006  
     
Sales and client service expenses
  $ 11,412  
Software development expense
    4,269  
General and administrative expenses
    3,340  
 
     
Total stock-based compensation expense
  $ 19,021  
 
     
    Sales and client service expenses as a percent of total revenues were 42% and 40% in 2006 and 2005, respectively. The increase in total sales and client service expenses to $578,050,000 in 2006 from $466,206,000 in 2005 was primarily due to an increase in personnel expenses associated with the strong growth in our professional services and managed services businesses and an increased presence in the global market. Sales and client service expenses include salaries of sales and client service personnel, communications expenses, unreimbursed travel expenses, expense for share-based payments, sales and marketing salaries and trade show and advertising costs.

 


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    Total expense for software development in 2006 increased 17% to $246,970,000, from $211,455,000 in 2005. The increase in aggregate expenditures for software development in 2006 was due to continued development and enhancement of the Cerner Millennium platform and software solutions. A summary of the Company’s total software development expense for 2006 and 2005 is as follows:
                 
(In thousands)   2006   2005
     
Software development costs
  $ 262,163     $ 225,606  
Capitalized software costs
    (59,991 )     (62,039 )
Capitalized costs related to share-based payments
    (952 )      
Amortization of capitalized software costs
    45,750       47,888  
     
Total software development expense
  $ 246,970     $ 211,455  
     
    General and administrative expenses as a percent of total revenues were 7% in both 2006 and 2005. Total general and administrative expenses were $95,881,000 and $81,620,000 for 2006 and 2005, respectively. The increase was due primarily to growth in the Company’s core business and increased presence in the global market. General and administrative expenses include salaries for corporate, financial and administrative staffs, utilities, communications expenses, professional fees and the transaction gains or losses on foreign currency. The Company had net transaction gains on foreign currency of $3,764,000 for 2006 compared to $2,700,000 for 2005.
    2005 includes a write-off of in process research and development in the amount of $3,941,000, net of $2,441,000 tax benefit, related to the acquisition of the medical division of VitalWorks.
Net interest expense was $697,000 in 2006 compared to $5,858,000 in 2005. Interest income increased to $11,877,000 in 2006 from $3,871,000 in 2005, due primarily to higher interest rates and a higher cash balance. Interest expense increased to $12,574,000 in 2006 from $9,729,000 in 2005, due primarily to a higher level of debt during 2006.
Other income was $2,074,000 in 2006 compared to $666,000 in 2005. Included in other income is income from office space leased to third parties. 2006 other income also includes a gain recorded in the first quarter of 2006 related to the renegotiation of a supplier contract that eliminated a liability related to unfavorable future commitments due to that supplier. The Company was able to renegotiate the contract to eliminate certain minimum volume requirements and reduce pricing to market rates leading to the elimination of the previously recorded liability. The increase in other income in 2006 was driven by this gain and by higher lease income.
The Company’s effective tax rate was 34% and 36% in 2006 and 2005, respectively. Tax expense for 2006 includes benefits of approximately $1,994,000 for adjustments relating to prior periods. Tax expense for 2005 includes an adjustment that reduced tax expense related to a prior period for a tax benefit from the carry-back of a capital loss generated by the sale of Zynx of $4,749,000. Adjusting for these items, the effective tax rates were 36% and 40% in 2006 and 2005, respectively.
Operations by Segment
The Company has two operating segments, Domestic and Global.
The following table presents a summary of the operating information for the years ended 2006 and 2005:

 


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    Operating Segments  
2006                        
(In thousands)   Domestic     Global     Other     Total  
Revenues
  $ 1,166,662     $ 207,367     $ 4,009     $ 1,378,038  
 
                       
 
                               
Cost of revenues
    251,574       39,224       172       290,970  
Operating expenses
    308,085       107,571       505,245       920,901  
 
                       
Total costs and expenses
    559,659       146,795       505,417       1,211,871  
 
                       
 
                               
Operating earnings
  $ 607,003     $ 60,572     $ (501,408 )   $ 166,167  
 
                       
                                 
    Operating Segments  
2005                        
(In thousands)   Domestic     Global     Other     Total  
Revenues
  $ 1,043,804     $ 113,317     $ 3,664     $ 1,160,785  
 
                       
 
                               
Cost of revenues
    238,096       17,189       (599 )     254,686  
Operating expenses
    288,098       48,098       429,467       765,663  
 
                       
Total costs and expenses
    526,194       65,287       428,868       1,020,349  
 
                       
 
Operating earnings
  $ 517,610     $ 48,030     $ (425,204 )   $ 140,436  
 
                       
Domestic Segment
The Company’s domestic segment includes revenue contributions and expenditures associated with business activity in the United States.
Operating earnings increased 17% to $607,003,000 in 2006 from $517,610,000 in 2005.
    Revenues increased 12% to $1,166,662,000 in 2006 from $1,043,804,000 in 2005. This increase was primarily driven by growth in managed and professional services.
 
    Cost of revenues was basically unchanged at 22% and 23% in 2006 and 2005, respectively.
 
    Operating expenses increased 7% for the year ended December 30, 2006, as compared to the year ended December 31, 2005, due primarily to growth in professional and managed services.

 


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Global Segment
The Company’s global segment includes revenue contributions and expenditures linked to business activity outside of the United States, which for 2006 and 2005 included: in Australia, Canada, China (Hong Kong), England, France, Germany, India, Malaysia, Saudi Arabia, Singapore, Spain and the United Arab Emirates.
Operating earnings increased 26% to $60,572,000 in 2006 from $48,030,000 in 2005.
    Revenues increased 83% to $207,367,000 in 2006 from $113,317,000 in 2005. This increase was primarily driven by an increase in revenue from the Company’s participation in the National Health Service (NHS) initiative to automate clinical processes and digitize medical records in England. Revenue related to the NHS initiative that is being accounted for at zero-margin totaled $69,000,000 and $14,000,000 for the, 2006 and 2005 fiscal years, respectively. These revenues did not affect operating earnings as the Company is accounting for them at zero-margin using a zero-margin approach of applying percentage-of-completion accounting until either the software customization and development services are completed or the Company is able to determine fair value for the support services. The Company expects to recognize margin on the arrangements by 2009. The remaining unrecognized portion of the fee will be recognized over the remaining term of the arrangement, which expires in 2014.
 
    Cost of revenues was 19% and 15% in 2006 and 2005, respectively. The increase in costs of revenues as a percent of total revenues was driven by a much higher level of global hardware sales in 2006 compared to 2005.
 
    Operating expenses for the year ended December 30, 2006 increased 124%, compared to the year ended December 31, 2005, primarily due to hiring personnel for the projects in England and supporting growth in other global regions.
Other Segment
The Company’s Other segment includes revenues and expenses which are not tracked by geographic segment.
Operating losses increased 18% to $501,408,000 in 2006 from $425,204,000 in 2005. This increase was primarily due to an increase in operating expenses such as software development, marketing, general and administrative, share-based compensation expense and depreciation. Operating expenses in the 2005 period includes the write-off of acquired in-process research and development of $6,382,000.
Liquidity and Capital Resources
The Company’s liquidity is influenced by many factors, including the amount and timing of the Company’s revenues, its cash collections from its clients and the amounts the Company invests in software development, acquisitions and capital expenditures.
The Company’s principal source of liquidity is its cash, cash equivalents and short-term investments. The majority of the Company’s cash and cash equivalents consist of U.S. Government Federal Agency Securities, short-term marketable securities and overnight repurchase agreements. At December 29, 2007 the Company had cash and cash equivalents of $182,914,000, short-term investments of $161,600,000 and working capital of $530,441,000 compared to cash and cash equivalents of $162,545,000, short-term investments of $146,239,000 and working capital of $444,656,000 at December 30, 2006.
At December 29, 2007, we held approximately $162 million of auction rate securities, classified as short-term investments, with an auction reset feature (“auction rate securities”) whose underlying assets are generally student loans which are substantially backed by various state governments. There were successful auctions for all of the securities held at December 29, 2007. At February 14, 2008, we held approximately $122 million of auction rate securities. In February 2008, auctions failed for $36 million

 


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of our auction rate securities, and there is no assurance that currently successful auctions on the other auction rate securities in our investment portfolio will continue to succeed, and as a result, our ability to liquidate our investment and fully recover the carrying value of our investment in the near term may be limited or not exist. An auction failure means that the parties wishing to sell securities could not. All of our auction rate securities, including those subject to the failure, are currently rated AAA the highest rating, by a rating agency. If the issuers are unable to successfully close future auctions and their credit ratings deteriorate, we may in the future be required to record an impairment charge on these investments. We believe we will be able to liquidate our investment without significant loss within the next year, and we currently believe these securities are not significantly impaired, primarily due to the government guarantees and AAA ratings of the underlying securities, however, it could take until the final maturity of the underlying notes (up to 30 years) to realize our investments’ recorded value. Based on our expected operating cash flows, and our other sources of cash, we do not anticipate the potential lack of liquidity on these investments to affect our ability to execute our current business plan.
Cash Flow from Operating Activities
The Company generated cash of $274,565,000, $232,718,000 and $228,865,000 from operations in 2007, 2006 and 2005, respectively. Cash flow from operations increased in 2007 due primarily to a stronger performance in net earnings. The Company has periodically provided long-term financing options to creditworthy clients through third party financing institutions and has directly provided extended payment terms to clients from contract date. These extended payment term arrangements typically provide for date based payments over periods ranging from 12 months to seven years. Pursuant to SOP 97-2, because a significant portion of the fee is due beyond one year, we have analyzed our history with these types of arrangements and have concluded that we do have a standard business practice of using extended payment term arrangements and have a long history of successfully collecting under the original payment terms for arrangements with similar clients, product offerings and economics without granting concessions. Accordingly, we consider the fee to be fixed and determinable in these extended payment term arrangements and, thus, the timing of revenue is not impacted by the existence of extended payments. Some of these payment streams have been assigned on a non-recourse basis to third party financing institutions. The Company has provided its usual and customary performance guarantees to the third party financing institutions in connection with its on-going obligations under the client contract. During 2007, 2006 and 2005, the Company received total client cash collections of $1,646,584,000, $1,457,603,000 and $1,200,595,000, respectively, of which approximately 5%, 7% and 7% were received from third party client financing arrangements and non-recourse payment assignments, respectively. The days sales outstanding increased to 90 days for the quarter ended December 29, 2007 compared to 87 days for the quarter ended December 30, 2006. Revenues provided under support and maintenance agreements represent recurring cash flows. Support and maintenance revenues increased 17% in 2007 and 15% in 2006, and the Company expects these revenues to continue to grow as the base of installed systems grows.
Cash Flow from Investing Activities
Cash used in investing activities in 2007 consisted primarily of capital purchases of $180,723,000, which includes $105,678,000 of capital equipment and $75,045,000 of land, buildings and improvements and business acquisitions totaling $24,061,000. Capitalized software development costs were $66,063,000 in 2007. Cash paid for short-term investments, net of sales and maturities was $13,277,000 in 2007. Cash used in investing activities in 2006 consisted primarily of capital purchases of $131,478,000, which includes $70,299,000 of capital equipment and $61,179,000 of land, buildings and improvements. Capitalized software development costs were $61,223,000 and the acquisition of businesses totaled $13,731,000. Cash provided by sales and maturities of short-term investments, net of purchases, was $29,122,000 in 2006.
In the second quarter of 2007, the Company completed the construction of a new data center on its world headquarters campus in North Kansas City, Missouri. The Company spent approximately $61,203,000 on this construction project. Of this amount, $34,345,000 was spent in 2006 and the remaining amount was spent in 2007.
Cash Flow from Financing Activities

 


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The Company’s 2007 financing activities consisted primarily of proceeds from the exercise of options of $29,085,000, the excess tax benefit from share-based compensation of $30,357,000 and repayment of long-term debt of $22,359,000. In 2006, the Company’s financing activities consisted primarily of proceeds from the exercise of options of $21,704,000, the excess tax benefit from share-based compensation of $7,068,000 and repayment of long-term debt of $30,783,000.
In December 2007, the Company had a one-day borrowing of $40,000,000 from its line of credit which was repaid on the following day. This was in connection with tax incentives related to the World Headquarters data center. The Company does not expect this to be necessary in future periods.
In November 2005, the Company completed a £65,000,000 ($129,779,000 at December 29, 2007) private placement of debt at 5.54% pursuant to a Note Agreement. The Note Agreement is payable in seven equal annual installments beginning in November 2009. The proceeds were used to repay the outstanding amount under the Company’s credit facility and for general corporate purposes. The Note Agreement contains certain net worth and fixed charge coverage covenants and provides certain restrictions on the Company’s ability to borrow, incur liens, sell assets and pay dividends. The Company was in compliance with all covenants at December 29, 2007.
In December 2002, the Company completed a $60,000,000 private placement of debt pursuant to a Note Agreement. The Series A Senior Notes, with a $21,000,000 principal amount at 5.57%, are payable in three equal installments that commenced in December 2006. The Series B Senior notes, with a $39,000,000 principal amount at 6.42%, are payable in four equal annual installments beginning December 2009. The proceeds were used to repay the outstanding amount under the Company’s credit facility and for general corporate purposes. The Note Agreement contains certain net worth and fixed charge coverage covenants and provides certain restrictions on the Company’s ability to borrow, incur liens, sell assets and pay dividends. The Company was in compliance with all covenants at December 29, 2007.
In May 2002, the Company expanded its credit facility by entering into an unsecured credit agreement with a group of banks led by US Bank. This agreement was amended and restated on November 30, 2006, and provides for a current revolving line of credit for working capital purposes. The current revolving line of credit is unsecured and requires monthly payments of interest only. Interest is payable at the Company’s option at a rate based on prime (7.25% at December 29, 2007) or LIBOR (4.73% at December 29, 2007) plus 1.55%. The interest rate may be reduced by up to 1.15% if certain net worth ratios are maintained. The agreement contains certain net worth, current ratio, and fixed charge coverage covenants and provides certain restrictions on the Company’s ability to borrow, incur liens, sell assets and pay dividends. A commitment fee of 2/10% is payable quarterly based on the usage of the revolving line of credit. The revolving line of credit matures on May 31, 2010. On January 10, 2005, the Company drew down $35,000,000 from its revolving line of credit in connection with the acquisition of the medical business division of VitalWorks. (See Note 2 to the consolidated financial statements.) This amount was paid in full as of December 31, 2005. At December 29, 2007, the Company had no outstanding borrowings under this agreement and had $90,000,000 available for working capital purposes. The Company was in compliance with all covenants at December 29, 2007.
In April 1999, the Company completed a $100,000,000 private placement of debt pursuant to a Note Agreement. The Series A Senior Notes, with a $60,000,000 principal amount at 7.14%, were paid in full in 2006. The Series B Senior Notes, with a $40,000,000 principal amount at 7.66%, are payable in six equal annual installments which commenced in April 2004. The proceeds were used to retire the Company’s existing $30,000,000 of debt, and the remaining funds were used for capital improvements and to strengthen the Company’s cash position. The Note Agreement contains certain net worth, current ratio, and fixed charge coverage covenants and provides certain restrictions on the Company’s ability to borrow, incur liens, sell assets and pay dividends. The Company was in compliance with all covenants at December 29, 2007.
The Company believes that its present cash position, together with cash generated from operations and, if necessary, its lines of credit, will be sufficient to meet anticipated cash requirements during 2008.

 


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The following table represents a summary of the Company’s contractual obligations and commercial commitments, excluding interest, as of December 29, 2007, except short-term purchase order commitments arising in the ordinary course of business.
                                                         
    Payments due by period  
Contractual Obligations                                           2013 and        
(In thousands)   2008     2009     2010     2011     2012     thereafter     Total  
     
Long-term debt obligations
  $ 13,506     $ 36,029     $ 29,362     $ 28,290     $ 28,290     $ 55,620     $ 191,097  
 
Capital lease obligations
    754       15                               769  
 
Operating lease obligations
    34,143       27,971       24,497       23,387       22,928       99,198       232,124  
 
Purchase obligations
    8,897       6,902       5,313       3,368       3,334       561       28,375  
 
Other, including uncertain tax positions
    25       2,275       2,230       3,564                   8,094  
     
 
Total
  $ 57,325     $ 73,192     $ 61,402     $ 58,609     $ 54,552     $ 155,379     $ 460,459  
The effects of inflation on the Company’s business during 2007, 2006 and 2005 were not significant.

 


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Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 157 (SFAS 157), “Fair Value Measurements.” This statement establishes a single authoritative definition of fair value when accounting rules require the use of fair value, sets out a framework for measuring fair value and requires additional disclosures about fair value measurements. The Company is currently assessing the impact of adoption of SFAS 157 on its results of operations and its financial position and will be required to adopt SFAS 157 as of the first day of the 2008 fiscal year. The effect of adopting SFAS 157 is not expected to be material to the Company’s consolidated financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (SFAS 159), “The Fair Value Option for Financial Assets and Financial Liabilities.” This statement provides companies with an option to report selected financial assets and liabilities at fair value. The Company is currently assessing the impact of adoption of SFAS 159 on its results of operations and its financial position and will be required to adopt SFAS 159 as of the first day of the 2008 fiscal year. The effect of adopting SFAS 159 is not expected to be material to the Company’s consolidated financial statements.
In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations (SFAS 141(R)) which replaces SFAS 141 and supersedes FIN 4, “Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method”. SFAS 141(R) establishes guidelines for how an acquirer measures and recognizes the identifiable assets, goodwill, noncontrolling interest, and liabilities assumed in a business combination. Additionally, SFAS 141(R) outlines the disclosures necessary to allow financial statement users to assess the impact of the acquisition. The Company is currently assessing the impact of adoption of SFAS 141(R) on its results of operations and its financial position, which is expected to be immaterial, and will be required to adopt SFAS 141(R) prospectively for business combinations occurring on or after the first day of the 2009 fiscal year.
Also in December 2007, the FASB issued Statement of Financial Accounting Standards No. 160 (SFAS 160), “Noncontrolling Interests in Consolidated Financial Statements”, which amends ARB No. 51. SFAS 160 guides that a noncontrolling interest in a subsidiary should be reported as equity in the consolidated financial statements, and that net income should be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. The Company is currently assessing the impact of adoption of SFAS 160 on its results of operations, which is expected to be immaterial, and its financial position and will be required to adopt SFAS 160 as of the first day of the 2009 fiscal year.
Critical Accounting Policies
The Company believes that there are several accounting policies that are critical to understanding the Company’s historical and future performance, as these policies affect the reported amount of revenue and other significant areas involving management’s judgments and estimates. These significant accounting policies relate to revenue recognition, software development, potential impairments of goodwill and income taxes. These policies and the Company’s procedures related to these policies are described in detail below and under specific areas within this “Management Discussion and Analysis of Financial Condition and Results of Operations.” In addition, Note 1 to the consolidated financial statements expands upon discussion of the Company’s accounting policies.
Revenue Recognition
The Company recognizes its multiple element arrangements, including software and software-related services, using the residual method under SOP 97-2, “Software Revenue Recognition,” as amended by SOP No. 98-4, SOP 98-9 and clarified by Staff Accounting Bulletin’s (SAB) 104 “Revenue Recognition” and Emerging Issues Task Force 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). Key factors in the Company’s revenue recognition model are management’s assessments that installation services are essential to the functionality of the Company’s software whereas implementation services are not; and the length of time it takes for the Company to achieve its delivery and installation milestones for its licensed software. If the Company’s business model were to change such that implementation services are deemed to be essential to the functionality of the

 


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Company’s software, the period of time over which the Company’s licensed software revenue would be recognized would lengthen. The Company generally recognizes combined revenue from the sale of its licensed software and related installation services over two key milestones, delivery and installation, based on percentages that reflect the underlying effort from planning to installation. Generally, both milestones are achieved in the quarter the contracts are executed. If the period of time to achieve the Company’s delivery and installation milestones for its licensed software were to lengthen, its milestones would be adjusted and the timing of revenue recognition for its licensed software could materially change.
The Company also recognizes revenue for certain projects using the percentage of completion method pursuant to Statement of Position 81-1 (SOP 81-1), Accounting for Performance of Construction-Type and Certain Production-Type Contracts , as prescribed by SOP 97-2. The Company’s revenue recognition is dependent upon the Company’s ability to reliably estimate the direct labor hours to complete a project. The Company utilizes its historical project experience as a basis for its future estimates to complete current projects.
Software Development Costs
Costs incurred internally in creating computer software solutions and enhancements to those solutions are expensed until completion of a detailed program design, which is when the Company determines that technological feasibility has been established. Thereafter, all software development costs are capitalized until such time as the software solutions and enhancements are available for general release, and the capitalized costs subsequently are reported at the lower of amortized cost or net realizable value. Net realizable value is computed as the estimated gross future revenues from each software solution less the amount of estimated future costs of completing and disposing of that product. Because the development of projected net future revenues related to our software solutions used in our net realizable value computation is based on estimates, a significant reduction in our future revenues could impact the recovery of our capitalized software development costs. We historically have not experienced significant inaccuracies in computing the net realizable value of our software solutions and the difference between the net realizable value and the unamortized cost has grown over the past three years. We expect that trend to continue in the future. If we missed our estimates of net future revenues by up to 10%, the amount of our capitalized software development costs would not be impaired. Capitalized costs are amortized based on current and expected net future revenue for each software solution with minimum annual amortization equal to the straight-line amortization over the estimated economic life of the software solution. The Company is amortizing capitalized costs over five years. The five-year period over which capitalized software development costs are amortized is an estimate based upon the Company’s forecast of a reasonable useful life for the capitalized costs. Historically, use of the Company’s software programs by its clients has exceeded five years and is capable of being used a decade or more.
The Company expects that major software information systems companies, large information technology consulting service providers and systems integrators and others specializing in the healthcare industry may offer competitive products or services. The pace of change in the HIT market is rapid and there are frequent new product introductions, product enhancements and evolving industry standards and requirements. As a result, the capitalized software solutions may become less valuable or obsolete and could be subject to impairment.
Goodwill
The Company accounts for its goodwill under the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” As a result, goodwill and intangible assets with indefinite lives are not amortized but are evaluated for impairment annually or whenever there is an impairment indicator. All goodwill is assigned to a reporting unit, where it is subject to an annual impairment test based on fair value. The Company assesses goodwill for impairment in the second quarter of each fiscal year and evaluates impairment indicators at each quarter end. The Company assessed its goodwill for impairment in the second quarters of 2007 and 2006 and concluded that no goodwill was impaired. The Company used a discounted cash flow analysis to determine the fair value of the reporting units for all periods. Goodwill amounted to $143,924,000 and $128,819,000 at December 29, 2007 and December 30, 2006, respectively. If future, anticipated cash flows from the Company’s reporting units that recognized goodwill do not materialize as expected the Company’s goodwill could be impaired, which could result in significant write-offs.

 


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Income Taxes
In 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes – an Interpretation of SFAS No. 109.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 also prescribes a recognition threshold and measurement of a tax position taken or expected to be taken in an enterprise’s tax return. Management makes a number of assumptions and estimates in determining the appropriate amount of expense to record for income taxes. These assumptions and estimates consider the taxing jurisdiction in which the Company operates as well as current tax regulations. Accruals are established for estimates of tax effects for certain transactions, business structures and future projected profitability of the Company’s businesses based on management’s interpretation of existing facts and circumstances. If these assumptions and estimates were to change as a result of new evidence or changes in circumstances the change in estimate could result in a material adjustment to the consolidated financial statements. The Company adopted FIN 48 effective at the beginning of 2007. The adoption of FIN 48 did not have any impact on Cerner’s consolidated financial position. See Note 9 to the consolidated financial statements for additional disclosures related to FIN 48.
Our management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors and the Audit Committee has reviewed the Company’s disclosure contained herein.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
At December 29, 2007, the Company had a £65,000,000 ($129,779,000 at December 29, 2007) note payable outstanding through a private placement with an interest rate of 5.54%. The note is payable in seven equal installments beginning in November 2009. Because the borrowing is denominated in pounds, the Company is exposed to movements in the foreign currency exchange rate between the U.S. dollar and the Great Britain pound. The note was entered into for other than trading purposes. Beginning in 2006, at the beginning of each quarterly period, the Company designated a portion (between £60 million and £63 million during the year) of its debt (£65 million) that is denominated in Great Britain Pounds, to hedge its net investment in England. During 2007 the Company designated all £65 million of its debt that is denominated in Great Britain Pounds.
Item 8. Financial Statements and Supplementary Data
The Financial Statements and Notes required by this Item are submitted as a separate part of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9.A. Controls and Procedures
  a)   Evaluation of disclosure controls and procedures. The Company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO) have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by the Annual Report (the “Evaluation Date”). They have concluded that, as of the Evaluation Date, these disclosure controls and procedures were effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities and would be disclosed on a timely basis. The CEO and CFO have concluded that the Company’s disclosure controls and procedures are designed, and are effective, to give reasonable assurance that the information required to be disclosed by the Company in reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the rules and forms of the SEC. They have also concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act are accumulated and communicated to the Company’s

 


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      management, including the CEO and CFO, to allow timely decisions regarding required disclosure.
  b)   There were no changes in the Company’s internal controls over financial reporting during the three months ended December 29, 2007, that have materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting.
 
  c)   The Company’s management, including its Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at that reasonable assurance level. However, the Company’s management can provide no assurance that our disclosure controls and procedures or our internal control over financial reporting can prevent all errors and all fraud under all circumstances. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been or will be detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 29, 2007. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in its Internal Control-Integrated Framework. The Company’s management has concluded that, as of December 29, 2007, the Company’s internal control over financial reporting is effective based on these criteria. The Company’s independent registered public accounting firm that audited the consolidated financial statements included in the annual report has issued an audit report on the effectiveness of the Company’s internal control over financial reporting, which is included herein under “Report of Independent Registered Public Accounting Firm”.
Item 9.B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item 10 regarding our Directors will be set forth under the caption “Election of Directors” in our Proxy Statement in connection with the 2008 Annual Shareholders’ Meeting scheduled to be held May 23, 2008, and is incorporated in this Item 10 by reference. The information required by this Item 10 concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 will be set forth under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement in connection with the 2008 Annual Shareholders’ Meeting scheduled to be held May 23, 2008, and is incorporated in this Item 10 by reference.
The information required by this Item 10 concerning our Code of Business Conduct and Ethics will be set forth under the caption “Code of Business Conduct and Ethics” in our Proxy Statement in connection with the 2008 Annual Shareholders’ Meeting scheduled to be held May 23, 2008, and is incorporated in this

 


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Item 10 by reference. The information required by this Item 10 concerning our Audit Committee and our Audit Committee financial expert will be set forth under the caption “Audit Committee” in our Proxy Statement in connection with the 2008 Annual Shareholders’ Meeting scheduled to be held May 23, 2008, and is incorporated in this Item 10 by reference.
There have been no material changes to the procedures by which security holders may recommend nominees to our Board of Directors since our last disclosure thereof.
The following table set forth the names, ages, positions and certain other information regarding the Company’s executive officers as of February 22, 2008. Officers are elected annually and serve at the discretion of the Board of Directors.
             
Name   Age   Positions
Neal L. Patterson
    58     Chairman of the Board of Directors and Chief Executive Officer
 
           
Clifford W. Illig
    57     Vice Chairman of the Board of Directors
 
           
Earl H. Devanny, III
    56     President
 
           
Douglas M. Krebs
    50     Senior Vice President Cerner and President Cerner Global
 
           
Marc G. Naughton
    52     Senior Vice President and Chief Financial Officer
 
           
Jeffrey A. Townsend
    44     Executive Vice President
 
           
Mike Valentine
    39     Executive Vice President and General Manager, U.S.
 
           
Randy D. Sims
    47     Vice President, Chief Legal Officer and Secretary
 
           
Julia M. Wilson
    45     Senior Vice President and Chief People Officer
Neal L. Patterson has been Chairman of the Board of Directors and Chief Executive Officer of the Company for more than five years. Mr. Patterson also served as President of the Company from March of 1999 until August of 1999.
Clifford W. Illig has been a Director of the Company for more than five years. He also served as Chief Operating Officer of the Company for more than five years until October 1998 and as President of the Company for more than five years until March of 1999. Mr. Illig was appointed Vice Chairman of the Board of Directors in March of 1999.
Earl H. Devanny, III joined the Company in August of 1999 as President. Mr. Devanny also served as interim President of Cerner Southeast from January 2003 through July 2003. Prior to joining the Company, Mr. Devanny served as president of ADAC Healthcare Information Systems, Inc. Prior to joining ADAC, Mr. Devanny served as a Vice President of the Company from 1994 to 1997. Prior to that he spent 17 years with IBM Corporation.
Douglas M. Krebs joined the Company in June 1994 as a Regional Vice President. He was promoted to Senior Vice President and Area Manager in April 1999. In February 2000, Mr. Krebs was appointed as President of Cerner Global and in January 2005, Mr. Krebs was appointed General Manager of the Company’s Global Organization. Prior to joining Cerner, he spent 15 years with IBM Corporation.
Marc G. Naughton joined the Company in November 1992 as Manager of Taxes. In November 1995 he was named Chief Financial Officer and in February 1996 he was promoted to Vice President. He was promoted to Senior Vice President in March 2002.
Jeffrey A. Townsend joined the Company in June 1985. Since that time he has held several positions in the Intellectual Property Organization and was promoted to Vice President in February 1997. He was

 


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appointed Chief Engineering Officer in March 1998, promoted to Senior Vice President in March 2001 and promoted to Executive Vice President in March 2005.
Mike Valentine joined the Company in December 1998 as Director of Technology. He was promoted to Vice President in 2000 and to President of Cerner Mid America in January of 2003. In February 2005, he was named General Manager of the U.S. Client Organization and was promoted to Senior Vice President in March 2005. He was promoted to Executive Vice President in March 2007. Prior to joining the Company, Mr. Valentine was with Accenture Consulting.
Randy D. Sims joined the Company in March 1997 as Vice President and Chief Legal Officer. Prior to joining the Company, Mr. Sims worked at Farmland Industries, Inc. for three years where he served most recently as Associate General Counsel. Prior to Farmland, Mr. Sims was in-house legal counsel at The Marley Company for seven years, holding the position of Assistant General Counsel when he left to join Farmland.
Julia M. Wilson joined the Company in November 1995. Since that time, she has held several positions in the Functional Group Organization. She was promoted to Vice President and Chief People Officer in August 2003 and to Senior Vice President in March 2007.
Item 11. Executive Compensation
The information required by this Item 11 concerning our executive compensation will be set forth under the caption “Compensation Discussion and Analysis” in our Proxy Statement in connection with the 2008 Annual Shareholders’ Meeting scheduled to be held May 23, 2008, and is incorporated in this Item 11 by reference. The information required by this Item 11 concerning Compensation Committee interlocks and insider participation will be set forth under the caption “Compensation Committee Interlocks and Insider Participation” in our Proxy Statement in connection with the 2008 Annual Shareholders’ Meeting scheduled to be held May 23, 2008, and is incorporated in this Item 11 by reference. The information required by this Item 11 concerning Compensation Committee report will be set forth under the caption “Compensation Committee Report” in our Proxy Statement in connection with the 2008 Annual Shareholders’ Meeting scheduled to be held May 23, 2008, and is incorporated in this Item 11 by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item 12 will be set forth under the caption “Voting Securities and Principal Holders Thereof” in our Proxy Statement in connection with the 2008 Annual Shareholders’ Meeting scheduled to be held May 23, 2008, and is incorporated in this Item 12 by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item 13 concerning our transactions with related parties will be set forth under the caption “Certain Transactions” in our Proxy Statement in connection with the 2008 Annual Shareholders’ Meeting scheduled to be held May 23, 2008, and is incorporated in this Item 13 by reference. The information required by this Item 13 concerning director independence will be set forth under the caption “Director Independence” in our Proxy Statement in connection with the 2008 Annual Shareholders’ Meeting scheduled to be held May 23, 2008, and is incorporated in this Item 13 by reference.
Item 14. Principal Accountant Fees and Services
The information required by this Item 14 will be set forth under the caption “Relationship with Independent Registered Public Accounting Firm” in our Proxy Statement in connection with the 2008 Annual Shareholders’ Meeting scheduled to be held May 23, 2008, and is incorporated in this Item 14 by reference.
PART IV

 


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Item 15. Exhibits and Financial Statement Schedules
  (a)   Financial Statements and Exhibits.
 
  (1)   Consolidated Financial Statements:
 
      Reports of Independent Registered Public Accounting Firm
 
      Consolidated Balance Sheets - December 29, 2007 and December 30, 2006
 
      Consolidated Statements of Operations - Years Ended December 29, 2007, December 30, 2006 and December 31, 2005
 
      Consolidated Statements of Changes in Equity Years Ended December 29, 2007, December 30, 2006 and December 31, 2005
 
      Consolidated Statements of Cash Flows Years Ended December 29, 2007, December 30, 2006 and December 31, 2005
 
      Notes to Consolidated Financial Statements
 
  (2)   The following financial statement schedule and Report of Independent Registered Public Accounting Firm of the Registrant for the three-year period ended December 29, 2007 are included herein:
 
      Schedule II — Valuation and Qualifying Accounts,
 
      Report of Independent Registered Public Accounting Firm
 
      All other schedules are omitted, as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes.
 
  (3)   The exhibits required to be filed by this item are set forth below:
     
Number   Description
3(a)
  Second Restated Certificate of Incorporation of the Registrant, dated December 5, 2003 (filed as exhibit 3(a) to Registrant’s Annual Report on Form 10-K for the year ended January 3, 2004 and incorporated herein by reference).
 
   
3(b)
  Amended and Restated Bylaws, dated September 11, 2006 (filed as Exhibit 3.1 to Registrant’s Form 8-K filed on September 15, 2006 and incorporated herein by reference).
 
   
3(c)
  Bylaw Amendment No. 1, dated December 3, 2007.
 
   
4(a)
  Specimen stock certificate (filed as Exhibit 4(a) to Registrant’s Annual Report on Form 10-K for the year ended December 30, 2006 and incorporated herein by reference).
 
   
4(b)
  Amended and Restated Credit Agreement between Cerner Corporation and U.S. Bank N.A., LaSalle Bank National Association, Commerce Bank, N.A. and UMB Bank, N.A., dated November 30, 2006 (filed as Exhibit 99.1 to Registrant’s Form 8-K filed on December 6, 2006, and incorporated herein by reference).

 


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Number   Description
 
   
4(c)
  Cerner Corporation Note Agreement dated April 1, 1999 among Cerner Corporation, Principal Life Insurance Company, Principal Life Insurance Company, on behalf of one or more separate accounts, Commercial Union Life Insurance Company of America, Nippon Life Insurance Company of America, John Hancock Mutual Life Insurance Company, John Hancock Variable Life Insurance Company, and Investors Partner Life Insurance Company (filed as Exhibit 4(e) to Registrant’s Form 8-K dated April 23, 1999 and incorporated herein by reference).
 
   
4(d)
  Note Purchase Agreement between Cerner Corporation and the purchasers therein, dated December 15, 2002 (filed as Exhibit 10(x) to Registrant’s Annual Report on Form 10-K for the year ended December 28, 2002 and incorporated herein by reference).
 
   
4(e)
  Cerner Corporation Note Purchase Agreement dated November 1, 2005 among Cerner Corporation, as issuer, and AIG Annuity Insurance Company, American General Life Insurance Company and Principal Life Insurance Company, as purchasers, (filed as Exhibit 99.1 to Registrant’s Form 8-K filed on November 7, 2005 and incorporated herein by reference).
 
   
10(a)
  Indemnification Agreement Form for use between the Registrant and its Directors (filed as Exhibit 10(a) to Registrant’s Annual Report on Form 10-K for the year ended December 30, 2006 and incorporated herein by reference).*
 
   
10(b)
  Employment Agreement of Earl H. Devanny, III dated August 13, 1999 (filed as Exhibit 10(q) to Registrant’s Annual Report on Form 10-K for the year ended January 1, 2000 and incorporated herein by reference).*
 
   
10(c)
  Amended & Restated Executive Employment Agreement of Neal L. Patterson dated January 1, 2008.*
 
   
10(d)
  Amended Stock Option Plan D of Registrant dated December 8, 2000 (filed as Exhibit 10(f) to Registrant’s Annual Report on Form 10-K for the year ended December 30, 2000 and incorporated herein by reference).*
 
   
10(e)
  Amended Stock Option Plan E of Registrant dated December 8, 2000 (filed as Exhibit 10(g) to Registrant’s Annual Report on Form 10-K for the year ended December 30, 2000 and incorporated herein by reference).*
 
   
10(f)
  Cerner Corporation 2001 Long-Term Incentive Plan F (filed as Annex I to Registrant’s 2001 Proxy Statement and incorporated herein by reference).*
 
   
10(g)
  Cerner Corporation 2004 Long-Term Incentive Plan G Amended & Restated dated October 1, 2007.*
 
   
10(h)
  Cerner Corporation 2001 Associate Stock Purchase Plan (filed as Annex II to Registrant’s 2001 Proxy Statement and incorporated herein by reference).*
 
   
10(i)
  Qualified Performance-Based Compensation Plan dated December 3, 2007.*
 
   
10(j)
  Form of 2007 Executive Performance Agreement (filed as Exhibit 99.1 to Registrant’s Form 8-K on April 5, 2007 and incorporated herein by reference).*
 
   
10(k)
  Cerner Corporation Executive Deferred Compensation Plan as Amended & Restated dated January 1, 2008.*
 
   
10(l)
  Cerner Corporation 2005 Enhanced Severance Pay Plan as Amended and Restated dated January 1, 2008.*

 


Table of Contents

     
Number   Description
 
   
10(m)
  Cerner Corporation 2001 Long-Term Incentive Plan F Nonqualified Stock Option Agreement (filed as Exhibit 10(v) to Registrant’s Annual Report on Form 10-K for the year ended January 1, 2005 and incorporated herein by reference).*
 
   
10(n)
  Cerner Corporation 2001 Long-Term Incentive Plan F Nonqualified Stock Option Grant Certificate (filed as Exhibit 10(a) to Registrant’s Quarterly Report on Form 10-Q for the quarter ended October 1, 2005 and incorporated herein by reference).*
 
   
10(o)
  Cerner Corporation 2001 Long-Term Incentive Plan F Nonqualified Stock Option Director Agreement (filed as Exhibit 10(x) to Registrant’s Annual Report on Form 10-K for the year ended January 1, 2005 and incorporated herein by reference).*
 
   
10(p)
  Cerner Corporation 2001 Long-Term Incentive Plan F Director Restricted Stock Agreement (filed as Exhibit 10(w) to Registrant’s Annual Report on Form 10-K for the year ended January 1, 2005 and incorporated herein by reference).*
 
   
10(q)
  Cerner Corporation 2004 Long-Term Incentive Plan G Nonqualified Stock Option Grant Certificate.*
 
   
10(r)
  Time Sharing Agreements between the Registrant and Neal L. Patterson and Clifford W. Illig, both dated February 7, 2007 (filed as Exhibits 10.2 and 10.3, respectively, to Registrant’s Form 8-K filed on February 9, 2007 and incorporated herein by reference).
 
   
10(s)
  Aircraft Services Agreement between the Registrant’s wholly owned subsidiary, Rockcreek Aviation, Inc., and PANDI, Inc., dated February 6, 2007 (filed as Exhibit 10.1 to Registrant’s Form 8-K filed on February 9, 2007 and incorporated herein by reference).*
 
   
 
  *Management contracts or compensatory plans or arrangements required to be identified by Item15(a)(3)
 
   
11
  Computation of Registrant’s Earnings Per Share. (Exhibit omitted. Information contained in notes to consolidated financial statements.)
 
   
21
  Subsidiaries of Registrant.
 
   
23
  Consent of Independent Registered Public Accounting Firm.
 
   
31.1
  Certification of Neal L. Patterson pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
31.2
  Certification of Marc G. Naughton pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
32.1
  Certification pursuant to 18 U.S.C. Section. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
   
32.2
  Certification pursuant to 18 U.S.C. Section. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  (b)   Exhibits.
 
      The response to this portion of Item 15 is submitted as a separate section of this report.
 
  (c)   Financial Statement Schedules.
 
      The response to this portion of Item 15 is submitted as a separate section of this report.

 


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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
         
  CERNER CORPORATION
 
 
Dated: February 27, 2008  By:   /s/ Neal L. Patterson    
    Neal L. Patterson   
    Chairman of the Board and
Chief Executive Officer 
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
     
Signature and Title   Date
 
   
/s/ Neal L. Patterson
 
Neal L. Patterson, Chairman of the Board and
Chief Executive Officer (Principal Executive Officer)
  February 27, 2008 
 
   
/s/ Clifford W. Illig
 
Clifford W. Illig, Vice Chairman and Director
  February 27, 2008 
 
   
/s/ Marc G. Naughton
 
Marc G. Naughton, Senior Vice President and
Chief Financial Officer (Principal Financial and Accounting Officer)
  February 27, 2008 
 
   
/s/ Gerald E. Bisbee, Jr.
 
Gerald E. Bisbee, Jr., Ph.D., Director
  February 27, 2008 
 
   
/s/ John C. Danforth
 
John C. Danforth, Director
  February 27, 2008 
 
   
/s/ Nancy-Ann DeParle
 
Nancy-Ann DeParle, Director
  February 27, 2008 
 
   
/s/ Michael E. Herman
 
Michael E. Herman, Director
  February 27, 2008 
 
   
/s/ William B. Neaves
 
William B. Neaves, Ph.D., Director
  February 27, 2008 
 
   
/s/ William D. Zollars
 
William D. Zollars, Director
  February 27, 2008 

 


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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Cerner Corporation:
We have audited Cerner Corporation’s (the Corporation) internal control over financial reporting as of December 29, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report over Internal Control of Financial Reporting,” appearing in Item 9.A. Controls and Procedures. Our responsibility is to express an opinion on the effectiveness of the Corporation’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Cerner Corporation maintained, in all material respects, effective internal control over financial reporting as of December 29, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Cerner Corporation and subsidiaries as of December 29, 2007 and December 30, 2006, and the related consolidated statements of operations, changes in equity, and cash flows for each of the years in the three-year period ended December 29, 2007, and our report dated February 27, 2008 expressed an unqualified opinion on those consolidated financial statements.
(signed) KPMG LLP
Kansas City, Missouri
February 27, 2008

 


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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Cerner Corporation:
We have audited the accompanying consolidated balance sheets of Cerner Corporation and subsidiaries (the Corporation) as of December 29, 2007 and December 30, 2006, and the related consolidated statements of operations, changes in equity, and cash flows for each of the years in the three-year period ended December 29, 2007. These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cerner Corporation and subsidiaries as of December 29, 2007 and December 30, 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 29, 2007, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Corporation adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” effective January 1, 2006.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Cerner Corporation’s internal control over financial reporting as of December 29, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 27, 2008 expressed an unqualified opinion on the effectiveness of the Corporation’s internal control over financial reporting.
(signed) KPMG LLP
Kansas City, Missouri
February 27, 2008
Management’s Report
The management of Cerner Corporation is responsible for the consolidated financial statements and all other information presented in this report. The financial statements have been prepared in conformity with U.S. generally accepted accounting principles appropriate to the circumstances, and, therefore, included in the financial statements are certain amounts based on management’s informed estimates and judgments. Other financial information in this report is consistent with that in the consolidated financial statements. The consolidated financial statements have been audited by Cerner Corporation’s independent registered public accountants and have been reviewed by the Audit Committee of the Board of Directors.

 


Table of Contents

CONSOLIDATED BALANCE SHEETS
December 29, 2007 and December 30, 2006
                 
(In thousands, except share data)   2007     2006  
     
Assets
               
Current Assets:
               
Cash and cash equivalents
  $ 182,914     $ 162,545  
Short-term investments
    161,600       146,239  
Receivables, net
    391,060       361,424  
Inventory
    10,744       18,084  
Prepaid expenses and other
    61,878       60,315  
Deferred income taxes
    10,368       2,423  
     
 
               
Total current assets
    818,564       751,030  
 
               
Property and equipment, net
    462,839       357,942  
Software development costs, net
    200,380       187,788  
Goodwill
    143,924       128,819  
Intangible assets, net
    46,854       54,428  
Other assets
    17,395       16,426  
     
 
               
Total assets
  $ 1,689,956     $ 1,496,433  
     
 
               
Liabilities and Shareholders’ Equity
               
Current Liabilities:
               
Accounts payable
  $ 79,812     $ 79,735  
Current installments of long-term debt
    14,260       20,242  
Deferred revenue
    98,802       93,699  
Accrued payroll and tax w ithholdings
    65,011       77,914  
Other accrued expenses
    30,238       40,584  
     
 
               
Total current liabilities
    288,123       312,174  
 
               
Long-term debt
    177,606       187,391  
Deferred income taxes and other liabilities
    68,738       58,731  
Deferred revenue
    21,775       14,557  
 
               
Minority owners’ equity interest in subsidiary
    1,286       1,286  
 
               
Stockholders’ Equity:
               
Common stock, $.01 par value, 150,000,000 shares authorized, 80,147,955 shares issued at December 29, 2007 and 78,392,071 issued at December 30, 2006
    801       784  
Additional paid-in capital
    451,876       376,595  
Retained earnings
    671,440       544,315  
Accumulated other comprehensive income:
               
Foreign currency translation adjustment
    8,311       600  
     
 
               
Total stockholders’ equity
    1,132,428       922,294  
     
 
               
Commitments
               
Total liabilities and stockholders’ equity
  $ 1,689,956     $ 1,496,433  
     
See notes to consolidated financial statements.

 


Table of Contents

CONSOLIDATED STATEMENTS OF OPERATING EARNINGS
For the years ended December 29, 2007, December 30, 2006 and December 31, 2005
                         
    2007     2006     2005  
(In thousands, except per share data)                        
Revenues:
                       
System sales
  $ 500,319     $ 505,743     $ 449,734  
Support, maintenance and services
    982,780       833,244       677,664  
Reimbursed travel
    36,778       39,051       33,387  
     
 
                       
Total revenues
    1,519,877       1,378,038       1,160,785  
     
 
                       
Costs and expenses:
                       
Cost of system sales
    181,744       194,646       171,073  
Cost of support, maintenance and services
    61,588       57,273       50,226  
Cost of reimbursed travel
    36,778       39,051       33,387  
Sales and client service
    657,956       578,050       466,206  
Software development (Includes amortization of software development costs of $53,475, $45,750, and $47,888, respectively.)
    270,576       246,970       211,455  
General and administrative
    107,152       95,881       81,620  
Write-off of in process research and development
                6,382  
     
 
                       
Total costs and expenses
    1,315,794       1,211,871       1,020,349  
     
 
                       
Operating earnings
    204,083       166,167       140,436  
 
                       
Other income (expense):
                       
Interest income (expense), net
    1,269       (697 )     (5,858 )
Other income (expense), net
    (1,385 )     2,074       666  
     
 
                       
Total other income (expense), net
    (116 )     1,377       (5,192 )
     
 
                       
Earnings before income taxes
    203,967       167,544       135,244  
Income taxes
    (76,842 )     (57,653 )     (48,993 )
     
 
                       
Net earnings
  $ 127,125     $ 109,891     $ 86,251  
     
 
                       
Basic earnings per share
  $ 1.60     $ 1.41     $ 1.16  
 
                       
Diluted earnings per share
  $ 1.53     $ 1.34     $ 1.10  
See notes to consolidated financial statements.

 


Table of Contents

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the years ended December 29, 2007, December 30, 2006 and December 31, 2005
                                                 
                                    Accumulated    
                                    Other    
    Common Stock   Additional   Retained   Comprehensive   Comprehensive
(In thousands)   Shares   Amount   Paid-in Capital   Earnings   Income   Income
     
Balance at January 1, 2005 (see note 9)
    73,274     $ 733     $ 243,971     $ 348,173     $ 8,770          
Exercise of options
    3,737       37     $ 50,926                      
Employee stock option compensation expenses
                780                      
Tax benefit from disqualifying disposition of stock options
                30,289                      
Associate stock purchase plan discounts
                (832 )                    
Foreign currency translation adjustment
                            (4,403 )     (4,403 )
Net earnings
                      86,251             86,251  
     
 
                                               
Comprehensive Income
                                            81,848  
 
                                               
 
                                               
Balance at December 31, 2005
    77,011     $ 770     $ 325,134     $ 434,424     $ 4,367          
Exercise of options
    1,381       14     $ 21,333                      
Employee stock option compensation expenses
                19,746                      
Third party warrants
                1,010                      
Tax benefit from disqualifying disposition of stock options
                9,372                      
Foreign currency translation adjustment
                            (3,767 )     (3,767 )
Net earnings
                      109,891             109,891  
     
 
                                               
Comprehensive Income
                                            106,124  
 
                                               
 
                                               
Balance at December 30, 2006
    78,392     $ 784     $ 376,595     $ 544,315     $ 600          
Exercise of options
    1,756       17       29,068                      
Employee stock option compensation expenses
                16,348                      
Tax benefit from disqualifying disposition of stock options
                29,865                      
Foreign currency translation adjustment
                            7,711       7,711  
Net earnings
                      127,125             127,125  
     
 
                                               
Comprehensive Income
                                            134,836  
 
                                               
 
                                               
Balance at December 29, 2007
    80,148     $ 801     $ 451,876     $ 671,440     $ 8,311          
     
See notes to consolidated financial statements.

 


Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOW
For the years ended December 29, 2007, December 30, 2006 and December 31, 2005
                         
(In thousands)   2007   2006   2005
     
CASH FLOWS FROM OPERATING ACTIVITIES:
                       
Net earnings
  $ 127,125     $ 109,891     $ 86,251  
Adjustments to reconcile net earnings to net cash provided by operating activities:
                       
Depreciation and amortization
    152,817       125,254       114,055  
Share-based compensation expense
    16,189       19,021        
Write-off of acquired in process research and development
                6,382  
Provision for deferred income taxes
    (4,496 )     2,503       (6,874 )
Tax benefit from disqualifying dispositions of stock options
    29,865       7,923       30,289  
Excess tax benefits from share based compensation
    (30,357 )     (7,068 )      
 
                       
Changes in assets and liabilities (net of businesses acquired):
                       
Receivables, net
    (22,802 )     (38,918 )     (22,502 )
Inventory
    5,435       (8,405 )     (2,078 )
Prepaid expenses and other
    5,752       (22,008 )     (18,781 )
Accounts payable
    1,768       14,465       14,382  
Accrued income taxes
    (4,744 )     8,900       13,594  
Deferred revenue
    10,993       12,002       949  
Other accrued liabilities
    (12,980 )     9,158       13,198  
     
Total adjustments
    147,440       122,827       142,614  
     
Net cash provided by operating activities
    274,565       232,718       228,865  
     
 
                       
CASH FLOWS FROM INVESTING ACTIVITIES:
                       
Purchase of capital equipment
    (105,678 )     (70,299 )     (64,785 )
Purchase of land, buildings and improvements
    (75,045 )     (61,179 )     (35,798 )
Purchase of other intangibles
    (3,542 )     (254 )      
Acquisition of businesses, net of cash acquired
    (24,061 )     (13,731 )     (119,683 )
Purchases of short-term investments
    (495,508 )     (306,653 )     (658,708 )
Maturities of short-term investments
    482,231       335,775       497,478  
Repayment of notes receivable
                  51  
Capitalized software development costs
    (66,063 )     (61,223 )     (62,523 )
     
Net cash used in investing activities
    (287,666 )     (177,544 )     (443,968 )
     
 
                       
CASH FLOWS FROM FINANCING ACTIVITIES:
                       
Financing of receivables
          137        
Proceeds from issuance of long-term debt
                111,827  
Proceeds from revolving line of credit and long-term debt
    40,000             70,000  
Repayment of revolving line of credit and long-term debt
    (62,359 )     (30,783 )     (91,848 )
Proceeds from third party warrants
          1,010        
Proceeds from excess tax benefits from share based compensation
    30,357       7,068        
Proceeds from exercise of options
    29,085       21,704       51,744  
Associate stock purchase plan discount
                (832 )
     
Net cash provided by (used in) financing activities
    37,083       (865 )     140,891  
     
Effect of exchange rate changes on cash
    (3,613 )     (4,821 )     (2,515 )
     
Net increase (decrease) in cash and cash equivalents
    20,369       49,488       (76,727 )
Cash and cash equivalents at beginning of period
    162,545       113,057       189,784  
     
Cash and cash equivalents at end of period
  $ 182,914     $ 162,545     $ 113,057  
     
Supplemental disclosures of cash flow information
                       
Cash paid during the year for:
                       
Interest
  $ 12,024     $ 12,568     $ 8,157  
Income taxes, net of refund
    54,301       27,847       13,591  
Non-cash investing and financing activities Acquisition of equipment through capital leases
                89  
Non-cash changes resulting from acquisitions:
                       
Increase in accounts receivable
    930       618       11,621  
Increase in property and equipment, net
    391       205       2,355  
Increase in good will and intangibles
    23,368       13,599       124,921  
Increase in deferred revenue
    (476 )     (150 )     (10,979 )
Increase in long term debt
          (27 )     (3,111 )
Decrease in other working capital components
    (152 )     (514 )     (5,124 )
     
Total
  $ 24,061     $ 13,731     $ 119,683  
     
See notes to consolidated financial statements.

 


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(1) Summary of Significant Accounting Policies
(a)  Principles of Consolidation - The consolidated financial statements include the accounts of Cerner Corporation and its wholly-owned subsidiaries (the “Company”). All significant intercompany transactions and balances have been eliminated in consolidation.
(b)  Nature of Operations - The Company designs, develops, markets, installs, hosts and supports software information technology, healthcare devices and content solutions for healthcare organizations and consumers. The Company also provides a wide range of value-added services, including implementing solutions as individual, combined or enterprise-wide systems; hosting solutions in its data center; and clinical process optimization services. Furthermore, the Company provides fully–automated on-site employer health clinics and third party administrator health plan services for employers.
(c)  Revenue Recognition - Revenues are derived primarily from the sale of clinical, financial and administrative information systems and solutions. The components of the system sales revenues are the licensing of computer software, deployment period upgrades, installation, content subscriptions, transaction processing and the sale of computer hardware and sublicensed software. The components of support, maintenance and service revenues are software support and hardware maintenance, remote hosting and managed services, training, consulting and implementation services. For arrangements that include both product and services which are accounted for under SOP 81-1 and also include support services (PCS) for which vendor-specific objective evidence of fair value (VSOE) of PCS does not exist such that a zero margin approach is used to recognize revenue, the Company classifies revenue under such arrangements as either systems sales or support, maintenance and services based on the nature of costs incurred. For similar arrangements for which VSOE of PCS exists, PCS is separated from the arrangement based on VSOE and the residual amount is allocated to the software and services accounted for on a combined basis under SOP 81-1. For these arrangements, the service component of the SOP 81-1 deliverable is classified as support, maintenance and services based on the VSOE of the services provided and the residual is classified as systems sales revenue. For the years ended December 29, 2007 and December 30, 2006, approximately $20,000,000 and $16,000,000, respectively, of revenue were included in system sales and approximately $95,000,000 and $55,000,000, respectively, of revenue were included in support, maintenance, and services for both such arrangements. The Company provides several models for the procurement of its clinical, financial and administrative information systems. The predominant method is a perpetual software license agreement, project-related installation services, implementation and consulting services, software support and either remote hosting services or computer hardware and sublicensed software.
The Company recognizes revenue in accordance with the provisions of Statement of Position (SOP) 97-2, “Software Revenue Recognition,” as amended by SOP 98-4, SOP 98-9 and clarified by Staff Accounting Bulletin’s (SAB) No. 104 “Revenue Recognition” and Emerging Issues Task Force Issue No. 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). SOP 97-2, as amended, generally requires revenue earned on software arrangements involving multiple-elements to be allocated to each element based on the relative fair values of those elements if fair values exist for all elements of the arrangement. Pursuant to SOP 98-9, the Company recognizes revenue from multiple-element software arrangements using the residual method. Under the residual method, revenue is recognized in a multiple-element arrangement when Company-specific objective evidence of fair value exists for all of the undelivered elements in the arrangement (i.e. professional services, software support, hardware maintenance, remote hosting services, hardware and sublicensed software), but does not exist for one or more of the delivered elements in the arrangement (i.e. software solutions including project-related installation services). The Company allocates revenue to each undelivered element in a multiple-element arrangement based on the element’s respective fair value, with the fair value determined by the price charged when that element is sold separately. Specifically, the Company determines the fair value of the software support and maintenance, hardware and sublicensed software support, remote hosting and subscriptions portions of the arrangement based on the substantive renewal price for these services charged to clients; professional services (including training and consulting) portion of the arrangement, other than installation services, based on hourly rates which the Company charges for these services when sold apart from a software license; and, the hardware and sublicensed software, based on the prices for these elements when they are sold separately from the software. The residual amount of the fee after allocating revenue to the fair value of the undelivered elements is attributed to the software

 


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solution, including project-related installation services. If evidence of the fair value cannot be established for the undelivered elements of a license agreement, the entire amount of revenue under the arrangement is deferred until these elements have been delivered or objective evidence can be established.
The Company provides project-related installation services, which include project-scoping services, conducting pre-installation audits and creating initial environments. Because installation services are deemed to be essential to the functionality of the software, the Company recognizes the software license and installation services fees over the software installation period using the percentage of completion method pursuant to Statement of Position 81-1 (SOP 81-1), Accounting for Performance of Construction-Type and Certain Production-Type Contracts, as prescribed by SOP 97-2. The Company measures the percentage of completion based on output measures which reflect direct labor hours incurred, beginning at software delivery and culminating at completion of installation. The installation services process length is dependent upon client specific factors and generally occurs in the same period the contracts are executed but can extend up to one year.
The Company also provides implementation and consulting services, which include consulting activities that fall outside of the scope of the standard installation services. These services vary depending on the scope and complexity requested by the client. Examples of such services may include additional database consulting, system configuration, project management, testing assistance, network consulting, post conversion review and application management services. Implementation and consulting services generally are not deemed to be essential to the functionality of the software, and thus do not impact the timing of the software license recognition, unless software license fees are tied to implementation milestones. In those instances, the portion of the software license fee tied to implementation milestones is deferred until the related milestone is accomplished and related fees become billable and non-forfeitable. Implementation fees are recognized over the service period, which may extend from nine months to three years for multi-phased projects.
Remote hosting and managed services are marketed under long-term arrangements generally over periods of five to 10 years. These services are typically provided to clients that have acquired a perpetual license for licensed software and have contracted with the Company to host the software in its data center. Under these arrangements, the client has the contractual right to take possession of the licensed software at any time during the hosting period without significant penalty and it is feasible for the client to either run the software on its own equipment or contract with another party unrelated to the Company to host the software. These services are not deemed to be essential to the functionality of the licensed software or other elements of the arrangement and as such, the Company accounts for these arrangements under SOP 97-2, as prescribed by EITF Issue No. 00-3, Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware. The hosting and managed services are recognized as the services are performed.
The Company also offers its solutions on an application service provider (“ASP”) model, making available time based licenses for the Company’s software functionality and providing the software solutions on a remote processing basis from the Company’s data centers. The data centers provide system and administrative support as well as processing services. Revenue on software and services provided on an ASP or term license basis is combined and recognized on a monthly basis over the term of the contract. The Company capitalizes related direct costs consisting of third party costs and direct software installation and implementation costs associated with the initial set up of the client on the ASP service. These costs are amortized over the term of the arrangement.
Software support fees are marketed under annual and multi-year arrangements and are recognized as revenue ratably over the contracted support term. Hardware and sublicensed software maintenance revenues are recognized ratably over the contracted maintenance term.
Subscription and content fees are generally marketed under annual and multi-year agreements and are recognized ratably over the contracted terms.
Hardware and sublicensed software sales are generally recognized when delivered to the client, assuming title and risk of loss have transferred to the client.

 


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Where the Company has contractually agreed to develop new or customized software code for a client as a single element arrangement, the Company utilizes percentage of completion accounting in accordance with SOP 81-1.
In England, the Company has contracted with third parties to customize software and provide implementation and support services under long term arrangements (nine years). Because the arrangements require customization and development of software, and fair value for the support services does not exist in the arrangements, the entire arrangements are being accounted for as single units of accounting under SOP 81-1. Also, because the Company believes it is reasonably assured that no loss will be incurred under these arrangements, it is using the zero margin approach of applying percentage-of-completion accounting until the software customization and development services are completed or the Company is able to determine fair value for the support services. The remaining unrecognized portion of the fee will be recognized ratably over the remaining term of the arrangement. For the years ended December 29, 2007 and December 30, 2006, approximately $96,000,000 and $71,000,000, respectively of revenue and expense had been recognized in the accompanying Consolidated Statement of Operations.
Deferred revenue is comprised of deferrals for license fees, support, maintenance and other services for which payment has been received and for which the service has not yet been performed and revenue has not been recognized. Long-term deferred revenue at December 29, 2007, represents amounts received from software support and maintenance services to be earned or provided beginning in periods on or after December 30, 2007.
The Company incurs out-of-pocket expenses in connection with its client service activities, primarily travel, which are reimbursed by its clients. The amounts of ”out-of-pocket” expenses and equal amounts of related reimbursements were $36,778,000, $39,051,000 and $33,387,000 for the years ended December 29, 2007, December 30, 2006 and December 31, 2005, respectively.
The Company’s arrangements with clients typically include a deposit due upon contract signing and date-based licensed software payment terms and payments based upon delivery for services, hardware and sublicensed software. The Company has periodically provided long-term financing options to creditworthy clients through third party financing institutions and has directly provided extended payment terms to clients from contract date. These extended payment term arrangements typically provide for date based payments over periods ranging from 12 months up to seven years. Pursuant to SOP 97-2, because a significant portion of the fee is due beyond one year, the Company has analyzed its history with these types of arrangements and has concluded that it has a standard business practice of using extended payment term arrangements and a long history of successfully collecting under the original payment terms for arrangements with similar clients, product offerings, and economics without granting concessions. Accordingly, the Company considers the fee to be fixed and determinable in these extended payment term arrangements and, thus, the timing of revenue is not impacted by the existence of extended payments. Some of these payment streams have been assigned on a non-recourse basis to third party financing institutions. The Company accounts for the assignment of these receivables as “true sales” as defined in FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Provided all revenue recognition criteria have been met, the Company recognizes revenue for these arrangements under its normal revenue recognition criteria, net of any payment discounts from financing transactions.
The terms of the Company’s software license agreements with its clients generally provide for a limited indemnification of such intellectual property against losses, expenses and liabilities arising from third party claims based on alleged infringement by the Company’s solutions of an intellectual property right of such third party. The terms of such indemnification often limit the scope of and remedies for such indemnification obligations and generally include a right to replace or modify an infringing solution. To date, the Company has not had to reimburse any of its clients for any losses related to these indemnification provisions pertaining to third party intellectual property infringement claims. For several reasons, including the lack of prior indemnification claims and the lack of a monetary liability limit for certain infringement cases under the terms of the corresponding agreements with its clients, the

 


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Company cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions.
(d)  Fiscal Year - The Company’s fiscal year ends on the Saturday closest to December 31. All references to years in these notes to consolidated financial statements represent fiscal years unless otherwise noted.
(e)  Software Development Costs - Costs incurred internally in creating computer software products are expensed until technological feasibility has been established upon completion of a detailed program design. Thereafter, all software development costs are capitalized and subsequently reported at the lower of amortized cost or net realizable value. Capitalized costs are amortized based on current and expected future revenue for each software solution with minimum annual amortization equal to the straight-line amortization over the estimated economic life of the solution. The Company is amortizing capitalized costs over five years. During 2007, 2006 and 2005, the Company capitalized $65,985,000, $60,943,000 and $62,039,000, respectively, of total software development costs of $283,086,000, $262,163,000 and $225,606,000, respectively. Amortization expense of capitalized software development costs in 2007, 2006 and 2005 was $53,475,000, $45,750,000 and $47,888,000, respectively, and accumulated amortization was $356,485,000, $303,010,000 and $255,122,000, respectively. Included in 2007 total software development costs is $8.6 million of research and development activities for the RxStation medical dispensing devices. $3.4 million of this amount recorded in 2007 is related to periods prior to 2007 and is immaterial to both 2007 and the prior periods to which it relates.
(f)  Cash Equivalents – Cash equivalents consist of short-term marketable securities with original maturities less than 90 days.
(g)  Short-term Investments – The Company’s short-term investments are primarily invested in auction rate securities which are debt instruments having longer-dated (in most cases, many years) legal maturities, but with interest rates that are generally reset every 28-49 days under an auction system. Because auction rate securities are frequently re-priced, they trade in the market on par-in, par-out basis. Because the Company regularly liquidates its investments in these securities for reasons including, among others, changes in market interest rates and changes in the availability of and the yield on alternative investments, the Company has classified these securities as available-for-sale securities. As available-for-sale securities, these investments are carried at fair value, which approximates cost. Despite the liquid nature of these investments, the Company categorizes them as short-term investments instead of cash and cash equivalents due to the underlying legal maturities of such securities. However, they have been classified as current assets as they are generally available to support the Company’s current operations. There have been no realized gains or losses on these investments.
(h)  Inventory - Inventory consists primarily of computer hardware, sub-licensed software held for resale and RxStation medication dispensing units. Inventory is recorded at the lower of cost (first-in, first-out) or market.
(i)  Property and Equipment - Property, equipment and leasehold improvements are stated at cost. Depreciation of property and equipment is computed using the straight-line method over periods of two to 50 years. Amortization of leasehold improvements is computed using a straight-line method over the shorter of the lease terms or the useful lives, which range from periods of two to 15 years.
(j)  Earnings per Common Share – Basic earnings per share (EPS) excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. A reconciliation of the numerators and the denominators of the basic and diluted per-share computations are as follows:

 


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    2007     2006     2005  
    Earnings     Shares     Per-Share     Earnings     Shares     Per-Share     Earnings     Shares     Per-Share  
    (Numerator)     (Denominator)     Amount     (Numerator)     (Denominator)     Amount     (Numerator)     (Denominator)     Amount  
     
(In thousands, except per share data)
                                                                       
Basic earnings per share:
                                                                       
Income available to common stockholders
  $ 127,125       79,395     $ 1.60     $ 109,891       77,691     $ 1.41     $ 86,251       74,144     $ 1.16  
                     
Effect of dilutive securities:
                                                                       
Stock options
          3,823                     4,032                     3,946          
     
Diluted earnings per share:
                                                                       
     
Income available to common stockholders including assumed conversions
  $ 127,125       83,218     $ 1.53     $ 109,891       81,723     $ 1.34     $ 86,251       78,090     $ 1.10  
     
Options to purchase 1,081,000, 1,121,000 and 166,000 shares of common stock at per share prices ranging from $40.84 to $136.86, $33.86 to $136.86 and $38.32 to $136.86, were outstanding at the end of 2007, 2006 and 2005, respectively, but were not included in the computation of diluted earnings per share because they were antidilutive.
(k)  Foreign Currency - Assets and liabilities of foreign subsidiaries whose functional currency is the local currency are translated into U.S. dollars at exchange rates prevailing at the balance sheet date. Revenues and expenses are translated at average exchange rates during the year. The net exchange differences resulting from these translations are reported in accumulated other comprehensive income. Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations. The net gain resulting from foreign currency transactions is included in general and administrative expenses in the consolidated statements of operations and amounted to $3,691,000, $3,764,000 and $2,700,000 in 2007, 2006 and 2005, respectively.
(l)  Income Taxes - Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
(m)  Goodwill and Other Intangible Assets – The Company accounts for goodwill under the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” As a result, goodwill and intangible assets with indefinite lives are not amortized but are evaluated for impairment annually or whenever there is an impairment indicator. All goodwill is assigned to a reporting unit, where it is subject to an impairment test based on fair value. The Company assesses its goodwill for impairment in the second quarter of its fiscal year. There was no impairment of goodwill in 2007 and 2006. The Company used a discounted cash flow analysis to determine the fair value of the reporting units for all periods tested. The company also evaluated impairment indicators in 2006 and 2007, resulting in no impairment. The Company’s intangible assets, other than goodwill or intangible assets with indefinite lives, are all subject to amortization, are amortized on a straight-line basis, and are summarized as follows:

 


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    Weighted-Average   December 29, 2007   December 30, 2006
    Amortization   Gross Carrying   Accumulated   Gross Carrying   Accumulated
    Period (Yrs)   Amount   Amortization   Amount   Amortization
            (In thousands)
Purchased software
    5.0     $ 59,775     $ 44,557     $ 56,663     $ 36,031  
Customer lists
    5.0       55,384       30,236       47,793       19,688  
Patents
    17.0       6,826       1,244       6,136       1,198  
Non-compete agreements
    3.0       1,824       918       1,118       364  
             
Total
    5.63     $ 123,809     $ 76,955     $ 111,709     $ 57,281  
             
Amortization expense was $19,674,000, $16,842,000 and $17,258,000 for the years ended 2007, 2006 and 2005, respectively.
Estimated aggregate amortization expense for each of the next five years is as follows:
         
(In thousands)        
For year ended: 2008
  $ 17,289  
2009
    15,388  
2010
    4,639  
2011
    3,135  
2012
    855  

 


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The changes in the carrying amount of goodwill for the 12 months ended December 29, 2007 are as follows:
         
(In thousands)        
Balance as of December 30, 2006
  $ 128,819  
Goodwill acquired
    12,733  
Foreign currency translation adjustment and other
    2,372  
 
     
Balance as of December 29, 2007
  $ 143,924  
 
     
At December 29, 2007 and December 30, 2006, goodwill of $125,516,000 and $112,312,000 has been allocated to the Domestic segment respectively. The 2007 and 2006 amounts of goodwill allocated to the global segment was $18,408,000 and $16,507,000, respectively.
(n)  Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(o)  Concentrations – Substantially all of the Company’s cash and cash equivalents and short-term investments are held at three major U.S. financial institutions. The majority of the Company’s cash equivalents consist of U.S. Government Federal Agency Securities, short-term marketable securities, and overnight repurchase agreements. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally these deposits may be redeemed upon demand and, therefore, bear minimal risk.
Substantially all of the Company’s clients are integrated delivery networks, physicians, hospitals and other healthcare related organizations. If significant adverse macro-economic factors were to impact these organizations it could materially adversely affect the Company. The Company’s access to certain software and hardware components is dependent upon single and sole source suppliers. The inability of any supplier to fulfill supply requirements of the Company could affect future results.
(p)  Accounting for Share-based payments — On January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payments,” using the modified prospective method of adoption. SFAS 123R replaces SFAS 123, “Accounting for Stock-Based Compensation,” and supersedes Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123R addresses the accounting for share-based payment transactions with employees and other third parties and requires that the compensation costs relating to such transactions be recognized in the consolidated statement of earnings.

 


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Prior to the adoption of SFAS 123R, the Company applied the intrinsic-value-based method of accounting prescribed by APB Opinion No. 25 to account for its fixed-plan stock options. Under this method, compensation expense was recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. As previously allowed under SFAS 123, the Company only adopted the disclosure requirements of SFAS 123, which established a fair value-based method of accounting for stock-based employee compensation plans. The following is a reconciliation of reported net earnings to adjusted net earnings had the Company recorded compensation expense based on the fair value at the grant date for its stock options under SFAS 123 for the year ended 2005.
         
(In thousands, except per share data)   2005  
Reported net earnings
  $ 86,251  
Less: stock-based compensation expense determined under fair-value-based method for all awards, net of tax
    (10,971 )
 
     
Adjusted net earnings
    75,280  
 
     
Basic earnings per share:
       
 
       
Reported net earnings
  $ 1.16  
Less: stock-based compensation expense determined under fair-value-based method for all awards, net of tax
    (0.14 )
 
     
Adjusted net earnings
    1.02  
 
     
Diluted earnings per share:
       
 
       
Reported net earnings
  $ 1.10  
Less: stock-based compensation expense determined under fair-value-based method for all awards, net of tax
    (0.14 )
 
     
Adjusted net earnings
    0.96  
 
     
(q) Reclassifications — Certain prior year amounts in our consolidated balance sheet have been reclassified to conform to the current year presentation.
(r) Derivative Instruments and Hedging Activities — The Company follows Statement of Financial Accounting Standards No. 133 (SFAS 133), “Accounting for Derivative Investments and Hedging Activities,” as amended, to account for its derivative and hedging activities.
The Company has issued foreign-denominated debt to manage its foreign currency exposure related to its net investment in its subsidiary in England. Beginning in 2006, at the beginning of each quarterly period, the Company designated a portion (between £60 million and £63 million during the year) of its debt (£65 million), which is denominated in Great Britain Pounds, to hedge its net investment in England. During 2007 the Company designated all £65 million of its debt that is denominated in Great Britain Pounds. At December 29, 2007, approximately $1.5 million, net of approximately $1 million of tax, of increases in the debt related to changes in the foreign currency exchange rate were included in accumulated other comprehensive income. At December 30, 2006 approximately $9 million, net of approximately $6 million of tax, of increases in the debt related to changes in the foreign currency exchange rate were included in accumulated other comprehensive income.
(s) Recent Accounting Pronouncements — In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157 (SFAS 157), “Fair Value Measurements.” This statement establishes a single authoritative definition of fair value when accounting rules require the use of fair value and sets out a framework for measuring fair value and requires additional disclosures about fair value measurements. The Company is currently assessing the impact of adoption of SFAS 157 on its results of operations and its financial position and will be required to adopt SFAS 157 as of the first day of the 2008 fiscal year. The effect of adopting SFAS 157 is not expected to be material to the Company’s consolidated financial statements.

 


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In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (SFAS 159), “The Fair Value Option for Financial Assets and Financial Liabilities.” This statement provides companies with an option to report selected financial assets and liabilities at fair value. The company is currently assessing the impact of adoption of SFAS 159 on its results of operations and its financial position and will be required to adopt SFAS 159 as of the first day of the 2008 fiscal year. The effect of adopting SFAS 159 is not expected to be material to the Company’s consolidated financial statements.
In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations (“SFAS 141(R)”) which replaces SFAS 141 and supersedes FIN 4, “Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method”. SFAS 141(R) establishes guidelines for how an acquirer measures and recognizes the identifiable assets, goodwill, noncontrolling interest, and liabilities assumed in a business combination. Additionally, SFAS 141(R) outlines the disclosures necessary to allow financial statement users to assess the impact of the acquisition. The Company is currently assessing the impact of adoption of SFAS 141(R) on its results of operations and its financial position, which is expected to be immaterial, and will be required to adopt SFAS 141(R) prospectively for business combinations occurring on or after the first day of the 2009 fiscal year.
Also in December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements”, which amends ARB No. 51. SFAS 160 guides that a noncontrolling interest in a subsidiary should be reported as equity in the consolidated financial statements, and that net income should be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. The Company is currently assessing the impact of adoption of SFAS 160 on its results of operations and its financial position, which is expected to be immaterial, and will be required to adopt SFAS 160 as of the first day of the 2009 fiscal year.
(2) Business Acquisitions
During the three years ended December 29, 2007, the Company completed five acquisitions, which were accounted for under the purchase method of accounting. The results of each acquisition are included in the Company’s consolidated statements of operations from the date of each acquisition. Below is a description of the three most significant acquisitions.
On February 22, 2007, the Company completed the purchase of assets of Etreby Computer Company, Inc. (“Etreby”), for $25,120,000, which was reduced by $1,588,000 for a working capital adjustment in the second quarter of 2007. Etreby was a software provider of retail pharmacy management systems. The acquisition of Etreby’s assets has expanded the Company’s pharmacy systems portfolio. The operating results of Etreby were combined with those of the Company subsequent to the purchase date of February 22, 2007. The allocation of the purchase price to the estimated fair values of the identified tangible and intangible assets acquired and liabilities assumed, resulted in goodwill of $12,676,000 and $10,181,000 in intangible assets. The intangible assets are being amortized over five years. The goodwill was allocated to the Domestic segment and is expected to be deductible for tax purposes. Unaudited pro-forma results of operations have not been presented because the effect of this acquisition was not material to the Company.
On July 5, 2006, the Company completed the purchase of Galt Associates, Inc., now known as Cerner Galt, Inc. (“Galt”) for $13,766,000, net of cash acquired. Galt is a provider of safety and risk management solutions for pharmaceutical, medical device and biotechnology companies. The acquisition of Galt has enhanced the Company’s LifeSciences portfolio by adding solutions and services that use medical event data to monitor and manage the safety and effectiveness of various therapies. The allocation of the purchase price to the estimated fair values of the identified tangible and intangible assets acquired and liabilities assumed, resulted in goodwill of $9,298,000 and $4,266,000 in intangible assets. The intangible assets are being amortized over periods between two and five years. Unaudited pro-forma results of operations for 2006 were not presented because the effect of this acquisition was not material to the Company.

 


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On January 3, 2005, the Company completed the purchase of assets of the medical business division of VitalWorks, Inc. for approximately $100,000,000, which was funded with existing cash of approximately $65,000,000 and borrowings on the revolving line of credit of approximately $35,000,000. The medical business consists of delivering and supporting physician practice management, electronic medical record, electronic data interchange and emergency department information solutions and related products and services to physician practices, hospital emergency departments, management service organizations and other related entities. The acquisition of VitalWorks’ medical division expanded the Company’s presence in the physician practice market. $6,382,000 of the purchase price was allocated to in-process research and development that had not reached technological feasibility and is reflected as a charge to earnings in 2005. The allocation of the purchase price to the estimated fair values of the identified tangible and intangible assets acquired and liabilities assumed, resulted in goodwill of $55,166,000 and $43,450,000 in intangible assets that are being amortized over five years.
A summary of the Company’s purchase acquisitions for the three years ended December 29, 2007, is included in the following table (in millions, except share amounts):

 


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                                            Developed   Form of
(In millions)   Date   Consideration   Goodwill   (Tax Basis)   Intangibles   Technology   Consideration
 
Fiscal Year 2007 Acquisition
                                                       
 
Name:
                                                       
Etreby Computer Company, Inc.
                                                       
 
                                                       
Description of Business:
                                                       
Software provider of retail pharmacy management systems
    2/07     $ 23.5     $ 12.7     $ (12.7 )   $ 8.3     $ 1.9     $23.5 cash
 
                                                       
Reason for Acquisition:
                                                       
Integrate technology into Cerner Millennium
                                                       
 
Fiscal Year 2006 Acquisition
                                                       
 
Name:
                                                       
Galt Associates, Inc.
                                                       
 
                                                       
Description of Business:
                                                       
Safety and risk management software for pharmaceutical, medical device and biotechnology companies
    7/06     $ 13.7     $ 9.3     $     $ 2.7     $ 1.6     $13.7 cash
 
                                                       
Reason for Acquisition:
                                                       
Integrate technology into Cerner Millennium
                                                       
 
Fiscal Year 2005 Acquisition
                                                       
 
Name:
                                                       
Bridge Medical, Inc.
                                                       
 
                                                       
Description of Business:
                                                       
Leader in point-of-care software market
    7/05     $ 11.0     $ 5.4     $ (5.4 )   $ 5.5     $ 2.9     $11 cash
 
                                                       
Reason for Acquisition:
                                                       
Integrate technology into Cerner Millennium
                                                       
 
Name:
                                                       
DKE SARL (Axya Systemes)
                                                       
 
Description of Business:
                                                       
Financial, administrative, and clinical solutions in Europe
    5/05     $ 5.2     $ 1.2     $     $ 1.8     $ 1.5     $5.2 cash
 
                                                       
Reason for Acquisition:
                                                       
Integrate technology into Cerner Millennium
                                                       
 
Name:
                                                       
Medical Division of VitalWorks, Inc.
                                                       
 
                                                       
Description of Business:
                                                       
Physician practice solution
    1/05     $ 100.0     $ 55.2     $ (55.2 )   $ 35.1     $ 8.4     $100 cash
 
Reason for Acquisition:
                                                       
Integrate technology into Cerner Millennium
                                                       
 
Amounts allocated to intangibles are amortized on a straight-line basis over three to 17 years. Amounts allocated to software are amortized based on current and expected future revenues for each product with minimum annual amortization equal to the straight-line amortization over the estimated economic life of the product.
 
(a) The assets and liabilities of the acquired companies at the date of acquisition are as follows:

 


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    Etreby                
    Computer   Galt   Bridge Medical,   Axya   Medical Division of
(In thousands)   Company, Inc.   Associates, Inc.   Inc.   Systemes   VitalWorks, Inc.
     
Current assets
  $ 1,002       751       1,172       2,680       11,404  
Total assets
    24,280       15,372       15,802       7,209       120,175  
Current liabilities
    748       1,606       4,748       2,244       17,064  
Total liabilities
    748       1,606       4,783       2,483       19,877  
(3) Receivables
Receivables consist of accounts receivable and contracts receivable. Accounts receivable represent recorded revenues that have been billed. Contracts receivable represent recorded revenues that are billable by the Company at future dates under the terms of a contract with a client. Billings and other consideration received on contracts in excess of related revenues recognized are recorded as deferred revenue. Substantially all receivables are derived from sales and related support and maintenance and professional services of the Company’s clinical, administrative and financial information systems and solutions to healthcare providers located throughout the United States and in certain non-U.S. countries. A summary of receivables is as follows:
                 
    December 29,   December 30,
(In thousands)   2007   2006
     
Accounts receivable, net of allowance
  $ 261,456     $ 228,676  
Contracts receivable
    129,604       132,748  
     
Total receivables, net
  $ 391,060     $ 361,424  
     
The Company performs ongoing credit evaluations of its clients and generally does not require collateral from its clients. The Company provides an allowance for estimated uncollectible accounts based on specific identification, historical experience and management’s judgment. At the end of 2007 and 2006 the allowance for estimated uncollectible accounts was $15,469,000 and $14,628,000, respectively.
During 2007 and 2006, the Company received total client cash collections of $1,646,584,000 and $1,457,603,000, respectively, of which $88,286,000 and $108,814,000 were received from third party arrangements with non-recourse payment assignments.

 


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(4) Property and Equipment
A summary of property, equipment, and leasehold improvements stated at cost, less accumulated depreciation and amortization, is as follows:
                           
    Depreciable     December 29,   December 30,
(In thousands)   Lives (Yrs)     2007   2006
               
Furniture and fixtures
  5    -    12     $ 55,016     $ 41,914  
Computer and communications equipment
  2 - 5       422,716       308,370  
Leasehold improvements
  2 - 15       123,799       95,433  
Capital lease equipment
  3 - 5       17,416       17,333  
Land, buildings and improvements
   12 -  50       176,216       144,820  
Other equipment
  5 - 20       983       4,299  
               
 
                         
 
              796,146       612,169  
Less accumulated depreciation and amortization
              333,307       254,227  
               
 
                         
Total property and equipment, net
            $ 462,839     $ 357,942  
               
Depreciation expense for the years ended December 29, 2007, December 30, 2006 and December 31, 2005 was $80,020,000, $61,380,000 and $49,057,000, respectively.
(5) Indebtedness
In November 2005, the Company completed a £65,000,000 ($129,779,000 at December 29, 2007) private placement of debt at 5.54% pursuant to a Note Agreement. The Note Agreement is payable in seven equal annual installments beginning in November 2009. The proceeds were used to repay the outstanding amount under the Company’s credit facility and for general corporate purposes. The Note Agreement contains certain net worth and fixed charge coverage covenants and provides certain restrictions on the Company’s ability to borrow, incur liens, sell assets and pay dividends. The Company was in compliance with all covenants at December 29, 2007.
In December 2002, the Company completed a $60,000,000 private placement of debt pursuant to a Note Agreement. The Series A Senior Notes, with a $21,000,000 principal amount at 5.57%, are payable in three equal installments, which began in December 2006. The Series B Senior notes, with a $39,000,000 principal amount at 6.42%, are payable in four equal annual installments beginning December 2009. The proceeds were used to repay the outstanding amount under the Company’s credit facility and for general corporate purposes. The Note Agreement contains certain net worth and fixed charge coverage covenants and provides certain restrictions on the Company’s ability to borrow, incur liens, sell assets and pay dividends. The Company was in compliance with all covenants at December 29, 2007.
In May 2002, the Company expanded its credit facility by entering into an unsecured credit agreement with a group of banks led by US Bank. This agreement was amended and restated on November 30, 2006 and provides for a current revolving line of credit for working capital purposes. The current revolving line of credit is unsecured and requires monthly payments of interest only. Interest is payable at the Company’s option at a rate based on prime (7.25% at December 29, 2007) or LIBOR (4.73% at December 29, 2007) plus 1.55%. The interest rate may be reduced by up to 1.15% if certain net worth ratios are maintained. The agreement contains certain net worth, current ratio, and fixed charge coverage covenants and provides certain restrictions on the Company’s ability to borrow, incur liens, sell assets, and pay dividends. A commitment fee of 2/10% is payable quarterly based on the usage of the revolving line of credit. The revolving line of credit matures on May 31, 2010. On January 10, 2005, the Company drew down $35,000,000 from its revolving line of credit in connection with the acquisition of the medical business division of VitalWorks. (See Note 2 to the consolidated financial statements.) This amount was

 


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paid in full as of December 31, 2005. As of December 29, 2007, the Company had no outstanding borrowings under this agreement and had $90,000,000 available for working capital purposes. The Company was in compliance with all covenants at December 29, 2007.
In April 1999, the Company completed a $100,000,000 private placement of debt pursuant to a Note Agreement. The Series A Senior Notes, with a $60,000,000 principal amount at 7.14% were paid in full in 2006. The Series B Senior Notes, with a $40,000,000 principal amount at 7.66%, are payable in six equal annual installments which commenced in April 2004. The proceeds were used to retire the Company’s existing $30,000,000 of debt, and the remaining funds were used for capital improvements and to strengthen the Company’s cash position. The Note Agreement contains certain net worth, current ratio, and fixed charge coverage covenants and provides certain restrictions on the Company’s ability to borrow, incur liens, sell assets and pay dividends. The Company was in compliance with all covenants at December 29, 2007.
In March 2004, the Company issued a $7,500,000 promissory note to Cedars-Sinai Medical Center of which $2,500,000 was repaid in October 2004. The balance of the note was paid on April 30, 2007.
The Company also has capital lease obligations amounting to $769,000, payable over the next two years.
The aggregate maturities for the Company’s long-term debt, including capital lease obligations, are as follows (in thousands):
         
(In thousands)        
2008
  $ 14,260  
2009
    36,044  
2010
    29,362  
2011
    28,290  
2012
    28,290  
2013 and thereafter
    55,620  
 
     
Total maturities
  $ 191,866  
 
     
The Company estimates the fair value of its long-term, fixed-rate debt using a discounted cash flow analysis based on the Company’s current borrowing rates for debt with similar maturities. The fair value of the Company’s long-term debt was approximately $173,675,000 and $185,154,000 at December 29, 2007 and December 30, 2006, respectively.
(6) Interest Income (Expense)
A summary of interest income and expense is as follows:
                         
     
(In thousands)   2007   2006   2005
     
Interest income
  $ 13,206     $ 11,877     $ 3,871  
Interest expense
    (11,937 )     (12,574 )     (9,729 )
     
Interest income (expense), net
  $ 1,269     $ (697 )   $ (5,858 )
     

 


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(7) Stock Options and Equity
At the end of 2007 and 2006, the Company had 1,000,000 shares of authorized but unissued preferred stock, $.01 par value.
As of December 29, 2007, the Company had four fixed stock option and equity plans in effect for associates. The awards granted under these plans qualify for equity classification pursuant to SFAS 123R. Amounts recognized in the consolidated financial statements with respect to these plans are as follows:
                         
     
(In thousands)   2007   2006   2005
     
Total cost of share-based payments for the period
  $ 17,334     $ 19,973     $ 727  
Amounts capitalized in software development costs, net of amortization
    (1,145 )     (952 )      
     
Amounts charged against earnings, before income tax benefit
  $ 16,189     $ 19,021     $ 727  
     
 
                       
Amount of related income tax benefit recognized in earnings
  $ 6,030     $ 7,275     $ 278  
     
During 2007, the Company had two shareholder approved long-term incentive plans from which it could issue grants.
Under the 2001 Long-Term Incentive Plan F, the Company is authorized to grant to associates, directors and consultants 4,000,000 shares of common stock awards taking into account the stock-split effective January 10, 2006. Awards under this plan may consist of stock options, restricted stock and performance shares, as well as other awards such as stock appreciation rights, phantom stock and performance unit awards which may be payable in the form of common stock or cash at the Company’s discretion. However, not more than 1,000,000 of such shares will be available for granting any types of grants other than options or stock appreciation rights. Options under Plan F are exercisable at a price not less than fair market value on the date of grant as determined by the Stock Option Committee. Options under this plan typically vest over a period of five years as determined by the Stock Option Committee and are exercisable for periods of up to 25 years.
Under the 2004 Long-Term Incentive Plan G, the Company is authorized to grant to associates and directors 4,000,000 shares of common stock awards taking into account the stock-split effective January 10, 2006. Awards under this plan may consist of stock options, restricted stock and performance shares, as well as other awards such as stock appreciation rights, phantom stock and performance unit awards which may be payable in the form of common stock or cash at the Company’s discretion. Options under Plan G are exercisable at a price not less than fair market value on the date of grant as determined by the Stock Option Committee. Options under this plan typically vest over a period of five years as determined by the Stock Option Committee and are exercisable for periods of up to 12 years. In 2007, Long-Term Incentive Plan G was amended to permit Cerner the ability to recover fringe benefit tax payments made by Cerner on behalf of its associates in India.
In addition to the stock option plans, the Company has also granted 1,708,170 other non-qualified stock options over time through December 29, 2007, under separate agreements to associates and certain third parties. These options are exercisable at a price equal to or greater than the fair market value on the date of grant. These options vest over periods of up to six years and are exercisable for periods of up to 10 years.
The fair market value of each stock option award is estimated on the date of grant using a lattice option-pricing model for 2007 and 2006 and the Black-Scholes option-pricing model for 2005. In 2006, the Company changed its valuation model from the Black-Scholes option-pricing model to the lattice pricing model because it is believed to provide greater flexibility for valuing the substantive characteristics of employee share instruments, resulting in a more accurate estimate of fair market value. The pricing model requires the use of the following estimates and assumptions:
    Expected volatilities under the lattice model are based on an equal weighting of implied volatilities from traded options on the Company’s shares and historical volatility. Expected volatilities under

 


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      the Black-Scholes model were based entirely on the historical volatility. The Company uses historical data to estimate the stock option exercise and associate departure behavior used in the lattice model; groups of associates (executives and non-executives) that have similar historical behavior are considered separately for valuation purposes.
 
    The expected term of stock options granted is derived from the output of the lattice model and represents the period of time that stock options granted are expected to be outstanding; the range given below results from certain groups of associates exhibiting different post-vesting behaviors. The expected term under the Black-Scholes model was determined using the simplified method of estimating the term as described in Staff Accounting Bulletin 107.
 
    The risk-free rate used in 2007 and 2006 is based on the zero-coupon U.S. Treasury bond with a term equal to the contractual term of the awards. The risk-free rate used in 2005 is based on the zero-coupon U.S. Treasury bond with a term equal to the expected term of the awards.
The weighted-average assumptions used to estimate the fair market value of stock options are as follows:
                                                                         
(In thousands)   2007   2006   2005
     
Expected Volatility (%)
    43.1       -       46.1       46.8       -       48.2       45.4       -       49.1  
 
Expected term (yrs)
    9.6       -       9.9       8.0       -       8.7               6.6          
 
Risk-free rate (%)
            4.6                       4.9                       4.1          
A combined summary of the stock option activity of the Company’s four fixed stock option and equity plans (Non-Qualified Stock Option Plans D and E were in effect prior to 2005 and some options remain issued and outstanding; however, no new grants were permitted to be issued from Plans D and E after January 1, 2005 pursuant to the terms of the Plans) and other stock options at the end of 2007, 2006 and 2005 are presented below:
                                                                 
    2007   2006   2005
            Weighted-Average   Aggregate           Weighted-Average   Aggregate           Weighted-Average
Options   Number of Shares   Exercise Price   Intrinsic Value   Number of Shares   Exercise Price   Intrinsic Value   Number of Shares   Exercise Price
         
Outstanding at December 30, 2006
    10,432,448     $ 21.11               11,039,522     $ 18.51               14,545,148     $ 16.25  
Granted
    934,280       55.04               1,044,230       42.63               1,341,286       33.77  
Exercised
    (1,731,512 )     16.80               (1,352,318 )     15.78               (4,272,960 )     15.62  
Forfeited and Expired
    (489,653 )     29.83               (298,986 )     24.32               (573,952 )     18.18  
 
                                                               
 
                                                               
Outstanding at December 29, 2007
    9,145,563     $ 24.94     $ 298,744,933       10,432,448     $ 21.11     $ 177,409,878       11,039,522     $ 18.51  
 
                                                               
 
                                                               
Options exercisable at the end of the year
    5,423,960     $ 17.51     $ 217,383,381       5,391,750     $ 15.98     $ 116,135,878       4,813,058     $ 15.56  
The following tables summarize information about fixed and other stock options outstanding at December 29, 2007:

 


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Options Outstanding
            Weighted-Average    
Range of   Number Outstanding at   Remaining Contractual   Weighted-Average
Exercise Prices   12/29/2007   Life (yrs)   Exercise Price
$6.25 - 14.00
    2,361,129       6.15     $ 10.16  
14.10 - 21.64
    2,465,376       7.05       18.07  
21.65 - 39.29
    2,383,141       6.10       27.65  
39.78 - 136.86
    1,935,917       8.77       48.37  
 
                       
 
    9,145,563       6.94       24.94  
 
                       
                         
Options Exercisable
            Weighted-Average    
Range of   Number Exercisable at   Remaining Contractual   Weighted-Average
Exercise Prices   12/29/2007   Life (yrs)   Exercise Price
$6.25 - 14.00
    1,890,587             $ 10.16  
14.10 - 21.64
    2,091,288               17.75  
21.65 - 39.29
    1,387,485               26.18  
39.78 - 136.86
    54,600               42.28  
 
                       
 
    5,423,960       6.54       17.51  
 
                       
The weighted-average grant date fair market value of stock options granted during 2007, 2006 and 2005 was $29.17, $19.68 and $17.86, respectively. The total intrinsic value of stock options exercised in 2007 and 2006 was $67,336,000 and $39,276,000, respectively. The Company issues new shares to satisfy option exercises.

 


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Restricted Stock Grants
A summary of the Company’s restricted stock grants during 2007, 2006 and 2005 are presented below:
                                                 
                    Fair           Number of    
Plan   Shares Granted   Grant Date   Value   Vesting Date   Shares   Recipient
 
F
    15,000       7/6/2004     $ 21.16       5/26/2005       15,000     BOD
 
F
    5,000       4/4/2005       26.19       2/2/2006       1,666     BOD
 
                            2/2/2007       1,666          
 
                            2/2/2008       1,668          
 
F
    25,000       6/3/2005       31.41       5/25/2006       25,000     BOD
 
G
    5,000       6/3/2005       31.41       5/25/2006       1,666     BOD
 
                            5/24/2007       1,666          
 
                            5/22/2008       1,668          
 
F
    5,000       6/13/2005       31.79       12/31/2006           * Associate
 
F
    15,000       5/26/2006       36.61       5/24/2007       15,000     BOD
 
F
    6,000       7/25/2006       38.75       5/24/2007       6,000     BOD
 
F
    13,800       5/25/2007       57.25       5/22/2008       13,800     BOD
 
G
    9,666       12/5/2007       58.62       12/5/2008       3,222     Associate
 
                            12/5/2009       3,222          
 
                            12/5/2010       3,222          
 
 
*   Grant cancelled on 12/30/2006 due to failure to meet performance criteria.
All grants were valued at the fair market value on the date of grant and vest provided the recipient has continuously served on the Board of Directors through such vesting date or in the case of an associate provided that performance measures are attained. The expense associated with these grants is being recognized over the period from the date of grant to the vesting date. The Company recognized expenses related to the restricted stock of $887,000, $853,000 and $780,000 in 2007, 2006 and 2005, respectively.

 


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Nonvested Shares
A summary of the Company’s nonvested share-based compensation arrangements granted under all plans as of December 29, 2007 is presented below:
                 
    Nonvested Stock  
            Weighted-Average  
            Grant Date  
Options   Number of Shares     Fair Value  
 
Outstanding at December 30, 2006
    27,668     $ 34.67  
Granted
    23,466       57.81  
Vested
    (24,332 )     38.72  
 
           
Outstanding at December 29, 2007
    26,802       54.20  
 
           
As of December 29, 2007, there was $38,533,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements (including stock option and nonvested share awards) granted under all plans. That cost is expected to be recognized over a weighted-average period of 1.58 years. The total fair market value of shares vested during 2007, 2006 and 2005 was $1,380,000, $1,031,000 and $494,400, respectively.
Associate Stock Purchase Plan
The Company established an Associate Stock Purchase Plan (ASPP) in 2001, which qualifies under Section 423 of the Internal Revenue Code. Each individual employed by the Company and associates of the Company’s United States based subsidiaries, except as provided below, are eligible to participate in the Plan (“Participants”). The following individuals are excluded from participation: (a) persons who, as of the beginning of a purchase period under the Plan, have been continuously employed by the Company or its domestic subsidiaries for less than two weeks; (b) persons who, as of the beginning of a purchase period, own directly or indirectly, or hold options or rights to acquire under any agreement or Company plan, an aggregate of 5% or more of the total combined voting power or value of all outstanding shares of all classes of Company Common Stock; and, (c) persons who are customarily employed by the Company for less than 20 hours per week or for less than five months in any calendar year. Participants may elect to make contributions from 1% to 20% of compensation to the ASPP, subject to annual limitations determined by the Internal Revenue Service. Participants may purchase Company Common Stock at a 15% discount on the last business day of the purchase period. The purchase of the Company’s Common Stock is made through the ASPP on the open market and subsequently reissued to the associates. Under FAS123R, the difference of the open market purchase and the participant’s purchase price is being recognized as compensation expense.
(8) Foundations Retirement Plan
The Cerner Corporation Foundations Retirement Plan (the Plan) is established under Section 401(k) of the Internal Revenue Code. All associates over age 18 and not a member of an excluded class are eligible to participate. Participants may elect to make pretax contributions from 1% to 80% of eligible compensation to the Plan, subject to annual limitations determined by the Internal Revenue Service. Participants may direct contributions into mutual funds, a money market fund, a Company stock fund, or a self-directed brokerage account. The Company makes matching contributions to the Plan, on behalf of participants, in an amount equal to 33% of the first 6% of the participant’s salary contribution. The Company’s expenses for the Plan amounted to $8,280,000, $7,791,000 and $7,130,000 for 2007, 2006 and 2005, respectively.
The Company added a second tier discretionary match to the Plan in 2000. Contributions are based on attainment of established earnings per share goals for the year or the established financial metric for the Plan. Only participants who defer 2% of their base salary are eligible to receive the discretionary match

 


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contribution. For the years ended 2007, 2006 and 2005 the Company expensed $6,019,000, $6,638,000 and $5,783,000 for discretionary distributions, respectively.
(9) Income Taxes
Income tax expense (benefit) for the years ended 2007, 2006 and 2005 consists of the following:
                         
(In thousands)   2007   2006   2005
     
Current:
                       
Federal
  $ 66,701     $ 44,139     $ 47,499  
State
    3,600       7,855       7,549  
Foreign
    24,629       (2,987 )     819  
     
Total current expense
    94,930       49,007       55,867  
     
 
                       
Deferred:
                       
Federal
    (1,726 )     6,586       (2,964 )
State
    (1,360 )     (1,431 )     (2,382 )
Foreign
    (15,002 )     3,491       (1,528 )
     
Total deferred expense (benefit)
    (18,088 )     8,646       (6,874 )
     
 
                       
Total income tax expense
  $ 76,842     $ 57,653     $ 48,993  
     

 


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Temporary differences between the financial statement carrying amounts and tax basis of assets and liabilities that give rise to significant portions of deferred income taxes at the end of 2007 and 2006 relate to the following:
                 
    December 29,   December 30,
(In thousands)   2007   2006
     
Deferred tax assets
               
Accrued expenses
  $ 20,332     $ 15,224  
Separate return net operating losses
    24,462       12,291  
Share based compensation
    11,433       5,800  
Hedge of net investment in foreign subsidiary
    10,174       7,189  
Other
    834       4,336  
     
Total deferred tax assets
    67,235       44,840  
     
 
               
Deferred tax liabilities
               
Software development costs
    (73,165 )     (71,035 )
Contract and service revenues and costs
    (8,616 )     (12,881 )
Depreciation and amortization
    (26,616 )     (17,138 )
Other
    (1,156 )     (94 )
     
Total deferred tax liabilities
    (109,553 )     (101,148 )
     
 
               
Net deferred tax liability before valuation allowance
  $ (42,318 )   $ (56,308 )
     
 
               
Valuation allowance
    (7,982 )     0  
 
               
     
Net deferred tax liability
    (50,300 )     (56,308 )
     
During the second quarter of 2007, the Company determined that due to a change in circumstances in the quarter, it is more likely than not that certain tax operating loss carry-forwards in a non-U.S. jurisdiction would not be realized resulting in the recognition of a valuation allowance totaling approximately $7,982,000. Based upon the level of historical taxable income and projections for future taxable income over the periods which the remaining deferred tax assets are expected to be deductible, as well as the scheduled reversal of deferred tax liabilities, management believes it is more likely than not the Company will realize the remaining deferred tax assets. At December 29, 2007, the Company has net operating loss carry-forwards subject to Section 382 of the Internal Revenue Code for Federal income tax purposes of $19.0 million which are available to offset future Federal taxable income, if any, through 2020.
The December 30, 2006 deferred tax assets include an adjustment to correct amounts previously reported for non-U.S. net operating losses related to periods prior to 2005. The effect of this adjustment is an increase to deferred tax assets and January 1, 2005 retained earnings by $4,162,000. The impact of this adjustment is not material to previously reported periods.

 


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The effective income tax rates for 2007, 2006 and 2005 were 38%, 34% and 36%, respectively. These effective rates differ from the Federal statutory rate of 35% as follows:
                         
(In thousands)   2007   2006   2005
     
Tax expense at statutory rates
  $ 71,389     $ 58,640     $ 47,335  
State income tax, net of federal benefit
    4,640       4,176       4,396  
Zynx tax benefit adjustment
                (4,794 )
Prior period adjustments
    (3,125 )     (1,994 )      
Valuation Allowance
    7,982              
Other, net
    (4,044 )     (3,169 )     2,056  
     
Total income tax expense
    76,842       57,653       48,993  
     
The 2007 and 2006 tax expense amounts include the recognition of approximately $3,125,000 and $1,994,000 respectively of tax benefits for items related to prior periods. The adjustments in 2007 were recorded primarily to correct an error in the Company’s 2006 state income tax rate. These differences have accumulated over several years and the impact to any one of these prior periods is not material. The 2006 amounts relate to tax credits taken on prior income tax returns and to correct an error in prior years’ effective foreign tax rate, which have accumulated over several years.
Income taxes payable are reduced by the tax benefit resulting from disqualifying dispositions of stock acquired under the Company’s stock option plans. The 2007, 2006 and 2005 benefits of $29,865,000, $9,372,000 and $30,289,000, respectively, are treated as increases to additional paid-in capital.
On December 31, 2006, the Company adopted the Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes,” an interpretation of the Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes”. This interpretation clarifies how companies calculate and disclose uncertain tax positions. The effect of adopting this interpretation did not impact any previously recorded amounts for unrecognized tax benefits.
The 2007 beginning and ending amounts of accrued interest related to the underpayment of taxes was $1,150,000 and $202,000, respectively. The Company classifies interest and penalties as income tax expense in its consolidated statement of earnings, which is consistent with how the Company previously classified interest and penalties related to the underpayment of income taxes. No accrual for tax penalties was recorded upon adoption of FIN 48 or at the end of the year.
The total amount of unrecognized tax benefits including interest was $13,300,000 as of December 31, 2006. During 2007, the Company effectively settled IRS examinations for the 1998 to 2004 periods and as a result reclassified previously recorded reserves for tax uncertainties by $9,845,000 including interest. Of this amount, $1,732,000 was recorded as a reduction to income tax expense in 2007. The years after 2004 remain open. As of December 29, 2007, the total amount of unrecognized tax benefits, including interest, was $8,069,000. All of this amount, if recognized, would affect the effective tax rate. The Company does not expect the current amount of its unrecognized tax benefits to change materially over the next 12 months.

 


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A reconciliation of unrecognized tax benefit as of December 29, 2007, is presented below:
         
(In thousands)
       
Unrecognized tax benefit — December 30, 2006
  $ 13,300  
Gross decreases- tax positions in prior period
    (1,732 )
Gross increases- in current-period tax positions
    4,614  
Settlements
    (8,113 )
 
     
Unrecognized tax benefit — December 29, 2007
    8,069  
 
     
(10) Related Party Transactions
The Company leases an airplane from PANDI, Inc. (PANDI), a company owned by Mr. Neal L. Patterson and Mr. Clifford W. Illig, the Company’s Chairman/CEO and Vice Chairman of the Board, respectively. The airplane is leased on a per mile basis with no minimum usage guarantee. The lease rate is believed to approximate fair market value for this type of aircraft. During 2007, 2006 and 2005 the Company paid an aggregate of $661,000, $670,000 and $812,000 for the rental of the airplane, respectively. The airplane is used principally by Mr. Trace Devanny, President, and Mr. Mike Valentine, Executive Vice President, to make client visits.
On February 6, 2007, the Company entered into an Aircraft Service Agreement between Rockcreek Aviation, Inc. (the Company’s wholly-owned flight operations subsidiary) and PANDI. Under this agreement Rockcreek Aviation provides flight operations services to PANDI with respect to PANDI’s aircraft. PANDI owns and operates a Beechcraft, BeechJet 400. During 2007, the aircraft services fees paid by PANDI to the Company were $238,000.

 


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(11) Commitments
In prior years, the Company leased space to unrelated parties in its North Kansas City headquarters complex and in other business locations under noncancelable operating leases. Included in other revenues is rental income of $305,000 and $583,000 in 2006 and 2005, respectively. The Company did not receive rental income in 2007.
The Company is committed under operating leases for office space and computer equipment through October 2027. Rent expense for office and warehouse space for the Company’s regional and global offices for 2007, 2006 and 2005 was $12,436,000, $11,391,000 and $9,056,000, respectively. Aggregate minimum future payments (in thousands) under these noncancelable operating leases are as follows:
         
(In thousands)
       
2008
  $ 34,143  
2009
    27,971  
2010
    24,497  
2011
    23,387  
2012
    22,928  
2013 and thereafter
    99,198  

 


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(12) Segment Reporting
The Company has two operating segments, Domestic and Global. Revenues are derived primarily from the sale of clinical, financial and administrative information systems and solutions. The cost of revenues includes the cost of third party consulting services, computer hardware and sublicensed software purchased from computer and software manufacturers for delivery to clients. It also includes the cost of hardware maintenance and sublicensed software support subcontracted to the manufacturers. Operating expenses incurred by the geographic business segments consist of sales and client service expenses including salaries of sales and client service personnel, communications expenses and unreimbursed travel expenses. Performance of the segments is assessed at the operating earnings level and, therefore, the segment operations have been presented as such. “Other” includes revenues not generated by the operating segments and expenses such as software development, marketing, general and administrative, share-based compensation expense and depreciation that have not been allocated to the operating segments. It is impractical for the Company to track assets by geographical business segment.
Accounting policies for each of the reportable segments are the same as those used on a consolidated basis. The following table presents a summary of the operating information for the years ended December 29, 2007, December 30, 2006 and December 31, 2005.
                                 
    Operating Segments  
(In thousands)   Domestic     Global     Other     Total  
2007
                               
Revenues
  $ 1,227,434     $ 290,677     $ 1,766     $ 1,519,877  
 
                       
 
                               
Cost of revenues
    221,154       53,367       5,589       280,110  
Operating expenses
    331,124       151,355       553,205       1,035,684  
 
                       
Total costs and expenses
    552,278       204,722       558,794       1,315,794  
 
                       
 
                               
Operating earnings
  $ 675,156     $ 85,955     $ (557,028 )   $ 204,083  
 
                       
                                 
    Operating Segments  
(In thousands)   Domestic     Global     Other     Total  
2006
                               
Revenues
  $ 1,166,662     $ 207,367     $ 4,009     $ 1,378,038  
 
                       
 
                               
Cost of revenues
    251,574       39,224       172       290,970  
Operating expenses
    308,085       107,571       505,245       920,901  
 
                       
Total costs and expenses
    559,659       146,795       505,417       1,211,871  
 
                       
 
                               
Operating earnings
  $ 607,003     $ 60,572     $ (501,408 )   $ 166,167  
 
                       

 


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    Operating Segments  
(In thousands)   Domestic     Global     Other     Total  
2005
                               
Revenues
  $ 1,043,804     $ 113,317     $ 3,664     $ 1,160,785  
 
                       
 
                               
Cost of revenues
    238,096       17,189       (599 )     254,686  
Operating expenses
    288,098       48,098       429,467       765,663  
 
                       
Total costs and expenses
    526,194       65,287       428,868       1,020,349  
 
                       
 
                               
Operating earnings
  $ 517,610     $ 48,030     $ (425,204 )   $ 140,436  
 
                       

 


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(13) Revised Quarterly Results (unaudited)
Selected quarterly financial data for 2007 and 2006 is set forth below:
                                         
            Earnings             Basic     Diluted  
            Before Income             Earnings     Earnings Per  
(In thousands,except per share data)   Revenues     Taxes     Net Earnings     Per Share     Share  
     
2007 quarterly results:
                                       
March 31
  $ 365,852     $ 42,976     $ 27,711       0.35       0.34  
June 30
    386,588       48,189       26,849       0.34       0.32  
September 29
    372,936       53,576       31,234       0.39       0.37  
December 29
    394,501       59,226       41,331       0.52       0.49  
     
Total
  $ 1,519,877       203,967       127,125                  
 
                                 
 
                                       
2006 quarterly results:
                                       
April 1
  $ 321,224       33,426       20,144       0.26       0.25  
July 1
    330,572       39,368       23,873       0.31       0.29  
September 30
    345,452       43,831       26,728       0.34       0.33  
December 30 (1)
    380,790       50,919       39,146       0.50       0.48  
     
Total
  $ 1,378,038       167,544       109,891                  
 
                                 
 
(1)   Includes a tax benefit of $7.9 million related to the extension of the Federal Research and Development Credit, the recognition of certain state tax benefits and adjustments to correct certain federal and foreign items unrelated to the fourth quarter of 2006. This results in an increase to dilted earnings per share of $0.10.

 


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Immaterial Corrections
During 2007, certain errors were identified that impacted amounts previously reported on our Form 10-Q for the 2007 quarterly periods and on our Form 10-K for the prior annual periods. These items separately and in the aggregate did not have a material impact on results previously reported in 2007 or prior periods. However, we have revised our previously reported quarterly results in 2007 to reflect the adjustments in the appropriate quarterly period. These items are:
Research and Development
In connection with production and delivery of the RxStation medication dispensing devices, the Company reviewed the accounting treatment of previously capitalized costs related to this device and determined a write-off was necessary. The fourth quarter of 2007 in the table below includes additional after tax expense of $2.1 million, net of $1.3 million tax benefit, related to periods prior to 2007.
State Income Taxes
This adjustment relates to the use of a higher estimated effective state income tax rate than the actual effective rate in computing the Company’s current tax provision. The Company’s fourth quarter of 2007 in the table below includes a decrease in tax expense of $3.1 million related to the 2006 period.
Foreign Taxes
This adjustment corrected a tax item of $4.2 million previously reported in the second quarter of 2007 relating to foreign net operating losses for periods prior to 2005. This adjustment has been corrected through an adjustment to the January 1, 2005 retained earnings. The second item is due to a reduction in foreign income tax rates resulting from a law that was enacted in the third quarter of 2007, which effectively reduced the value of the Company’s foreign tax losses.
A summary of the quarterly adjustments for 2007 is set forth below:

 


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    2007  
(In thousands)
                                       
 
  March 31   June 30   September 29   December 29   Total
Revenues
                   
As reported
  $ 365,852     $ 386,588     $ 372,936     $ 394,501     $ 1,519,877  
Research & Development
                             
State Income taxes
                             
Foreign Taxes
                             
     
Revised
  $ 365,852     $ 386,588     $ 372,936     $ 394,501     $ 1,519,877  
     
 
                                       
Earnings Before Income taxes
                                       
As reported
  $ 43,751     $ 49,031     $ 56,010     $ 59,226     $ 208,018  
Research & Development
    (775 )     (842 )     (2,434 )           (4,051 )
State Income taxes
                             
Foreign Taxes
                             
     
Revised
  $ 42,976     $ 48,189     $ 53,576     $ 59,226     $ 203,967  
     
 
                                       
Net Earnings
                                       
As reported
  $ 27,580     $ 31,115     $ 35,841     $ 41,331     $ 135,867  
Research & Development
    (487 )     (528 )     (1,528 )           (2,543 )
State Income taxes
    521       521       521             1,563  
Foreign Taxes
    97       (4,259 )     (3,600 )           (7,762 )
     
Revised
  $ 27,711     $ 26,849     $ 31,234     $ 41,331     $ 127,125  
     

 


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Cerner Corporation
Valuation and Qualifying Accounts
Schedule II
                                         
                    Additions                
                    Through                
            Additions     Acquisitions and                
    Balance at     Charged to     Consolidation of                
    Beginning     Costs and     Variable Interest             Balance at  
Description   of Period     Expenses     Entity     Deductions     End of Period  
 
For Year Ended December 31, 2005
                                       
 
                                       
Doubtful Accounts and Sale Allowances
  $ 17,583,000     $ 5,758,000     $ 3,136,000     $ (7,622,000 )   $ 18,855,000  
                                         
            Additions                      
    Balance at     Charged to     Additions                
    Beginning     Costs and     Through             Balance at  
Description   of Period     Expenses     Acquisitions     Deductions     End of Period  
 
For Year Ended December 30, 2006
                                       
 
                                       
Doubtful Accounts and Sale Allowances
  $ 18,855,000     $ 3,258,000     $ 34,000     $ (7,519,000 )   $ 14,628,000  
                                         
            Additions                      
    Balance at     Charged to     Additions                
    Beginning     Costs and     Through             Balance at  
Description   of Period     Expenses     Acquisitions     Deductions     End of Period  
 
For Year Ended December 29, 2007
  $ 14,628,000     $ 7,392,000     $ 31,000     $ (6,582,000 )   $ 15,469,000  

 


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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Cerner Corporation:
Under date of February 27, 2008, we reported on the consolidated balance sheets of Cerner Corporation and subsidiaries (the Corporation) as of December 29, 2007 and December 30, 2006, and the related consolidated statements of operations, changes in equity, and cash flows for each of the years in the three-year period ended December 29, 2007, which are included in the Corporation’s 2007 Annual Report on Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related consolidated financial statement schedule as listed under Item 15(a)(2). This consolidated financial statement schedule is the responsibility of the Corporation’s management. Our responsibility is to express an opinion on this consolidated financial statement schedule based on our audits.
In our opinion, this consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Our report dated February 27, 2008 on the consolidated financial statements contains an explanatory paragraph that states that, as discussed in note 1 to the consolidated financial statements, the Corporation adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, effective January 1, 2006.
Kansas City, Missouri
February 27, 2008

 

Exhibit 3(c)
BYLAWS
OF
CERNER CORPORATION
Amendment No. 1
The Section in the Corporation’s Bylaws titled “Stock” (Sections 40-45) is hereby replaced in its entirety with the following Section “Stock”, to permit the issuance of uncertificated shares:
Stock
40.  Shares of Stock . The shares of the corporation shall be represented by certificated or uncertificated stock. The shares of stock shall be issued in numerical order. Stockholders shall not be entitled to receive a certificate to evidence share ownership. The board of directors, chairman of the board, president or secretary shall, at their discretion, determine whether shares shall be issued in certificated or uncertificated form. To the extent that shares are represented by certificates, such certificates of stock shall be signed by, or in the name of the corporation by, the chairman of the board or the president or a vice president, and by the treasurer or an assistant treasurer or the secretary or an assistant secretary, certifying the number of shares represented by such certificate. Any of or all the signatures on such certificate may be a facsimile, engraved or printed. In case any officer, transfer agent or registrar who has signed or whose facsimile, engraved or printed signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, such certificate may nevertheless be issued by the corporation with the same effect as if such officer, transfer agent or registrar who signed such certificate, or whose facsimile signature shall have been used thereon, had not ceased to be such officer, transfer agent or registrar of the corporation.
41.  Transfers of Stock . Transfers of stock shall be made only upon the stock transfer books of the corporation, kept at the office of the corporation or of the transfer agent designated to transfer the class of stock, and before a new certificate, provided such shares are represented by a certificate, is issued or a transfer of stock is effectuated, the old certificate (if such shares were initially issued in certificated form) shall be surrendered for cancellation. Until and unless the board appoints some other person, firm or corporation as its transfer agent (and upon the revocation of any such appointment, thereafter until a new appointment is similarly made) the secretary of the corporation shall be the transfer agent of the corporation without the necessity of any formal action of the board, and the secretary, or any person designated by him, shall perform all of the duties thereof.
42.  Registered Stockholders . Only registered stockholders shall be entitled to be treated by the corporation as the holders and owners in fact of the shares standing in their respective names, and the corporation shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not it shall have express or other notice thereof, except as expressly provided by applicable federal law or by the laws of Delaware.
43.  Lost Certificates . The board of directors, chairman of the board, president or secretary may direct that certificated stock be cancelled and the stock reissued as either certificated or

 


 

uncertificated stock, in place of any certificate or certificates theretofore issued by the corporation, alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate or certificates to be lost, stolen or destroyed. When authorizing such issuance of a replacement certificate or certificates or the recording of uncertificated stock, the board of directors, chairman of the board, president or secretary may, in their discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to give the corporation and its transfer agents and registrars, if any, a bond in such sum as it may direct to indemnify it against any claim that may be made against it with respect to the certificate or certificates alleged to have been lost, stolen or destroyed or with respect to the issuance of such new certificate, certificates or uncertificated stock.
44.  Regulations . The board of directors shall have power and authority to make all such rules and regulations as it may deem expedient concerning the issue, transfer, conversion and registration of certificated or uncertificated shares of stock of the corporation, not inconsistent with the laws of Delaware, the certificate of incorporation of the corporation and these bylaws.
45.  Fixing Record Date . In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, if such action is authorized, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting.
Approved by the Board of Directors on December 3, 2007

 

 

Exhibit 10(c)
AMENDED & RESTATED
CERNER EXECUTIVE EMPLOYMENT AGREEMENT
This Cerner Executive Employment Agreement, as amended and restated, describes the formal employment relationship between Neal L. Patterson (“you"/“your”) and Cerner Corporation, a Delaware corporation (“Cerner”). This amended and restated Agreement is effective on January 1, 2008.
RECITALS
A.   You were one of the three (3) founders of Cerner and have been employed by Cerner since its inception on January 4, 1980. You have been its leader since the inception of the company, driving most of its strategic direction. You own a substantial amount of shares of Cerner’s capital stock.
 
B.   You and Cerner desired to set forth the terms and conditions on which you would continue to be employed by Cerner as its Chief Executive Officer, and accordingly entered into an Executive Employment Agreement (the “2005 Employment Agreement”) effective on November 10, 2005 (the “Effective Date”). Section 10 of the 2005 Employment Agreement specifically authorized amendments to the 2005 Employment Agreement that were necessary for the agreement to comply with Section 409A of the Internal Revenue Code. This amended and restated Employment Agreement has been amended to incorporate such changes required by Section 409A of the Internal Revenue Code.
 
C.   In consideration for your continuing employment with Cerner, the potential severance payments and potential acceleration of the vesting of outstanding equity incentive awards described herein, and the potential benefits to you in the event of a Change in Control (as defined herein), and other good and valuable consideration, the receipt and sufficiency of which you and Cerner hereby acknowledge, you and Cerner hereby agree to the following terms and conditions.
 
1.   EMPLOYMENT RELATIONSHIP .
  A.   Type . To the extent permitted by law, your employment relationship with Cerner is “at will,” which means that you may resign from Cerner at any time, for any reason, or for no reason at all, and without advance notice (except as described below). It also means that Cerner may terminate your employment at any time, for any legally permitted reason, or for no reason at all, and without advance notice, subject to Cerner’s potential obligations to you under Paragraph 1(E) below.
     
 
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  B.   Compensation . You will be paid a base salary, specified use of Cerner’s airplane and you may receive a bonus, all as determined by the Board of Directors from time to time. You will be entitled to receive the benefits generally provided to other Cerner Associates, and such other benefits as determined by the Board of Directors from time to time. In addition, Cerner shall reimburse you for your reasonable travel, meals, entertainment, and other similar expenses reasonably incurred in the performance of your duties, as long as such expenses are accompanied by valid receipts and any other documentation required pursuant to any applicable Cerner policy. The Board of Directors will have the ability to review the expenses presented, and any expenses that are reasonably rejected by the Board of Directors shall be reimbursed by you to Cerner.
 
  C.   Duties . You will be employed as Cerner’s Chief Executive Officer and Chairman of the Board of Directors to perform the duties and responsibilities normally attendant with such positions and as assigned to you from time to time by the Board of Directors. You shall report directly to the Board of Directors. You will not be precluded from engaging in other business activities outside normal business hours so long as other such business activities do not detract from your activities on behalf of Cerner.
 
  D.   Resignation and Termination . Cerner may terminate your employment (i) at any time with or without Cause, or (ii) upon your Disability. Your employment with Cerner shall be deemed automatically terminated upon your death. You may resign your employment with Cerner at any time. You agree to give Cerner written notice of your intention to resign from employment at least thirty (30) days prior to the last day you intend to work at Cerner. You also agree to report to Cerner the identity of your new employer (if any) and the nature of your proposed duties for that employer. Cerner, however, reserves the right either to accelerate your intended effective termination date to an earlier actual date or to allow your intended effective termination date to stand. Upon your resignation or the termination of your employment, you agree to promptly execute a Termination Statement in the form of Attachment I and, if you are entitled to any severance payments or benefits described in Paragraph 1(E) below, a written severance agreement containing normal and customary provisions, including but not limited to, a release releasing Cerner from any claims against Cerner related to your employment with Cerner that you might have at the time of or following the termination of your employment, and reasonable and customary representations and warranties.
 
      If you resign with fewer than thirty (30) days’ notice, or if you actually leave Cerner’s employ prior to expiration of the notice period and without the permission of Cerner, then you agree that (to the extent permitted by law) no vacation pay, base salary or other compensation otherwise due or accruing in accordance with Cerner policies, from the date of your resignation notice until the
     
 
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      time of your approved effective termination date, will be owed or paid to you by Cerner.
 
  E.   Severance Payments .
  1.   Non-Change in Control: If Cerner terminates your employment (which for purposes of this entire Agreement, shall have the same meaning as a “separation from service” under Section 409A of the Code) without Cause (as defined herein) prior to a change in control, Cerner will pay you, commencing within 30 days of your termination of employment, severance pay equal to the sum of (i)  three (3) years’ base salary (based on your annual base salary at the time of the termination), plus (ii) three (3) times the average annual cash bonus you received from Cerner during the three (3) years preceding the termination of your employment, less normal tax and payroll deductions. Such severance pay will be payable pro rata during the three (3) year severance term on Cerner’s regular paydays. Also, in the event Cerner terminates your employment without Cause, (i) for three (3) years following your termination without Cause, Cerner shall arrange to provide you with health, vision and dental insurance benefits that are substantially similar to the benefits provided to you by Cerner immediately prior to the termination of your employment and (ii) all of the equity incentive awards granted to you under any Cerner equity incentive plans after the date hereof that would have vested based on the passage of time during the three (3) year period following the date of your termination had you not been terminated without Cause, shall immediately vest.
  a.   Notwithstanding the above, if you are “specified employee” (as defined in section 409A(a)(2)(B)(i) of the Code) (a “Specified Employee”) at the time you become eligible to be paid any amounts under this Paragraph 1(E)1 as a result of Cerner terminating your employment without Cause prior to a Change in Control, such payment(s) shall be made as follows:
 
      (I) That portion of the total amount to be paid to you during the six-month period immediately following your termination of employment which does not exceed two times the lesser of (A) or (B) below, shall be paid pro rata during such six month period on Cerner’s regular paydays.
 
      (A) The sum of your annualized compensation based upon the annual rate of pay for services provided to Cerner for Cerner’s taxable year preceding the taxable year in
     
 
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which you terminate employment with Cerner (adjusted for any increase during that prior year that was expected to continue indefinitely if you had not terminated employment); or
 
     
(B) The maximum amount that may be taken into account under a qualified plan pursuant to section 401(a)(17) of the Code for the year of your termination of employment.
 
      (II) That portion of the total amount to be paid to you during the six-month period immediately following your termination of employment which exceeds two times the lesser of (A) or (B) above shall be set aside in a separate bank account by Cerner, and such amounts shall not be accessible by Cerner for any reason other than performance under this Agreement, however such amounts would still be subject to Cerner creditors, until the first day after six months following your termination of employment, at which time all delayed amounts shall be paid in a lump sum.
 
      (III) All amounts to be paid after the six-month period immediately following your termination shall be paid pro-rata on Cerner’s regular paydays as set forth above in Paragraph 1(E)1.
  2.   Change in Control: If there is a Change in Control (as defined herein) of Cerner, and either (i) your employment with Cerner is terminated without Cause within twelve (12) months following the date the Change in Control becomes effective, or (ii) you resign your employment with Good Reason (as defined herein) within twelve (12) months after the date the Change in Control becomes effective, then Cerner will pay you, on or commencing on a date (as the case may be depending on whether such amount is to be paid in a lump sum or installments) within 30 days (or six months if you are a Specified Employee, see 1(E)2.d below) of your termination of employment, severance pay equal to the sum of (a) three (3) years’ base salary (based on your annual base salary at the time of the termination or resignation), plus (b) three (3) times the average annual cash bonus you received from Cerner during the three (3) years preceding such termination or resignation, less normal tax and payroll deductions.
  a.   If your employment is terminated without Cause, or you resign for Good Reason, within twelve (12) months following the date the Change in Control becomes effective and the Change in Control would constitute a change in control event specified under Section 409A(a)(2)(A)(v) of the Code, the entire amount of such severance pay shall be paid in one lump-sum payment.
     
 
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  b.   If your employment is terminated without Cause, or you resign for Good Reason, within twelve (12) months following the date the Change in Control becomes effective but the Change in Control does not constitute a change in control event specified under Section 409A(a)(2)(A)(v) of the Code, the severance payments will be payable pro rata during the three (3) year severance term on Cerner’s regular paydays.
 
  c.   In addition to any severance payment or severance payments, in the event your employment is terminated without Cause, or you resign for Good Reason, within twelve (12) months following the date the Change in Control becomes effective, Cerner will also arrange to provide you with health, vision and dental insurance benefits that are substantially similar to the benefits provided to you by Cerner immediately prior to the termination of your employment for a period of three (3) years following such termination or resignation of your employment.
 
  d.   Notwithstanding the above, if you are “specified employee” (as defined in section 409A(a)(2)(B)(i) of the Code) (a “Specified Employee”) at the time you become eligible to be paid any amounts under this Paragraph 1(E)2 as a result of a termination from employment occurring after a Change in Control , no payments will be made until the first day following six months after you terminate employment.
 
  e.   In addition, following a Change in Control, 50% of each equity incentive award granted to you under any Cerner equity incentive plans after June 1, 2005 and prior to the date the Change in Control becomes effective that has not yet vested will become vested on the date the Change in Control becomes effective. The remaining 50% of each such equity incentive award that has not yet vested will continue to vest according to its vesting schedule, unless your employment is terminated without Cause or you resign with Good Reason within twelve (12) months following the date the Change in Control becomes effective, in which case 100% of all equity incentive awards made after June 1, 2005 will become fully vested upon the effective date of such termination or resignation.
  3.   Further, notwithstanding anything to the contrary in this Agreement, if you breach any provision in Paragraph 2, 3, 4 or 6 of this Agreement following the termination of your employment with Cerner, Cerner’s obligation, if applicable, to deliver severance payments and benefits to you under this Paragraph 1(E) , and the vesting of any equity incentive awards described in this Paragraph 1(E) , will cease immediately, you will reimburse Cerner
     
 
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      the amount of severance payments delivered to you by Cerner prior to such breach by you, and you will forfeit to Cerner all equity incentive awards (or the proceeds of exercised awards) that vested based on or after such termination of your employment and prior to your breach.
 
  4.   Because the severance payments described in this Paragraph 1(E) may be covered by the Employee Retirement Income Security Act of 1974, as amended, the Claims Review Procedures attached hereto at Attachment II may apply.
 
  5.   In the event Cerner terminates your employment with Cause or as a result of your Disability, in the event of your death, or if you resign your employment (other than for Good Reason within twelve (12) months following a Change in Control), Cerner will owe you no further compensation or benefits, and (except as may be otherwise specifically provided in the applicable equity incentive plan or grant) your equity incentive awards will cease vesting on the date of such termination, death or resignation.
2.   AGREEMENT NOT TO DISCLOSE OR TO USE CONFIDENTIAL INFORMATION .
 
    You agree that you will forever maintain the confidentiality of Confidential Information. You will never disclose Confidential Information except to persons who have both the right and need to know it, and then only for the purpose and in the course of performing Cerner duties, or of permitting or assisting in the authorized use of Cerner solutions and services. In the event your employment with Cerner terminates (voluntarily or involuntarily), you will promptly deliver to Cerner all Confidential Information, including any Confidential Information on any laptop, computer or other communication equipment used by you during your employment with Cerner.
 
    The above statement includes an agreement to abide by Cerner’s internal security and privacy policies as well as all client security and privacy policies that are relevant to your job position. As Chief Executive Officer and Chairman of the Board of Directors of a healthcare information technology provider, you may have access to confidential patient information, which may be protected by federal, state and/or local laws. You agree to maintain the confidentiality of all such confidential patient information, including but not limited to health, medical, financial or personal information, in any form, and you agree not to use any such information in any manner other than as expressly permitted by all applicable rules and regulations.
 
    You are aware that Cerner does not expect nor does it want you to disclose trade secrets or other confidential information of any of your former employers, and you acknowledge that it is your responsibility not to disclose to Cerner any information in the nature of a trade secret which would violate your legal obligation to others.
     
 
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3.   NEW SOLUTIONS AND IDEAS .
 
    In consideration for your continuing employment with Cerner, the mid-year adjustments of your base salary provided in 2005, bonus and equity incentive plan participation, the potential severance payments and potential acceleration of the vesting of outstanding equity incentive awards described herein, and the potential benefits to you in the event of a Change in Control of Cerner (the sufficiency of such consideration you hereby acknowledge), you agree and hereby assign and transfer to Cerner, without further consideration, your entire right, title and interest in and to all such New Solutions and Ideas including any patents, copyrights, trade secrets and other proprietary rights in the same that you may have developed, authored or conceived, in whole or in part, prior to the Effective Date, or that you may develop, author or conceive, in whole or in part, on or after the Effective Date. You waive any and all moral rights and similar rights of copyright holders in other countries, including but not limited to rights of attribution and integrity, which you would otherwise have in any New Solutions and Ideas.
 
    In furtherance of this Agreement, you agree to execute promptly, at Cerner’s expense, a written assignment of title to Cerner, and all letters (and applications for letters) of patent and copyright, in all countries, for any New Solutions or Ideas required to be assigned by this Agreement. You also agree to assist Cerner or its nominee in every reasonable way (at Cerner’s request and expense, but at no charge to Cerner), both during and after your time of employment at Cerner, in vesting and defending title to the New Solutions and Ideas in and for Cerner, in any and all countries, including the attainment and preservation of patents, copyrights, trade secrets and other proprietary rights.
 
    This Paragraph does not apply to your New Solutions and Ideas which do not relate directly or indirectly to the business of Cerner, and which are developed entirely on your own time.
 
4.   NON-COMPETITION AND NON-SOLICITATION .
 
    In consideration for your continuing employment with Cerner, the mid-year adjustments of your base salary provided in 2005, bonus and equity incentive plan participation, the potential severance payments and potential acceleration of the vesting of outstanding equity incentive awards described herein, and the potential benefits to be provided to you in the event of a Change in Control of Cerner (the sufficiency of such consideration you hereby acknowledge), during the term of this Agreement and for a period of two (2) years after the voluntary or involuntary termination of your employment with Cerner (with or without Cause or Good Reason, as defined herein):
  A.   You will tell any prospective new employer, prior to accepting employment that this Agreement exists.
 
  B.   You will not, directly or indirectly for yourself or for any other person, entity or organization, provide services directly or indirectly of a type similar to those
     
 
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      related to or involved with your employment at Cerner to any Conflicting Organization (i) in the United States, or (ii) in any country in which Cerner has a business interest. However, you may accept employment with a large Conflicting Organization whose business is diversified, but only with respect to the portion of such Conflicting Organization’s business that does not involve and is not related to a Conflicting Solution.
 
  C.   Notwithstanding the foregoing, nothing contained in this Paragraph 4 shall prohibit you (after your termination of employment with Cerner) from taking a position with a general consulting organization whose only Conflicting Solution is the provision of consulting services to the healthcare industry, so long as you personally do not thereby provide or assist in providing consulting services to a Client with respect to any Cerner solution, product, process or service or any Conflicting Solution or to any Client upon which you called or whose account you supervised, directly or indirectly, on behalf of Cerner at any time during the last three (3) years of your employment by Cerner.
 
  D.   You agree not, directly or indirectly on behalf of yourself or on behalf of any other person, entity or organization, to employ, solicit for employment, or otherwise seek to employ or retain any Cerner Associate, or in any way assist or facilitate any such employment, solicitation or retention effort.
    You have carefully read and considered the provisions of this Paragraph 4 and agree that (i) the restrictions set forth herein are fair and reasonable and are reasonably required for the protection of Cerner’s interests, and (ii) your experience, capabilities and personal assets are such that the restrictive provisions of this Paragraph 4 would not deprive you from either earning a livelihood in the unrestricted business activities that remain open to you or from otherwise adequately supporting yourself and your family.
 
5.   PUBLICITY RELEASE .
 
    You consent to the use of your name, voice and picture (including but not limited to use in still photographs, videotape and film formats, and both during and after your period of employment at Cerner) for advertising, promotional, public relations, and other business purposes (including its and their use in newspapers, brochures, magazines, journals and films or videotapes) by Cerner.
 
6.   CERNER PROPERTY .
 
    You understand that you may be assigned various items of Cerner property and equipment to help you carry out your Cerner responsibilities, including but not limited to keys, credit cards, access cards, Confidential Information, laptops, computer related and other office equipment, wireless telephone, pagers and/or other computer or communication devices (“Cerner Property”). When such Cerner Property is issued, you will formally acknowledge receipt of it when requested to do so and will take all
     
 
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    reasonable precautions and actions necessary to safeguard and maintain it in normal operating condition. You further agree to accept financial responsibility for damage or wear to the Cerner Property you are issued beyond that associated with normal business use. You will notify Cerner immediately of any such damage or loss. If your employment with Cerner terminates (for any reason), you will immediately return to Cerner all Cerner Property which you have been issued or which otherwise belongs to Cerner. You understand that Cerner’s vacation policy states that upon termination, for whatever reason, vacation pay will be paid out, if paid out at all, in accordance with the policy only after Cerner has received all Cerner Property issued to you or then in your possession. You agree to reimburse Cerner for any attorneys’ fees and other collection charges incurred by Cerner in the event it becomes necessary to file a replevin or other legal action to recover the Cerner Property from you.
 
7.   SYSTEMS AND PHYSICAL SECURITY .
 
    You understand the importance of both systems and physical security to the daily operations of Cerner and to the protection of business information. You will, therefore, comply with and assist in the vigorous enforcement of all policies, practices, and procedures which may be developed to ensure the integrity of Cerner systems and facilities.
 
8.   REMEDIES .
 
    By signing this Agreement, you agree that the promises you have made in it are of a special nature, and that any breach, violation or evasion by you of the terms of this Agreement will result in immediate and irreparable harm to Cerner. It will also cause damage to Cerner in amounts difficult to ascertain. Accordingly, Cerner shall be entitled to the remedies of injunction and specific performance, as well as to all other legal and equitable remedies which may be available to Cerner. You and Cerner hereby waive the posting of any bond or surety required prior to the issuance of an injunction hereunder. However, in the event that a court refuses to honor the waiver of bond, you and Cerner agree to a bond of $500. In addition, unless otherwise prohibited by law, you and Cerner waive the award of consequential and/or punitive damages in any action related to this Agreement or your employment with Cerner.
 
9.   INDEMNIFICATION .
 
    You agree to indemnify, defend and hold Cerner harmless from and against any damages (including reasonable attorneys’ fees), liability, actions, suits or other claims arising out of your breach of this Agreement. Cerner agrees to indemnify, defend and hold you harmless from and against any damages (including reasonable attorneys’ fees), liability, actions, suits or other claims arising out of Cerner’s breach of this Agreement.
 
10.   MODIFIED 280G CARVE-BACK .
     
 
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    Notwithstanding anything contained in this Agreement to the contrary, if on an after-tax basis the aggregate payments and benefits paid pursuant to Section 1.E would be larger if the portion of such payments and benefits constituting “parachute payments” under Code Section 280G were reduced by the minimum amount necessary to avoid the imposition of the excise tax under Code Section 4999, then such payments and benefits shall be reduced by the minimum amount necessary to avoid such excise tax. 
 
11.   MODIFICATION .
 
    This Agreement may not be modified in any respect, except by a written agreement executed by you and Cerner. However, (a) Cerner may from time to time publish and adopt supplementary policies with respect to the subject matter of this Agreement, and you agree that such supplementary policies shall be binding upon you; and (b) Cerner may modify this Agreement from time to time without your consent if Cerner’s legal counsel deems doing so to be advisable to comply with Section 409A of the Internal Revenue Code of 1986, as amended, and you agree that any such modifications shall be binding upon you.
 
12.   NOTICES .
 
    Any notice required or permitted to be given pursuant to the terms of the Agreement shall be sufficient if given in writing and if personally delivered by receipted hand delivery to you or to Cerner, or if deposited in the United States mail, postage prepaid, first class or certified mail, to you at your residence address or to Cerner’s corporate headquarters address or to such other addresses as each party may give the other party notice in accordance with this Agreement.
 
13.   TERM OF THIS AGREEMENT .
 
    This Agreement begins as noted above and will continue in perpetuity, even though you are an at-will employee and your employment can be terminated by you or by Cerner as described elsewhere herein. Notwithstanding the termination of the employment relationship underlying this Agreement, the rights and obligations set forth in this Agreement with respect to both parties shall survive such termination as necessary to permit the intent of the provisions to be carried out.
 
14.   GOVERNING LAW; JURISDICTION AND LEGAL FEES .
 
    This Agreement will be governed by, construed, interpreted, and its validity determined, under the laws of the State of Missouri, without regard to its conflict of law principles. You and Cerner each hereby irrevocably and unconditionally submit to the nonexclusive jurisdiction of any Missouri state court or federal court of the United States of America sitting in Kansas City, Missouri and any appellate court thereof, in any action or proceeding arising out of or relating to this Agreement. You and Cerner agree and acknowledge that venue in any such court is proper. In any such action or proceeding,
     
 
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    the non-prevailing party shall pay the reasonable attorneys’ fees and costs of the prevailing party.
 
15.   SEVERABILITY .
 
    If any provision of this Agreement is held to be unenforceable, then this Agreement will be deemed amended to the extent necessary to eliminate the otherwise unenforceable provision, and the rest of this Agreement will remain valid and enforceable. In the event that any provisions of Paragraphs 2, 3, or 4 of this Agreement relating to time period and/or areas of restrictions shall be declared by a court of competent jurisdiction to exceed the maximum time period or areas such court deems reasonable and enforceable, said time period and/or areas of restriction shall be deemed to become and thereafter be the maximum time period and/or areas that such court deems reasonable and enforceable.
 
16.   ENTIRE AGREEMENT AND PRIOR AGREEMENTS .
 
    You hereby acknowledge receipt of a signed counterpart of this Agreement and acknowledge that it is your entire agreement with Cerner concerning the subject matter. This Agreement cancels, terminates and supersedes any of your previous oral or written understandings or agreements with Cerner or with any director, officer or representative of Cerner with respect to your employment with Cerner.
 
17.   SUCCESSORS .
 
    This Agreement shall be binding upon Cerner’s successors and assigns. This Agreement shall also be binding upon your heirs, spouse, assigns and legal representatives. You, however, agree that you may not delegate the performance of any of your obligations or duties hereunder, or assign any rights hereunder, without the prior written consent of Cerner. Any such reported delegation or assignment in the absence of any such written consent shall be void. Cerner may assign this Agreement to the acquiring entity in a Change of Control transaction without your consent.
 
    This amended and restated Employment Agreement is executed as of this 1 st day of January, 2008.
     
 
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  /s/ Neal L. Patterson    
  Neal L. Patterson   
     
 
  Cerner Corporation
 
 
  By:   /s/ Julia M. Wilson    
    Julia M. Wilson   
    Vice President and Chief People Officer   
 
     
 
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APPENDIX A
DEFINITION OF TERMS
ASSOCIATE means a Cerner employee.
CAUSE means your material breach of this Agreement, fraud against Cerner, misappropriation of Cerner’s assets, embezzlement from Cerner, theft from Cerner, material neglect of your duties and responsibilities hereunder, your arrest and indictment for a crime involving drug abuse, violence, dishonesty or theft, or your taking any action or omitting to take any action that results in a violation of the Sarbanes-Oxley Act of 2002, or any related statutes, laws or regulations.
CERNER CORPORATION and CERNER mean Cerner Corporation, a Delaware corporation. The terms also cover all of Cerner Corporation’s parent, subsidiary and affiliate corporations and business enterprises, both presently existing and subsequently created or acquired. Such affiliate corporation may be directly or indirectly controlled by Cerner or related to Cerner by equity ownership.
CHANGE IN CONTROL means:
     (i) The acquisition by any individual, entity or group (a “Person”) within the meaning of Section 12(d)(3) or 13(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 35% or more of either: (A) the then outstanding shares of common stock of Cerner (the “Outstanding Cerner Common Stock”), or (B) the combined voting power of the then outstanding voting securities of Cerner entitled to vote generally in the election of directors (the “Outstanding Cerner Voting Securities”); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change in Control: (X) any acquisition directly from Cerner, (Y) any acquisition by Cerner, or (Z) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by Cerner or any corporation controlled by Cerner; or
     (ii) Individuals who, as of the date hereof, constitute the Cerner Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by Cerner’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or
     
 
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     (iii) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of Cerner ( a “Business Combination”), in each case, unless, following such Business Combination, (A), all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Cerner Common Stock and Outstanding Cerner Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of Cerner resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns Cerner or all or substantially all of Cerner’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Cerner Common Stock and Outstanding Cerner Voting Securities, as the case may be, (B) no Person (excluding any employee benefit plan (or related trust) of Cerner or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 35% or more of, respectively, the then outstanding shares of common stock of Cerner resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the Board of Directors of Cerner resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the board, providing for such Business Combination; or
     (iv) Approval by the shareholders of Cerner of a complete liquidation or dissolution of Cerner.
CLIENT means any actual or potential customer or licensee of Cerner.
CODE means the Internal Revenue Code of 1986 as from time to time amended.
CONFIDENTIAL INFORMATION means Cerner, Client and Supplier trade secrets, and Cerner, Cerner Associate, Client and Supplier information which is not generally known, and is proprietary or confidential to Cerner, Clients or Suppliers. It includes, but is not limited to, research, design, development, installation, purchasing, accounting, marketing, selling, servicing, finance, business systems, business practices, documentation, methodology, procedures, manuals (both internal and user), program listings, computer programs and software in source code, object or other form, working papers, Client and Supplier lists, marketing and sales materials not otherwise available to the general public, sales activity information, compensation plans, your personal compensation or performance evaluations (specifically, no Associate may disclose Cerner compensation structures or bonus programs with Conflicting Organizations, in addition, Associates in supervisory or managerial roles may not disclose their personal compensation or their performance evaluations with anyone other than their manager or with Cerner Human Resources), patient information and other client-related data, and all other non-public information of Cerner and its Associates, Clients and Suppliers. CONFIDENTIAL INFORMATION shall not include any information that has been voluntarily disclosed to the
     
 
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public by Cerner (except where such public disclosure has been made by you without authorization) or that has been independently developed and disclosed without confidentiality protections by others, or that otherwise enters the public domain through lawful means.
CONFLICTING ORGANIZATION means any person or organization engaged (or planning to become engaged) in research, development, installation, marketing, selling or servicing with respect to a Conflicting Solution.
CONFLICTING SOLUTION means any solution, product, process or service which is the same as, similar to, or competes with any Cerner solution, product, process or service with which you worked or supervised, directly or indirectly, during the last three (3) years of your employment by Cerner, or about which you have acquired Confidential Information or which you developed, authored or conceived, in whole or in part, at any time during your past or future employment by Cerner.
DISABILITY means a physical or mental illness, as determined by an accredited physician, which causes you to be unable to perform your duties hereunder for ninety (90) consecutive days, or for an aggregate of ninety (90) days during any period of twelve (12) consecutive months.
GOOD REASON means (1) the material reduction of your authority, duties and job responsibilities (except for such subordination in duties and job responsibilities as may normally be required due to Cerner’s change from an independent business entity to a subsidiary or division of another corporate entity), including, without limitation, a change in your reporting structure such that you no longer report to the Board of Directors or if you are no longer serving as Chief Executive Officer of the business enterprise that constituted Cerner prior to the Change in Control, (2) a reduction in your annual salary and cash bonus opportunity to an amount below 100% of the salary and cash bonus opportunity in effect prior to the Change in Control, or (3) the relocation of the principal location in which you are required to perform your duties hereunder to more than twenty-five (25) miles from the Kansas City metropolitan area.
NEW SOLUTIONS AND IDEAS means discoveries, computer programs, improvements, works of authorship, designs, methods, ideas, solutions and products (whether or not they are described in writing, reduced to practice, patentable or copyrightable) which results from any work performed by you for Cerner, or involve the use of any Cerner equipment, supplies, facilities or Confidential Information, or relate directly to the business of Cerner, or relate to Cerner’s actual or demonstrably anticipated research or development.
SUPPLIER means any actual or potential licensor, vendor, supplier, contractor, agent, consultant or other purveyor of products or services to Cerner.
     
 
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APPENDIX B
SUMMARY OF ATTACHMENTS
The following documents are incorporated as attachments to this Employment Agreement.
     
Attachment
  Description
I
  Termination Statement
II
  Claims Review Procedures
     
 
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ATTACHMENT I
TERMINATION STATEMENT
I represent that I have complied with and will continue to comply with all of the provisions of the Cerner Executive Employment Agreement entered into between Cerner Corporation and me on the 1st day of January, 2008 in that:
1.   I have not improperly disclosed or otherwise misused any Confidential Information covered by such Agreement. I shall continue to comply with all the continuing terms of the Agreement, including but not limited to the non-disclosure and (for the required term) non-compete and non-solicit provisions, and also including but not limited to the reporting of any New Solutions and Ideas conceived or made by me as covered by the Agreement.
 
2.   I do not have in my possession, nor have I taken with me or failed to return, any records, plans, information, drawings, designs, documents, computer programs or software, manuals, formulae, statistics, correspondence, client or supplier lists, specifications, blueprints, reproductions, sketches, notes, reports, proposals, or other documents or materials, or copies of them, or any equipment (including any laptops, computer equipment, office equipment, wireless telephone, pagers and/or other computer or communication devices provided to me by Cerner), credit cards or other property belonging to Cerner or its Clients or suppliers. I have returned to Cerner (or will return within 10 calendar days or earlier if requested by Cerner) all Confidential Information, as specified by such Agreement, and all correspondence and other writings. I have returned (or will return within 10 calendar days or earlier if requested by Cerner) all keys and other means of access to Cerner’s premises. Failure to return such Cerner Property as defined in Paragraph 6 of my Employment Agreement will result in any vacation pay and/or severance payments or benefits, if applicable, that is due to me under the terms of Cerner’s vacation policy or my Employment Agreement to be withheld until the return to Cerner of all such Cerner Property. In addition, if I fail to return such Cerner Property, then any equity incentive awards I am entitled to under my Employment Agreement will cease to vest, I will reimburse Cerner the amount of any severance payments delivered to me by Cerner, and I will forfeit to Cerner all equity incentive awards (or the proceeds of exercised awards) that are then vested.
 
3.   I understand that, with regard to all provisions of my Employment Agreement relating to non-disclosure, non-solicitation, confidentiality of information and New Solutions and Ideas, such provisions shall not cease as of this termination but shall continue in full force and effect in perpetuity or as otherwise indicated within such Employment Agreement. In compliance with my Employment Agreement, I shall continue to preserve as confidential all Confidential Information as defined in such Employment Agreement.
 
4.   I understand that upon my breach of Paragraphs 2, 3, 4 or 6 of my Employment Agreement, Cerner’s obligation, if any, to deliver severance payments and benefits under Paragraph 1(E) of my Employment Agreement, and the vesting of any equity incentive
     
 
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    awards described in Paragraph 1(E) of my Employment Agreement will cease immediately, I will reimburse Cerner the amount of severance payments delivered to me by Cerner prior to such breach by me, and I will forfeit to Cerner all equity incentive awards (or the proceeds of exercised awards) that vested after termination or resignation of my employment with Cerner and prior to my breach.
         
     
 
  Executive Signature   Printed Name
 
       
     
 
  Date    
 
       
     
 
  Termination Date    
 
       
 
  Cerner Corporation    
 
       
     
 
  By    
 
       
     
 
  Title    
     
 
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ATTACHMENT II
CLAIMS REVIEW PROCEDURES
     In the event that any benefits payable under the terms of this Executive Employment Agreement shall become subject to the Employer Retirement Income Securities Act (“ERISA”), the following claims procedure shall apply to all such benefits (but shall not apply to any benefits that are not subject to ERISA):
     I.  Initial Claims .
     If benefits under this Agreement become due, Cerner will notify you as to the amount of benefits you are entitled to, the duration of such benefit, the time the benefit is to commence and other pertinent information concerning your benefit. If you have been denied a benefit under the Agreement, or if you feel that the benefit which has been given to you is not accurate, you may file a claim with Cerner. If a claim for benefit is denied by Cerner, Cerner shall provide you with written or electronic notification of any adverse benefit determination within ninety (90) days after receipt of the claim unless special circumstances require an extension of time for processing the claim. If such an extension of time for processing is required, written or electronic notice indicating the special circumstances and the date by which a final decision is expected to be rendered shall be furnished to you. In no event shall the period of extension exceed one hundred eighty (180) days after receipt of the claim. The notice of denial of the claim shall set forth:
  (a)   The specific reason or reasons for the adverse determination;
 
  (b)   Reference to the specific Agreement provisions on which the determination is based;
 
  (c)   A description of any additional material or information necessary for you to perfect the claim, and an explanation of why such material or information is necessary; and
 
  (d)   A description of the applicable review procedures and the time limits applicable to such procedures, including a statement of your right to bring a civil action under ERISA section 502(a) following an adverse benefit determination on review.
     You (or your duly authorized representative) may review pertinent documents and submit issues and comments in writing to Cerner. If you fail to appeal such action to Cerner in writing within the prescribed period of time described in the next section, Cerner’s adverse determination shall be final, binding and conclusive.
     
 
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     II.  Appeal .
     In the event of an adverse benefit determination, you may appeal the adverse determination by giving written notice to Cerner within 60 days after receipt of the notice of adverse benefit determination. Cerner may hold a hearing or otherwise ascertain such facts as it deems necessary and shall render a decision which shall be binding upon both parties. The appeal procedure shall:
  (a)   Provide you at least 60 days following receipt of a notification of an adverse benefit determination within which to appeal the determination;
 
  (b)   Provide you the opportunity to submit written comments, documents, records, and other information relating to the claim for benefits;
 
  (c)   Provide that you shall be provided, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to your claim for benefits; and
 
  (d)   Provide for a review that takes into account all comments, documents, records, and other information submitted by you relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination.
     The decision of Cerner shall be made within sixty (60) days after the receipt by Cerner of the notice of appeal, unless special circumstances require an extension of time for processing, in which case a decision of Cerner shall be rendered as soon as possible but not later than one hundred twenty (120) days after receipt of the request for review. If such an extension of time is required, written or electronic notice of the extension shall be furnished to you prior to the commencement of the extension. The decision of Cerner shall be provided in written or electronic form to you and shall include the following:
  (a)   The specific reason or reasons for the adverse determination;
 
  (b)   Reference to the specific Agreement provisions on which the benefit determination is based;
 
  (c)   A statement that you are entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to your claim for benefits. Whether a document, record, or other information is relevant to a claim for benefits shall be determined by reference to DOL regulation section 2560.503-1(m)(8); and
 
  (d)   A statement describing any voluntary appeal procedures (if any) that may be available and your right to obtain the information about such procedures, and a statement of your right to bring an action under ERISA section 502(a).
     
 
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Exhibit 10(g)
CERNER CORPORATION
2004 LONG — TERM INCENTIVE PLAN G
     The purpose of the Cerner Corporation Long-Term Incentive Plan G (the “Plan”) is to encourage designated key associates and non-employee directors of Cerner Corporation (the “Company”) and its subsidiaries to contribute materially to the growth of the Company, thereby benefiting the Company’s shareholders by aligning the economic interests of the participants with those of the shareholders.
     1. Administration
     (a) Committee. The Plan shall be administered and interpreted by the Compensation Committee of the Board of Directors or such other committee as the Board of Directors of the Company (the “Board”) may designate to administer this Plan (the “Committee”). The Committee shall consist of three or more members of the Board, all of whom shall be: (i) “outside directors” as defined under section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”) and related Treasury regulations, (ii) “non-employee directors” as defined under Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and (iii) in the judgment of the Board, qualified to administer the Plan and act as a Member of the Committee pursuant to all applicable rules, regulations and listing standards of the Nasdaq Stock Market (or such other stock exchange on which the Stock is traded), including any applicable standards for independence. Any member of the Committee who does not satisfy the qualifications set out in the preceding sentence may recuse himself or herself from any vote or other action taken by the Committee. The Board may, at any time and in its complete discretion, remove any member of the Committee and may fill any vacancy in the Committee.
     (b) Committee Authority. The Committee shall have the sole authority to (i) determine the individuals to whom grants shall be made under the Plan; (ii) determine the type, size and terms of the grants to be made to each such individual; (iii) determine the time when the grants will be made and the duration of any applicable exercise or restriction period, including the criteria for exercisability and the acceleration of exercisability; (iv) amend the terms (other than terms related to initial pricing of the shares) of any previously issued Grant and (v) deal with any other matters arising under the Plan.
     (c) Delegation by the Committee. The Committee, in its sole discretion and on such terms and conditions as it may provide, may delegate all or any part of its authority and powers under this Plan to one or more Directors or officers of the Company; provided, however, that the Committee may not delegate its authority and powers (i) with respect to Section 16 Persons, or (ii) in any way which would jeopardize the Plan’s qualification under Section 162(m) of the Code or Rule 16b-3.
     (d) Committee Determinations. The Committee shall have full power and authority to administer and interpret the Plan, to make factual determinations and to adopt, amend or rescind such rules, regulations, agreements and instruments for implementing the Plan and for the conduct of its business as it deems necessary or advisable, in its sole discretion. The Committee’s interpretations of the Plan and all determinations made by the Committee pursuant to the powers vested in it hereunder shall be conclusive and binding on all persons having any interest in the Plan or in any awards granted hereunder. All powers of the Committee shall be executed in its sole discretion, in the best interest of the Company and in keeping with the objectives of the Plan and need not be uniform as to similarly situated individuals.
     2. Grants
     Awards under the Plan may consist of grants of incentive stock options as described in Section 5 (“Incentive Stock Options”), nonqualified stock options as described in Section 5 (“Nonqualified Stock Options”) (Incentive Stock Options and Nonqualified Stock Options are collectively referred to as “Options”), restricted stock as described in Section 6 (“Restricted Stock”), restricted stock units as described in Section 6 (“Restricted Stock Units”), stock appreciation rights as described in Section 7 (“SARs”), performance units as described in Section 8 (“Performance Units”), performance shares as

 


 

described in Section 8 (“Performance Shares”), and phantom stock as described in Section 9 (“Phantom Stock”) (hereinafter collectively referred to as “Grants”). All Grants shall be subject to the terms and conditions set forth herein and to such other terms and conditions consistent with this Plan as the Committee deems appropriate and as are specified in writing by the Committee to the individual in a grant instrument (the “Grant Instrument”) or an amendment to the Grant Instrument. The Committee shall approve the form and provisions of each Grant Instrument. Grants under a particular Section of the Plan need not be uniform as among the Grantees. Grants, other than Options or SARs, shall vest as follows: (a) time based Grants shall have a minimum three (3) year vesting schedule; and, (b) performance based Grants shall have a minimum one (1) year vesting schedule.
     3. Shares Subject to the Plan
     (a) Shares Authorized. Subject to the adjustment specified in Section 3(c) below, the aggregate number of shares of common stock of the Company (“Company Stock”) that may be issued or transferred under the Plan is two million (2,000,000) shares. The shares may be authorized but unissued shares of Company Stock or reacquired shares of Company Stock, including treasury shares and shares purchased by the Company on the open market for purposes of the Plan. If and to the extent that shares of Company Stock subject to an outstanding Grant are not issued by reason of the forfeiture, termination, surrender, cancellation or expiration while unexercised of such Grant, or by reason of tendering or withholding of shares (by either actual delivery or by attestation) to pay all or a portion of the Exercise Price or to satisfy all or a portion of any tax withholding obligations relating to the Grant or the exercise of a Grant, or to satisfy recovery of all or a portion of the fringe benefit tax or similar taxes (the “Fringe Benefit Tax”), payable by the Company and/or its subsidiaries relating to the Grant, vesting and/or exercise of a Grant settled in such a manner such that some or all of the shares covered by the Grant are not issued to a participant, or being exchanged for a Grant under this Plan that does not involve Company Stock, then such shares shall immediately again be available for issuance under this Plan and credited back to the 2,000,000 share limitation on Company Stock, as applicable. The Committee may from time to time adopt and observe such procedures concerning the counting of Shares against the Plan maximum as it may deem appropriate.
     (b) Individual Limit. During any calendar year, no individual may be granted Options or other Grants under the Plan that, in the aggregate, may be settled by delivery of more than five hundred thousand (500,000) shares of Company Stock, subject to adjustment as provided in Section 3(c). In addition, with respect to Grants the value of which is based on the Fair Market Value of Company Stock and that may be settled in cash (in whole or in part), no individual may be paid during any calendar year cash amounts relating to such Grants that exceed the greater of the Fair Market Value (as defined in Section 5(b)(iii)) of the number of shares of Company Stock set forth in the preceding sentence either at the date of grant or at the date of settlement. This provision sets forth two separate limitations, so that Grants that may be settled solely by delivery of Company Stock will not operate to reduce the amount or value of cash-only Grants, and vice versa; nevertheless, Grants that may be settled in Company Stock or cash must not exceed either limitation.
     With respect to Grants, the value of which is not based on the Fair Market Value of Company Stock, no individual may receive Grants pursuant to this Plan during any calendar year involving a cash value plus shares of Company Stock with a Fair Market Value at date of grant that, in the aggregate, exceeds five million dollars ($5,000,000).
     Grants to Non-Employee Directors will be set by the Committee based on either a formula or a maximum grant amount taking into consideration the recommendations of at least one independent third party consultant to the Company’s Board of Directors.
     (c) Adjustments. If there is any change in the number or kind of shares of Company Stock outstanding (i) by reason of a stock dividend, spin-off, recapitalization, stock split, or combination or exchange of shares, (ii) by reason of a merger, reorganization or consolidation in which the Company is the surviving corporation, (iii) by reason of a reclassification or change in par value, or (iv) by reason of any other extraordinary or unusual event affecting the outstanding Company Stock as a class without the

 


 

Company’s receipt of consideration, or if the value of outstanding shares of Company Stock is substantially reduced as a result of a spin-off or the Company’s payment of an extraordinary dividend or distribution, the maximum number of shares of Company Stock available for Grants, the maximum number of shares of Company Stock that any individual participating in the Plan may be granted in any year, the number of shares covered by outstanding Grants, the kind of shares issued under the Plan, and the price per share or the applicable market value of such Grants may be appropriately adjusted by the Committee to reflect any increase or decrease in the number of, or change in the kind or value of, issued shares of Company Stock to preclude, to the extent practicable, the enlargement or dilution of rights and benefits under such Grants; provided, however, that any fractional shares resulting from such adjustment shall be eliminated. Any adjustments determined by the Committee shall be final, binding and conclusive. If and to the extent that any such change in the number or kind of shares of Company Stock outstanding is effected solely by application of a mathematical formula (e.g., a 2-for-1 stock split), the adjustment described in this Section 3(c) shall be made and shall occur automatically by application of such formula, without further action by the Committee.
     4. Eligibility for Participation
     (a) Eligible Persons. All key associates of the Company and its subsidiaries (“Associates”), including Associates who are officers or members of the Board, shall be eligible to participate in the Plan. Members of the Board who are not Associates (“Non-Employee Directors”) shall be eligible to participate in the Plan.
     (b) Selection of Grantees. The Committee shall select the Associates and Non-Employee Directors to receive Grants and shall determine the number of shares of Company Stock subject to a particular Grant, and/or shall establish such other terms and conditions applicable to such Grant, in such manner as the Committee determines. Associates and Non-Employee Directors who receive Grants under this Plan shall hereinafter be referred to as “Grantees.”
     5. Granting of Options
     (a) Number of Shares. The Committee shall determine the number of shares of Company Stock that will be subject to each Grant of Options to a Grantee.
     (b) Type of Option and Price.
     (i) The Committee may grant Incentive Stock Options that are intended to qualify as “incentive stock options” within the meaning of section 422 of the Code or Nonqualified Stock Options that are not intended to qualify or any combination of Incentive Stock Options and Nonqualified Stock Options, all in accordance with the terms and conditions set forth herein.
     (ii) The purchase price (the “Exercise Price”) of Company Stock subject to an Option shall be determined by the Committee and shall be equal to or greater than the Fair Market Value (as defined below) of a share of Company Stock on the date the Option is granted; provided, however, that an Incentive Stock Option may not be granted to an Associate who, at the time of grant, owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any parent or subsidiary of the Company, unless the Exercise Price per share is not less than 110% of the Fair Market Value of Company Stock on the date of grant.
     (iii) The Fair Market Value per share as of any date shall be the closing reported sale prices of the Stock on The Nasdaq Stock Market (or such other national securities exchange in the event the Company stock is not then traded on The Nasdaq Stock Market) as of that date, or if there is no such reported sales price on the relevant date, then on the last previous day on which a sale was reported.
     (c) Option Term. The Committee shall determine the term of each Option. The term of any Option shall not exceed twelve years from the date of grant. However, an Incentive Stock Option that is granted to an Associate who, at the time of grant, owns stock possessing more than 10% of the total

 


 

combined voting power of all classes of stock of the Company, or any parent or subsidiary of the Company, may not have a term that exceeds five years from the date of grant.
     (d) Exercisability of Options. Options shall become exercisable in accordance with such terms and conditions, consistent with the Plan, as may be determined by the Committee and specified in the Grant Instrument or an amendment to the Grant Instrument. The Committee may accelerate the exercisability of any or all outstanding Options at any time for any reason.
     (e) Termination of Employment, Disability or Death. Except as provided below, an Option may only be exercised while the Grantee who is an Associate is employed by the Company. In the event that such a Grantee ceases to be employed for any reason other than a “disability”, death, retirement, or a termination for the convenience of the Company, any Option held by the Grantee shall terminate at the close of business ninety days after the Grantee’s last day of employment. In such case, and in all cases described below under (i), (ii), (iii) and (iv) below, the Option may be exercised only as to the shares of Company Stock as to which the Option had become exercisable on or before the date the Grantee ceases to be an Associate.
     (i) In the event that the Grantee ceases to be employed in a manner determined by the Committee or Board, in its sole discretion, to constitute retirement (which determination shall be communicated to the Grantee within sixty days of such termination), the Option may be exercised by the Grantee, or in the case of the Grantee’s death, by the Grantee’s beneficiaries entitled to do so, (A) if the Option is an Incentive Stock Option, within three months following the Grantee’s retirement, or (B) if the Option is a Nonqualified Stock Option, the Committee, in its discretion, may provide that the Grantee’s Options shall be exercisable for up to three years after the date of retirement.
     (ii) In the event the Grantee dies while he or she is an Associate, within the period referred to in clause (iv) below, or within the period described in sub-clause (A) and (B) of clause (i), above, (A) if the Option is an Incentive Stock Option, the Option may be exercisable within one year following the Grantee’s date of death, or (B) if the Option is a Nonqualified Stock Option, the Committee, in its discretion, may provide that the Grantee’s Options shall be exercisable for up to three years after the date of death.
     (iii) In the event the Grantee ceases to be employed by the Company because the Grantee becomes “disabled”, or if the Grantee becomes disabled within the period referred to in clause (iv) below, (A) if the Option is an Incentive Stock Option, the Option may be exercisable within twelve months following the date Grantee’s employment has ceased or the date the Grantee became disabled, whichever is later, or (B) if the Option is a Nonqualified Stock Option, the Committee, in its discretion, may provide that the Grantee’s Options shall be exercisable for up to three years after the date Grantee’s employment has ceased or the date the Grantee became disabled, whichever is later.
     (iv) In the event the Grantee ceases to be employed by the Company because the Grantee is terminated for the convenience of the Company (as determined by the Committee or the Board in its sole discretion), any Incentive Stock Option and/or Nonqualified Stock Option exercisable on the date of termination of employment may be exercised by the Grantee within a period determined by the Committee, in its discretion, commencing on the date of termination of employment and continuing for up to three years after the date Grantee’s employment has ceased.
     (v) For purposes of this Section 5(e) and Sections 6, 7 and 8:
     (A) The term “Company” shall mean the Company and its subsidiary corporations.
     (B) “Disability” or “disabled” shall mean a Grantee’s becoming disabled within the meaning of section 22(e)(3) of the Code.
     (f) Exercise of Options. A Grantee may exercise an Option that has become exercisable, in whole or in part, by delivering a notice of exercise to the Company with payment of the Exercise Price. The Grantee shall pay the Exercise Price for an Option as specified by the Committee (x) in cash, (y) with the

 


 

approval of the Committee, by delivering shares of Company Stock owned by the Grantee (including Company Stock acquired in connection with the exercise of an Option, subject to such restrictions as the Committee deems appropriate) and having an aggregate Fair Market Value for such shares on the date of exercise equal to the aggregate Exercise Price or (z) by such other method as the Committee may approve, including attestation (on a form prescribed by the Committee) to ownership of shares of Company Stock having a Fair Market Value on the date of exercise equal to the Exercise Price, or payment through a broker in accordance with procedures permitted by Regulation T of the Federal Reserve Board. In addition, the Committee may authorize loans by the Company to Grantees in connection with the exercise of an Option, upon such terms and conditions that the Committee, in its sole discretion deems appropriate. However, the Committee may not authorize any loans under this Plan to any of the Company’s Section 16 Officers as defined by the Securities Exchange Commission and determined each year by the Company’s Board of Directors. Shares of Company Stock used to exercise an Option shall have been held by the Grantee for the requisite period of time to avoid adverse accounting consequences to the Company with respect to the Option. The Grantee shall pay the Exercise Price and the amount of any withholding tax due and/or the amount of any Fringe Benefit Tax due (pursuant to Section 10) at the time of exercise. Shares of the Company Stock shall not be issued upon exercise of an Option until the Exercise Price is fully paid and any required withholding is made and/or the amount of any Fringe Benefit Tax is paid by or recovered from the Grantee .
     (g) Limits on Incentive Stock Options. Each Incentive Stock Option shall provide that, if the aggregate Fair Market Value of the stock on the date of grant with respect to which Incentive Stock Options are exercisable for the first time by a Grantee during any calendar year, under the Plan or any other stock option plan of the Company or a parent or subsidiary, exceeds one hundred thousand U.S. dollars ($100,000), then the Option, as to the excess, shall be treated as a Nonqualified Stock Option.
     6. Restricted Stock and Restricted Stock Units Grants
     The Committee may issue or transfer shares of Company Stock to a Grantee under a Grant of Restricted Stock or Grant Restricted Stock Units, upon such terms as the Committee deems appropriate. A Restricted Stock Unit shall mean any unit granted under this Section 6 evidencing the right to receive a share of Company Stock (or a cash payment equal to the Fair Market Value of a share of Company Stock) at some future date. The following provisions are applicable to Restricted Stock and Restricted Stock Units:
     (a) General Requirements. Shares of Company Stock issued or transferred pursuant to Restricted Stock and Restricted Stock Unit Grants may be issued or transferred for consideration or for no consideration, as determined by the Committee. The Committee may establish conditions under which restrictions on shares of Restricted Stock and Restricted Stock Units shall lapse over a period of time or according to such other criteria as the Committee deems appropriate including, without limitation, restrictions based upon the achievement of specific performance goals. The period of time during which the Restricted Stock and Restricted Stock Units will remain subject to restrictions will be designated in the Grant Instrument as the “Restriction Period.” Each Restricted Stock or Restricted Stock Unit shall provide for vesting not more rapidly than ratably over a three year period unless the Restricted Stock or Restricted Stock Unit is also subject to performance restrictions, in which case the minimum Restriction Period shall be one year.
     (b) Number of Shares. The Committee shall determine the number of shares of Company Stock to be issued or transferred pursuant to a Restricted Stock Grant or issuable or transferable pursuant to a Restricted Stock Unit Grant and the restrictions applicable to such shares or Restricted Stock Units.
     (c) Requirement of Employment. If the Grantee ceases to be employed by the Company during the Restriction Period, or if other specified conditions are not met, the Restricted Stock or Restricted Stock Unit Grant shall terminate as to all shares covered by the Grant as to which the restrictions have not lapsed at the close of business on the Grantee’s last day of employment, and those shares of Company Stock must be immediately returned to the Company. The Committee may, however, accelerate the termination of the restrictions for all or a portion of such Restricted Stock or Restricted Stock Unit as it deems appropriate.

 


 

     (d) Restrictions on Transfer and Legend on Stock Certificate. During the Restriction Period, a Grantee may not sell, assign, transfer, pledge or otherwise dispose of the shares of Restricted Stock or the Restricted Stock Units except to a Successor Grantee under Section 11(a). Each certificate for a share of Restricted Stock or Restricted Stock Units shall contain a legend giving appropriate notice of the restrictions in the Grant. The Grantee shall be entitled to have the legend removed from the stock certificate covering the shares subject to restrictions when all restrictions on such shares have lapsed. The Committee may determine that the Company will not issue certificates for shares of Restricted Stock until all restrictions on such shares have lapsed, or that the Company will retain possession of certificates for shares of Restricted Stock until all restrictions on such shares have lapsed.
     (e) Right to Vote and to Receive Dividends. Unless the Committee determines otherwise, during the Restriction Period the Grantee shall not have the right to vote shares of Restricted Stock. During the Restriction Period the Grantee shall have the right to receive any dividends or other distributions paid on such shares, subject to any restrictions deemed appropriate by the Committee. Such dividends, if any, may be paid currently, accrued as contingent cash obligations, or converted into additional shares of Restricted Stock, upon such terms as the Committee may establish, including the achievement of specific performance goals.
     (f) Lapse of Restrictions. All restrictions imposed on Restricted Stock and Restricted Stock Units shall lapse upon the expiration of the applicable Restriction Period and the satisfaction of all conditions imposed by the Committee. The Committee may terminate the restrictions, in its discretion, as to any or all Restricted Stock Grants, without regard to any Restriction Period, as specifically set forth in Section 19.
     (g) Recovery of Fringe Benefit Tax – The Grantee of Restricted Stock or Restricted Stock Units shall reimburse the Company for any Fringe Benefit Tax payable by the Company with respect to such Restricted Stock or Restricted Stock Units. The Committee shall have the right to retain possession of the certificates for shares of Restricted Stock until the Fringe Benefit Tax is paid by or recovered from the Grantee in accordance with the provisions of Section 10.
     7. Stock Appreciation Rights
     (a) General Requirements. The Committee may grant SARs to a Grantee separately or in tandem with any Option (for all or a portion of the applicable Option). Tandem SARs may be granted either at the time the Option is granted or at any time thereafter while the Option remains outstanding; provided, however, that, in the case of an Incentive Stock Option, SARs may be granted only at the time of grant of the Incentive Stock Option. The Committee shall establish the base amount of the SAR at the time the SAR is granted. Unless the Committee determines otherwise, the base amount of each SAR shall be equal to the per share Exercise Price of the related Option or, if there is no related Option, a predetermined percentage of the Fair Market Value of a share of Company Stock as of the date of grant of the SAR, which percentage shall equal 50% or greater of the Fair Market Value .
     (b) Tandem SARs. In the case of tandem SARs, the number of SARs granted to a Grantee that shall be exercisable during a specified period shall not exceed the number of shares of Company Stock that the Grantee may purchase upon the exercise of the related Option during such period. Upon the exercise of an Option, the SARs relating to the Company Stock covered by such Option shall terminate. Upon the exercise of SARs, the related Option shall terminate to the extent of an equal number of shares of Company Stock.
     (c) Exercisability. A SAR shall be exercisable during the period specified by the Committee in the Grant Instrument and shall be subject to such vesting and other restrictions as may be specified in the Grant Instrument; provided, however, that the term of the SAR shall not exceed ten years. The Committee may accelerate the exercisability of any or all outstanding SARs at any time for any reason. SARs may only be exercised while the Grantee is employed by the Company or during the applicable period after termination of employment as described in Section 5(e) for Options. For purposes of the preceding sentence, the rules applicable to a tandem SAR shall be the rules applicable under Section 5(e) to the Option to which it relates, and the rules applicable to any other SAR shall be the rules applicable under Section 5(e) for a

 


 

Nonqualified Stock Option. A tandem SAR shall be exercisable only during the period when the Option to which it is related is also exercisable.
     (d) Value of SARs. When a Grantee exercises SARs, the Grantee shall receive in settlement of such SARs an amount equal to the value of the stock appreciation for the number of SARs exercised, payable in cash, Company Stock or a combination thereof. The stock appreciation for an SAR is the amount by which the Fair Market Value of the underlying Company Stock on the date of exercise of the SAR exceeds the base amount of the SAR as described in Subsection (a).
     (e) Form of Payment. The Committee shall determine whether the appreciation in an SAR shall be paid in the form of cash, shares of Company Stock, or a combination of the two, in such proportion as the Committee deems appropriate. For purposes of calculating the number of shares of Company Stock to be received, shares of Company Stock shall be valued at their Fair Market Value on the date of exercise of the SAR. If shares of Company Stock are to be received upon exercise of an SAR, cash shall be delivered in lieu of any fractional share.
     (f) Recovery of Fringe Benefit Tax – The Grantee of SARs shall reimburse the Company, for any Fringe Benefit Tax payable by the Company with respect to such SARs. The amount of Fringe Benefit Tax shall be payable by or recoverable from the Grantee in accordance with the provisions of Section 10.
     8. Performance Units and Performance Shares
     (a) General Requirements. The Committee may grant Performance Units or Performance Shares to a Grantee. Each Performance Unit/Share shall represent the right of the Grantee to receive an amount based on the value of the Performance Unit/Share, if performance goals established by the Committee are met. A Performance Unit shall have a value based on such measurements or criteria as the Committee determines. A Performance Share shall have a value equal to the Fair Market Value of a share of Company Stock. The Committee shall determine the number of Performance Units/Shares to be granted and the requirements applicable to such Units/Shares.
     (b) Performance Period and Performance Goals. When Performance Units/Shares are granted, the Committee shall establish the performance period during which performance shall be measured (the “Performance Period”), performance goals applicable to the Units/Shares (“Performance Goals”) and such other conditions of the Grant as the Committee deems appropriate.
     (c) Payment with respect to Performance Units/Shares. At the end of each Performance Period, the Committee shall determine to what extent the Performance Goals and other conditions of the Performance Units/Shares are met, the value of the Performance Units (if applicable) and the amount, if any, to be paid with respect to the number of Performance Units/Shares that have been earned. Payments with respect to Performance Units/Shares shall be made in cash, in Company Stock, or in a combination of the two, as determined by the Committee.
     (d) Requirement of Employment. If the Grantee ceases to be employed by the Company during a Performance Period, or if other conditions established by the Committee are not met, the Grantee’s Performance Units/Shares shall be forfeited at the close of business on the Grantee’s last day of employment. The Committee may, however, provide for complete or partial exceptions to this requirement as it deems appropriate. If the Grantee ceases to be employed by the Company after the expiration of a Performance Period but prior to payment, payment shall be made to the Grantee or the Successor Grantee, if applicable.
     (e) Recovery of Fringe Benefit Tax – The Grantee of Performance Units or Performance Shares shall reimburse the Company for any Fringe Benefit Tax payable by the Company with respect to such Performance Units or Performance Shares. The Committee will have the right to recover such Fringe Benefit Tax from the cash payable or shares to be allotted to the Grantee. The Committee shall have the right to withhold allotment of shares in respect of SARs until such Fringe Benefit Tax is paid by or recovered from the Grantee.

 


 

     9. Phantom Stock
     (a) General Requirements. The Committee may grant Phantom Stock to a Grantee in such amounts and upon such terms, and at any time and from time to time, as shall be determined by the Committee.
     (b) Value of Phantom Stock. The Committee shall establish the initial value of the Phantom Stock at the time of grant which may be greater than, equal to or less than the Fair Market Value of a share of Company Stock.
     (c) Form and Timing of Payment. The Committee shall determine whether the Phantom Stock shall be paid in the form of cash, shares of Company Stock or a combination of the two, in such proportion as the Committee deems appropriate. Cash payments shall be in an amount equal to the Fair Market Value on the payment date of the number of shares of Company Stock equal to the number of shares of Phantom Stock with respect to which payment is made. The number of shares of Company Stock distributed in settlement of a Phantom Stock Grant shall equal the number of shares of Phantom Stock with respect to which settlement is made. Payment shall be made in accordance with the terms and at such times as determined by the Committee at the time of grant.
     (d) Requirement of Employment. If the Grantee ceases to be employed by the Company prior to becoming vested or otherwise entitled to payment, the Grantee’s Phantom Stock shall be forfeited at the close of business on the Grantee’s last day of employment. The Committee may, however, provide for complete or partial exceptions to this requirement as it deems appropriate.
     (e) Recovery of Fringe Benefit Tax – The Grantee of Phantom Stock shall reimburse the Company for any Fringe Benefit Tax payable by the Company with respect to such Phantom Stock. The Committee shall have the right to withhold issuance of shares in respect of Phantom Stock until such Fringe Benefit Tax is paid by or recovered from the Grantee.
     10. Withholding/Recovery of Taxes
     (a) Required Withholding. All Grants under the Plan shall be subject to applicable federal (including FICA), state and local tax withholding requirements. The Company shall have the right to deduct from all Grants paid in cash, or from other wages paid to the Grantee, any federal, state or local taxes required by law to be withheld with respect to such Grants. In the case of Options and other Grants paid in Company Stock, the Company may require the Grantee or other person receiving such shares to pay to the Company the amount of any such taxes that the Company is required to withhold with respect to such Grants, or the Company may deduct from other wages paid by the Company the amount of any withholding taxes due with respect to such Grants.
     (b) Recovery of Fringe Benefit Tax – All Grants under the Plan shall be subject to reimbursement by the Grantee to Company of any Fringe Benefit Tax, wherever payable by the Company – with respect to Options, SARs, Restricted Stock, Restricted Stock Units, Performance Stock Units, Performance Stock or Phantom Shares. The Company shall have the right to recover such Fringe Benefit Tax by deducting such amounts from all Grants paid in cash or from other wages or compensation paid to the Grantee. In case of Options and other Grants paid in Company Stock, the Company may require the Grantee or any other person receiving such shares to pay to the Company the amount of such Fringe Benefit Tax with respect to such Grants or the Company may deduct from other wages paid by the Company the amount of any Fringe Benefit Tax payable by the Company with respect to such Grants.
     (c) Election to Withhold Shares. If the Committee so permits, a Grantee may elect to satisfy the Company’s income tax withholding obligation and/or obligation to pay Fringe Benefit Tax with respect to an Option, SAR, Restricted Stock, Restricted Stock Units, Performance Units, Performance Shares or Phantom Stock, any of which is paid in Company Stock, by having shares withheld having an aggregate

 


 

Fair Market Value up to an amount that does not exceed the required minimum amount necessary to satisfy the federal (including FICA), state and local tax liabilities and Fringe Benefit Tax. The election must be in a form and manner prescribed by the Committee and shall be subject to the prior approval of the Committee.
     11. Transferability of Grants
     (a) Nontransferability of Grants. Except as provided below, only the Grantee may exercise rights under a Grant during the Grantee’s lifetime. A Grantee may not transfer those rights except by will or by the laws of descent and distribution or, with respect to Grants other than Incentive Stock Options, if permitted in any specific case by the Committee, pursuant to a domestic relations order (as defined under the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the regulations thereunder). When a Grantee dies, the personal representative or other person entitled to succeed to the rights of the Grantee (“Successor Grantee”) may exercise such rights which have not been extinguished by the Grantee’s death. A Successor Grantee must furnish proof satisfactory to the Company of his or her right to receive the Grant under the Grantee’s will or under the applicable laws of descent and distribution.
     (b) Transfer of Nonqualified Stock Options. Notwithstanding the foregoing, the Committee may provide in a Grant Instrument that a Grantee may transfer a Grant to family members or other persons or entities according to such terms as the Committee may determine; provided that the Grantee receives no consideration for the transfer of an Option and the transferred Option shall continue to be subject to the same terms and conditions as were applicable to the Option immediately before the transfer.
     12. Grants Subject to Code Section 162(m)
     (a) Performance Based Grants. Any Grant to a Grantee who is a “covered employee” within the meaning of Code Section 162(m), the exercisability or settlement of which is subject to the achievement of performance goals, shall qualify as “qualified performance-based compensation” within the meaning of Code Section 162(m) and regulations thereunder. The performance goals for such a Grant shall consist of one or more of the business criteria set forth in Section 12(b), below, and a targeted level or levels of performance with respect to such criteria, as specified by the Committee in writing prior to (or, in the event the applicable performance period is one year, within 90 days after commencement of) the applicable performance period. Performance goals shall be objective and shall otherwise meet the requirements of Section 162(m)(4)(C) of the Code and regulations thereunder. Performance goals may differ for such Grants to different Grantees. The Committee shall specify the weighting to be given to each performance goal for purposes of determining the final amount payable with respect to any such Grant. The Committee may, in its discretion, reduce the amount of a payout otherwise to be made in connection with such a Grant, but may not exercise discretion to increase such amount. All determinations by the Committee as to the achievement of performance goals shall be certified in writing prior to payment under the Plan, in the form of minutes of a meeting of the Committee or otherwise.
     (b) Business Criteria. Unless and until the Committee proposes for shareholder approval and the Company’s shareholders approve a change in the general business criteria set forth in this Section, the attainment of which may determine the amount and/or vesting with respect to Grants, the business criteria to be used for purposes of establishing performance goals for such Grants shall be selected from among the following alternatives, each of which may be based on absolute standards or peer industry group comparatives and may be applied at various organizational levels (e.g., corporate, business unit, division):
  (i)   Total shareholder return
 
  (ii)   Stock price increase
 
  (iii)   Return on equity
 
  (iv)   Return on capital
 
  (v)   Cash flow, including operating cash flows, free cash flow, discounted cash flow return on investment, and cash flow in excess of cost of capital
 
  (vi)   Economic value added

 


 

  (vii)   Market share
 
  (viii)   Client/associate satisfaction as measured by survey instruments
 
  (ix)   Earnings per share
 
  (x)   Revenue Levels
 
  (xi)   Personal performance
 
  (xii)   Productivity measures
 
  (xiii)   Diversification of business opportunities
 
  (xiv)   Price to earnings ratio
 
  (xv)   Expense ratios
 
  (xvi)   Total expenditures
 
  (xvii)   Completion of key projects
 
  (xviii)   Employee Retention
     In the event that Code Section 162(m) or applicable tax and/or securities laws change to permit Committee discretion to alter the governing performance measures without disclosing to shareholders and obtaining shareholder approval of such changes and without thereby exposing the Company to potentially adverse tax or other legal consequences, the Committee shall have sole discretion to make such changes without obtaining shareholder approval.
     13. Deferrals
     The Committee may permit or require a Grantee to defer receipt of the payment of cash or the delivery of shares that would otherwise be due to such Grantee by virtue of the exercise of any Option, SAR, or Restricted Stock Units the lapse or waiver of restrictions applicable to Restricted Stock, the satisfaction of any requirements or objectives with respect to Performance Units/Shares or the vesting or satisfaction of any terms applicable to Phantom Stock. If any such deferral election is permitted or required, the Committee shall, in its sole discretion, establish rules and procedures for such deferrals.
     14. Requirements for Issuance or Transfer of Shares
     No Company Stock shall be issued or transferred in connection with any Grant hereunder unless and until all legal requirements applicable to the issuance or transfer of such Company Stock have been complied with to the satisfaction of the Committee. The Committee shall have the right to condition any Grant made to any Grantee hereunder on such Grantee’s undertaking in writing to comply with such restrictions on his or her subsequent disposition of such shares of Company Stock as the Committee shall deem necessary or advisable as a result of any applicable law, regulation or official interpretation thereof, and certificates representing such shares may be legended to reflect any such restrictions. Certificates representing shares of Company Stock issued or transferred under the Plan will be subject to such stop-transfer orders and other restrictions as may be required by applicable laws, regulations and interpretations, including any requirement that a legend be placed thereon.
     15. Amendment and Termination of the Plan
     (a) Amendment. The Committee or the Board of Directors of the Company may amend or terminate the Plan at any time or from time to time, without obtaining the approval of the Company’s shareholders, except that the Plan may not be amended without the approval of the Company’s shareholders(i) to increase the aggregate number of shares issuable under the Plan (excepting proportionate adjustments made under Section 3(c) to give effect to stock splits, etc); (ii) to change the option price of optioned stock (excepting proportionate adjustments made under Section 3(c); (iii) to change the requirement that the option price per share of common stock covered by an incentive stock option (but not a nonqualified stock option) granted under this plan not be less than 100% of the fair market value of the Company’s common stock on the date such option is granted; (iv) to extend the time within which Options may be granted or the time without which a granted Option may be exercised; (v) to change, without the consent of the Optionee (or the Optionee’s, or the Optionee’s estate’s, legal representative), any Option previously granted to him or her under the Plan; or (vi) make any material amendment or other amendment

 


 

if shareholder approval is required by Section 162(m) of the Code or the rules of the Securities and Exchange Commission or any stock exchange on which Company Stock is listed.
     (b) Termination of Plan. The Plan shall terminate on the day immediately preceding the tenth anniversary of its effective date, unless the Plan is terminated earlier by the Committee or is extended by the Committee with the approval of the shareholders.
     (c) Termination and Amendment of Outstanding Grants. A termination or amendment of the Plan that occurs after a Grant is made shall not materially impair the rights of a Grantee unless the Grantee consents or unless the Committee acts under Section 22(b). The termination of the Plan shall not impair the power and authority of the Committee with respect to an outstanding Grant. Whether or not the Plan has terminated, an outstanding Grant may be terminated or amended under Section 22(b) or may be amended by agreement of the Company and the Grantee consistent with the Plan.
     (d) Governing Document. The Plan shall be the controlling document. No other statements, representations, explanatory materials or examples, oral or written, may amend the Plan in any manner. The Plan shall be binding upon and enforceable against the Company and its successors and assigns.
     16. Funding of the Plan
     This Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure the payment of any Grants under this Plan. In no event shall interest be paid or accrued on any Grant, including unpaid installments of Grants.
     17. Rights of Participants
     Nothing in this Plan shall entitle any Associate, Non-Employee Director or other person to any claim or right to be granted a Grant under this Plan, and no Grant shall entitle any Associate, Non-Employee Director or other person to any future Grant. Neither this Plan nor any action taken hereunder shall be construed as giving any individual any rights to be retained by or in the employ of the Company or any other employment rights.
     18. No Fractional Shares
     No fractional shares of Company Stock shall be issued or delivered pursuant to the Plan or any Grant. The Committee shall determine whether cash, other awards or other property shall be issued or paid in lieu of such fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated.
     19. Reorganization, Merger, Consolidation, Sale of Assets or Change of Control.
     (a) General. Except as otherwise provided in any Grant Instrument or other agreement approved by the Committee to which any Non-Employee Director or Associate is a party, in the event that the Company undergoes a Change of Control, as defined in Section 19(c), each Option, share of Restricted Stock and other Grant held by a Non-Employee Director shall without regard to any vesting schedule, restriction or performance target, automatically become fully exercisable or payable, as the case may be, as of the date of such Change of Control. In addition to the foregoing, in the event the Company undergoes a Change of Control or in the event of a corporate merger, consolidation, major acquisition of property for stock, separation, reorganization or liquidation in which the Company is a party to and in which a Change of Control does not occur, the Committee, or the board of directors of any corporation assuming the obligations of the Company, shall also have the full power and discretion to prescribe and amend the terms and conditions of any outstanding Grants granted hereunder . The Committee may remove restrictions on Restricted Stock and Restricted Stock Units and may modify the performance requirements for any other Grants. The Committee may provide that Options or other Grants granted hereunder must be exercised in connection with the closing of such transactions, and that if not so exercised such Grants will expire. Any such determinations by the Committee may be made generally with respect to all Grantees, or may be made

 


 

on a case-by-case basis with respect to particular Grantees. Notwithstanding the foregoing, any transaction undertaken for the purpose of reincorporating the Company under the laws of another jurisdiction, if such transaction does not materially affect the beneficial ownership of the Company’s capital stock shall not constitute a merger, consolidation, major acquisition of property for stock, separation, reorganization, liquidation or Change of Control.
     (b) Stock Options. By way of illustration, and not by way of limitation, in the event of a Change of Control or in the event of corporate merger, consolidation, major acquisition of property for stock, separation, reorganization or liquidation in which the Company is a party to and in which a Change of Control does not occur, the Committee may, without obtaining shareholder approval (i) in all such events other than a liquidation, cause any Option then outstanding to be assumed by the surviving corporation in such corporate transaction; (ii) require the mandatory surrender to the Company by any Grantee of some (in all such events other than a liquidation) or all of the outstanding Options held by a Grantee as of a date specified by the Company or the surviving corporation, in which event the Company or the surviving corporation shall thereupon cancel such Options and pay to each Grantee an amount of cash per share equal to the amount that could have been attained upon the exercise of such Option or realization of the Grantee’s rights to the extent that such cash is available for distribution to Grantees after payment of all debt and senior securities of the Company; (iii) in all such events other than a liquidation, require the substitution of a new Option for some or all of the outstanding Options held by a Grantee provided that any replacement or substituted Option shall be equivalent in economic value to the Grantee; or (iv) in all such events other than a liquidation, make such adjustment to any such Option then outstanding as the Company deems appropriate to reflect such merger, consolidation, major acquisition of property for stock, separation, reorganization or liquidation.
     (c) Definition of Change of Control. For purposes of this Plan, a Change of Control of the Company shall mean:
     (i) The acquisition by any individual, entity or group within the meaning of Section 12(d)(3) or 13(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act” a (“Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 35% or more of either: (A) the then outstanding shares of common stock of the Company (the “outstanding Corporation Common Stock”) or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Corporation Voting Securities”); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control: (X) any acquisition directly from the Company, (Y) any acquisition by the Company, or (Z) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or
     (ii) Individuals who, as of the date hereof, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or
     (iii) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company ( a “Business Combination”), in each case, unless, following such Business Combination, (A), all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the Company resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or

 


 

substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities, as the case may be, (B) no Person ( excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 35% or more of, respectively, the then outstanding shares of common stock of the Company resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the Company resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the board, providing for such Business Combination; or
     (iv) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.
     20. Effective Date of the Plan
     This Plan will become effective on May 28, 2004, as approved by the shareholders of the Company on May 28, 2004.
     21. Headings
     Section headings are for reference only. In the event of a conflict between a title and the content of a Section, the content of the Section shall control.
     22. Miscellaneous
     (a) Grants in Connection with Corporate Transactions and Otherwise. Nothing contained in this Plan shall be construed to (i) limit the right of the Committee to make Grants under this Plan in connection with the acquisition, by purchase, lease, merger, consolidation or otherwise, of the business or assets of any corporation, firm or association, including Grants to associates thereof who become Associates of the Company, or for other proper corporate purposes, or (ii) limit the right of the Company to grant stock options or make other awards outside of this Plan. Without limiting the foregoing, the Committee may make a Grant to an associate of another corporation who becomes an Associate by reason of a corporate merger, consolidation, acquisition of stock or property, reorganization or liquidation involving the Company or any of its subsidiaries in substitution for a stock option or restricted stock grant made by such corporation. If substitute Options are granted, the Committee, in its sole discretion, may determine that such substitute Options shall have an Exercise Price less than the Fair Market Value of a share of Company Stock on the date of Grant. The terms and conditions of the substitute Grants may vary from the terms and conditions required by the Plan and from those of the substituted stock incentives. The Committee shall prescribe the provisions of the substitute Grants.
     (b) Compliance with Law. The Plan, the exercise of Options and SARs and the obligations of the Company to issue or transfer shares of Company Stock under Grants shall be subject to all applicable laws and to approvals by any governmental or regulatory agency as may be required. With respect to persons subject to Section 16 of the Exchange Act, it is the intent of the Company that the Plan and all transactions under the Plan comply with the Sarbanes Oxley Act of 2002 and all applicable provisions of Rule 16b-3 or its successors under the Exchange Act. In particular, and without otherwise limiting the provisions of this Section 22(b), no Grantee subject to section 16 of the Exchange Act may exercise any Option or SAR except in accordance with applicable requirements of Rule 16b-3 or its successors under the Exchange Act. The Committee may revoke any Grant if it is contrary to law or modify a Grant to bring it into compliance with any valid and mandatory government regulation. The Committee may also adopt rules regarding the withholding of taxes on payments to Grantees. The Committee may, in its sole discretion, agree to limit its authority under this Section.

 


 

     (c) Governing Law. The validity, construction, interpretation and effect of the Plan and Grant Instruments issued under the Plan shall exclusively be governed by and determined in accordance with the law of the State of Missouri.
Adopted by Shareholders on May 28, 2004
Amended by the Compensation Committee on December 3, 2007

 

 

Exhibit 10(i)
CERNER CORPORATION
PERFORMANCE-BASED COMPENSATION PLAN
As amended: December 3, 2007
1.   Name . The name of the Plan is the Cerner Corporation Performance Plan (the “Plan”).
 
2.   Basic Function . The Plan provides for payment of quarterly and annual bonuses to select key associates of Cerner Corporation (the “Company”) and its subsidiaries, depending upon the financial performance of the Company or certain subsidiaries or business units and/or the job performance of the individual associates in question. Bonuses, if paid, may be paid on a quarterly or annual basis and determined based on the actual performance of the Company or its subsidiaries or business units or on one or more pre-established financial or operational goals or targets. Payments of awards to certain executives are made pursuant to the “Executive Award Feature” (see Section 10). All bonuses will be calculated as soon as administratively practicable following the end of the quarter or year for which the bonus is based. All quarterly and annual bonuses will be paid out no later than March 15 th of the calendar year following the year in which such bonus determination is made.
 
3.   Purpose . The purpose of the Plan is to provide a meaningful incentive on both a quarterly and annual basis to key associates and officers of the Company and to motivate them to assist the Company in achieving ambitious and attainable short-term goals. Individual payments made under the Plan will vary, depending upon individual performance and, in some cases, business unit operational achievements.
 
4.   Termination; Amendment . The Plan shall continue to be in effect, unless and until terminated by the Compensation Committee of the Board of Directors of the Company. The Executive Award Feature of the Plan is subject to the approval of the shareholders of the Company, every five (5) years in accordance with Section 162(m) of the Internal Revenue Code, as amended (the “Code”) by the affirmative vote of the holders of a majority of the shares present in person or represented by proxy, and entitled to vote thereon, at a meeting of the shareholders at which a quorum is present or represented. The Plan may be further amended from time to time by the Compensation Committee provided that any amendment which, if effected without the approval of the shareholders of the Company, would result in the loss of an exemption from federal income tax deduction limitations under Section 162(m) of the Code, for amounts payable thereunder but would not result in such loss if approved by the shareholders, shall become effective only upon approval thereof by the shareholders of the Company within the meaning of Section 162(m).
 
5.   Administration . The Plan is administered by the Compensation Committee, which has the sole authority to make all discretionary determinations under the Plan. In suitable circumstances, the Compensation Committee may evaluate and use the Company’s management’s input as well as input and other relevant information from any outside parties it deems appropriate.
 
6.   Participation . Key associates and officers eligible for participation in the Plan will be determined by the Compensation Committee on an annual basis. Executive officers eligible to receive awards under the Executive Award Feature of the Plan will be identified each year by the Compensation Committee as described in Section 10 below.
 
7.   General Feature; Determination of Annual Targets . The Compensation Committee will determine the measure or measures of financial performance and/or the target levels of performance, the attainment of which in any quarter or year will result in the payment of awards to all eligible participants except for those executives covered by the Executive Award Feature. Such determinations on financial or operational performance measures or target levels may be made, and under appropriate circumstances may subsequently be modified, by the Compensation

 


 

    Committee at any time during the calendar year. Alternative performance measures or targets may be established and different target levels may be selected with different general bonus amounts established for each participant. Following the initial determination of performance targets, the Compensation Committee will monitor corporate performance throughout each fiscal quarter, and may decide at any time before final quarter or year-end determinations are reached to adjust the earlier target levels as appropriate, for example, to take into account unusual or unanticipated corporate or industry-wide developments. Final determinations of the amounts to be paid to a participant under the general feature of the plan may also be adjusted upward or downward depending upon subjective evaluations by an associate’s executive or manager.
 
8.   Performance Measures . Measures of financial performance selected by the Compensation Committee on a quarterly or annual basis for determination of payments of awards under the general feature of the Plan may include but are not limited to one or more of the following: stock price, earnings per share (with or without extraordinary items), net income (with or without extraordinary items), return on equity, return on assets, profit margins on contract-by-contract basis, collection of certain accounts receivable, client satisfaction results, or achievement of subsidiary business unit operating plans. Target performance may be expressed as absolute or average dollar amounts, percentages, changes in dollar amounts or changes in percentages, and may be considered on an institution-alone basis or measured against specified peer groups or companies. Notwithstanding the foregoing, the measures of financial or operational performance for determination of awards payable under the Plan to those executive officers covered under the Executive Award Feature and the calculation of the maximum amount payable and amounts actually paid to such executive officers under the Plan shall be as set forth in the Executive Award Feature of the Plan (see Section 10).
 
9.   Individual Factors . The Compensation Committee, in exercising discretion under the Plan on determinations of cash bonuses payable to individuals, may consider particular individual goals as well as subjective factors, including any unique contributions.
 
10.   Executive Award Feature . Notwithstanding any other provision of the Plan to the contrary, any awards granted under the Plan to those individuals identified by the Compensation Committee as Section 16 “insiders” of the Company, within the meaning of Security Exchange Commission Regulations (the “Covered Executives”), for purposes of this Plan, shall be governed by the provisions of this Section 10 while such associate is a Covered Executive.
          (i) On or before the ninetieth (90 th ) day of each calendar year (in the case of annual-based awards or combination of annual and quarterly based awards), or on or before the twenty-second (22 nd ) day of each fiscal quarter (in the case of awards based solely on performance in such fiscal quarter) while the Plan is in effect, the Compensation Committee will (a) identify those individuals who it reasonably believes to be Covered Executives for such calendar year or fiscal quarter, (b) establish in writing the Earnings Per Share Target (as defined below) for such calendar year, (c) establish in writing the Company Operating Margin Target (as defined below) for such quarter or year, (d) establish in writing the Agreement Margin Targets (as defined below) for such quarter or year, and (e) establish in writing any other targets for the Covered Executives as specifically set forth below and as determined by the Compensation Committee and set forth in the Compensation Committee minutes (“Other Targets”) (the Earnings Per Share Target, the Company Operating Margin Target, the Agreement Margin Target, and all Other Targets to be referred to collectively as the “Executive Targets”). The Compensation Committee may elect to establish any combination of the above Executive Targets in a given quarter or year provided that any established Executive Target(s) be established on or before the end of the ninety day or twenty-second day period set forth above. Due to the Compensation Committee’s belief that the disclosure of the Executive Targets would adversely affect the Company, the Compensation Committee, the Covered Executives and all other directors, officers and associates who become aware of such targets shall and will treat such Executive Targets for any year or fiscal quarter as confidential. Executive Targets based on recognized accounting principles shall be determined

 


 

and deemed satisfied by using the same accounting principles in effect and relied upon when such Executive Target was established.
          (ii) The Earnings Per Share Target shall be expressed as a specific target earnings per share for the Company’s common stock on a fully diluted basis, before the after-tax effect of any extraordinary items, the cumulative effect of accounting changes, or other nonrecurring items of income or expense including restructuring charges.
          (iii) The Company Operating Margin Target shall be expressed as a target percentage reflecting the leverage of the Company’s revenue relative to the expense associated with that revenue.
          (iv) The Agreement Margin Targets shall be expressed as a dollar amount of booking margins on specified types of sales, adjusted for the costs associated with delivery of the solutions.
          (v) The Other Targets shall be determined based solely on the following list of targets:
               (a) Total shareholder return
               (b) Stock price increase
               (c) Return on equity
               (d) Return on capital
               (e) Cash flow, including collection of cash, operating cash flows, free cash flow, discounted cash flow return on investment, and cash flow in excess of cost of capital
               (f) Economic value added
               (g) Market share
               (h) Client/associate satisfaction
               (i) Revenue levels
               (j) Employee retention
               (k) Productivity measures
               (l) Diversification of business opportunities
               (m) Price to earnings ratio
               (n) Expense ratios
               (o) Total expenditures
               (p) Completion of key projects
               (q) Operating margin
          (vi) If at the end of each fiscal quarter (in the case of quarterly-based performance targets) or at the end of the fiscal year (in the case of annual-based or combination of annual and quarterly based performance targets) any of the Executive Targets established by the Compensation Committee have been met, the maximum amount payable to the Covered Executives in any calendar year shall be as follows: (a) for the Chief Executive Officer, 200% of the Chief Executive Officer’s base salary at the time the Executive Targets are established, and (b) for all other executive officers, 175% of such individual’s base salary at the time the Executive Targets are established. The Compensation Committee has discretion to reduce the amount of the bonus payable; provided, however, under no circumstances may the Compensation Committee increase the amount of the bonus payment beyond its maximum limit. The amount of the bonus reduction, if any, will depend upon a subjective bonus reduction factor, formally known as an Annual Performance Evaluation (APE) Factor, which will be determined at the Covered Executive’s end-of-the-year evaluation. This factor will range from 100% of the maximum bonus amount for demonstrated distinguished performance to 40% if performance does not satisfy the required standard.

 


 

          (vii) At the election of the Compensation Committee, the Covered Executives’ individual performance plan agreements may provide for incentive payment recovery in the event Cerner implements a Mandatory Restatement, which restatement relates to one or more fiscal years. Such incentive payment recovery would require that some or all of any amounts paid to a Covered Executive as an incentive payment earned under this Plan and related to such restated periods would be recoverable and must be repaid within ninety days of such restatement(s). The amount which must be repaid, if any, is the amount by which the compensation paid or received exceeds the amount that would have been paid or received based on the financial results reported in the restated financial statement. For this purpose, a “Mandatory Restatement” is a restatement of Cerner’s audited financial statements included in any of its periodic reports filed with the Securities and Exchange Commission (SEC), which, in the good faith opinion of the Company’s Independent Registered Public Accounting Firm, is required to be implemented pursuant to generally accepted accounting principles, but excluding: a) any restatement which is required with respect to a particular year as a consequence of a change in generally accepted accounting rules effective after the publication of the financial statements for such year; b) any restatement that in the good faith judgment of the Audit Committee of the Board is required due to a change in the manner in which the Company’s auditors interpret the application of generally accepted accounting principles (as opposed to a change in a prior accounting conclusion due to a change in the facts upon which such conclusion was based); and, c) any restatement that is otherwise required due to events, facts or changes in law or practice that the Audit Committee concludes were beyond the control and responsibility of the Covered Executives and that occurred regardless of the Covered Executives’ diligent and thorough performance of their duties and responsibilities.
11.   Certification . Prior to any payment to any Covered Executive of any amount accrued under Section 10 of this Plan, the Compensation Committee (or its delegated subcommittee) shall certify in writing that an Executive Target has been satisfied. For purposes of this certification, approved minutes of the Compensation Committee meeting in which the certification is made shall satisfy this Plan certification requirement.
12.   Code Section 409A . In the event that any provision of this Plan shall be determined to contravene Code section 409A, the regulations promulgated thereunder, regulatory interpretations or announcements with respect to section 409A or applicable judicial decisions construing section 409A, any such provision shall be void and have no effect. Moreover, this Plan shall be interpreted at all times in such a manner that the terms and provisions of the Plan comply with Code section 409A, the regulations promulgated thereunder, regulatory interpretations or announcements with respect to section 409A and applicable judicial decisions construing section 409A.

 

 

Exhibit 10(k)
CERNER CORPORATION EXECUTIVE DEFERRED
COMPENSATION PLAN
ARTICLE I
RESTATEMENT AND PURPOSE OF PLAN
           1.1 Plan Restatement . Cerner Corporation, a Delaware corporation, originally established the Cerner Corporation Executive Deferred Compensation Plan effective August 1, 1999. Pursuant to certain changes required by the American Jobs Creation Act of 2004 that relate to nonqualified deferred compensation arrangements, Cerner hereby amends and restates this Plan effective as of January 1, 2008.
           1.2 Purpose of Plan . The purpose of the Plan is to provide deferred compensation benefits to certain Associates of Cerner who are members of a select group of management or highly compensated Associates.
ARTICLE II
DEFINITIONS
           2.01 Account shall mean a memorandum account maintained by the Company for bookkeeping purposes only, to which is credited or debited, as appropriate, the amount of an Executive’s Deferral Contributions, Company Contributions (if any), Investment Return, forfeitures and distributions.
           2.02 Associate shall mean an employee of the Company.
           2.03 Change of Control Event means the first to occur of any of the following:
          (a) Any one person, or more than one person acting as a group (as defined below) acquires ownership of stock of the Company that, together with stock held by such person or group, constitutes more than 50 percent of the total fair market value or total voting power of the stock of the Company.
          (b) Either: (i) any one person, or more than one person acting as a group (as defined below), acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of the Company possessing 35 percent or more of the total voting power of the stock of the Company; or (ii) a majority of members of the Company’s board of directors is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Company’s board of directors prior to the date of the appointment or election.
          (c) Any one person, or more than one person acting as a group (as defined below), acquires (or has acquired during the 12-month period ending on the date of the most

 


 

recent acquisition by such person or persons) assets from the Company that have a total gross fair market value (“gross fair market value” means the value of the assets of the Company, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets) equal to or more than 40 percent of the total gross fair market value of all of the assets of the Company immediately prior to such acquisition or acquisitions.
          (d) For purposes of this definition, persons will not be considered to be acting as a group solely because they purchase or own stock, or purchase assets, of the same corporation at the same time, or as a result of the same public offering. However, persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock or assets, or similar business transaction with the corporation. If a person, including an entity or entity shareholder, owns stock in both corporations that enter into a merger, consolidation, purchase or acquisition of stock or assets, or similar transaction, such shareholder is considered to be acting as a group with other shareholders in a corporation (only with respect to the ownership in that corporation in the case of an event described above in paragraph (b) or only to the extent of the ownership in that corporation in the case of an event described above in paragraph (c) prior to the transaction giving rise to the change and not with respect to the ownership interest in the other corporation.
           2.04 Code shall mean the Internal Revenue Code of 1986 as from time to time amended.
           2.05 Committee shall mean the Committee selected by the Company to be responsible for administering and interpreting the Plan as provided in Article X.
           2.06 Company shall mean Cerner Corporation.
           2.07 Company Contributions shall mean Performance Contributions (if any), Discretionary Contributions (if any) and Matching Contributions (if any).
           2.08 Compensation shall mean the total salary, bonus and commissions payable to an Executive by the Company in a given Year. Compensation shall include Deferral Contributions under the Plan and shall include salary deferral contributions made to a retirement plan of the Employer intended to qualify under Section 401(k) of the Code.
           2.09 Deferral Contribution shall mean the amount credited to an Executive’s Account for a particular Year pursuant to the voluntary deferral election of the Executive.
           2.10 Designated Beneficiary shall mean the individual, individuals, trust or estate identified by an Executive to receive any benefits payable hereunder on account of the death of the Executive. Each such designation shall revoke any prior designation executed by the Executive. If no beneficiary is effectively designated, then the Designated Beneficiary shall be the Executive’s surviving spouse, but if there is no surviving spouse then the Designated Beneficiary shall be the personal representatives of the Executive’s estate.

 


 

           2.11 Discretionary Contribution shall mean the amount, if any, allocated by the Company to an Executive’s Account pursuant to Section 5.2.
           2.12 ERISA shall mean the Employee Retirement Income Security Act of 1974, as from time to time amended.
           2.13 Executive shall mean an Associate who satisfies the requirements for participation in the Plan under Article III and for whom an Account is maintained.
           2.14 Investment Election shall mean the election made by the Executive from time to time as provided in Article VI which shall be used for purposes of crediting or debiting, as applicable, of the Investment Return to the Executive’s Account.
           2.15 Investment Return shall mean the hypothetical investment return, which may include earnings and losses, on the amounts credited to an Executive’s Account as determined under Article VI.
           2.16 Matching Contributions shall mean the amount allocated to an Executive’s Account pursuant to Section 5.1.
           2.17 Participation Agreement shall mean an agreement executed by an Executive by which the Executive acknowledges acceptance of the terms and conditions of the Plan.
           2.18 Performance Contribution shall mean the amount, if any, allocated to an Executive’s Account pursuant to Section 5.3.
           2.19 Permanent Disability shall mean an Executive: (a) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (b) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than three months under a Company-sponsored accident or health plan covering Associates.
           2.20 Plan shall mean the Cerner Corporation Executive Deferred Compensation Plan as contained herein and as from time to time amended.
           2.21 Separation from Service means an Executive’s death, retirement or other termination of employment with the Company. A Separation from Service shall not occur if the Executive is on military leave, sick leave or other bona fide leave of absence (such as temporary employment by the government) if the period of such leave does not exceed six months, or if longer, as long as the Executive’s right to reemployment with the Company is provided either by statute or by contract. “Separation from Service” shall be interpreted in a manner consistent with Code Section 409A(a)(2)(A)(i) and the applicable Treasury regulations issued thereunder.

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           2.22 Specified Associate means an Associate that would be a “specified employee” as defined in Section 409A(a)(2)(B)(i) of the Code and Department of Treasury regulations and other interpretive guidance issued thereunder.
           2.23 Termination of Employment shall have the same meaning as Separation from Service.
           2.24 Unforeseeable Emergency means a severe financial hardship to an Executive resulting from an illness or accident of the Executive, the Executive’s spouse or a dependent (as defined in Code Section 152) of the Executive, loss of the Executive’s property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Executive.
           2.25 Year shall mean the calendar year.
ARTICLE III
PARTICIPATION
           3.1 Designation by Company . Prior to the first day of each Year the Company shall designate certain Associates as eligible Executives to make Deferral Contributions hereunder for such Year; provided, however, that if an Associate becomes employed by the Company after the first day of a Year or receives a promotion after the first day of the Year such that the Associate meets the criteria set forth in Section 3.2, then the Company may designate such Associate as an Executive eligible to make Deferral Contributions hereunder at any time during such Year. In addition, at any time the Company determines to make Company Contributions hereunder, the Company shall designate certain Associates as Executives eligible for allocations of specific types of such Company Contributions.
           3.2 Criteria for Designation . An Associate must be a member of a select group of management or highly compensated Associates within the meaning of ERISA as determined by the Company in order to be designated by the Company as an Executive eligible to make Deferral Contributions under the Plan or as an Executive eligible for allocation of any Company Contributions under the Plan.
ARTICLE IV
DEFERRAL CONTRIBUTIONS
           4.1 Time of Election .
           (a) Deferral Contributions. An Executive’s election to make Deferral Contributions with respect to services performed in a particular Year must be made prior to the first day of such Year; provided, however, that if an Associate not previously eligible to make Deferral Contributions is designated during a Year as eligible to make Deferral Contributions for such Year then such Associate’s election to make Deferral Contributions must be made within 30

 


 

days after the Associate is designated as an eligible Executive by the Company and such newly eligible Associate’s deferral election shall relate only to compensation earned after the date such election in made. An eligible Executive must make a new election with respect to each Year for which the Executive elects to make Deferral Contributions. All elections made by an Executive are revocable until 4:00 p.m. on the last business day of the calendar year before the calendar year for which the deferral election relates. Except as provided below in Sections 4.3 and 4.4, after 4:00 p.m. on such date, all standing elections become irrevocable for such upcoming year.
           (b) Company Contributions. An Executive must make an election as to the form (e.g., lump sum or installments) of payment(s) attributable to Company Contributions, if any, made during a particular Year before the first day of the Year in which such Company Contribution will be allocated to the Executive’s Account.
           4.2 Method of Election . An election by an Executive to make Deferral Contributions hereunder shall be made in writing on a form furnished by the Committee and shall be delivered to the Committee prior to 4:00 p.m. on the last business day of the Year preceding the Year for which the election relates, or, in the case of an Executive who first becomes eligible to make Deferral Contributions during the Year, within 30 days after the associate first becomes eligible and prior to the day such election is first effective.
           4.3 Change or Termination of Election . Once an election for Deferral Contributions for a particular Year becomes irrevocable pursuant to Section 4.1, the Executive cannot change the election to a greater or lesser amount during such Year nor can the Executive terminate the election for a particular Year at any time during such Year; provided, however, the Committee may permit the Executive to terminate during a Year the Executive’s election to make Deferral Contributions if the Committee determines that the Executive has an Unforeseeable Emergency resulting in a financial need that can be met by the termination of Deferral Contributions. The Committee may also permit the Executive to terminate during a Year the Executive’s election to make Deferral Contributions if the Executive becomes eligible to receive a hardship distribution pursuant to Treasury regulations 1.401(k)-1(d)(3). To the extent any election to make Deferral Contributions is canceled as provided for under this Section 4.3, such election must be canceled, and not postponed or otherwise delayed, such that any later deferral election will be subject to the election timing rules set forth above in Section 4.1.
           4.4 Mandatory Termination of Deferral Contributions . If a distribution is made to an Executive on account of an Unforeseeable Emergency as provided in Section 8.3, then the Executive’s current election (if any) to make Deferral Contributions shall terminate at the time of such distribution, and the Executive may make no Deferral Contributions for the duration of the Year in which such distribution is made.
           4.5 Default Election . If, for any particular year, an Executive fails to designate the time at which the Executive’s Deferral Contributions for such Year are to be distributed, the Executive shall be deemed to have made an election to receive such Year’s Deferral Contributions on the first business day following six months after Executive’s Separation from Service.

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           4.6 409A Transition Election . An Executive may amend his or her current election relating to both timing and form of payment for all Deferral Contributions before December 31, 2008 or before any later date permitted under final Treasury Regulations or other applicable guidance under Code Section 409A. An Executive will not, however, be permitted to, and the Plan will not recognize any election to, change a timing or form election that either: (1) applies to payments the Executive would otherwise receive during the year of the change, or (2) causes a Plan benefit to be paid during the year of the change.
ARTICLE V
COMPANY CONTRIBUTIONS
           5.1 Company Matching Contribution . The Company may in its sole and absolute discretion direct the Committee to allocate a contribution from time to time to the Accounts of those Executives who have made Deferral Contributions during the applicable period. The amount of any such Matching Contribution, and the applicable period for which it is allocated, shall be determined by the Company in its sole and absolute discretion.
           5.2 Company Discretionary Contribution . The Company may in its sole and absolute discretion direct the Committee to allocate a contribution from time to time in any amount or amounts it determines to the Account of any Executive. The amount of any such Discretionary Contribution allocated to the Account of any particular Executive, and the Executive or Executives to whose accounts such allocations are made, shall be determined by the Company in its sole and absolute discretion, and need not be uniform for all Executives.
           5.3 Company Performance Contribution . The Company may in its sole and absolute discretion direct the Committee to allocate a Performance Contribution in such amount as the Company determines in its sole and absolute discretion to the Account of any Executive.
ARTICLE VI
INVESTMENT RETURN
           6.1 Adjustments to Account . An Executive’s Account shall be adjusted as of the last day of each Year to reflect the Investment Return applicable to the Executive’s Account for such Year as determined by the Company. Such adjustment may be a net credit to the Executive’s Account, in the case of net investment gain, or a net debit to the Executive’s Account, in the case of net investment loss. In addition to the annual adjustment hereunder, the Executive’s Account shall be adjusted at such other time or times as the Company may determine.
           6.2 Determination of Investment Return . The amount of the applicable Investment Return shall be determined based upon the Executive’s Investment Election; provided, however, that the Investment Return applicable to Company Contributions (if any)

 


 

shall be determined as if all Company Contributions are invested in common stock of the Company.
           6.3 Investment Election . An Executive’s Investment Election shall be an election by the Executive among certain investment options designated from time to time by the Company which investment options shall include common stock of the Company. The Executive’s Investment Election will be used solely for purposes of determining the Investment Return applicable to the Executive’s Account and does not give the Executive any right to receive any particular asset. The Executive’s Investment Election shall be in whole percentages among one or more of the investment options, and shall be made on a form furnished by the Committee. An Executive may complete a new Investment Election form at any time. The Executive’s Investment Election form shall be effective prospectively only and only after it is received by the Committee.
ARTICLE VII
VESTING
           7.1 Deferral Contributions . An Executive shall be fully vested at all times in the amount of Deferral Contributions credited to the Executive’s Account subject to any adjustments for Investment Return.
           7.2 Matching Contributions and Discretionary Contributions . Subject to the provisions of Section 7.4 and Section 7.5, the Matching Contribution, if any, allocated to an Executive’s Account in a given Year, and the Discretionary Contribution, if any, allocated to an Executive’s Account in a given Year, as adjusted for Investment Return applicable to each such particular contribution for a particular Year, shall vest from the initial date of allocation to the Executive’s Account in accordance with the following schedule:
         
Number of Full Years of Employment After    
Year of Allocation   Cumulative Percentage Vested
1
    20 %
2
    40 %
3
    60 %
4
    80 %
5
    100 %
           7.3 Performance Contributions . Subject to the provisions of Section 7.4 and Section 7.5, the Performance Contribution, if any, allocated to an Executive’s Account in a given Year, as adjusted for Investment Return applicable thereto, shall vest from the initial date of allocation to the Executive’s Account in accordance with the following schedule:
         
Number of Full Years of Employment After    
Year of Allocation   Cumulative Percentage Vested
1
    0 %
2
    0 %
3
    100 %

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           7.4 Forfeiture Upon Breach of Agreement . Notwithstanding the provisions of Section 7.2 and Section 7.3, if the Committee determines that an Executive has breached the provisions of the employment agreement between the Executive and the Company (including, without limitation, provisions regarding confidentiality, non-competition or non-solicitation), then all Company Contributions allocated to the Executive’s Account and the Investment Return applicable to such Company Contributions shall be forfeited in full immediately upon such determination of breach effective as of the date of such breach.
           7.5 Full Vesting Upon Death . Notwithstanding the provisions of Section 7.2 and Section 7.3, if an Executive dies while employed by the Company then the entire amount of the Executive’s Account at the time of the Executive’s death and thereafter shall become fully vested.
ARTICLE VIII
DISTRIBUTIONS
           8.1 Method of Payment . The method of payment to an Executive shall be either a lump sum cash distribution or a designated number of annual installments. The Executive shall elect a method of payment upon commencement of participation in the Plan. The Executive may change such election at the time the Executive makes a new voluntary deferral election, but, unless the change constitutes a subsequent election made in accordance with Section 8.4, any such change shall apply only to Deferral Contributions and Company Contributions thereafter made and the Investment Return applicable to such contributions. To the extent that an Executive makes an election to receive his or her payments in the form of installments, such series of installments shall at all times be treated as the right to a series of separate payments.
           8.2 Time of Payment .
           (a) Deferral Contributions . Subject to Sections 8.2(c) and 8.2(e) below and any subsequent election as provided for in Section 8.4, payment of an Executive’s benefit with respect to the Executive’s Deferral Contributions and the Investment Return applicable to such contributions shall be made (in the case of a lump sum payment) or shall commence (in the case of installment payments) upon the earlier or later of the applicable event or calendar year as elected by the Executive at the time the Executive elects to make such Deferral Contributions; provided, however, in no event shall such payment with respect to any Deferral Contributions and the Investment Return applicable to such contributions be made or commence earlier than the first to occur of: (i) three years after the date of the Executive’s election to make such Deferral Contributions, or, (ii) the Executive’s Termination of Employment with the Company. To maximize an Executive’s opportunity for Subsequent Elections under Section 8.4 in accordance with IRC Section 409A, all payments of the Executive’s Deferral Contributions and

 


 

the Investment Return applicable thereto which are scheduled to be made within a particular Year shall be made on the last business day of such Year.
           (b) Company Contributions. Subject to any subsequent election as provided for in Section 8.4, payment of an Executive’s vested benefit with respect to Company Contributions (if any) and the Investment Return applicab