73

Download the Full Report - Cerner Corporation

  • Upload
    others

  • View
    8

  • Download
    0

Embed Size (px)

Citation preview

Page 1: Download the Full Report - Cerner Corporation
Page 2: Download the Full Report - Cerner Corporation
Page 3: Download the Full Report - Cerner Corporation

ANNUAL REPORT 2005

Page 4: Download the Full Report - Cerner Corporation

Table of Contents: Annual Report 2005

Board of Directors 2

Leadership 3

Letter to Our Shareholders 4

Appendix: Cerner’s Business Model and Financial Assessment 12

10K BusinessandIndustryOverview 20

Properties 29

SelectedFinancialData 32

Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations 33

IndependentAuditor’sReport 47

Financial Statements and Discussion BalanceSheet 49

IncomeStatement 50

ConsolidatedStatementsofChangesinEquity 51

StatementofCashFlows 52

SummaryofSignificantAccountingPolicies 53

BusinessAcquisitions 58

Receivables 59

PropertyandEquipment 60

Indebtedness 60

InterestIncome(Expense) 61

StockOptions,WarrantsandEquity 61

AssociateStockPurchasePlan 63

FoundationsRetirementPlan 63

IncomeTaxes 63

RelatedPartyTransactions 64

Commitments 64

SegmentReporting 65

QuarterlyResults 66

Corporate Information 68

Page 5: Download the Full Report - Cerner Corporation

2

Board of DirectorsNeal L. Patterson •ChairmanoftheBoardandChiefExecutiveOfficer,CernerCorporation

Clifford W. Illig •ViceChairman,CernerCorporation

Gerald E. Bisbee Jr., Ph.D. •Chairman,PresidentandChiefExecutiveOfficer,ReGenBiologics,Inc.,FranklinLakes,NJ

The Honorable John C. Danforth •Partner,BryanCaveLLP,St.Louis,MO •AmbassadortotheUnitedNations,June2004–January2005 •U.S.Senator-Missouri,1976-1995

The Honorable Nancy-Ann DeParle •SeniorAdvisortoJPMorganPartners,LLC •AdjunctProfessorofHealthCareSystemsattheWhartonSchooloftheUniversityofPennsylvania •Administrator,CentersforMedicareandMedicaidServices,1997-2000

Michael E. Herman •GeneralPartner,HermanFamilyTradingCompany,KansasCity,Mo. •President,KansasCityRoyalsBaseballClub,1992-2000

William B. Neaves, Ph.D. •PresidentandChiefExecutiveOfficer,TheStowersInstituteforMedicalResearch,KansasCity,Mo.

William D. Zollars •PresidentandChiefExecutiveOfficer,YRCWorldwide,Inc.

Page 6: Download the Full Report - Cerner Corporation

Americas Client OrganizationCerner MidwestJudeG.Dieterman•VicePresident,CernerCorporationandPresident,CernerMidwest

AmyD.Amick•VicePresident,Services

MichaelJ.Supple•VicePresident,Sales

Cerner North AtlanticMichaelL.Fiorito•VicePresident,CernerCorporationand

President,CernerNorthAtlantic

SantoA.Cugliotta,Jr.•VicePresident,Sales

DougP.Rempfer•VicePresident,Services

Cerner SoutheastJohnT.Peterzalek•VicePresident,CernerCorporationandPresident,CernerSoutheast

GaryA.Pederson•VicePresident,Sales

PaulJ.Sinclair•SeniorVicePresident,Services

Cerner WestMichaelC.Neal•VicePresident,CernerCorporationandPresident,CernerWest

MitchellClark•VicePresident,Sales

TylerW.Viernow•VicePresident,Services

Cerner CanadaRobertJ.Shave•VicePresident,CernerCorporationandPresident,CernerCanada

Europe, Middle East and Asia Pacific Client OrganizationAsia PacificRobertL.Wilhelm•GeneralManager

France and SpainBrunoN.Slosse•VicePresidentandGeneralManager

Germany/AustriaSteffenZander•GeneralManager

Middle EastAmrMostafaGad•GeneralManager

United KingdomDavidW.Sides•VicePresidentandGeneralManager

MarcosGarcia•VicePresident,U.K.NationalProgrammes

Intellectual Property OrganizationDouglasS.McNair,M.D.&Ph.D.•SeniorVicePresident,KnowledgeandDiscovery

JohnP.Fingado•VicePresident,SolutionSalesOperations

J.BryanInce•VicePresident,KnowledgeandDiscovery

LisaA.LaBau•VicePresident,CernerTransitions

DavidP.McCallie,Jr.,M.D.•VicePresident,MedicalInformatics

RajneeshBajaj•ManagingDirector,CernerIndia

LeadershipCerner Executive Cabinet

NealL.Patterson•ChairmanoftheBoardandChiefExecutiveOfficer

CliffordW.Illig•ViceChairman

EarlH.“Trace”Devanny,III•President

PaulM.Black•ExecutiveVicePresidentandChiefOperatingOfficerJeffreyA.Townsend•ExecutiveVicePresident

ZaneM.Burke•SeniorVicePresident,CernerCorporation

PaulN.Gorup•SeniorVicePresidentandChiefofInnovation

DouglasM.Krebs•SeniorVicePresidentandGeneralManager,CernerEurope,MiddleEastandAsiaPacificOrganization

MarcG.Naughton•SeniorVicePresidentandChiefFinancialOfficer

MichaelR.Nill•SeniorVicePresident,TechnicalArchitecture andCernerWorksManagedServices

MikeValentine•SeniorVicePresidentandGeneralManager,U.S.ClientOrganization

ShelleeK.Spring•VicePresident,PowerWorks

JuliaM.Wilson•VicePresidentandChiefPeopleOfficer

JackA.Newman,Jr.•ExecutiveVicePresident

WilliamM.Dwyer•SeniorVicePresident

JohnB.Landis•SeniorVicePresident,SalesandServicesOperations

RobertJ.Campbell•VicePresidentandChiefLearningOfficer

GayM.Johannes•VicePresidentandChiefQualityOfficer

JayE.Linney•VicePresident,StateandRegionalGrids

RichardH.Miller,Jr.•VicePresidentandChiefInformationOfficer

WilliamJ.Miller•VicePresident,CernerTechnologies

CatherineE.Mueller•VicePresident,ClientCare

J.RandallNelson•VicePresident,LifeSciences

EdwardJ.Schifman•VicePresident,DeviceInnovation

RandyD.Sims•VicePresident,ChiefLegalOfficerandSecretary

JacobP.Sorg•VicePresident,AcceleratedSolutionsCenter

DonaldD.Trigg•VicePresidentandChiefMarketingOfficer

CharlotteA.Weaver,R.N.&Ph.D.•VicePresidentandChiefNursingOfficer

Cerner Executive Management

Page 7: Download the Full Report - Cerner Corporation

To Cerner’s Shareholders, Clients and Associates: 2005wasthestartofCerner’ssecond25years.Itwasaverysolidyearbothstrategicallyandwithregardtoplanexecutionandresults.Itcontinueda

decadeinwhichCernerisbecomingpartoftheinfrastructureofhealthcaredeliveryaroundtheworld.Iofferthefollowing2005highlights:

Ourcompany’sannualrevenuesexceeded$1billionforthefirsttime,growing25percentin2005andanaverageof23percentoverthepastfive

years.

Ourearningspersharegrew27percentin2005andhavegrownanaverageof31percentoverthepastfiveyears.

Wecollectedmorethan$1billionincash,andourtotalassetsalsoexceeded$1billion,growing31percentin2005andanaverageof16percent

overthepastfiveyears.

Ourbacklog(contractedfuturerevenues)grewtobegreaterthan$2billion,a39percentincreasein2005andanaverageof28percentgrowth

overfiveyears.

Forthefirsttime,ourGlobalbusinessrepresented10percentofourtotalrevenues,growingmorethan75percentin2005andanaverageof34

percentoverfiveyears.

WehadanotherrecordyearinBookings,Backlog,Revenues,OperatingEarnings,NetEarnings,EarningsPerShare,CashCollectionsandCash

Flow.

Wealsoachievedoperationalandmarketingrecordsacrosstheboardincluding:numberofclientfacilitiesbroughtlivewithourCerner Millennium®

solutions,numberofcontractssigned,numberofclientvisitstoourVisionCenter,andnumberofrequestsforpricing.

We continued our track record of innovation, including our entry into the hardware businesswith the introduction of ourCareAware™ line of

medicationdispensingdevices.

Ouroutstandingresultsin2005ledtostrongshareholderreturns,withCerner’sstockpriceincreasing71percentduringtheyear,drivingourmarket

capitalizationtomorethan$3.5billionforthefirsttimeasourpre-splitstockpriceapproached$100pershare.Ifyou’venoticed,overtheyearsmany

ofourfinancialmetricscontinuedtoaddnewzerosontheend—agoodthing.Financialstrengthallowsustopursueourvisionandmission;itletsus

driveintothefuturewithconfidence.

In thesimplest termspossible,Cerner isasoftwarecompany thatprovidesa fullcomplementofservicesnecessary to implementandoperateour

software.Inour2003shareholderletter,IdiscussedCerner’sbusinessmodelandreceivedagreatdealofpositivefeedbackfromyouabouthowthis

additionaltransparencyimprovedyourunderstandingofhowCerner’sbusinessmodelworksandourfinancialstrategiesofcontinuingtogrowourtop

line,expandouroperatingmarginsandincreaseourfreecashflow.Lastyear,weoptedtokeepandupdatethisdetailedinformation,movingitintoan

appendixtotheshareholderletter.Thisyearwehavedonethesame.

ThisannualletteralsooffersanopportunitytocommunicatemoresubtlebutvitallyimportantaspectsaboutCerner.Shareholderswhojustwanttostudy

thenumberswillfindtheAppendixmoreenjoyablereadingthantherestofthisletter.ButIbelievethattheresultsareareflectionofanumberofother

decisions.Inlastyear’sletter,IdiscussedtheimportanceofinnovationtoCerner’scultureandgrowthpotentialasacompany.Inthisyear’sletter,I

wouldliketoreturntotheimportanttopicofhowthecomplexitiesofthehealthcareenvironmentandthemediumofinformationtechnologyinteract,how

Cernergaineditsuniquevaluepropositionforhealthcare,andwaysinwhichCernerstrivestoextenditscompetitiveadvantagewellintothefuture.In

doingthis,IwilltouchonthetrendsCerner’sexecutiveteamandIseeinourbusinessenvironmentandthekeystrategieswearepursuingasacompany

inordertocontinueourremarkablelong-termgrowthandcontributionstoimprovinghealthcaredeliverysystemsaroundtheworld.

CernerwentpubliconDecember5,1986,atasplit-adjustedpriceof$1.00pershare.FactsaboutCerner’shistoryasapubliccompanyinclude

thefollowing:

Cerner’sstockpricehasincreasedanaverageofmorethan20percentannuallysince1986comparedto10percentfortheNASDAQ

CompositeIndexand9percentfortheS&P500Index.

$10,000investedinCernerin1986wouldbeworthmorethan$460,000today.

Cerner’smarketcapitalizationisapproximately80timeslargerthanin1986,growingfrom$45millionin1986tomorethan$3.5billion

today.

Cernerhasgrownitsrevenueanaverageof25percentannually,from$17millionin1986tomorethan$1.1billionin2005.

Cernerhasbeenprofitableonaproformabasiseveryquartersincegoingpublic,growingearningsanaverageofmorethan20percent

annually.

Cernerhasinvestedmorethan$1.3billioninresearchanddevelopmentsince1986andintendstoinvestasimilaramountinthenextfive

years.

Cernerhascreatednearly7,000high-qualityjobs,withapproximately4,000ofthemintheKansasCitymetropolitanarea.

Page 8: Download the Full Report - Cerner Corporation

Healthcare & Information Technology Create Complexities, OpportunitiesCerner operates in two fast-paced industries, healthcare and information technology. A third industry derives from the convergence of these two,

healthcare information technology (HIT).WhileCernercompetesdailyagainstcompanies thathavea largeroverallpresence ineitherhealthcareor

informationtechnology,nocompetitorhasalargercommitmentthanourstothespacewherebothindustriesmeet.AtCerner,Iregardhealthcareas

ourenvironmentandinformationtechnologyasthemediumthroughwhichweimpactthatenvironment.Wherethetwointersect,avastamountofwork

remainstobedone.Asyouwillseeinthefollowingsections,thechallengesinthehealthcareenvironmentareconsiderable,andinformationtechnology

isperhapstheonlymediumwellsituatedtoaddressthechallenges.Bothourenvironmentandourmediumhavehadahistoryofrapidandrobustchange,

andvirtuallyallofCerner’sopportunitiesasacompanyhaveemergedoutofthesechanges.AschangecontinuestocreateopportunityforCerner,itwill

alsocreateadditionalcomplexitythatwemustsuccessfullymanage.

Inherent Challenges in the Healthcare EnvironmentThe Fragmented Nature of Healthcare Delivery

AstandardopeninglineofmanyhealthcareexecutiveswhentalkingaboutUnitedStateshealthcaredeliveryisthatthereisno“system”inthesystem.In

mostcommunities,apatchworkofindependentorganizationsformstheoverallentityweperceiveasaconnectedhealthcaredeliverysystem.Mostofus

inthecommunityviewourpersonalphysicianasourtrustedguidethroughthesystem,theprofessionalwhowillmanageourconditionsandsafeguard

ourpassagethroughitscomplexity.Practicingwithinthesystemtoday,however,aremorethan100typesofphysiciansspecializingandsubspecializing

indifferentmedicalfunctionsorconditions,andtheirconnectionswithoneanotheraretenuousatbest.Themovementtowardthesehighlyspecialized

nichesofcarehasbeennecessitatedbyanever-wideningsphereofknowledgeaboutourcomplexhumanbiology.Even if thisbodyofknowledge

stoppedincreasingtoday,nophysicianalivecouldlearnandretainallofit.Howmuchless,then,cananyonephysicianhopetoapprehendtheongoing,

acceleratingexplosionofmedicalknowledgeinalldisciplines?Specializationhasbeentheresponsetothisphenomenon.Specializationhasoccurred

throughoutthepastcentury,butithasincreasedinrecentdecadesasthediscoveryofmedicalknowledgehasaccelerated.

Frequently,specialistsarenot inmedicalpracticewithoneanother.Avisittoeachrequiresaseparateappointment,andveryfewspecialistshave

easyaccesstoaperson’spreviousmedicalrecords.Evenhospitalshaveseparatefacilitiescroppingupforthetreatmentofchildren,women,hearts,

orthopediccasesandcancer.Inmostcases,homehealth,hospice,medicalequipmentservices,thelaboratoryandpharmacyalsofunctionseparately.

Eachoperateswithinitsownsilo,and,typically,eachhasitsownsetofmedicalrecordsthatarenotdesignedtobeexchangedwiththeothers.In

mostcases,thevariouscliniciansinthe“system”aretrainedseparately,withoutcomprehensivemodelsforinteractingwithoneanother.Whenweas

consumersareinneedofcare,thisrealityhasadoubleedge.Specializedknowledgecanhelpuswhenwearepatientswithaknownailment,butitcan

alsoharm usbyitsinabilitytoviewusaswholepersonsinneedofalifetimeofdiagnosis,treatmentandprevention.

Paper,filmandmanualhumanprocesseseventuallyconnectedthepartsofthesystem,butthehand-offpointswere—andare—pronetoerror,variance,

waste,delayandfriction.ThisistheenvironmentCliff,PaulandIdiscoveredwhenweenteredbusinesstogetherin1979.As“systemsguys,”wecould

notfindthesystem.Whatwefoundwasthecomplexityofthehealthcaresystemandnumerousunmetneeds—anentrepreneurs’paradise.Pocketsof

profoundimprovementnotwithstanding,fragmentationisstillthenorminhealthcaretoday.ThisissomethingIamacutelyremindedofeachtimeIora

familymemberaccessthesystemforcare.Weneedtoputthe“system”intoourhealthcaresystem.

Healthcare’s Complexity Creates Quality Issues

At the verybeginningof thisdecade, information technologybecameamainstream topic forhealthcareexecutiveswhen the landmark Instituteof

Medicine(IOM)report,“ToErrIsHuman,”raisedpublicconcernoverthenumberofpreventablemedicalerrors.Thereportestimatedthatpreventable

medicalerrorscauseupto98,000deathseachyear—thisisequivalenttoajetcarrying270passengerscrashingeverydayoftheyear.Importantly,the

reportcalledfor“increasedunderstandingoftheuseofinformationtechnologytoincreasepatientsafety.”IntheUnitedStates,thefirstfiveyearsofthe

decadehaveseentheprogressive“wiring”ofhealthcaredelivery,innovationsandcompetitionbetweensuppliersofinformationtechnology,andtalkof

definingstandardsofinteroperabilitybetweensystemsthatare,forthemostpart,privatelyowned.

Healthcareasanindustryhasaunique,inherentlyintimaterelationshipwitheachofusasindividuals.Ourlivesandthelivesofourfamilies,friendsand

associateswilldependontheaccessibility,timelinessandqualityofthecareinourcommunities.

Financial Complexities Create Unnecessary Friction for All

Beyondthefragmentationcausedbyclinicalspecialization,healthcarefinancingisalsoabizarremazeoffundingcomingfrommultiplepublicandprivate

sources.Thefederalgovernment’sMedicareprogram,whichcoversthelargerportionofthecostsoftheover-65population(thedemographicsegment

abouttobeinvadedbytheBabyBoomers),andthestate-runMedicaidprogram,whichusesamixoffederalandstatefundstoprovideasafetynetfor

thepoor,combinetoaccountfornearly50percentofcurrenthealthcarefinancing.Privatesources,originallyprivateinsuranceprogramsfundedby

employers,haveconvertedtoself-insuredemployerplans.Out-of-pocketconsumerspendingfillsthegapsincoverage.Today,morethan40million

individualsintheUnitedStateshavenoformalsourceofhealthcarecoverageandlittleabilitytopayformajorservices,leavinghealthcareprovidersto

coverthecostsofcareforthispopulationfromothersourcesoffunds.

5

Page 9: Download the Full Report - Cerner Corporation

Gettingpaidforpracticingmedicineasaphysicianorhospitalisincrediblyslowandcomplex.Smallphysicianpracticesandhospitalshavecontracts

withnumerouspayors,eachdefiningrulesthatmustbecompliedwithinordertosuccessfullysubmitaclaim.Amultitudeofplanvariationsspecify

preciselywhichpatients,procedures,services,conditionsandmedicationsareeligibleforreimbursement.Asconsumers,wearequicklyexposedto

thisrat’snestofrulesandregulationswhenthingsarenotcovered,creatingasenseofconfusionandpotentialconflictwithourphysiciansatthevery

timeweneedtofocuson“gettingwell.”

Theprevailing,incoherentincentiveinmostofthispaymentsystemisthatphysiciansandhospitalsonlygetpaidwhenpeoplearesick.Mostofuswould

likeasystemdesignedtokeepushealthyandreactquicklyandefficientlywhenwehappentobesick.Thefuturedirectionisclear;theconsumerwill

bemoreinvolvedinmakingeconomichealthcaredecisions,andweneedtoredesignhowcommerceworksinhealthcare,eliminatingthefriction.

Healthcare’s Rising Costs

Anydiscussionofhealthcarewouldbeincompletewithoutamentionofhealthcare’srisingcosts.Onaverage,therateofincrease ofnationalspending

onhealthcarehasexceededthegrowthoftheworld’snationaleconomiesby2percentperyearforthelast40years,creatinganunsustainablecourse.

IntheUnitedStates,whenthe2005figuresarefinalized,thenationalconsumptionofhealthcareisexpectedtohavetopped$2trillionor16.2percentof

theGrossDomesticProduct(GDP),morethananyothersector.Remarkably,thisequatestomorethan$6,600perperson(capita)intheUnitedStates.

Thefundamentalsarguethattherateofincreasewillclimbinthefuture.Thesefundamentalsincludetheagingofthepopulation;newsciencesthat

willextendtheyearsofourlives,addingmorepeopletotheMedicareenrollment;newentitlementprogramssuchastherecentMedicaredrugbenefit;

andmajoraddedcostsassociatedwithnewlifesavingandlife-prolongingproceduresandexpensivenewtechnologies. Anotherfundamental isthe

inevitableincreaseofconsumerisminhealthcaredecision-making.Althoughconsumerismsometimesactstoincreasequalitywhileloweringthecost

ofhealthcare,itcanalsoincreasetheexpectation—andprovision—ofinordinatemeasuresofcarethatcostmuchanddonotprolongyearsorimprove

qualityoflife.Insomecases,theriseisexplainedbythefinancialdislocationofthehealthcareconsumer.Whenthepersonorfamilyreceivingcareis

notpayingforthecare,thereislittleincentivetocontrolcosts.Buthealthcarecostsalsoriseforotherfundamentalreasonsthatarenoteasilyisolated

orcontrolled.

The twobiggestdifferences inhealthcaredeliverysystemsoutside theUnitedStatesare thatmostof themaresingle-payersystems inwhich the

governmentisthepayer,andthelevelofspendingasapercentofGDPisless.Theimplicationofthisdifferenceissignificant,puttingUnitedStates

employersatacompetitivedisadvantagewithothercountries.Still,thetrendisforhealthcarecoststoriseformanyofthesamereasonstheyrisein

theUnitedStates.

This trend has been long in the making, and policymakers have been reacting for decades. The 1980s saw shifts in the United States’ federal

reimbursementsystemfromaretrospective“replaceyourcosts”systemtoonethatofferedfixedpaymentpercaseusingdiagnosis-relatedgroups

(DRGs).The1990swasadecadeof“managedcare”designedtousetheintermediariesasactiveinterventionistsincaredecisions.Theirgoalswere

twofold:toreduceutilizationbyensuringmedicalnecessity,andtoimprovequality.Whilethereweresomebenefitssuchasreducedlength-of-stay

inhospitals,thiseraendedinawhimperandwithsomefairlyhealthymarketcapitalizationsofthetopfiveinsurancecompanies,whichtodayhavea

collectivemarketcapitalizationthatexceeds$180billion.Hospitalsrespondedbyhorizontalconsolidationaswellassomeverticalconsolidation,forming

IntegratedDeliveryNetworkstoincreasetheirpowertonegotiatewiththeintermediaries.ThefederalgovernmentusedtheBalancedBudgetActof1997

toattempttobreakthetrendofrisingcostsinthelatterhalfofthedecade.

AtCerner,wearesometimesimpactedbypolicymakers’attemptstocontrolrisingcosts.TheBalancedBudgetActslashedourclients’operatingmargins

andaffectedpurchasinginthelate1990s.Inthelongterm,however,risingcoststendtoworkinourfavorbecausetheybecomeakeyincentivetoinvest

ininformationtechnology.Thereturnoninvestmentthatusedtobeunprovenisquicklybecomingundeniable.Inthefallof2005,themulti-year,peer-

reviewedRANDstudyonhealthcareITwaspublishedinHealth Affairs,anditofferedsolidevidenceofwhatweatCernerhavebelievedforyears—that

informationtechnologyhasauniquevaluepropositionforhealthcare.ThestudyconcludedthattheUnitedStatescouldhaveanetsavingsof$162billion

peryear,orapproximately10percentofthetotalcostofhealthcare,throughthewidespreadadoptionofIT.Irefertothisas“thefirst10percent,”

becauseIbelievetheRANDstudyisconservativeinitsscope.Iwanttobeonrecordassayingthatwebelieveourindustry’struevaluetoUnitedStates

healthcarewillbea30percentreductionincostaswellasprofoundimprovementsinsafetyandquality.

Page 10: Download the Full Report - Cerner Corporation

Capitalizing on the Opportunities Using Information Technology as a Medium Information Technology – The Medium for Mission-Critical Change

Cliff,PaulandIstartedthinkingaboutwhatwouldbecomeCerneronSundayafternoonmeetingsinaKansasCityparkin1979.Ourday-oneconcept

evenbeforewestartedCernerwastocreate“mission-critical”systemsforamajor,information-drivenindustry.Intheearlysurvivaldays,wediscussed

andevendabbledinanumberofindustries,butwhenwesignedourfirsthealthcareclient,alaboratory,itwascleartoallofus,wehadfoundthe

industrythatwaseverythingwewantedandmore.Healthcarewasbig.Itwascomplex.Itwaspropelledatitsheartbyinformation.Beforelong,we

werehooked.

Itdidn’ttaketoolongforustogetexposedtomoreofthecomplexitiesofthehealthcareenvironment—theintricacyofhumanbiology,thefragmented

illusionofa“system,”themisalignedfinancialincentivesandthetreacherouscostpressures.Ateverystepalongtheway,wefoundthatinformation

technologyhadthecapacitytoextendclinicians’abilities,toconnectacrosscarevenues,togainefficienciesandtoremoveneedlesscosts.Beforewe

weredonebuildingPathNet®,ourfirstlaboratoryapplication,wehadavisionforconnectingthemission-criticalinformationinhealthcareonacommon

informationplatform.Ourpicnic-tableconceptofbeing“mission-critical”tookonacrispnewmeaninginourchosenhealthcareindustry:itmeantbeing

clinical—thatis,beingdirectlyorindirectlyinvolvedinthediagnosis,treatmentandmonitoringofapersonwhoneedsmedicalcare.Duringthe1970s

andcontinuingthroughthe1990s,mosthealthcareITsystemswereanythingbutclinical.Thethen-dominantcompanieshadmadefinancialsystemsthe

centeroftheirinformationstrategiesandarchitectures.Atthattime,clinicallybasedsystemsexistedonlyindepartmentssuchaslaboratory,pharmacy

andradiology.Hence,thesethreedepartmentswerethefirstsetofsolutionsdevelopedbyCerner.

Ifyouhappentohaveacollector’seditionofCerner’sIPOprospectusyouwillseeourstrategyofautomatingthecoreclinicalcareprocessesaswe

describeourfirst-generationHealth Network Architecture®(HNA)platform.HNAwasagoodandpopulararchitecturethataccomplishedmanyofour

original goals, but over timeourgrowing vision forhealthcare ledus toanew, scalablearchitecturebuilt around theperson. In time, ourCerner Millenniuminformationarchitecturewouldincludeapplicationsthatshareinformationacrossalmosteveryvenueofcare,fromtheoperatingroomto

theboardroomtothelivingroom.Today,theCerner Millenniumsuiteisthebroadestanddeepestsetofrichapplicationswithacommonarchitecture

anywhereintheworld.Andeachyear,wedeepenitscapabilitiesandbroadenitsreachwithnewapplications.

Healthcarecontinuestopresentmanyunsolvedproblems,manyofthembasedontheinherentchallengesinthehealthcareenvironment.AtCerner,we

continuetoidentifynewopportunitiestogrowourcompanyorganically.Inotherindustries,ourentrepreneurialculturemaybeadisadvantage.Inthis

industry,ithasbeenanadvantageinthepast,andIbelieveitwillcontinuetobeabigadvantageoverthenextdecade.

Competitive Trends in HIT

Cernerisnotaloneinrecognizingtheopportunitiesinthisindustry.Thecompetitivelandscapecontinuestochange.Thishealthyenvironmentcreates

arobustcompetitivelandscapeintheHITindustry.Itcontinuestoattracttheworld’slargestcompanies,withGEHealthcareexpandingtheirpresence

with the acquisition of IDX Systems. The overall competitive landscape continues to have three basic types of competitors. The first type is the

entrepreneuriallydrivencompany.ThisincludesCerneraswellasahostofsmallernichecompaniestryingtogrowintothenextCernerintheindustry.

Thesecondtypeisthelargemultinationalconglomerate.ThisincludesGEandSiemens,whoseegrowthopportunitiesandsynergieswiththeirother

businesses.Thethirdtypeisthefinanciallyengineered“rollup”businessthatbuiltabusinessandgeneratesgrowththroughaseriesofacquisitionsof

weakercompanies.Averygoodbusinessenvironmentwillcontinuetoattractincreasedcompetitorsofalltypes.

Cerner Strategies Driving Our GrowthStrategymaybethemostusedbusinesstermwiththegreatestvarianceindefinition.Everybusinessleaderultimatelyusesittodefinehowtheirfirm

isorwillbeobtainingcompetitiveadvantage.Webelievethatgoodcorporatestrategieshavelonglifecyclesbecausetheyarethepathtosolvecomplex

changes.Somestrategiesarewellthoughtthroughatthebeginningofalongpath.Beingmission-critical(clinical),andhavingonearchitecturethat

spansthecontinuumofcareareCernerstrategiesthathavedecades-longrelevance,becausetheyaddresstheessentialmissionofhealthcareandoneof

itsbiggestchallenges.Likewise,creatingorganicgrowththroughinnovationisalsoastrategythathasbeenpresentwithCernerfromdayone.Itispart

ofthefabricofourcompanytoreiterateavirtuouscycleoftakingaconceptfrom“visiontovalue,”andweexpectthistocontinue.Inreality,however,

manystrategiesarediscoveredalongtheway,eitherasadjustmentsthatresultfromdifficultiesorasdiscoveriesofthingsthatjusthappentoworkwell.

BelowaresomekeystrategiesweareusingtogrowandimproveCerneratthestartof2006.

Page 11: Download the Full Report - Cerner Corporation

Using Size and Scale to Our Advantage

WhenCliff,PaulandIsatatthatparkpicnictableastwenty-somethingscreatingastart-up,therewasnowayweforesawsizeasastrategy.In2005,

wepassedthe$1billionrevenuemark,reachednearly7,000Cernerassociates,andoperatedthelargestHITdevelopmentandconsultingorganizations

intheworld.Sizehasbecomeoneofourstrengths.Clientswanttoknowthatthecompanytheychoosetobuildonwillbearoundformorethana

fewyears.Governmentsarestartingtocontractforbusiness,andtheywantacompanywithsubstantialresourcesontheothersideofthecontract.

Ourrelativesizehasbecomeanadvantageinthisera.Wehavethetalent,resourcesandtechnologytotakeonanyhealthcareinformationjobinthe

world.

Ininformationtechnology,theconceptofscalabilitymeansthatthearchitecturecanaccommodatemore(withmoreresources)withoutdegradingin

performance.WedevelopedCerner Millenniumasacontemporary,n-tieredarchitecturedesignedaroundtheperson,notaroundasingleorganization.

Weenvisionedacommunitymodelandknewweneededanarchitecturethatwouldscaleupwardtohandletheinformationneedsofmillionsofpeople

whilerunningasasinglesystem.Today,theCerner Millenniumarchitectureisproventorunlargeenterprisesandevencountries.Thisisclearlya

Cernercompetitiveadvantage.

Healthcare is Global, Cerner is Global

OurfirstforayintotheGlobalmarketwasin1986.Werecognizedthenthatthemarketforoursolutionswasaglobalone.Becauseourfocusbegan

intheclinicalarena,mostofourapplicationsrequiredlittleenhancementtomeettherequirementsofmarketsofothercountries.Clinicalmedicineis

practicedsimilarlyandwiththesamemedicaltechnologyaroundtheworld.Howhospitalsanddoctorsarepaiddiffersfromplacetoplace,butdisease

anditsimpactonhumanlifedonot.

TwentyyearsofCernerAnnualReportstellthestoryofCerner’sgrowingpresenceinEurope,NorthAmerica,theMiddleEast,AustraliaandAsia.Wenow

havesystemsinusein17countriesandhaveofficesin13countries(seethebackcoverofthisAnnualReportfordetails).HIThasbecomehealthcare

policy,withfederalgovernmentspromotingandinsomecasesacquiringclinicallybasedsystems.ThiswasabreakoutyearforourGlobalorganization,

withsuccessesaroundtheworld,includingthenationalcontracttoimplementCerner Millenniumsolutionsinmorethan20percentofEnglandasthe

softwaresupplierfortheFujitsuconsortium.Twoyearsago,wewereeliminatedfromconsiderationfromthissameprocurement,butthestrugglesofa

competitorallowedusthechancetogobackinanddeliveroursolutions.Cernerisglobal.

Combining Biology & Information Technology – Millennium Helix

Justfiveyearsaftertheinitialdraftofthefirsthumangenomesequencingwascompletedforanestimatedcostof$300million(thefinaldraftandallthe

technologythatmadeitpossiblecameinnear$3billion),theheadlineinSciencemagazinereads,“TheRaceforthe$1000Genome.”Thisyearalone,

thecostofsequencingamammaliangenomeisexpectedtodeclinefrom$22milliontoamere$100,000,andisexpectedtofallfurtherwithinashort

time.Althoughhavingyourowngenomesequencedtodaywouldbeconsideredaveryexpensivenovelty,newdiscoveriesarebeingmadeonaweekly

basisthatwillmakesequencinglessofanoveltyandmoreofapracticalbenefittoyourhealth.ThedecliningcostofDNAsequencingtriggerseven

morediscoveries.ItisundeniablethatfuturebestmedicaldecisionswillbebasedonyouractualDNA.Yourphysicianstandsnervouslyinbetweenthe

potentialbenefittoyouofthenewscientifictechnologyandthepotentialburdenofusingitfully.

AtCerner,wesawthistrendcomingseveralyearsagoandhavedesigned,builtandimplementedtheMillennium Helix™solutionaspartofourinformation

platform. In thisworkwehave defined a newnomenclature, the Clinical Bioinformatics Ontology™, to classify and store the vast amount ofDNA

informationcontainedinthehumangenome.Recently,theNationalCancerInstituteadoptedandispublishingthisnomenclatureinitsMetathesaurus

forotherresearchersaroundtheworldtouse.

HavingyourowngenomeaspartofyourPersonalHealthRecordcreatestheplatformforanincreasingpercentageofyourfuturemedicaldecisionstobe

personalizedtoyou,usheringinaneweraof“personalizedmedicine.”Thephysiciankeepingabreastofrecentgenomicadvancessensesthetsunamiof

informationheadingtowardtheirprofessionalpractice.Weseetheupcomingpostgenomicsea-changeasasignificantopportunityforCernertoemerge

asthevehicleforhealthcareinformationinthenewworld.

Providing Our Clients the Necessary Technology Infrastructure and Management Skills to Operate Millennium – CernerWorks CernerWorks (formerly Cerner Managed Services) has quietly become the third leg of Cerner, standing strong alongside the Client and Intellectual

Propertyorganizations.Ourstrategyistoreducetotalcostofownershipforourclientswhileweincreasethevaluetheapplicationsdeliver.Cernerhas

Page 12: Download the Full Report - Cerner Corporation

theopportunitytousethe“economyofscale”ofhostingourclients’Cerner Millennium applicationsatacostlowerthanwhatclientsincurinsidetheir

ownorganizations.ItalsomovesthecapitalexpendituresrequiredforthenecessarytechnologyinfrastructurefromtheclienttoCerner,reducingthe

start-upcashrequirement.Inmostcases,wehavealsobeenabletoimprovethereliabilityandavailabilityofthesystemtotheendusers.Weprovide

a99.9%uptimeguaranteetoourCernerWorksclients,whileworkingonmakingoursystemsavailable100%ofthetime.Overall,thevalueproposition

toourclientsisstrongandaccountsforthelargegrowthinthispartofCerner.

Creating an Information Utility for Physicians – PowerWorks

Themajorityofphysiciansare insmallpracticesof20or fewerphysicians. Theseare truesmallbusinessorganizations,and they lackaccess to

muchofthecapital,managementandinformationtechnologyassetsandtalentenjoyedbylargerorganizations.Cerneriscommittedtobringingthese

organizationsworld-classsolutionsandserviceswithouttheburdenofinvestinginandmanagingtheenablingtechnologyplatform.Historically,Cerner Millenniumsolutionsandserviceshavenotbeenaffordableforthesmallestofphysicianpractices.In2005,wemadesignificantstridesinadvancinga

strategytoprovidelow-cost,high-valueservicesdirectlytothelow-endphysicianofficemarket.Offeringalarge-scale,utility-likesolutionthatmakes

useofasharedoperatingenvironmentallowsustolowercostsandconnectphysicianswitheachotherandwiththepeopletheyserve.Thebeautyof

theutilitymodelisthegreaterthenumberofphysicianswhoconnect,thegreaterthebenefittoall.Welaunchedthisstrategyatthebeginningof2005

withtheacquisitionoftheMedicalBusinessDivisionofVitalWorks,Inc.,whichbroughtmorethan30,000physiciansin3,500physicianpracticesto

Cernerandwasthelargestacquisitioninourcompany’shistory.Thebusinessmodelisamonthlysubscriptionthatvariesbasedontheserviceschosen,

muchlikesubscribingtocableTVservice.

Coordinating Care across Communities with Health Information Networks

Oneofthelargesystemicissuesinhealthcareistheneedtocoordinatecareacrossallpartsofthefragmentedhealthcaredeliverysystem.Itisclear

thatinformationtechnologywillbeamajorconstructinthesolutionoftheseissues.Itislessclearbywhomandhowthesesolutionswillbedeveloped

anddeliveredintheUnitedStates.Inothercountries,thefederalorprovincial/stategovernmentsaresteppingintoprovidethenecessaryinfrastructure.

Cernerhastakenthoughtleadershipinthiscriticalarea.InthestateofTennesseewithourpartnerSharedHealth,wedevelopedandimplementeda

communityhealthrecordforeachofthemembersofthestate-wideTennCareMedicaidprogram.Today,morethan1millioncitizensofTennessee

haveavailableacommunityhealthrecordthatisaccessibletotheirpersonalphysiciansandemergencydepartmentsinthestate,andweexpectmore

than1.5millioncitizenstohavecommunityhealthrecordsavailablebythemiddleof2006.BuildingonwhathasbeenaccomplishedinTennessee,the

stateofKansasisintheearlystagesofadoptingasimilarprogramfeaturingacommunityhealthrecordforthestate’sMedicaidpopulationinSedgwick

Countyandnotablyaddingtothatvaluablee-prescribingdata,allenabledbyCerner.Inadditiontothesestate-basedinitiatives,Cernerin2005also

facilitatedthecreationofafirst-of-its-kind,employer-drivenapproachtocarecoordinationinKansasCity.AmericanCenturyInvestments,Applebee’s

International,SprintNextelandYRCWorldwideareamongtheprivate-sectoremployerswhohavecommittedtojoinHealtheMid-America.Indoingso,

theywillprovidetheiremployeesaportablepersonalhealthrecordthatholdsthepromiseofimprovingthequalityandcompletenessofcaretheyreceive

invenuesacrossthemetropolitanarea.

Taking a New Approach to Managing Type I Diabetes

Fragmentation’sbiggestimpactinthehealthcaresystemismostvisiblewhenyouaremanagingchronicmedicalconditions.Thereislittledoubtthat

informationtechnologywillplayalargepartinsolvingchallengesfacedbypopulationswithchronicillnesses.Cernerhastakenaleadershiprolethrough

ournationalprogramtoconnectthechildrenandyouthintheUnitedStateswhohaveType1(juvenile)diabeteswiththeirdoctors.Todate,wehave

implementedthisofferingwithmorethan40participatinghealthcareorganizations,whohaveinturnregisteredmorethan6,000childrentothesystem,

withnumbersincreasingweekly.Whileweareprovidingtheservicefreeofcharge,webelievethatthisisaneffectivedemonstrationprojectforother

condition-basedutilities,andthereareseveralopportunitiesforsuccessfulbusinessmodelsfromthistypeofservice.

Entering a New Device Market with CareAware RxStation

Aselectronicmedicalrecords(EMRs)becomethesinglesourceoftruthforproviders,the“context”ofalmostallmedicaldecisionswillresideintheEMR.

Thissamecontextdrivesalmostalloftheclinicalprocesses.Thehealthcaredeviceindustryishuge,rangingfromthefamiliarstethoscopetoimplantable

devicesforcontrollingyourheartrate.

Page 13: Download the Full Report - Cerner Corporation

Mosthealthcaredevicesinexistencetodayareeithertoo“smart”ortoo“dumb”tofitthecapabilitiesoftherapidlyevolvinghealthcareinformation

infrastructure. Either theyareover-engineeredandoverlycomplex,or theyare lackingadequate technology to takeadvantageofavailableclinical

information. Anewgenerationofhealthcaredevices isneeded. Cernerrecognizedthis largeopportunityand, in lessthanoneyear,designedand

manufacturedtheprototypesofanewlineofmedicationdispensingdevicescalledCareAware RxStation™.OurintroductionoftheCareAwarelineat

therecentHIMSSconventionwasamajorsuccess.Hundredsofpeopleattendedprivatedemonstrations,andforthoseIwitnessed,itwasa“blink”

momentforeachofthem.Theyinstantlygot itandlovedthattheirCerner MillenniumEMRisthesinglesourceoftruthforthecomplexphysician-

pharmacist-nurseinteractionthatoccursduringthemedicationprocessofordering,dispensingandadministration.Thisprocessoftenincludesmultiple

modificationsandchangesinorderstatusascliniciansinteracttoprovidethebestcarefortheirpatient.BecauseofitsconnectiontoCerner Millennium,

eachCareAware RxStationdeviceisatalltimesawareoftherightperson,drug,dose,routeofadministrationandtimeforamedicationorder,aswell

aswhoisassignedtoadministerthemedication.Ourcompetitors’devicesrequireacumbersomeworkflowforthehospitalstaffanddualmaintenance

offormularyinformation,apotentialsourceoferroranddelay.Afterthe“blink”moment,mostclinicianswhoseetheCareAwaredeviceswanttheir

organizationstobuythem.

2005ishistory.Itwasagoodyear.WeimprovedCerner’sfinancialperformancesignificantlyandmovedourboundariesasacompany.Itwastheyear

inwhichCernerbecametrulyglobal,announcedcommercialavailabilityoftheworld’sfirstgenome-enabledsystem,advancedournewbusiness“utility”

modeltomeettheneedsofthesmallerphysicianpractice,grewtheCernerWorkssegmentintothethirdlegofourbusiness,successfullyconnected

largepopulationsofpeopletotheircareprovidersatthecommunitylevel,anddesigned,developedandintroducedourfirsthealthcaredevice,CareAware RxStation.

IbelieveitisgoingtobebothfascinatingandexcitingtowatchCernerevolveoverthenext10years,toseewhatCernerbecomesin2015.Ibelieve

theseedsarebeingplantednowforourcontinuedsuccessasaleaderindrivingthefutureconfigurationofhealthcareintheUnitedStatesandaround

theglobe.Thereismuchworktobedone.Theroadaheadwillhaveitsshareofbumpsandafewdetours.However,healthcareremainsanindustry

drivenbyinformation,andthefundamentalchallengesthatexistedwhenweenteredthisindustryin1979stillexistinagreatpercentageofthemarket

today.Ourindustryismaturing,andhealthcareprovidersarebecomingwisebuyersofIT.Thisnext10yearswillseparatetheHITcompaniescapable

ofinvestingwiselytosolvetomorrow’sneedsfromthosewhoareheretomeettoday’sneedsonly.Itwillseparatethosewhoproduceresultsfromthose

whocannot.Cernerwillcontinueourroleofleveragingourkeystrategiesandusinginnovationtocreatenewsolutionsthatmakehealthcaredelivery

safer,moreefficientandofhigherquality.

WarrenBuffettsaysthekeytoinvestingis“determining the competitive advantage of any given company and, above all, the durability of that advantage.

The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.”

WhereisCerner’smoat?ItisclearlyinourIntellectualProperty—Cerner Millenniumarchitecture,applicationsoftware,medicalcontent,algorithms,

empiricaldataandmethodologies—and in the IntellectualCapitalofourassociatesand theirexperiences. Only timewill tellhowwide,deepand

enduringourmoatis.WehavetriedtogiveyousomeideasinthisletterofwhereweareinvestingtoimproveCerner’smoat.Webelievethatthebusy

intersectionofhealthcareandinformationtechnologyhasasizeable,importantandincreasingroletoplayinoursociety.

OnbehalfoftheentireCernerteam, Iwould liketothankyouforsupportingourvisionandmission. Wewillcontinuetoworkhardtorewardyour

confidencebyimprovinghealthcaredeliveryaroundtheworld.

NEALL.PATTERSONFOUNDERChairman&ChiefExecutiveOfficer

CLIFFORDW.ILLIGFOUNDERViceChairman

EARLH.DEVANNY,IIIPresident

PAULM.BLACKExecutiveVicePresident&ChiefOperatingOfficer

MARCG.NAUGHTONSeniorVicePresident&ChiefFinancialOfficer

JEFFREYA.TOWNSENDExecutiveVicePresident

JULIAM.WILSONVicePresident&ChiefPeopleOfficer

PAULN.GORUPFOUNDERSeniorVicePresidentandChiefofInnovation

10

Page 14: Download the Full Report - Cerner Corporation

11

Page 15: Download the Full Report - Cerner Corporation

Appendix: Cerner’s Business Model and Financial Assessment INTRODUCTIONForthepasttwoyearswehaveincludedadetaileddiscussionofourbusinessmodelandfinancialperformanceaspartofourshareholderletterorinanappendixtotheshareholderletter.Wearecontinuingthattraditionthisyearwithadiscussionofourcurrentbusinessmodel,2005financialperformance,andstrategyforachieving20%operatingmargins.

THE CERNER BUSINESS MODELThecoreofCerner’sbusinessmodelisthecreationofintellectualproperty(IP)intheformofsoftwareandotherformsofdigitalcontent.Oursoftwareisbundledwithothertechnologiesandservicestocreatecompleteclinicalandbusinesssolutionsforhealthcareproviders.Inshort,webuildit,sellit,deliverit,andsupportitforhealthcareproviderorganizationsaroundtheworld(“it”inthiscontextreferstothesolutionsCernercreatesforhealthcareorganizations).Inouropinion,wehaveahealthybusinessmodeland,undertherightcircumstances,webelieveitwillcontinuetoimproveoverthenextseveralyears.BelowisagraphicalrepresentationofCerner’sbusinessmodelshowingatop-to-bottomflowofhowCernerconvertsnewbusinessopportunitiesandourbacklogintorevenueandearnings.

AtthetopofourmodelisourSales Pipelineofpotentialfuturebusiness opportunities we have identified in the marketplace.Our pipeline has increased substantially over the past severalyears,reflectingbothastrongmarketforoursolutionsandourleadership position in the healthcare information technologymarketplace.

During each quarter, we sign new contracts to deliver oursolutions to clients. These contract signings are reported asNew Contract Bookings and become part of our contractbacklog.Atypicalnewcontractwillimpactourrevenuesinthecurrentquarterandforthenextseveralquarters,orevenyears,dependingonhowthelicenses,technologyresale,subscriptions/transactions,managedservices,andprofessional servicesaredelivered

AlmostallofourclientcontractswillalsocontainprovisionsforSupport Contracts inwhichCerneragreestoprovideabroadsetofservicesthatsupportourclients’useofoursolutionsindemanding clinical settings. This support includes addressingtechnicalissuesrelatedtooursoftwareandprovidingaccesstofuturereleasesoflicensedsoftware.

Continuing with our top-down business model flow, the valueof the new contract bookings and support contracts rolls intoourContract BacklogandSupport Backlog,respectively.Eventhoughalmostallofoursystemsareinservicefordecades,ourreportedSupportBacklogonlyincludestheexpectedvalueforoneyearofsupportrevenueforallofourclientsupportcontracts.Wehavehistoricallyreportedthevalueofthesebacklogsbecausewe believe they are important to our shareholders’ ability tointerpret the overall health of our business. Our total backlog(signedcontractswithunrecognizedrevenuesandoneyearofsupportforallsupportcontracts)ended2005atapproximately$2.14billionandgrewathealthycompoundedannualratesof29percent,28percentand29percentoverthepastthree,fiveand10years.

At thecoreofourbusinessmodelareourvarious revenuestreamsand thecontributioneachstreammakes toward theprofitabilityofCerner.Thecontributionisstatedastherecognizedrevenuelessthedirectcosttoproducethatrevenue.Onourbusinessmodel,wehavedepictedsixrevenuecategoriesthatrollintothetworevenuelineitemsonourincomestatement.Licensed Software,Technology Resale,andSubscriptions/Transactions makeuptheSystem Saleslineofourincomestatement,andProfessional Services,Managed Services,andSupport & MaintenancemakeuptheServices, Support & Maintenanceline.Hereisadescriptionofeachrevenuestream:

CheCk for spaCing here

12

Page 16: Download the Full Report - Cerner Corporation

Licensed Software.WedevelopandlicenseIP(ourarchitectures,applicationsoftware,executableandreferentialknowledge,dataandalgorithms)toourclients.Ourstandardlicenseisperpetual—providingourclientspermanentrightstousethesoftwaretheypurchase.Thisapproachcontrastswiththeapproachofmostofourcompetitorswhoarealwaystryingtosell“upgrades”totheirclients.Webelieveourapproachispartofthereasonforourleadershippositionandthereasonwehavesomanylong-termclientrelationships—somelongerthan20years.Werecognizerevenuesfromlicensedsoftwareasweachievepredefinedclientengagementmilestones,suchasdeliveryandinstallationofoursoftware.In2005,thistypeofrevenuerepresented21percentofourtotalrevenueswithaprofitcontributionof85percent.

Technology Resale.Webundlelicensedsoftwarewithothercompanies’IP(e.g.,thatofHP,IBM,Microsoft,Oracle)intheformofsublicensesinordertocreatecompletetechnologysolutionsforourclients.Wealsoresellbundledcomputerequipment(hardware)fromtechnologycompaniestocreateacompletelyfunctionalsystem.Werecognizerevenuesfromtechnologyresaleastheequipmentisdeliveredtoourclients.In2005,theserevenuesrepresentedapproximately13percentofourtotalrevenuewithaprofitcontributionof13percent.Theprofitcontributionrealizedin2005isdownfrom20percentin2004duetoamuchhighervolumeoflowermarginhardware.Evenatthelowermargins,technologyresaleisstillavitalcomponentofourbusiness,asitisadriverofotherhighmargin,highvisibilityrevenue,suchastechnicalservices,sublicensedsoftwaresupport,andequipmentmaintenance.

Subscriptions/Transactions.Anothermethodbywhichweprovide IPisbasedonasubscriptionmodelthathasaperiodicusagecharge.Thisistheprimarywaywepackageandprovidemedicalknowledge,whichchanges based on research and can be updated independently fromthe software in which it is embedded. Also included in this categoryofrevenueisourElectronicDataInterchange(EDI)transactionrevenue.EDIistheelectronictransferofdatabetweenhealthcareprovidersandpayers.Boththesubscriptionandtransactionmodelrevenuestreamsaregenerallyrecognizedmonthly,andin2005theyrepresented5percentofourtotalrevenueswithaprofitcontributionof37percent.

Professional Services.Weprovideawiderangeofprofessionalservicestoassist our clients in the implementationof our information systemsintheirorganizations.Theseservicesareintheformofprojectmanagement,technicalandapplicationexpertise,andeducationandtrainingofourclients’staffstoassistintheconstructionandimplementationofoursystems.Werecognizerevenuesassociatedwiththeseengagementactivitiesastheyareprovidedtoourclients.In2005,theserevenuesrepresentedapproximately26percentofourtotalrevenuewithaprofitcontributionof27percent.Wehaveanumberofinitiativesinplaceinordertoimprovethefundamentalprofitabilityofthiselementofourbusiness.Ourtargetprofitcontributionis33percentby2008.

Managed Services.Therearesomeservicesthat,incertaincircumstances,wecanperformbetterandmoreeconomicallythanourclientscanforthemselves.Overthepastseveralyears,wehavebeguntoofferanumberofsuchserviceswecallCernerWorksManagedServices.WecurrentlyofferasetoftechnicalservicesthatincludeRemoteHosting,ApplicationManagementServicesandDisasterRecovery.RemoteHostingisthelargestoftheseofferings,anditinvolvesCernerbuying(outofcashflows)thenecessaryequipment,installingitinoneofourdatacenters,andoperatingtheentiresystemontheclient’sbehalf.Therevenuesforthisserviceandourchargefortheequipmentarerecognizedmonthlyasweprovidetheservices.Mostofourclientschoosetoowntheirownsoftwarelicense,sothatportionoftherevenueisunchanged.Cernerownstheequipment,however,insteadofsellingitupfronttotheclient;thisimpactsthetechnologyresaleportionoftherevenue.ManagedServicesrepresented7percentofourtotalrevenuein2005.Theprofitabilityofthispartofourbusinessiscurrentlyat25percentandshouldincreaseaswegrowthisbusinessandspreadthefixedcostsacrossalargerrevenuestream.

Support & Maintenance. Thefinalportionofourrevenuecomesfromtheongoingsupportandmaintenanceservicesweprovideafteroursystemsareinusebyourclientorganizations.Almostallofourclientscontractfortheseservices.Clientsonsupportcontractsget24x7accesstoourImmediateResponseCenter,whichservesasour“emergencyroom”,aswellasaccesstoaveryknowledgeablebaseofassociatesinourImmediateAnswerCenterforlessurgentissues.Inaddition,ourclients’supportpaymentsgivethemongoingaccesstothelatestreleasesofourIP.Cerneralsoprovidessupportforsublicensedsoftwareandmaintenanceforthird-partyhardware.In2005,supportandmaintenancerevenuesrepresentedapproximately25percentoftotalrevenuewithastrongprofitcontributionof62percent.

Notethatalloftherevenuecategoriesdiscussedaboveadduptoapproximately97percentoftotalrevenue.Theremaining3percentisrevenuefromreimbursedtravelexpensesrelatedtoCernerassociatestravelingtoclientlocations.Thisrevenuehasazeromarginasitissimplyapass-throughofourclient-relatedtravelexpensesthatarebilledtoourclients,butwhichwearerequiredtoreportasrevenue.

ThetwolargeindirectexpensesinourbusinessmodelarethecostsofourResearch and Development (R&D),whichwasequalto18percentofrevenuein2005,andtheindirectportionofSelling, General and Administrative (SG&A)activities,whichrepresented15percentofrevenuein2005.CernerhasalonghistoryofinvestingheavilyinR&Dandusingthatinvestmenttosystematicallyexpandmarketstocreateorganicgrowth.Weexpecttoinvestatleast$1billioninR&Dfrom2005-2010,aninvestmentwebelieveisunmatchedinourindustry.Overthenextseveralyears,weexpecttheindustrialstrengthofourCerner MillenniumarchitectureandtheenactmentofseveralinitiativesdesignedtoleverageourR&Dinvestmentstoslowtherateof

Managed Services7%

Reimbursed Travel3%

Licensed Software21%

TechnologyResale13%

Professional Services26%

Maintenance& Support

25%

Subscriptions/Transactions

5%

1�

Page 17: Download the Full Report - Cerner Corporation

1�

increaseinR&Dspendingwhilecontinuingourstrongrecordofinnovationandorganicgrowth.Similarly,weexpectto,andhavealreadybegunto,takeadvantageofamorescalablebusinessinfrastructuretoreducetherateofincreaseinSG&Aspendingtobelowourrevenuegrowthrate.Weexpectthisleveragetohelpimproveoperatingmarginswithoutimpactingourabilitytodevelopanddelivernewsolutionstoourclients.

In2005,ouroveralloperatingmarginof$147millionwas13percentofrevenue.Theremainingexpensesinourbusinessmodelaretaxesandinterestexpense,whichtotaled$61millionin2005,leaving$85millionofnetearnings,or$1.09ofearningspershare.

ASSESSMENT OF 2005 FINANCIAL RESULTSWecontinuedtofocusonthreekeyfinancialobjectivesin2005:growingthetopline,expandingoperatingmarginsandgeneratingfreecashflow.

Growing the Top Line

Cerner has consistently delivered strong long-term revenue growth. Both ournewbusinessbookingsandrevenuehavegrownatcompoundannualratesof20percentormoreoverthepastfive-andten-yeartimehorizons.In2005,wegrewour revenueat25percent (18percentexcluding revenue fromouracquisitionoftheMedicalDivisionofVitalWorks,Inc.thatclosedatthebeginningof2005).Ourstronggrowthin2005cameondoubledigitgrowthinbothU.S.andglobalrevenue.Notably,ourglobalbusinesshadabreakoutyearwithrevenuegrowing78percentandincreasingfrom7percentto10percentoftotalrevenue.OurreplacementofacompetitorintheSouthernregionofEnglandwasapartofourglobalsuccessin2005,withthiscontractcontributing$14millionofrevenue.However,otherregionsinourglobalbusinessalsohadstrongyears.OnstrengthintheMiddleEast,AsiaPacific,FranceandCanada,globalrevenuegrewmorethan50percentexcludingrevenuefromourcontractintheUnitedKingdom.

In2006,webelievewecancontinuegainingmarketsharebyleveragingourprovensolutions.Wearealsofocusedoncross-sellingintoourinstalledbaseasourclients’needsgrowovertime.Onaverage,anexistingclienthasjustoverfivesolutionsinstalledfromamongthenearly60potentialCerner Millenniumsolutionsthatareavailable.Evenaftertheaforementionedstronggrowthinourglobalbusiness,wecontinuetoseesignificantopportunitiesglobally.Also,asdiscussedinourshareholderletter,wecontinuetocreatenewareasofgrowthsuchasourCareAwarehospitaldeviceinitiative,stateandregionalcommunityhealthrecordinitiatives,andourphysicianpracticestrategy.

Expanding Operating Margins

InFebruaryof2004,wemappedoutourpathfromthe2003levelof9percentoperatingmarginstoourtargetof20.Wemadeverygoodprogressduringthefirstyearofthispath,withouroperatingmarginexpanding310basispointsin2004to12.4percent.In2005,therateofourmarginexpansionslowed,withoperatingmarginsincreasing20basispointsto12.6percent.Theprimarycauseofthelowerlevelofmarginexpansionin2005wasthatwesoldmorehardwarethanexpectedandthosehardwaresaleswereatlowerthannormalmargins.Toalesserextent,ouroperatingmarginswereimpactedbyourcontractwithFujitsuintheSouthernregionofEngland,whichisbeingaccountedforatzeromargins(equalamountsofrevenueandexpense)untilallelementsofsoftwarehavebeendelivered,whichisexpectedsometimein2008.Despitetheimpactthelow-marginhardwaresalesandourcontractinEnglandhadonouroperatingmarginasapercentofrevenue,westillgrewoperatingearningsnearly30percentin2005becauseofstronglevelsofsoftwaresalesandmarginexpansioninourprofessionalservices,managedservices,subscriptions,transactionprocessing,andsupportandmaintenancebusinessmodels.

InFebruaryof2006,weupdatedourpathto20percentoperatingmargins.Belowisadescriptionofthekeyelementsofourpathtoachieving20percentoperatingmargins.Notethatthe‘basecase’pathdiscussedbelowleadstoapproximately19percentoperatingmarginsforthefull-year2008,whichwouldequatetoanoperatingmarginof20percentormoreinthefourthquarterof2008.ThispathassumesforcomparativepurposesthattherevenuefromourcontractwithFujitsuwillremainatzeromarginthrough2008eventhoughweexpecttobeginrecognizingmarginonthatcontractsometimein2008.Itisalsoimportanttonotethatourmanagementteamhasamoreaggressivetargettoachieve20percentoperatingmarginsbythefourthquarterof2007and21percentoperatingmarginsforthefull-year2008.Thegraphshowingthemarginexpansiontargetsreflectsthismanagementtargetandaviewthatexcludesthezero-marginFujitsucontractrevenuefromthebasecase.Finally,itisimportanttorealizethatourmarginexpansionpathisbasedontheassumptionthatwewillgrowourrevenuebyapproximately14percentin2006and10-12percentin2007and2008.

Improving Professional Services Margins from 2� percent in 2005 to �� percent by 200�.Weexpectthistocontributemorethan130basispointstoCerner’soperatingmargin.Wemadealotofprogressatexpandingmarginsinthisorganizationin2005,andwebelievetherearestillmoreopportunitiestoenhanceproductivity.AkeydriverwillbecontinuingtoleverageourAcceleratedSolutionsCenter,whichhashighermarginsthantraditionalprojectsandaccountedforapproximately20percentofconversionsin2005.ThenextlevelofproductivityisexpectedtobeachievedthroughaninitiativecalledBedrock™,whichisawizard-liketechnologythatautomatesmuchoftheimplementationandmanagementofourCerner Millenniuminformationplatform.TheBedrocktechnologyhasthepotentialtosignificantlyreducetheimplementationcostforbothCernerandourclients,allowingformarginexpansionandacompetitiveadvantageinthemarketplace.

Page 18: Download the Full Report - Cerner Corporation

15

$(50)

$-

$50

$100

$150

$200

$250

2000 2001 2002 2003 2004 2005

Operating Cash Flow Free Cash Flow

Leverage R&D investments, bringing R&D as a percentage of revenue down from 1� percent to 1� percent by 200�.Weexpectthistocontributeover130basis points to Cerner’s operating margin. The opportunity to generate marginexpansionbyhoningandhardeningCerner Millenniumarchitectureandsolutionsinorder toreapthefullbenefitofoursignificantpast IP investments is in focus.Takingadvantageofourcommonplatformshouldallowustocontinueourrecordof innovationwhilegrowingR&Dspendingata rate that isslower thanour top-linegrowthrate.ThekeytodoingthiswillbeourabilitytoextendMillenniumtonew revenue opportunities, such as the global marketplace, without significantincrementalcosts.OurcertificationandtestingoperationsinIndiawillalsocontributetoourabilitytocontroltherateofR&Dgrowth.

Leverage Sales, General, and Administrative expenses. We expect this tocontribute over 170 basis points to Cerner’s operating margin. We have built ascalablebusiness infrastructurethatshouldallowustokeepourSG&Aspendinggrowthratelowerthanourtop-linegrowthrate.

Expand Margins and grow revenue in Managed Services and Subscription / Transaction business models. We expect these to contribute over 50 basispointstoCerner’soperatingmargin.Bothofthesebusinessmodelsarerelativelyimmature,but theyareexperiencingstronggrowth,andweexpect thembothtobecomemoreprofitableastheygrowandthefixedcostsassociatedwithsupportingthemarespreadoverahigherrevenuebase.

Increase profitability of Technology Resale. Weexpectthistocontributenearly40basispoints toCerner’soperatingmargin. Theprimarydriverof thiswill befocusingongettingbettermarginsonhardwaresalesand increasing themixofhighermarginsublicensedsoftwareasapercentoftotaltechnologyresale.

Increase profitability of Support and Maintenance.Weexpectthistocontributenearly100basispointstoCerner’soperatingmargin.AswehavecontinuedtohardentheCerner Millenniumplatform,ourincrementalcosttosupporteachadditionalclienthasdeclined.Weexpectthistocontinue,whichwillallowustoexpandtheprofitabilityofthishighlyvisiblerevenuestream.

Akeypointregardingourmarginexpansionstrategyisthatweareexecutingitwhileourbusinessmodelistransitioningtomorevisibleandrecurringrevenuecomponents.Forexample,in2000,approximately55percentofCerner’srevenuecamefromwhatweconsidervisibleorrecurringsourcessuchasProfessionalServices,ManagedServices,Subscriptions/Transactions,andSupport&Maintenance.In2005,66percentofourrevenuecamefromthesesources,andby2008,weestimatethat70percentofourrevenuewillbecomingfromthesesources.

Earnings Growth

Becauseofourstrongtop-linegrowthandstrongmargincontributionfromallareasofourbusinessexcepthardwaresales,wegrewourearningsover30percentin2005.Ourthree-andfive-yearcompoundannualearningsgrowthratesof18percentand33percent,respectively,reflectourabilitytodrive long-termearningsgrowth.Goingforward,ourtop-linestrategiescoupledwithcontinuedfocusonproductivityenhancementsandmarginexpansionpositionuswelltogrowearnings20to25percentannually.

Generating Free Cash Flow

Ahealthybusinessgeneratescashflow.Perhapsourmostsignificantimprovementover the past few years has been in our cash flow performance. In 2005, weincreasedoperatingcashflow36percentto$229millionandincreasedfreecashflow (operating cash flow less capital expenditures and capitalized software) 25percentto$66million.

Stock Price

We manage Cerner, not the stock price. In the short term, the stock price canbeinfluencedbymanyfactorsbeyondourcontrol,butwebelieveinthelongtermit will closely reflect the quality of our decisions. We believe it is important forourshareholdersthatwefocusondeliveringstronglong-termresults,butwealsounderstandtheimportanceofdeliveringconsistentlyagainstshort-termtargets.Wecontinue to deliver strong short-term and long-term results, and our stock pricereflectsthis.In2005,Cerner’sstockpriceincreased71percentcomparedtoa1percentincreaseintheNASDAQCompositeIndex.Thethree-,five-,andten-yearcompoundannualgrowthratesforourstockpriceare43percent,15percent,and16percent,respectively—morethandoublethereturnfortheNASDAQmarketineachtimehorizon.

Page 19: Download the Full Report - Cerner Corporation

1�

Page 20: Download the Full Report - Cerner Corporation

1�

ANNUAL REPORT 200510-K

Page 21: Download the Full Report - Cerner Corporation
Page 22: Download the Full Report - Cerner Corporation

UNITED STATES

SECURITIES AND EXCHANGE COMMISSIONWashington,D.C.20549

FORM 10-K(MarkOne)

( X ) ANNUAL REPORT PURSUANT TO SECTION 1� or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1��� ForthefiscalyearendedDecember31,2005

OR( )TRANSITION REPORT PURSUANT TO SECTION 1� OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1��� [NO FEE REQUIRED]

Forthetransitionperiodfrom_____________to___________

CommissionFileNumber0-15386

CERNERCORPORATION(ExactnameofRegistrantasspecifiedinitscharter)

Delaware 43-1196944 (Stateorotherjurisdiction (I.R.S.Employer ofincorporationororganization) IdentificationNumber)

2800RockcreekParkway,NorthKansasCity,Missouri64117(816)221-1024

(Addressofprincipalexecutiveoffices,includingzipcode;Registrant’stelephonenumber,includingareacode)

SecuritiesregisteredpursuanttoSection12(b)oftheAct:NONE

SecuritiesregisteredpursuanttoSection12(g)oftheAct:CommonStock,parvalue$.01pershare

PreferredStockPurchaseRights(TitleofClass)

Indicatebycheckmarkiftheregistrantisawell-knownseasonedissuer,asdefinedinRule405oftheSecuritiesAct. YesX No_____

IndicatebycheckmarkiftheregistrantisnotrequiredtofilereportspursuanttoSection13orSection15(d)oftheExchangeAct. YesX No_____

Indicatebycheckmarkwhethertheregistrant(1)hasfiledallreportsrequiredtobefiledbySection13or15(d)oftheSecuritiesExchangeActof1934duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtofilesuchreports),and(2)hasbeensubjecttosuchfilingrequirementsforthepast90days. YesX No_____

IndicatebycheckmarkifdisclosureofdelinquentfilerspursuanttoItem405ofRegulationS-Kisnotcontainedherein,andwillnotbecontained,tothebestofregistrant’sknowledge,indefinitiveproxyorinformationstatementsincorporatedbyreferenceinPartIIIofthisForm10-KoranyamendmenttothisForm10-K. []

Indicatebycheckmarkwhethertheregistrantisalargeacceleratedfiler,anacceleratedfiler,oranon-acceleratedfiler.Seedefinitionof“acceleratedfilerandlargeacceleratedfiler”inRule12b-2oftheExchangeAct. LargeacceleratedfilerX Acceleratedfiler_____ Non-acceleratedfiler_____

Indicatebycheckmarkwhethertheregistrantisashellcompany(asdefinedinRule12b-2oftheExchangeAct). Yes_____ NoX

AsofJuly2,2005,theaggregatemarketvalueoftheregistrant’scommonstockheldbynon-affiliatesoftheregistrantwas$2,063,790,353basedontheclosingsalepriceasreportedontheNASDAQStockMarket.

Indicatethenumberofsharesoutstandingofeachoftheissuer’sclassesofcommonstock,asofthelatestpracticabledate.

Class OutstandingatFebruary25,2006 [CommonStock,$.01parvaluepershare] 78,649,164shares

DOCUMENTS INCORPORATED BY REFERENCE Document PartsIntoWhichIncorporatedProxyStatementfortheAnnualMeetingofShareholderstobeheldMay26,2006(ProxyStatement) PartIII

1�

Page 23: Download the Full Report - Cerner Corporation

20

PART 1 Item 1. BusinessOverviewCernerCorporation(“Cerner”orthe“Company”)isaDelawarebusinessincorporatedin1980.TheCompany’scorporateheadquartersarelocatedat2800RockcreekParkway,NorthKansasCity,Mo.64117.Itstelephonenumberis(816)221-1024.TheCompany’sWebsiteaddressiswww.cerner.com.TheCompanymakesavailablefreeofcharge,onorthroughitsWebsite,itsannualreportonForm10-K,quarterlyreportsonForm10-Q,currentreportsonForm8-KandallamendmentstothosereportsassoonasreasonablypracticableaftersuchmaterialiselectronicallyfiledwithorfurnishedtotheSecuritiesandExchangeCommission.

Cerner is takingthepaperoutofhealthcare,eliminatingerror,varianceandwastefromthecareprocess.Withmorethan1,500clientsworldwide,Cernerisaleadingsupplierofhealthcareinformationtechnology(HIT)andhealthcaredevicesthatuniquelyconnectphysicianoffices,hospitals,clinics,laboratories,pharmaciesandconsumers’homestotimely,relevanthealthcareinformation.

Cerner’sunifiedarchitecture,end-to-endsolutionandserviceportfolioandprovenresults,combinedwithitscommitmenttoforminglong-term,alignedclientrelationships,arecentraltooptimizinghealthcareoutcomes.Alltogether,theCompany’s6,830associates,includingalmost900clinicians,helpclientorganizationsofeverysizeincreasesafety,improveefficiencyandimpactthebottomlineviaHIT.

Cerner®solutionsaredesignedtoimprovethesafety,qualityandefficiencyofhealthcaredeliverybyprovidingtherightinformationtotherightpersonattherighttimeandplacetoachievetheoptimalhealthoutcome.Withanelectronicmedicalrecordatthecoreofsolutionscreatedtomeetspecificneedsacrossthecontinuumofcare,Cernersolutionsprovidesecureaccesstoclinical,administrativeandfinancialdatainrealtime.CernerservicesenableclientstostreamlineinformationtechnologymanagementandmaintenancetorealizethegreatestreturnsontheirHITinvestments.

Cernersolutionsaredesignedanddevelopedontheunified,person-centricCerner Millennium®architecture.TheCerner Millenniumarchitectureisastate-of-the-arttechnologyinfrastructurethatseamlesslycombinesclinical,financialandmanagementinformationsystems.Itprovidesaccesstoanindividual’selectronicmedicalrecordatthepointofcareandorganizesandproactivelydeliversinformationtomeetthespecificneedsofthephysician,nurse,laboratorytechnician,pharmacistorothercareprovider,front-andback-officeprofessionals,andevenconsumers.

The Cerner Vision

Cerner’svisionhasevolvedfromafundamentalthought:Healthcareshouldnotbeorganizedaroundanencounter;itshouldrevolvearoundtheindividual.ThisconceptledtoCerner’sCommunityHealthModelandthecreationoftheperson-centricCernerMillenniumarchitecture—atrulyunified,enterprise-widearchitecture.TheCommunityHealthModelencompassesfoursteps:

Automate the Care Process

Cerneroffersalongitudinal,person-centricelectronicmedicalrecord,givingcliniciansfingertipaccesstotherightinformationattherighttimeandplacetoachievetheoptimalhealthoutcome.

Connect the Person

Cerner isdedicated tobuildingapersonalhealthsystem.Medical informationandcare regimensaccessible fromhomeempowerconsumers toeffectivelymanagetheirconditionsandadheretotreatmentplans,creatinganewmediumbetweenphysiciansandindividuals.

Structure the Knowledge

Cerner is dedicated to building systems that bring the best science to every medical decision by structuring, storing and studying the contentsurroundingeachcareepisodetoachieveoptimalclinicalandfinancialoutcomes.

Close the Loop

Today,thegapbetweenmedicaldiscoveryanditsincorporationintodailypracticecanbeaslongas10years.Cernerisdedicatedtobuildingsystemsthat implementevidence-basedmedicine,reducingtheaveragetimefromthediscoveryofanimprovedmethodtothechangeinthestandardofcare.

The Cerner Strategy

KeyelementsoftheCompany’sbusinessstrategyinclude:

LeveragetheprovenCerner MillenniumarchitectureandthedepthandbreadthofCernersolutionstocontinueexpandingmarketshareintheUnitedStatesandabroad

Increasepenetrationofbothlargehealthsystemsandindependenthospitals

Furtherpenetrateexistingclientbasebycross-sellingadditionalCernersolutionsandservices

Increasepenetrationofphysicianpracticesbyofferingahigh-valuesuiteofsolutionswithlowupfrontandrecurringcosts

Page 24: Download the Full Report - Cerner Corporation

21

ContinuetodevelopinnovativesolutionsandservicesthatleveragetheCompany’sexistingtechnologyandhumancapitalexpertiseandthatdrivecontinuedorganicrevenuegrowth

Stateandregionalcommunityhealthrecordinitiatives

Healthcaredeviceinnovation

Clinicalprocessoptimization

Moreefficientmethodsoftransactinghealthcare

Offermoreefficientandpredictable implementationsandsystems thatcanbeoperatedat lowercosts to reduce total costofownership for theCompany’sclients,whileallowingforexpandedprofitabilityforCerner

Cerner Bedrock™isaninnovativetechnologyforautomatingtheimplementationandmanagementoftheCerner Millenniuminformationplatform

CernerWorks™managedservicesallowCernertomanagecomplexityandtechnologyrisksforclientswhileprovidingmorereliabilityandlowercosts

DelivertheoptimalclientexperiencethatwillallowcriticalrelationshipwiththeCompany’sclientstocontinuegrowing

World-classsupportservices

Predictableandefficientimplementationsandupgrades

Lowertotalcostofownership

Commitmenttoresearchanddevelopment

Solution and Service Highlights

Cernerofferssome57solutionsenablingimprovementstoclinical,financialandoperationalhealthcareprocesses,aswellassupportingcommunityhealthneedsandknowledgedeliveryfunctions.AcomprehensivemanagedservicesofferingcomplementstheCompany’ssoftware,hardware,sublicensedsoftware andprofessional services, ensuring clients derivemaximumvalue from their systems.Continuing to broaden anddeepen theCompany’ssolutionandserviceportfolio,Cernerintroducedoradvancedthefollowingselectedinnovationsin2005:

Physician Solutions

Thenextgenerationof PowerChart®electronicmedicalrecordisanextensionoftheprovenCerner Millenniumarchitecture.Therefinementsstemfromclientfeedbackandencompassanenhancedvisualinterface,streamlinedprocessesandworkflowintuitivetoclinicianneeds.

PowerWorks®isafullsuiteofclinicalandpracticemanagementsolutionsdesignedtoprovideeverythingneededtorunadoctor’soffice.Deliveredonasubscriptionbasis, PowerWorksisavailableforalowmonthlyfee.Cernerhoststhedatafor PowerWorksclients,keepingtheinformationsafe,secureandavailabletotheappropriatepeopleattheappropriatetime.

Nursing Solutions

Cernersolutionshelpmakeevidence-basednursingpracticearealityby incorporatingbestpracticesat thepointofcareandaccessingnursing-specificcontentforfrequentlydiagnosedconditions.Cerner’scollaborationwithTheUniversityof Iowa,AuroraHealthCare, Inc.andUniversityofWisconsin-Milwaukeeinthisspaceenablesthebenefitsofevidence-basednursing,helpingclients:

Deliverprovenevidencetothepointofdecision

Reducethegapbetweenscientificdiscoveryandincorporationintodailypractice

Improvecarequalitywithconsistentuseofbest-practicecareguidelines

Optimizenursingresourcestohavethemaximumeffectonpatientoutcomes

Healthcare Devices

Cerner isapplyingmorethan26yearsofhealthcaretechnologyexpertisetothehealthcaredevicemarketplacewiththeCerner CareAware™deviceconnectivityarchitectureandstrategyfordeliveringhealthcaredevicesinfusedwithknowledgeofthecareprocess.

Initially,theCareAwareofferingisfocusedonimprovingthemedicationprocess,specificallyautomateddispensingmachines(ADM)andtheirsupportingsystems.TheCareAware RxStation™ isa familyofpharmacyautomationdevicesdesigned tobringgreaterefficiencyandsafety to themedicationandcareprocess throughappropriatelypriced,scaledand integrateddevices thatextend theCerner Millennium investment.Cernerannounced theCareAwarehealthcaredevicefamilyofsolutionsearlyin2006.During2006,theCompanywillbeworkingwithalphaclientsonRxStation,withbroaderavailabilityexpectedlaterin2006.TheCompanywillinitiallytargetclientswhoarealreadyusingCerner Millennium PharmNet®,theCompany’spharmacysolution.

Page 25: Download the Full Report - Cerner Corporation

22

Implementation and Support Services

Cerner’sevidence-basedrapiddeliverymodel isanevent-based,metric-drivenmethodologyemphasizingrecommendedpracticesforpredictableoutcomes.Itwasresponsibleforapproximately20percentoftheCompany’simplementationsin2005andenablestheimplementationof,onaverage,11solutionsin12months.

Cerner Bedrock is the Company’s innovative automation technology for implementation and management of the Cerner Millennium informationplatform.TheearlyclientusersofthissolutionexperiencedsignificantreductionsineffortbytheirownteamsaswellasCernerteamsduringthedesignandbuildportionsoftheir implementations.TheBedrocksolutionhasthepotential toremove30percentto50percentoftheworkefforttypicallyassociatedwithsuchprojects, thereby reducing implementation times toas littleassixmonths fora typicalhospitalandmuchshortertimeframesforphysicianpractices.

CernerWorksisaportfolioofhostedandmanagedservicesdesignedtohelpclientsmakethemostoftheirCernerinvestments.WithCernerWorks services,Cernerstrivestohelpclientslowercostswhilemaximizingavailability,performanceandsecurity,aswellasprovidingaccesstostate-of-the-artintellectualandtechnologyresources.

Selected Differentiating Solutions

Cernerunderstandsthecomplexityoftheemergencydepartment,surgeryandICUanddeliversseamlesslyconnectedHigh-Acuity Solutionstomeettheseuniqueandcomplexcross-venueneeds.Cerner’ssolutions for thesedepartmentsenableclinical,financialandoperationaladvantages,bycapturing,structuringandclearlypresentingdataforoptimaldecision-making.

CernerKnowledge Solutions & Outcomesguidecliniciansinidentifyingandapplyingthebestsciencetoeverymedicaldecision.Cernerleveragesworld-classcontent,developedfromanaggressiveannualinvestmentandinpartnershipwithleadingresearchinstitutions.Cernerinfusesknowledgeintothecareprocess,proactivelypushingtimely,relevantinformationintoindividualworkflowsintheformoftheExecutable Knowledge®contentderived from literature,empiricaldata, scientificmethodologiesand recommendedpractices.Cerner’sapproach isgeared towardhelpinghealthorganizationsrealizeoutcomes-basedpractice.

Cerner’sPoint-of-Care Solutionsreducemedicalerrorsatthebedsideandhighlightpatientsafetyinthebar-codingarena.Cernerprovidesstand-alonepoint-of-caresolutionsaswellasthosethatunifywiththe Cerner Millenniumarchitecture.

Cerner Millennium Lighthouse™ is theCompany’sapproach towardclinicalprocessoptimization.Millennium Lighthouse isacomprehensiveandadaptivesystemforachievingandsustainingprocessimprovementsthatoptimizeclinicalandfinancialoutcomes.TheMillennium Lighthousesystemisintendedtoimprovethequality,deliveryandcostofhealthcare,andisbuiltondecisionsupportmodelingandtheunderstandingofkeyobjectivesatadetailedlevelinthecontextofthecondition,venue,processandrolesinvolved.

WiththeseandthemanyothersolutionsandservicesintheCernerportfolio,theCompany,togetherwithclients,isdrivingerror,wasteandvariancefromhealthcareprocesses.

The Healthcare and Healthcare IT Industry

Aroundtheworld,2005sawhealthcarecostscontinuetoriseashealthcareprofessionalsworkedtosimultaneouslycontrolthemwhileupholdingqualitystandards.Theongoingtrendimpactedemployersandconsumers,oftenincreasingthecostburdenonemployers,andinmanycases,increasingthetransferofthosehighercostsdirectlytoemployees.Forexample,GeneralMotors’chairman,inaspeechtotheEconomicClubofChicago(Feb.2005),revealedthathiscompanyspendsmorethan$1,500inemployeemedicalexpensesforeverynewcaritsells.

These increasinghealthcarecostburdenshelpedbring increasedvisibility tohealthcare information technology (HIT)asoneof theopportunities forachievingmeaningfulandsustainablehealthcareimprovements.IntheUnitedStates,regionalhealthinformationorganizations(RHIOs),describedfurtherbelow,arereceivingmoreinterestandgeneratingmoreactivity.Overseas,HITisbeingputtousetoimprovequalityandgainefficiencies.OneexampleofgrowingglobaluseofHITistheNationalHealthServices’efforttoconnectEngland’shealthcareprovidersandcitizens.In2003,CernerwasawardedthestrategicChooseandBookelectronicschedulingportionoftheeffort,andin2005,CernerjoinedforceswithFujitsu,servingasthesoftwareproviderinanefforttoautomateclinicalprocessesanddigitizemedicalrecordsinthesouthernregionofEngland.

HIT Earns Broad Government Recognition

In2005,HITcontinuedtoreceiverecognitionasapartofthesolutiontotheproblemsfacingtheU.S.healthcaresystem.ItsadvocatesincludeU.S.PresidentGeorgeBush,whociteditspotentialinyetanotherStateoftheUnionaddress(Feb.1,2006).Intheaddress,thePresidenthighlightedthefactthatthefirstof78millionbabyboomersturn60in2006,puttingunprecedentedstrainsonthefederalgovernment.WithinthecontextofanationalconversationonMedicareandMedicaid,meaningfulactiononHIThasbecomeanimportantgoalatthefederallevel.HITisreceivingbipartisansupport,withnumerouspolicymakersembracingitasaprimaryopportunityforimprovingthecostandqualityofthenation’shealthcaredelivery.

RAND Study Identifies Dramatic HIT-Enabled Cost Savings

OnemilestoneeventthatsupportedthebeliefthatHITcanimprovethecostandqualityofhealthcaredeliverycameintheformoftheresultsofatwo-yearstudybyRANDCorporation,anon-profitthinktank.ThestudysoughttoexamineHIT’spotentialtosavelivesanddollarsifwidelyembracedintheUnited

Page 26: Download the Full Report - Cerner Corporation

2�

States.Theresults,publishedintheleadingacademicjournalHealth Affairs(Sept.2006),identifiedapossible$162billioninannualsavingsrelatedtoincreasedefficiencies,reducedadversedrugeventsandimprovedhealthqualityviapreventionanddiseasemanagement.Thestudy,whichadditionallyrevealedthepotentialpreventionof2.2millionavoidablemedicalerrors,alsopointedtotheelevatedrolethefederalgovernmentmustplayinhelpingrealizethepotentialsavingsidentified.

InkeepingwithRAND’sidentificationofimproveddiseasemanagementasameanstobetterclinicalandfinancialoutcomes,Cerneritselfcontributedtotheincreasingadoptionofthepersonalhealthrecordacrosscommunities.TheCompanycelebratedthefirstanniversaryofitsdiabetesinitiative,throughwhichitisprovidingapersonalhealthrecordtoeveryU.S.childwithtype1diabetesatnocost.Attheendof2005,theCernerinitiativehadconnected30hospitals,550cliniciansandnearly6,000childrenforimproveddiseasemanagement.

Regional Health Information Organizations

2005alsosawincreasedvisibilityandactivityrelatedtothecreationofregionalhealthinformationorganizations(RHIOs)withthepurposeofimprovingthesafetyandefficiencyofhealthcareprocessesacrosspopulations.Forexample,SharedHealthinTennessee,apayor-sponsoredRHIO,nowhasacommunityhealthrecordandclinicaldocumentationfor1.1millionTennCaremembersthatcanbeaccessedbymorethan2,500usersat500sites.UsingCernersoftwaresolutions,SharedHealthhasrealizeddiversebenefitsspanningtheareasofcarequality,medicationuseandsafety,efficiency,andtheavoidanceoffraudandabuse.Ofequalnote,KansasGovernorKathleenSebeliusrecentlycommittedtoasimilarinitiativewithCernerfortheMedicaidpopulationinWichita,Kansas.

Inanothersimilareffort,Cernerisengagedinfacilitatinganemployer-drivenRHIOintheKansasCitymetropolitanarea.CalledHealtheMid-America,itwillbeafirst-in-the-nationemployer-drivenRHIO.Nationallyrecognizedprivate-sectoremployers,includingAmericanCenturyInvestments,Applebee’s,SprintNextelandYRCWorldwide,havecommittedtojoiningHealthe.TheseemployersanticipatethatHITcanbepartofanapproachthatbringsbetterhealthoutcomes,elevatedefficiencyandincreasedpredictabilitytotheirhealthcarespending.

Influencers Come Together in Pursuit of Interoperability Standards

Providingfurthervalidationontheconceptofbetterconnectingcommunitiesandgeographies,2005sawincreasedvisibilityfortheNationalAllianceforHealthcareInformationTechnology.Amongotherobjectives,theAlliancetookonthecausetopromotetheidentificationandadoptionofnationalinteroperability standards. The organization made great strides in securing widespread industry agreement on the definition for interoperability inhealthcare,acrucialsteptoensuringthathundredsofthousandsofHITsystemswillonedayseamlesslyexchangecriticalpatientdata.Morethan37organizationsrepresentingeverysectorofhealthcare,includingtheJointCommissiononAccreditationofHealthcareOrganizations,BlueCrossBlueShieldAssociation,GeneralMotors,Oracle,theAmericanHospitalAssociationandCerner,tonamejustafew,agreedthat“Inhealthcare,interoperabilityistheabilityofdifferentinformationtechnologysystemsandsoftwareapplicationstocommunicate;toexchangedataaccurately,effectivelyandconsistently;andtousetheinformationthathasbeenexchanged.”

Hospital and Physician Practice Market Conditions

In2005,Moody’sreportedthathospitalbondratingupgradesoutnumbereddowngradesforthefirsttimesince1997.Andwhilesomeprovidersaredealingwithissuessuchasanunfavorablepayormixandtheresponsibilitytoserveagrowinguninsuredpopulation,USATodayindicatedinJanuary2006 thathospitalprofitmargins reachedasix-yearhighof5.2percent in2004. Several industryanalystsbelieve thatan inflectionpointmaybeapproachingthatwillacceleratetheadoptionofelectronicmedicalrecordswithinphysicianofficepracticesandthatphysiciansincreasinglybelievethatthereisademonstrablereturnoninvestmentassociatedwithHIT.Health Affairsreportedthatphysicians’evolvingcareenvironmentsincreasinglydemandsuchcapabilitiesase-prescribingtobettermanagethecurrenthealthcarelandscape.Overseas,numerousdrivers—includingmanagingthecostofhealthcaredelivery;improvingpatientsafety,patientsatisfactionandtheoverallpatientexperience;andtheneedtooptimizeresourceutilization—arealsoincreasingthevisibilityandusageofHIT.

Software Development Cernercommitssignificantresourcestodevelopingnewhealthinformationsystemsolutions.AsofDecember31,2005,approximately2,422associateswereengagedfull-timeinsoftwaresolutiondevelopmentactivities.TotalexpendituresforthedevelopmentandenhancementoftheCompany’ssoftwaresolutionswereapproximately$226,238,000,$188,264,000and$179,999,000duringthe2005,2004and2003fiscalyears,respectively.Thesefiguresincludebothcapitalizedandnon-capitalizedportionsandexcludeamountsamortizedforfinancialreportingpurposes.

TheCompanyexpectstocontinueinvestmentanddevelopmenteffortsforitscurrentandfuturesolutionofferings.Asnewclinicalandmanagementinformationneedsemerge,Cernerintendstoenhanceitscurrentsoftwaresolutionslineswithnewversionsreleasedtoclientsonaperiodicbasis.Inaddition,Cernerplansto:expanditscurrentsoftwaresolutionlinesbydevelopingadditionalinformationsystemsforclinical,financial,operationaland/orconsumeruse;continuetosupportsimultaneoususeofCerner’ssolutionsacrossmultiplefacilities;and,continuetoexpandintheglobalmarketplace.

TheCompanyiscommittedtomaintainingopenattributesinitssystemarchitecturetoachieveoperabilityinadiversesetoftechnicalandapplicationenvironments.TheCompanystrivestodesignitssystemstoco-existwithdisparateapplicationsdevelopedandsupportedbyothersuppliers.ThiseffortisexemplifiedbyCerner’s Open Engine Application Gateway™,Open Port Interface™andMillenniumObjects®offerings.

Page 27: Download the Full Report - Cerner Corporation

2�

Sales and Marketing ThemarketsforCerner’sHITsolutionsincludeintegrateddeliverynetworks,physiciangroupsandnetworks,managedcareorganizations,hospitals,medicalcenters,free-standingreferencelaboratories,homehealthagencies,bloodbanks,imagingcenters,pharmacies,pharmaceuticalmanufacturers,employercoalitionsandpublichealthorganizations.Todate,asubstantialportionofsystemsaleshasbeeninclinicalsolutionsinhospital-basedproviderorganizations.The Cerner Millenniumarchitectureishighlyscalable,withsolutionsbeingusedinorganizationsrangingfromseveral-doctorphysicianpracticestocommunityhospitalstocomplexintegrateddeliverynetworkstoentirecountries.AllCerner MillenniumsolutionsaredesignedtooperateonHPorIBMplatforms,therebyallowingCernertobepricecompetitiveacrossthefullsizeandorganizationalstructurerangeofhealthcareproviders.Thesaleofahealthinformationsystemusuallytakesapproximatelynineto18months,fromthetimeofinitialcontacttothesigningofacontract.

TheCompany’sexecutivemarketingmanagementislocatedinitsNorthKansasCity,Missouri,headquarters,whileitsclientrepresentativesaredeployedacrosstheUnitedStatesandglobally. Inadditionto theUnitedStates, theCompany, throughsubsidiariesand jointventures,hassalesstaffand/orofficesinAustralia,Canada,France,Germany,HongKong,India,Singapore,Malaysia,Spain,theUnitedKingdomandtheUnitedArabEmirates.Cerner’sconsolidatedrevenuesincludeforeignsalesof$113,314,000,$63,622,000and$54,191,000forthe2005,2004and2003fiscalyears,respectively.

TheCompanysupportsitssalesforcewithtechnicalpersonnelwhoperformdemonstrationsofCernersolutionsandassistclientsindeterminingtheproperhardwareandsoftwareconfigurations.TheCompany’sprimarydirectmarketingstrategyistogeneratesalescontactsfromitsexistingclientbaseandthroughpresentationsatindustryseminarsandtradeshows.Cernerutilizestelemarketingprimarilyforsalestophysicianpractices.CerneralsomarketsitsPowerWorkssolution,offeredonasubscriptionbasis,directlytothephysicianpracticemarket.Cernerattendsanumberofmajortradeshowseachyearandsponsorsexecutiveuserconferences,whichfeatureindustryexpertswhoaddresstheHITneedsoflargehealthcareorganizations.

Client Services SubstantiallyallofCerner’sclientsenterintosoftwaremaintenanceagreementswithCernerforsupportoftheirCerner systems.Inadditiontoimmediatesoftwaresupport intheeventofproblems,theseagreementsallowclientstheuseofnewreleasesoftheCernersolutionscoveredbymaintenanceagreements.Eachclienthas24-houraccesstotheclientsupportstafflocatedatCerner’sworldheadquartersinNorthKansasCity,MissouriandtheCompany’sglobalsupportorganizationintheUnitedKingdom.MostofCerner’sclientsalsoenterintohardwaremaintenanceagreementswithCerner.Thesearrangementsnormallyprovideforafixedmonthlyfeeforspecifiedservices.Inthemajorityofcases,Cernersubcontractshardwaremaintenancetothehardwaremanufacturer.Cerneralsooffersasetofmanagedservicesthatincluderemotehosting,applicationmanagementservicesanddisasterrecovery.

BacklogAtDecember31,2005,Cernerhadacontractbacklogofapproximately$1,724,583,000ascomparedtoapproximately$1,191,170,000atJanuary1,2005.Suchbacklogrepresentssystemsalesfromsignedcontracts,whichhadnotyetbeenrecognizedasrevenue.TheCompanyrecognizesrevenueonapercentofcompletionbasis,basedoncertainmilestoneconditions,foritssoftwaresolutions.AtDecember31,2005,theCompanyhadapproximately$100,717,000ofcontractsreceivable,whichrepresentsrevenuesrecognizedunderthepercentageofcompletionmethodbutnotyetbillableunderthetermsofthecontract.AtDecember31,2005,Cernerhadasoftwaresupportandmaintenancebacklogofapproximately$415,681,000ascomparedtoapproximately$347,662,000atJanuary1,2005.Suchbacklogrepresentscontractedsoftwaresupportandhardwaremaintenanceservicesforaperiodof12months.TheCompanyestimatesthatapproximately45percentoftheaggregatebacklogatDecember31,2005of$2,140,264,000willberecognizedasrevenueduring2006.

Competition ThemarketforHITsolutionsandservicesisintenselycompetitive,rapidlyevolvingandsubjecttorapidtechnologicalchange.TheCompany’sprincipalexistingcompetitors include:EclipsysCorporation,EpicSystemsCorporation,GEHealthcareTechnologies, iSoftCorporation,McKessonCorporation,Medical InformationTechnology, Inc. (“Meditech”),MisysHealthcareSystemsandSiemensMedicalSolutionsHealthServicesCorporation, eachofwhichoffersasuiteofsoftwaresolutionsandservicesthatcompetewithmanyoftheCompany’ssoftwaresolutionsandservices.OthercompetitorsfocusononlyaportionofthemarketthatCerneraddresses.Forexample,competitorssuchasAllscriptsHealthcareSolutions,Inc.,QualitySystems,Inc.andEmdeonCorporationoffersolutionstothephysicianpracticemarketbutdonotcurrentlyhaveasignificantpresenceinthehealthsystemsandindependenthospitalmarket.Inaddition,theCompanyexpectsthatmajorsoftwareinformationsystemscompanies,largeinformationtechnologyconsultingserviceproviders,system integrators,managedcarecompaniesandothersspecializing in thehealthcare industrymayoffercompetitivesoftwaresolutionsorservices. ThepaceofchangeintheHITmarket israpidandtherearefrequentnewsoftwaresolution introductions,softwaresolutionenhancementsandevolvingindustrystandardsandrequirements.TheCompanybelievesthattheprincipalcompetitivefactorsinthismarketincludethebreadthandqualityofsystemandsoftwaresolutionofferings,thestabilityoftheinformationsystemsprovider,thefeaturesandcapabilitiesoftheinformationsystems,theongoingsupportforthesystemandthepotentialforenhancementsandfuturecompatiblesoftwaresolutions.

Number of Employees (“Associates”)AsofDecember31,2005,theCompanyemployed6,830associatesworldwide.

Page 28: Download the Full Report - Cerner Corporation

25

Item 1A. Risk FactorsRisks Related to Cerner CorporationWe may be subject to product-related liabilities. Manyofoursoftwaresolutionsprovidedataforusebyhealthcareprovidersinprovidingcaretopatients.Althoughnosuchclaimshavebeenbroughtagainstustodateregardinginjuriesrelatedtotheuseofoursoftwaresolutions,suchclaimsmaybemadeinthefuture.Althoughwemaintainproductliabilityinsurancecoverageinanamountthatwebelieveissufficientforourbusiness,therecanbenoassurancethatsuchcoveragewillcoveraparticularclaimthatmaybebroughtinthefuture,provetobeadequateorthatsuchcoveragewillcontinuetoremainavailableonacceptableterms,ifatall.Asuccessfulclaimbroughtagainstus,whichisuninsuredorunder-insured,couldmateriallyharmourbusiness,resultsofoperationsandfinancialcondition.

We may be subject to claims for system errors and warranties.Oursystems,particularlytheCernerMillenniumversions,areverycomplex.Aswithcomplexsystemsofferedbyothers,oursystemsmaycontainerrors,especiallywhenfirstintroduced.Althoughweconductextensivetesting,wehavediscoveredsoftwareerrorsinoursoftwaresolutionsaftertheirintroduction.Oursystemsareintendedforuseincollectinganddisplayingclinicalinformationusedinthediagnosisandtreatmentofpatients.Therefore,usersofoursoftwaresolutionshaveagreatersensitivitytosystemerrorsthanthemarketforsoftwareproductsgenerally.Ouragreementswithclientstypicallyprovidewarrantiesagainstmaterialerrorsandothermatters.Failureofaclient’ssystemtomeetthesecriteriacouldconstituteamaterialbreachundersuchcontractsallowingtheclienttoterminatethecontractandobtainarefundand/ordamages,orcouldrequireustoincuradditionalexpenseinordertomakethesystemmeetthesecriteria.Ourclientcontractsgenerallylimitourliabilityarisingfromsuchclaimsbutsuchlimitsmaynotbeenforceableincertainjurisdictionsorcircumstances.Asuccessfulclaimbroughtagainstus,whichisuninsuredorunder-insured,couldmateriallyharmourbusiness,resultsofoperationsandfinancialcondition.

We may experience interruption at our data centers or client support facilities.Weperformdatacenterand/orhostingservicesforcertainclients,includingthestorageofcriticalpatientandadministrativedata.Inaddition,weprovidesupportservicestoourclientsthroughvariousclientsupportfacilities. Wehaveredundancies,suchasmultiplebackupgeneratorsandredundant telecommunications lines,built intoouroperations topreventdisruptions.However,completefailureofallgeneratorsorimpairmentofalltelecommunicationslinesorseverecasualtydamagetothebuildingorequipmentinsidethebuildingshousingourdatacentersorclientsupportfacilitiescouldcauseadisruptioninoperationsandnegativelyimpactclientswhodependonusfordatacenterandsystemsupportservices.Anyinterruptioninoperationsatourdatacentersand/orclientsupportfacilitiescoulddamageourreputation,causeustoloseexistingclients,hurtourabilitytoobtainnewclients,resultinrevenueloss,causepotentialliabilitytoourclients,andincreaseinsuranceandotheroperatingcosts.

Our proprietary technology may be subjected to infringement claims or may be infringed upon.Werelyuponacombinationoflicenseagreements,confidentialityprocedures,employeenondisclosureagreements,confidentialityagreementswiththirdpartiesandtechnicalmeasurestomaintaintheconfidentialityandtradesecrecyofourproprietaryinformation.Wealsorelyontrademarkandcopyrightlawstoprotectourintellectualpropertyrights.Wehaveinitiatedapatentprogrambutcurrentlyhavealimitedpatentportfolio.Asaresult,wemaynotbeabletoadequatelyprotectagainstcopying,reverse-engineeringorunauthorizeduseordisclosureofourintellectualproperty.

Inaddition,wecouldbesubject toadditional intellectualproperty infringementclaimsas thenumberofcompetitorsandpatents in thehealthcareinformationtechnologymarketgrowsandthefunctionalityofoursoftwaresolutionsandservicesexpands.Theseclaims,evenifnotmeritorious,couldbeexpensivetodefend.Ifwebecomeliabletothirdpartiesforinfringingtheirintellectualpropertyrights,wecouldberequiredtopayasubstantialdamageaward,andtodevelopnoninfringingtechnology,obtainalicenseand/orceasesellingthesoftwaresolutionsandservicesthatcontainorrelyupontheinfringingintellectualproperty.

We are subject to risks associated with our global operations. Wemarket,sellandserviceoursoftwaresolutionsglobally.Wehaveestablishedofficesaroundtheworld,includingintheAmericas,Europe,intheMiddleEastandintheAsiaPacificregion.Wewillcontinuetoexpandourglobaloperationsandenternewglobalmarkets.Thisexpansionwillrequiresignificantmanagementattentionandfinancialresourcestodevelopsuccessfuldirectand indirectglobalsalesandsupportchannels.Ourbusiness isgenerally transacted in the local functionalcurrency. Insomecountries,oursuccesswilldependinpartonourabilitytoformrelationshipswithlocalpartners.Thereisariskthatwemaysometimeschoosethewrongpartner.Forthesereasons,wemaynotbeabletomaintainorincreaseglobalmarketdemandforoursoftwaresolutions.

Globaloperationsaresubjecttoinherentrisks,andourfutureresultscouldbeadverselyaffectedbyavarietyofuncontrollableandchangingfactors.Theseinclude,butarenotlimitedto:

Greaterdifficultyincollectingaccountsreceivableandlongercollectionperiods

Difficultiesandcostsofstaffingandmanagingglobaloperations

Theimpactofglobaleconomicconditions

Certificationorregulatoryrequirements

Unexpectedchangesinregulatoryrequirements

Reducedprotectionofintellectualpropertyrightsinsomecountries

Potentiallyadversetaxconsequences

Page 29: Download the Full Report - Cerner Corporation

2�

Differentoradditionalfunctionalityrequirements

Tradeprotectionmeasures

Serviceproviderandgovernmentspendingpatterns

Naturaldisasters,warorterroristacts

Poorselectionofapartnerinacountry

Politicalconditionswhichmayimpactsalesorthreatenthesafetyofassociatesorourcontinuedpresenceinthesecountries

Our success depends upon the recruitment and retention of key personnel. Toremaincompetitiveinthehealthcareinformationtechnologyindustry,wemustattract,motivateandretainhighlyskilledmanagerial,sales,marketing,consultingandtechnicalpersonnel,includingexecutives,consultants,programmersandsystemsarchitectsskilledinthehealthcareinformationtechnologyindustryandthetechnicalenvironmentsinwhichoursolutionsoperate.Competitionforsuchpersonnelinthisindustryisintense.Ourfailuretoattractadditionalqualifiedpersonnelcouldhaveamaterialadverseeffectonourprospectsforlong-termgrowth.Oursuccessisdependenttoasignificantdegreeonthecontinuedcontributionsofkeymanagement,sales,marketing,consultingandtechnicalpersonnel.Wehavesuccessionplansinplace;however,theunexpectedlossofkeypersonnelcouldhaveamaterialadverseimpacttoourbusinessandresultsofoperations,andcouldpotentiallyinhibitsolutiondevelopmentandmarketshareadvances.

We significantly rely on third party suppliers.Welicenseorpurchaseintellectualpropertyandtechnology(suchassoftware,hardwareandcontent)fromthirdparties,includingsomecompetitors,andincorporateitintoorsellitinconjunctionwithoursoftwaresolutionsandservices,someofwhichiscriticaltotheoperationofoursolutions.Ifanyofthethirdpartysuppliersweretochangeproductofferings,increasepricesorterminateourlicensesorsupplycontracts,wemightneedtoseekalternativesuppliersandincuradditionalinternalorexternaldevelopmentcoststoensurecontinuedperformanceofoursolutions.Suchalternativesmaynotbeavailableonattractiveterms,ormaynotbeaswidelyacceptedoraseffectiveastheintellectualpropertyortechnologyprovidedbyourexistingsuppliers.Ifthecostoflicensing,purchasingormaintainingthesethirdpartyintellectualpropertyortechnologysolutionssignificantly increases,ourgrossmargin levelscouldsignificantlydecrease. Inaddition, interruption infunctionalityofoursolutionscouldadverselyaffectfuturesalesofsolutionsandservices.

We intend to continue strategic business acquisitions which are subject to inherent risks. Inorder toexpandoursolutionsandservicesandgrowourmarketandclientbase,wemaycontinuetoseekandcompletestrategicbusinessacquisitionsthatwebelievearecomplementarytoourbusiness.Acquisitionshaveinherentriskswhichmayhaveamaterialadverseeffectonourbusiness,financialcondition,operatingresultsorprospects,including,butnotlimitedto:1)failuretosuccessfullyintegratetheoperations,services,solutionsorpersonneloftheacquiredbusiness;2)diversionofmanagement’sattentionfromotherbusinessconcerns;3)entryintomarketsinwhichwehavelittleornodirectpriorexperience;4)failuretoachieveprojectedsynergiesandperformancetargets;5)lossofclientsorkeypersonneloftheacquiredbusiness;6)incurrenceofdebtand/orassumptionofknownandunknownliabilities;7)write-offofsoftwaredevelopmentcostsandamortizationofexpensesrelatedtointangibleassets;and,8)dilutiveissuancesofequitysecurities.Ifwefailtosuccessfullyintegrateacquiredbusinessesorfailtoimplementourbusinessstrategieswithrespecttotheseacquisitions,wemaynotbeabletoachieveprojectedresultsorsupporttheamountofconsiderationpaidforsuchacquiredbusinesses.

Risks Related to the Healthcare Information Technology IndustryThe healthcare industry is highly regulated and is subject to changing political, economic and regulatory influences. Forexample,theBalancedBudgetActof1997(PublicLaw105-32)containedsignificantchangestoMedicareandMedicaidandhadanimpactforseveralyearsonhealthcareproviders’abilitytoinvestincapitalintensivesystems.Inaddition,theHealthInsurancePortabilityandAccountabilityActof1996(HIPAA)ishavingadirectimpactonthehealthcareindustrybyrequiringidentifiersandstandardizedtransactions/codesetsandnecessarysecurityandprivacymeasuresinorder toensure theprotectionofpatienthealth information.These regulatory factorsaffect thepurchasingpracticesandoperationofhealthcareorganizations.FederalandstatelegislatureshaveperiodicallyconsideredprogramstoreformoramendtheU.S.healthcaresystematboththefederalandstate leveland tochangehealthcarefinancingandreimbursementsystems. Theseprogramsmaycontainproposals to increasegovernmentalinvolvementinhealthcare,lowerreimbursementratesorotherwisechangetheenvironmentinwhichhealthcareindustryparticipantsoperate.Healthcareindustryparticipantsmayrespondbyreducingtheirinvestmentsorpostponinginvestmentdecisions,includinginvestmentsinoursoftwaresolutionsandservices.

Manyhealthcareprovidersareconsolidatingtocreateintegratedhealthcaredeliverysystemswithgreatermarketpower.Theseprovidersmaytrytousetheirmarketpowertonegotiatepricereductionsforoursoftwaresolutionsandservices.Asthehealthcareindustryconsolidates,ourclientbasecouldbeeroded,competitionforclientscouldbecomemoreintenseandtheimportanceofacquiringeachclientbecomesgreater.

The healthcare industry is highly regulated at the local, state and federal level. Wearesubject toasignificantandwide-rangingnumberofregulationsbothwithintheUnitedStatesandelsewhere,suchasregulationsintheareasof:healthcarefraud,e-prescribing,claimsprocessingandtransmission,medicaldevicesandthesecurityandprivacyofpatientdata.

Healthcare Fraud. FederalandstategovernmentscontinuetostrengthentheirpositionsandscrutinyoverpracticesinvolvinghealthcarefraudaffectinghealthcareproviderswhoseservicesarereimbursedbyMedicare,Medicaidandothergovernmenthealthcareprograms.Healthcareproviderswhoareourclientsaresubjecttolawsandregulationsonfraudandabusewhich,amongotherthings,prohibitthedirectorindirectpaymentorreceiptofany

Page 30: Download the Full Report - Cerner Corporation

2�

remunerationforpatientreferrals,orarrangingfororrecommendingreferralsorotherbusinesspaidforinwholeorinpartbythesefederalorstatehealthcareprograms.Federalenforcementpersonnelhavesubstantialfunding,powersandremediestopursuesuspectedfraudandabuse.Theeffectofthisgovernmentregulationonourclientsisdifficulttopredict.Whilewebelievethatweareinsubstantialcompliancewithanyapplicablelaws,manyoftheregulationsapplicabletoourclientsandthatmaybeapplicabletous,arevagueorindefiniteandhavenotbeeninterpretedbythecourts.Theymaybeinterpretedorappliedbyaprosecutorial,regulatoryorjudicialauthorityinamannerthatcouldbroadentheirapplicabilitytousorrequireourclientstomakechangesintheiroperationsorthewaythattheydealwithus.Ifsuchlawsandregulationsaredeterminedtobeapplicabletousandifwefailtocomplywithanyapplicablelawsandregulations,wecouldbesubjecttosanctionsorliability,includingexclusionfromgovernmenthealthprograms,whichcouldhaveamaterialadverseeffectonourbusiness,resultsofoperationsorfinancialcondition.

E-Prescribing.Theuseofoursolutionsbyphysicians forelectronicprescribing,electronic routingofprescriptions topharmaciesanddispensing isgovernedbystateandfederallaw.Stateshavedifferingprescriptionformatrequirements,whichwehaveprogrammedintooursoftware.Inaddition,inNovember2005,theDepartmentofHealthandHumanServicesannouncedregulationsbytheCentersforMedicare&MedicaidServices(CMS)relatedto“E-PrescribingandthePrescriptionDrugProgram”(“E-PrescribingRegulations”).TheseE-PrescribingRegulationsweremandatedbytheMedicarePrescriptionDrug,Improvement,andModernizationActof2003(“MMA”).TheE-PrescribingRegulationssetforthstandardsforthetransmissionofelectronicprescriptions.ThefinalregulationsadoptedtwostandardseffectiveJanuary2006.AsecondandfinalsetofrequiredstandardsaretobepublishednolaterthanApril1,2008andimplementednolaterthanApril1,2009.Thesestandardsaredetailedandsignificant,andcovernotonlytransactionsbetweenprescribersanddispensersforprescriptionsbutalsoelectroniceligibilityandbenefitsinquiriesanddrugformularyandbenefitcoverage information. Ourefforts toprovide that our solutions enableour clients to complywith these regulationscouldbe time-consumingandexpensive.

Claims Transmissions.Certainofoursolutionsassistourclientsinsubmittingclaimstopayers,whichclaimsaregovernedbyfederalandstatelaws.Oursolutionsarecapableofelectronicallytransmittingclaimsforservicesanditemsrenderedbyaphysiciantomanypatients’payersforapprovalandreimbursement.Federallawprovidescivilliabilitytoanypersonthatknowinglysubmitsaclaimtoapayer,including,forexample,Medicare,Medicaidandprivatehealthplans,seekingpaymentforanyservicesoritemsthathavenotbeenprovidedtothepatient.Federallawmayalsoimposecriminalpenaltiesforintentionallysubmittingsuchfalseclaims.Wehavepoliciesandproceduresinplacethatwebelieveresultintheaccurateandcompletetransmissionofclaims,providedthattheinformationgiventousbyourclientsisalsoaccurateandcomplete.TheHIPAAsecurity,privacyandtransactionstandards,asdiscussedbelow,willalsohaveapotentiallysignificanteffectonourclaimstransmissionservices,sincethoseservicesmustbestructuredandprovidedinawaythatsupportsourclients’HIPAAcomplianceobligations.

Regulation of Medical Devices. TheUnitedStatesFoodandDrugAdministration(the“FDA”)hasdeclaredthatcertainofoursolutionsaremedicaldevicesthatareactivelyregulatedundertheFederalFood,DrugandCosmeticAct(“Act”)andamendmentstotheAct.Asaconsequence,wearesubjecttoextensiveregulationbytheFDAwithregardtothosesolutionsthatareactivelyregulated.Othercountrieshavesimilarregulationsinplacerelatedtomedicaldevices,thatnowormayinthefutureapplytocertainofoursolutions.IfotherofoursolutionsaredeemedtobeactivelyregulatedmedicaldevicesbytheFDAorsimilarregulatoryagenciesincountrieswherewedobusiness,wecouldbesubjecttoextensiverequirementsgoverningpre-andpost-marketingrequirements includingpre-marketnotificationclearanceprior tomarketing. Complyingwith thesemedicaldeviceregulationsonaglobalperspectiveistimeconsumingandexpensive.Further,itispossiblethattheseregulatoryagenciesmaybecomemoreactiveinregulatingsoftwarethatisusedinhealthcare.

TherehavebeensevenFDAinspectionssince1998atvariousCernersites.Inspectionsconductedatourworldheadquartersin1999andourHoustonfacilityin2002eachresultedintheissuanceofanFDAForm483thatwerespondedtopromptly.TheFDAhastakennofurtheractionwithrespecttoeitheroftheForm483sthatwereissuedin1999and2002.TheremainingfiveFDAinspections,includinganinspectionatourworldheadquartersin2004, resulted inno issuanceofaForm483. Weremainsubject toperiodicFDA inspectionsandwecouldbe required toundertakeadditionalactionstocomplywiththeActandanyotherapplicableregulatoryrequirements.OurfailuretocomplywiththeActandanyotherapplicableregulatoryrequirementscouldhaveamaterialadverseeffectonourabilitytocontinuetomanufactureanddistributeoursolutions.TheFDAhasmanyenforcementtoolsincludingrecalls,seizures,injunctions,civilfinesand/orcriminalprosecutions.Anyoftheforegoingcouldhaveamaterialadverseeffectonourbusiness,resultsofoperationsorfinancialcondition.

Security and Privacy of Patient Information. Stateandfederallawsregulatetheconfidentialityofpatientrecordsandthecircumstancesunderwhichthoserecordsmaybereleased.Theseregulationsgovernboththedisclosureanduseofconfidentialpatientmedicalrecordinformationandrequiretheusersofsuchinformationtoimplementspecifiedsecuritymeasures.Regulationscurrentlyinplacegoverningelectronichealthdatatransmissionscontinuetoevolveandareoftenunclearanddifficulttoapply.

TheHealthInsurancePortabilityandAccountabilityActof1996(“HIPAA”)requiresnationalstandardsforsometypesofelectronichealthinformationtransactionsandthedataelementsusedinthosetransactions,securitystandardstoensuretheintegrityandconfidentialityofhealthinformationandstandardstoprotecttheprivacyofindividuallyidentifiablehealthinformation.CoveredentitiesunderHIPAA,whichincludehealthcareorganizationssuchasourclients,wererequiredtocomplywiththeprivacystandardsbyApril2003,thetransactionregulationsbyOctober2003andthesecurityregulationsbyApril2005.Asabusinessassociateofthecoveredentities,we,inmostinstances,mustalsoensurecompliancewiththeHIPAAregulationsasitpertainstoourclients.

TheeffectofHIPAAonourbusinessisdifficulttopredict,andtherecanbenoassurancesthatwewilladequatelyaddressthebusinessriskscreatedbyHIPAAanditsimplementation,orthatwewillbeabletotakeadvantageofanyresultingbusinessopportunities.Furthermore,weareunabletopredict

Page 31: Download the Full Report - Cerner Corporation

2�

whatchangestoHIPAA,ortheregulationsissuedpursuanttoHIPAA,mightbemadeinthefutureorhowthosechangescouldaffectourbusinessorthecostsofcompliancewithHIPAA.EvolvingHIPAA-relatedlawsorregulationscouldrestricttheabilityofourclientstoobtain,useordisseminatepatientinformation.Thiscouldadverselyaffectdemandforoursolutionsiftheyarenotre-designedinatimelymannerinordertomeettherequirementsofanynewregulationsthatseektoprotecttheprivacyandsecurityofpatientdataorenableourclientstoexecutenewormodifiedhealthcaretransactions.Wemayneedtoexpendadditionalcapital,researchanddevelopmentandotherresourcestomodifyoursolutionstoaddresstheseevolvingdatasecurityandprivacyissues.

We operate in an intensely competitive and dynamic industry, and our ability to successfully compete and continue to grow our business depends on our ability to respond quickly to market changes and changing technologies and to bring competitive new solutions, features and services to market in a timely fashion. Themarketforhealthcareinformationsystemsisintenselycompetitive,dynamicallyevolvingandsubjecttorapidtechnologicalchange.Developmentofnewproprietarytechnologyorservicesiscomplex,entailssignificanttimeandexpenseandmaynotbesuccessful.Wecannotguaranteethatwewillbeabletointroducenewsolutionsorservicesonschedule,oratall,norcanweguaranteethat,despiteextensivetesting,errorswillnotbefoundinournewsolutionreleasesbeforeoraftercommercialrelease,whichcouldresultinsolutionredevelopmentcostsandlossof,ordelayin,marketacceptance.

Webelievethattheprincipalcompetitivefactors inthismarket includetheeaseof implementation,thebreadthandqualityofsystemandsoftwaresolutionofferings,thestabilityoftheinformationsystemsprovider,theongoingsupportforthesystemandthepotentialforenhancementsandfuturecompatiblesoftwaresolutions.Certainofourcompetitorshavegreaterfinancial,technical,productdevelopment,marketingandotherresourcesthanusandsomeofourcompetitorsoffersoftwaresolutionsthatwedonotoffer.Ourprincipalexistingcompetitorsinclude:EclipsysCorporation,EpicSystemsCorporation,GEHealthcareTechnologies,iSoftCorporation,McKessonCorporation,MedicalInformationTechnology,Inc.(“Meditech”),MisysHealthcareSystemsandSiemensMedicalSolutionsHealthServicesCorporation,eachofwhichoffersasuiteofsoftwaresolutionsthatcompetewithmanyofoursoftwaresolutionsandservices.Thereareothercompetitorsthatofferamorelimitednumberofcompetingsoftwaresolutionsandservices,including,withoutlimitation:AllscriptsHealthcareSolutions,Inc.,EmdeonCorporationandQualitySystems,Inc.

In addition, we expect that major software information systems companies, large information technology consulting service providers and systemintegrators,Internet-basedstart-upcompaniesandothersspecializinginthehealthcareindustrymayoffercompetitivesoftware/solutionsorservices.Thepaceofchangeinthehealthcareinformationsystemsmarketisrapidandtherearefrequentnewsoftwaresolutionintroductions,softwaresolutionenhancementsandevolvingindustrystandardsandrequirements.Asaresult,oursuccesswilldependuponourabilitytokeeppacewithtechnologicalchangeandtointroduce,onatimelyandcost-effectivebasis,newandenhancedsoftwaresolutionsandservicesthatsatisfychangingclientrequirementsandachievemarketacceptance.

Risks Related to the Company’s StockOur quarterly operating results may vary which could adversely affect our stock price. Ourquarterlyoperatingresultshavevariedinthepastandmaycontinuetovaryinfutureperiods,including,variationsfromguidance,expectationsorhistoricalresultsortrends.Quarterlyoperatingresultsmayvaryforanumberofreasonsincludingaccountingpolicychanges,demandforoursolutionsandservices,ourlongsalescycle,potentiallylonginstallationandimplementationcyclesforlarger,morecomplexandhigher-pricedsystemsandotherfactorsdescribedinthissectionandelsewhereinthisreport.AsaresultofhealthcareindustrytrendsandthemarketforourCerner Millenniumsolutions,alargepercentageofourrevenuesaregeneratedbythesaleandinstallationoflarger,morecomplexandhigher-pricedsystems.Thesalesprocessforthesesystemsislengthyandinvolvesasignificanttechnicalevaluationandcommitmentofcapitalandotherresourcesbytheclient.Salesmaybesubjecttodelaysduetochangesinclients’ internalbudgets,proceduresforapprovinglargecapitalexpenditures,competingneedsforothercapitalexpenditures,availabilityofpersonnelresourcesandbyactionstakenbycompetitors.Delaysintheexpectedsale,installationorimplementationoftheselargesystemsmayhaveasignificantimpactonouranticipatedquarterlyrevenuesandconsequentlyourearnings,sinceasignificantpercentageofourexpensesarerelativelyfixed.

Werecognizerevenueuponthecompletionofstandardmilestoneconditionsandtheamountofrevenuerecognizedinanyquarterdependsuponourandourclient’sabilitytomeetprojectmilestones.Delaysinmeetingthesemilestoneconditionsormodificationofthecontractcouldresultinashiftofrevenuerecognitionfromonequartertoanotherandcouldhaveamaterialadverseeffectonresultsofoperationsforaparticularquarter.

Ourrevenuesfromsystemsaleshistoricallyhavebeenlowerinthefirstquarteroftheyearandgreaterinthefourthquarteroftheyear,primarilyasaresultofclients’year-endeffortstomakeallfinalcapitalexpendituresforthethen-currentyear.

Our sales forecasts may vary from actual sales in a particular quarter.Weusea“pipeline”system,acommonindustrypractice,toforecastsalesandtrendsinourbusiness.Oursalesassociatesmonitorthestatusofallsalesopportunities,suchasthedatewhentheyestimatethataclientwillmakeapurchasedecisionandthepotentialdollaramountofthesale.Theseestimatesareaggregatedperiodicallytogenerateasalespipeline.Wecomparethispipelineatvariouspointsintimetoevaluatetrendsinourbusiness.Thisanalysisprovidesguidanceinbusinessplanningandforecasting,butthesepipelineestimatesarebytheirnaturespeculative.Ourpipelineestimatesarenotnecessarilyreliablepredictorsofrevenuesinaparticularquarteroroveralongerperiodoftime,partiallybecauseofchangesinthepipelineandinconversionratesofthepipelineintocontractsthatcanbeverydifficulttoestimate.Anegativevariationintheexpectedconversionrateortimingofthepipelineintocontracts,orinthepipelineitself,couldcauseourplanorforecasttobeinaccurateandtherebyadverselyaffectbusinessresults.Forexample,aslowdownininformationtechnologyspending,adverseeconomicconditionsoravarietyofotherfactorscancausepurchasingdecisionstobedelayed,reducedinamountorcancelled,whichwouldreducetheoverallpipelineconversionrateinaparticularperiodoftime.Becauseasubstantialportionofourcontractsarecompletedinthelatterpartofaquarter,we

Page 32: Download the Full Report - Cerner Corporation

2�

maynotbeabletoadjustourcoststructurequicklyenoughinresponsetoarevenueshortfallresultingfromadecreaseinourpipelineconversionrateinanygivenfiscalquarter(s).

The trading price of our common stock may be volatile.Themarketforourcommonstockmayexperiencesignificantpriceandvolumefluctuationsinresponsetoanumberoffactorsincludingactualoranticipatedquarterlyvariationsinoperatingresults,rumorsaboutourperformanceorsolutions,changesinexpectationsoffuturefinancialperformanceorestimatesofsecuritiesanalysts,governmentalregulatoryaction,healthcarereformmeasures,clientrelationshipdevelopments,changesoccurringinthesecuritiesmarketsingeneralandotherfactors,manyofwhicharebeyondourcontrol.Asamatterofpolicy,wedonotgenerallycommentonourstockpriceorrumors.

Furthermore,thestockmarketingeneral,andthemarketforsoftware,healthcareandinformationtechnologycompaniesinparticular,hasexperiencedextremevolatilitythatoftenhasbeenunrelatedtotheoperatingperformanceofparticularcompanies.Thesebroadmarketandindustryfluctuationsmayadverselyaffectthetradingpriceofourcommonstock,regardlessofactualoperatingperformance.

Our Directors have authority to issue preferred stock and our corporate governance documents contain anti-takeover provisions.OurBoardofDirectorshastheauthoritytoissueupto1,000,000sharesofpreferredstockandtodeterminethepreferences,rightsandprivilegesofthoseshareswithoutanyfurthervoteoractionbytheshareholders.Therightsoftheholdersofcommonstockmaybeharmedbyrightsgrantedtotheholdersofanypreferredstockthatmaybeissuedinthefuture.

Inaddition,someprovisionsofourCertificateofIncorporationandBylawscouldmakeitmoredifficultforapotentialacquirertoacquireamajorityofouroutstandingvotingstock.Thisincludes,butisnotlimitedto,provisionsthatprovideforaclassifiedboardofdirectors,prohibitshareholdersfromtakingactionbywrittenconsentandrestricttheabilityofshareholderstocallspecialmeetings.WehavealsoenteredintoaRightsAgreementwhichcoulddiscourageorpreventathirdpartyfrompursuingatakeoverproposalthatisnotsupportedbyourBoardofDirectors.WearealsosubjecttoprovisionsofDelawarelawthatprohibitusfromengaginginanybusinesscombinationwithanyinterestedshareholderforaperiodofthreeyearsfromthedatethepersonbecameaninterestedshareholder,unlesscertainconditionsaremet,whichcouldhavetheeffectofdelayingorpreventingachangeofcontrol.

Item 2. PropertiesThe Company’s world headquarters offices are located in a Company-owned office park in North Kansas City, Missouri, containing approximately858,170grosssquarefeetofuseablespace(the“Campus”),inclusiveofthenewbuildingdescribedbelow.AsofDecember31,2005,theCompanywasusingapproximately854,483squarefeetofsuchcampusspaceandsubstantiallyalloftheremainderwasleasedtoExecutiveTravel,thetravelmanagementcompanyhistoricallyusedbytheCompany’sassociatesforbusiness-relatedtravel.In2005,theCompanybeganconstructingabuildingtohouseHealtheClinic,asubsidiarywhichwillprovideprimarycareservicesfortheCompany’sassociatesandtheirfamilymembers.ThebuildingwascompletedinFebruary2006.

In2004,theCompanypurchasedapproximately12acresofunimprovedrealestateadjacenttotheCernerworldheadquartersforcampusexpansion.Anaccessroadhasbeenbuiltthroughthepropertyandplansareunderwayforfurtherdevelopment.InJune2005,theCompanypurchased263,512grosssquarefeetofpropertylocatedat3315NorthOakTrafficwayinKansasCity,Missouri.Theofficespace,knownastheCernerOaksCampus,housesassociatesfromtheCernerWorksandCernerTechnologiesgroupsandassociatesofCerner’swholly-ownedsubsidiary,HEALTHeExchange.

TheCompanyalsoownspropertylocatedalongthenorthriverbankoftheMissouriRiver,approximatelytwomilesfromtheCompany’sCampus.Thispropertyconsistsofa96,318grosssquarefootbuildinganda1,300-carparkinggarage.Thebuildinghasbeenrenovatedforuseasacorporatetraining,meetingandeventcenterfortheCompanyandthirdparties.TheCompanyhasalsomadeuseoftheparkinggaragetomeetoverflow-parkingdemandsontheCompany’sCampus.

AsofMarch2006,theCompanyalsoleasedofficespacein:Birmingham,Alabama;BeverlyHills,California;SolonaBeach,California;Denver,Colorado;DaytonaBeach,Florida;OverlandPark,Kansas;Waltham,Massachusetts;BelAir,Maryland;Minneapolis,Minnesota;Rochester,Minnesota;KansasCity,Missouri;Charlotte,NorthCarolina;Beaverton,Oregon;andVienna,Virginia.TheCompanyoperatesitsprimarysolutionscenter(ordatacenter)inleasedspaceinLee’sSummit,Missouri.Globally,theCompanyalsoleasesofficespacein:SydneyandMelbourne,Australia;Brussels,Belgium;London-Ontario,Canada;Paris,France;AachenandIdstein,Germany;HongKong;Bangalore,India;KualaLumpur,Malaysia;NgeeAnnCity,Singapore;BarcelonaandMadrid,Spain;and,LondonandSlough,UnitedKingdom.In2005,theCompany’sAlpharetta,Georgia;Houston,Texas;andSantiago,ChileofficeswereclosedastheCompanyrelocatedmanyassociatesand/orthenecessarybusinessfunctionstootherCompanyoffices.

Item �. Legal ProceedingsTheCompanyhasnomaterialpendinglitigation.

Aspreviouslydisclosed,eightshareholderclassactionlawsuitswerefiledagainstCernerandfiveofitsofficersintheUnitedStatesDistrictCourtfortheWesternDistrictofMissouriafteradeclineintheCompany’sstockpricefollowingtheCompany’sannouncementonApril3,2003thattheCompanywouldnotmeetrevenueandearningsestimatesforthefirstquarterof2003.TheselawsuitswereconsolidatedunderCaseNo.03-CV-00296-DW.OnDecember1,2003,theleadplaintifffiledaConsolidatedClassActionComplaintallegingthatduringaclassperiodcommencingasofJuly17,2002andendingApril2,2003,theCompanyandindividuallynameddefendantsmisrepresentedorfailedtodisclosecertainfactors,whichtheyallegeimpactedtheCompany’sbusinessandanticipatedrevenueandearnings,allallegedlyinviolationofSections10(b)and20(a)oftheSecuritiesExchangeActof1934andRule10b-5thereunder.

Page 33: Download the Full Report - Cerner Corporation

�0

OnJune16, 2004 theDistrict Court granted theCompany’s and the individual defendants’Motion toDismiss and ordered theConsolidatedClassActionComplaintdismissedwithprejudiceagainstre-filing.OnOctober6,2005,theEighthCircuitaffirmedtheDistrictCourt’sdismissaloftheclassactionclaimsagainstCernerandtheindividualdefendantsandtheplaintiffsfailedtoseekreconsiderationorappealofthatdecisionwithintherequireddeadlines.

Item �. Submission of Matters to a Vote of Security HoldersNomattersweresubmittedtoavoteoftheshareholdersoftheCompanyduringthefourthquarterofthefiscalyearendedDecember31,2005.

Item �A. Executive Officers of the CompanyThefollowingtablesetsforththenames,ages,positionsandcertainotherinformationregardingtheCompany’sexecutiveofficersasofMarch9,2006.OfficersareelectedannuallyandserveatthediscretionoftheBoardofDirectors.

Name Age Positions

NealL.Patterson 56 ChairmanoftheBoardofDirectorsandChiefExecutiveOfficer

CliffordW.Illig 55 ViceChairmanoftheBoardofDirectors

EarlH.Devanny,III 54 President

PaulM.Black 47 ExecutiveVicePresidentandChiefOperatingOfficer

DouglasM.Krebs 48 SeniorVicePresidentCernerandGeneralManagerofCernerEurope,MiddleEastandAsiaPacificOrganization

MarcG.Naughton 51 SeniorVicePresidentandChiefFinancialOfficer

JeffreyA.Townsend 42 ExecutiveVicePresident

MikeValentine 37 SeniorVicePresidentandGeneralManagerofU.S.ClientOrganization

RandyD.Sims 45 VicePresident,ChiefLegalOfficerandSecretary

JuliaM.Wilson 43 VicePresidentandChiefPeopleOfficer

NealL.PattersonhasbeenChairmanoftheBoardofDirectorsandChiefExecutiveOfficeroftheCompanyformorethanfiveyears.Mr.PattersonalsoservedasPresidentoftheCompanyfromMarchof1999untilAugustof1999.

CliffordW.IllighasbeenaDirectoroftheCompanyformorethanfiveyears.HealsoservedasChiefOperatingOfficeroftheCompanyformorethanfiveyearsuntilOctober1998andasPresidentoftheCompanyformorethanfiveyearsuntilMarchof1999.Mr.IlligwasappointedViceChairmanoftheBoardofDirectorsinMarchof1999.

EarlH.Devanny,IIIjoinedtheCompanyinAugustof1999asPresident.Mr.DevannyalsoservedasinterimPresidentofCernerSoutheastfromJanuary2003throughJuly2003.PriortojoiningtheCompany,Mr.DevannyservedaspresidentofADACHealthcareInformationSystems,Inc.PriortojoiningADAC,Mr.DevannyservedasaVicePresidentoftheCompanyfrom1994to1997.Priortothathespent17yearswithIBMCorporation.

PaulM.BlackjoinedtheCompanyinFebruaryof1994asaRegionalVicePresident.HewaspromotedinJune1998toSeniorVicePresidentandinJanuary1999toChiefSalesOfficerandtoExecutiveVicePresidentinSeptemberof2000.InJanuaryof2003Mr.BlackwasnamedExecutiveVicePresidentoftheU.S.ClientOrganization.InFebruary2005Mr.BlackwasnamedChiefOperatingOfficer.PriortojoiningtheCompany,hespent12yearswithIBMCorporation.

DouglasM.KrebsjoinedtheCompanyinJune1994asaRegionalVicePresident.HewaspromotedtoSeniorVicePresidentandAreaManagerinApril1999.InFebruary2000,Mr.KrebswasappointedasPresidentofCernerGlobalandinJanuary2005,Mr.KrebswasappointedGeneralManageroftheCompany’sEurope,MiddleEastandAsiaPacificOrganization.PriortojoiningCerner,hespent15yearswithIBMCorporation.

MarcG.NaughtonjoinedtheCompanyinNovember1992asManagerofTaxes.InNovember1995hewasnamedChiefFinancialOfficerandinFebruary1996hewaspromotedtoVicePresident.HewaspromotedtoSeniorVicePresidentinMarch2002.

JeffreyA.TownsendjoinedtheCompanyinJune1985.SincethattimehehasheldseveralpositionsintheIntellectualPropertyOrganizationandwaspromotedtoVicePresidentinFebruary1997.HewasappointedChiefEngineeringOfficerinMarch1998,promotedtoSeniorVicePresidentinMarch2001andpromotedtoExecutiveVicePresidentinMarch2005.

MikeValentinejoinedtheCompanyinDecember1998asDirectorofTechnology.HewaspromotedtoVicePresidentin2000andtoPresidentofCernerMidAmericainJanuaryof2003.InFebruary2005,hewasnamedGeneralManageroftheU.S.ClientOrganizationandwaspromotedtoSeniorVicePresidentinMarch2005.PriortojoiningtheCompany,Mr.ValentinewaswithAccentureConsulting.

Page 34: Download the Full Report - Cerner Corporation

�1

RandyD.SimsjoinedtheCompanyinMarch1997asVicePresidentandChiefLegalOfficer.PriortojoiningtheCompany,Mr.SimsworkedatFarmlandIndustries,Inc.forthreeyearswhereheservedmostrecentlyasAssociateGeneralCounsel.PriortoFarmland,Mr.Simswasin-houselegalcounselatTheMarleyCompanyforsevenyears,holdingthepositionofAssistantGeneralCounselwhenhelefttojoinFarmland.

JuliaM.WilsonjoinedtheCompanyinNovember1995.Sincethattime,shehasheldseveralpositionsintheFunctionalGroupOrganization.ShewaspromotedtoVicePresidentandChiefPeopleOfficerinAugust2003.

Page 35: Download the Full Report - Cerner Corporation

�2

PART IIItem 5. Market for the Registrant’s Common Stock and Related Security Holder MattersTheCompany’scommonstocktradesonThe NASDAQ Stock Market®underthesymbolCERN.Thefollowingtablesetsforththehigh,lowandlastsalespricesforthefiscalquartersof2005and2004asreportedbyThe NASDAQ National Market System.Thesequotationsrepresentpricesbetweendealersanddonotincluderetailmark-up,mark-downorcommissions,anddonotnecessarilyrepresentactualtransactions.

2005 200� High Low Last High Low Last Firstquarter $ 27.48 23.60 26.04 23.82 18.68 22.41 Secondquarter 34.74 25.69 33.86 23.63 19.95 21.37 Thirdquarter 43.72 34.03 43.47 23.47 20.69 22.31 Fourthquarter 49.26 40.76 45.46 26.80 21.99 26.59

AtMarch1,2006,therewereapproximately1,600ownersofrecord.Todate,theCompanyhaspaidnodividendsanditdoesnotintendtopaydividendsintheforeseeablefuture.Managementbelievesitisintheshareholders’bestinterestfortheCompanytoreinvestfundsintheoperationofthebusiness.

OnDecember15,2005, theCompany issued2,251shares (pre-stocksplit)of itsoutstandingstocktoUniversityofPittsburghMedicalCenteruponexerciseofawarrantgrantedin2000.Theaggregateexercisepricewas$101,717.06,or$45.1875(pre-stocksplit)pershare.TheshareswereissuedbytheCompanywithoutregistrationinrelianceontheexemptionprovidedbySection4(2)oftheSecuritiesAct.

Additionally,andaspreviouslydisclosed in theCompany’squarterly reportonForm10-Qfor thequarterendedJuly2,2005,onApril6,2005, theCompanyissued72,536shares(pre-stocksplit)ofitsoutstandingstocktoUniversityofPittsburghMedicalCenteruponexerciseofawarrantgrantedin2000.Theaggregateexercisepricewas$3,277,720.50,or$45.1875(pre-stocksplit)pershare.TheshareswereissuedbytheCompanywithoutregistrationinrelianceontheexemptionprovidedbySection4(2)oftheSecuritiesAct.

Item �. Selected Financial Data 2005 200� 200� 2002 2001 (2)(3) (4)(5) (6)(7)(8)(9)(10) (In thousands, except per share data)

Statements of Earnings Data:

Revenues $ 1,160,785 926,356 839,587 780,262 560,802

Operatingearnings 140,436 111,464 78,097 90,820 61,350

Earnings(loss)beforeincometaxesandcumulativeeffect

ofachangeinaccountingprinciple 135,244 107,920 71,222 80,625 (63,314)

Cumulativeeffectofachangeinaccountingforgoodwill,

netof$486incometaxbenefit - - - (786) -

Netearnings(loss) 86,251 64,648 42,791 48,022 (42,366)

Earnings(loss)pershare:(Note1)

Basic 1.16 .90 .61 .68 (.61)

Diluted 1.10 .86 .59 .65 (.61)

Weightedaveragesharesoutstanding:(Note1)

Basic 74,144 72,174 70,710 70,916 69,814

Diluted 78,090 75,142 72,712 74,100 69,814

BalanceSheetData:

Workingcapital $ 391,541 310,229 246,412 282,135 189,488

Totalassets 1,303,629 982,265 854,252 779,279 712,302

Long-termdebt,net 194,265 108,804 124,570 136,636 92,132

Shareholders’equity 760,533 597,485 494,680 441,244 394,839

Page 36: Download the Full Report - Cerner Corporation

��

(1) Reflectstheeffectofa2-for-1stocksplitdistributedonJanuary9,2006.

(2) Includesataxbenefitof$4.8millionrelatingtothecarrybackofacapitallossgeneratedbythesaleofZynxHealthIncorporatedinthefirstquarterof2004.Theimpactofthisrefundclaimisa$4.8millionincreaseinnetearningsandanincreaseindilutedearningspershareof$.06for2005.

(3) IncludesachargeforthewriteoffofacquiredinprocessresearchanddevelopmentrelatedtotheacquisitionofthemedicalbusinessdivisionofVitalWorks,Inc.Theimpactofthischargeisa$3.9milliondecrease,netof$2.4milliontaxbenefit,innetearningsandadecreasetodilutedearningspershareof$.05for2005.

(4) IncludesagainonthesaleofZynxHealthIncorporated.Theimpactofthisgainisa$3.0millionincreaseinnetearningsandincreasetodilutedearningspershareof$.04for2004.

(5) Includesachargeforvacationaccrualof$3.3millionincludedingeneralandadministrative.Theimpactofthischargeisa$2.1milliondecrease,netof$1.2milliontaxbenefit,innetearningsandadecreasetodilutedearningspershareof$.03for2004.

(6) IncludesagainonthesaleofsharesofWebMDcommonstock.Theimpactofthisgainisa$3.3million,netof$1.9milliontaxexpense,increaseinnetearningsandanincreasetodilutedearningspershareof$.05for2002.

(7) Includesachargeforimpairmentofinvestments.Theimpactofthischargeisa$6.3million,netof$3.6milliontaxbenefit,decreaseinnetearningsandadecreasetodilutedearningspershareof$.09for2002.

(8) Includesthecumulativeeffectofachangeinaccountingforgoodwill.Theimpactofthischangeisa$.8million,netof$.5milliontaxbenefit,decreaseinnetearningsandadecreasetodilutedearningspershareof$.01for2002.

(9) IncludesagainonthesettlementoftheWebMDperformancewarrants.Theimpactofthisgainisa$4.8million,netof$2.7milliontaxexpense,increaseinnetearningsandanincreasetodilutedearningspershareof$.07for2001.

(10) IncludesachargeontheadjustmentofthecarryingvalueoftheWebMDshares.Theimpactofthischargeisan$81.4million,netof$46.1milliontaxbenefit,decreaseinnetearningsandadecreasetodilutedearningspershareof$1.11for2001.

Item �. Management’s Discussion and Analysis of Financial Condition and Results of OperationsIntroductionCernerCorporation(“Cerner”orthe“Company”)isheadquarteredinNorthKansasCity,Missouri.TheCompanyderivesrevenuebyselling,implementingandsupportingsoftwaresolutionsandhardwarethatgivehealthcareproviderssecureaccesstoclinical,administrativeandfinancialdatainrealtime,allowingthemtoimprovethequality,safetyandefficiencyinthedeliveryofhealthcare.Cernerimplementsthesesolutionsasstand-alone,combinedorenterprise-widesystems.CernerMillennium®softwaresolutionscanbemanagedbytheCompany’sclientsorintheCompany’sdatacenterviaamanagedservicesmodel.

Results Overview

The Company delivered very strong results in 2005. Total revenues for 2005 were $1,160,785,000, an increase of 25%, over 2004 revenues of$926,356,000.NetEarningsfor2005were$86,251,000,anincreaseof33%over2004revenuesof$64,648,000.Totalnewbusinessbookings,whichreflectthevalueofexecutedcontractsforsoftware,hardware,servicesandmanagedservices(hostingofsoftwareintheCompany’sdatacenter),wereatrecordlevelsat$1,354,977,000in2005,anincreaseof48%comparedto$917,367,000in2004.

TheCompany’soperationalperformancewasalsostrongin2005.TheCompanybroughtmorethan1,000Cerner Millenniumsolutionslive in2005,bringing the cumulative number of solutions implemented to over 4,800 at over 925 client facilities. These results included significant progress inimplementingcomputerizedphysicianorderentry(CPOE),whichisthesolutiongeneratingthehighestlevelofindustryattention.

TheCompany’sstrongoperationalperformanceisalsoreflectedinitscashflowresults.In2005,theCompanygenerated$228,865,000ofcashflowfromoperations,withrecordcashcollectionsofapproximately$1,200,595,000anddayssalesoutstanding(DSO)decreasingfrom104daysattheendof2004to89daysattheendof2005.

Healthcare Information Technology Market

2005continuedatrendofpositivedevelopmentsinthehealthcareinformationtechnology(HIT)marketplaceandfortheCompany.Overall,theacutecarehospitalmarketplaceisingoodfinancialcondition.AsMoody’sreportedinJanuary2006,hospitalbondratingupgradesbeatdowngradesforthefirsttimesince1997.Andwhilesomeprovidersaredealingwithissuessuchasanunfavorablepayormixandtheresponsibilitytoserveagrowinguninsuredpopulation,USATodayindicatedinJanuary2006thathospitalprofitmarginsreachedasix-yearhighof5.2percentin2004.

NationalpolicymakerscontinuelookingtoHIT.2005sawmeaningfulprogresstowardsabipartisanconsensusonCapitalHillaroundtheviewthatHITcandeliversignificantreturns.TheRANDCorporationstudypublishedinHealth Affairshelpedshapethatperspectivebydetailingpotentialsavingsof$162billionperyearthrougherrorreduction,elevatedefficiencyandimprovedconditionmanagement.

Forthethirdconsecutiveyear,PresidentBushusedtheStateoftheUnionaddressinJanuary2006toexpresshissupportforelectronichealthrecords.ThePresidentalsohighlightedthefactthatthefirstof78millionBabyBoomersturn60in2006,puttingstrainsonthehealthcaresystemandthefederalgovernmentastheneedforcareoftheBabyBoomersincreases.

Page 37: Download the Full Report - Cerner Corporation

��

Results of OperationsYear Ended December 31, 2005, Compared to Year Ended January 1, 2005

TheCompany’snetearningsincreased33%to$86,251,000in2005comparedto$64,648,000in2004.Netearningsfor2005includedanadjustmentinthethirdquarterof2005relatedtoapriorperiodforataxbenefitfromthecarrybackofacapitallossgeneratedbythesaleofZynxHealthIncorporated(Zynx)of$4,749,000andthewriteoffofacquiredin-processresearchanddevelopmentinthefirstquarterof2005of$3,941,000,netofa$2,441,000taxbenefit.Includedin2004netearningsareanadjustmentinthethirdquarterof2004relatedtoapriorperiodvacationpayaccrualthatreducednetearningsby$2,076,000,netof$1,270,000oftax,andagainonthesaleofZynx,inthefirstquarterof2004thatincreasednetearningsby$3,023,000.Excludingthesefouritems,2005netearningswouldhaveincreased34%to$85,443,000comparedto2004netearningsof$63,701,000.

Revenues - TheCompany’srevenuesincreased25%to$1,160,785,000in2005from$926,356,000in2004.Revenuesfor2005includedrevenuesfromtheacquiredmedicalbusinessdivisionofVitalWorks,Inc.(VitalWorks),whichclosedonJanuary3,2005.ExcludingtherevenuefromthemedicalbusinessdivisionofVitalWorks,2005 revenues increased18%over2004. The revenuecomposition for2005was$449,734,000 insystemsales,$296,716,000insupportandmaintenance,$380,948,000inservicesand$33,387,000inreimbursedtravel.

Systemsalesincreased28%to$449,734,000in2005from$351,861,000in2004.Includedinsystemsalesarerevenuesfromthesaleofsoftware,hardwareandsublicensedsoftware,installationfees,transactionprocessingandsubscriptions,witheachcomponentgrowingatleast12%in2005.ThisincreaseisdueprimarilytoanincreaseinnewbusinessbookingsandtheinclusionofrevenuefromthemedicalbusinessdivisionofVitalWorksin2005.ExcludingrevenuefromthemedicalbusinessdivisionofVitalWorks,systemsaleswouldhaveincreased17%.

Support,maintenanceandservicerevenuesincreased25%to$677,664,000in2005from$542,414,000in2004.Supportandmaintenancerevenueswere$296,716,000and$241,439,000in2005and2004,respectively.Servicesrevenueswere$380,948,000and$300,975,000in2005and2004,respectively. Includedinsupport,maintenanceandservicerevenuesaresupportandmaintenanceofsoftwareandhardware,professionalservicesexcludinginstallation,andmanagedservices.TheseincreasesweredrivenbystrongperformanceindeliveringCerner MillenniumsolutionstoclientsandtheinclusionofrevenuefromtheacquiredmedicalbusinessdivisionofVitalWorks.ExcludingrevenuefromthemedicalbusinessdivisionofVitalWorks,support,maintenanceandservicesaleswouldhaveincreased19%.

Contractbacklog,whichreflectsnewbusinessbookingsthathavenotyetbeenrecognizedasrevenue, increased45%in2005comparedto2004.Thisincreaseisduetoanincreaseinnewbusinessbookingsin2005comparedto2004.AtDecember31,2005,theCompanyhad$1,724,583,000incontractbacklogand$415,681,000insupportandmaintenancebacklog,comparedto$1,191,170,000incontractbacklogand$347,662,000insupportandmaintenancebacklogattheendof2004.

Cost of Revenues -Thecostof revenues includes thecostof reimbursed travelexpense, thirdpartyconsultingservicesandsubscriptioncontent,computerhardwareandsublicensedsoftwarepurchasedfromhardwareandsoftwaremanufacturersfordeliverytoclients.Italsoincludesthecostofhardwaremaintenanceandsublicensedsoftwaresupportsubcontractedtothemanufacturers.Thecostofrevenueswas22%oftotalrevenuesin2005,and21%oftotalrevenuesin2004.Suchcosts,asapercentofrevenues,typicallyhavevariedasthemixofrevenue(software,hardware,servicesandsupport)componentscarryingdifferentmarginrateschangesfromperiodtoperiod.Theincreaseinthecostofrevenueasapercentoftotalrevenuesresultedprincipallyfromhigherlevelsofhardwaresalesatlowerthanhistoricallevelsofmarginforhardware.

Sales and Client Service -Salesandclientserviceexpensesincludesalariesofclientservicepersonnel,communicationsexpensesandunreimbursedtravelexpenses.Alsoincludedaresalesandmarketingsalaries,travelexpenses,tradeshowcostsandadvertisingcosts.Theseexpensesasapercentoftotalrevenueswere40%and41%in2005and2004,respectively.Theincreaseintotalsalesandclientserviceexpensesto$466,206,000in2005from$383,628,000in2004isprimarilyduetoanincreaseinpersonnel,personnelrelatedexpensesandincreasedpresenceintheglobalmarket.ThedecreaseinthisspendingasapercentoftotalrevenuereflectstheCompany’sabilitytogetbetterutilizationofitsresourcesandleveragethisspendingoveralargerrevenuestream.

Software Development - Softwaredevelopmentexpensesincludesalaries,documentationandotherdirectexpensesincurredinsoftwaredevelopmentandamortizationofsoftwaredevelopmentcosts.Totalexpendituresforsoftwaredevelopment,includingbothcapitalizedandnoncapitalizedportions,for 2005 and 2004 were $226,238,000 and $188,264,000, respectively. These amounts exclude amortization. Capitalized software costs were$62,523,000and$58,912,000for2005and2004,respectively.Theincreaseinaggregateexpendituresinsoftwaredevelopmentin2005isduetocontinueddevelopmentofCerner Millenniumsolutions.

General and Administrative - General and administrative expenses include salaries for corporate, financial and administrative staffs, utilities,communicationsexpenses,professionalfeesandthetransactiongainsorlossesonforeigncurrency.Theseexpensesasapercentoftotalrevenueswere7%inboth2005and2004.Totalgeneralandadministrativeexpenseswere$81,620,000and$63,327,000for2005and2004,respectively.Generalandadministrativeexpensesfor2004includeanadjustmenttoincreasethevacationpayaccrualof$3,346,000,relatedtopriorperiods.Excludingtheadjustmenttoincreasethevacationpayaccrual,generalandadministrativeexpensesasapercentofrevenueswere6%in2004.TheCompanyhadnettransactiongainsonforeigncurrencyof$2,700,000for2005comparedtonettransactionlossesonforeigncurrencyof$479,000for2004.

Thewrite-offofin-processresearchanddevelopmentin2005isanexpenseresultingfromtheacquiredmedicalbusinessdivisionofVitalWorks.

Interest Expense, Net -Interestincomewas$3,871,000in2005comparedto$3,022,000in2004.Thisincreaseisdueprimarilytohigherinterestrates,andahighercashbalancefedbycashcollections.Interestexpensewas$9,729,000in2005comparedto$9,174,000in2004.

Page 38: Download the Full Report - Cerner Corporation

�5

Other Income, Net -Otherincomewas$666,000in2005comparedto$2,608,000in2004.Otherincomein2004includedagainonthesaleofZynx.Alsoincludedinotherincomearerevenuesfromofficespaceleasedtothirdparties.

Income Taxes-TheCompany’seffectivetaxratewas36%and40%in2005and2004,respectively.Taxexpensefor2005includesanadjustmentthatreducedtaxexpenserelatedtoapriorperiodforataxbenefitfromthecarrybackofacapitallossgeneratedbythesaleofZynxof$4,749,000.Excludingthisadjustment,theCompany’seffectivetaxratewas40%for2005.

Operations by Segment

Inthefourthquarterof2005,theCompanychangeditsreportablesegmentstoreflecthowthechiefoperatingdecisionmakercurrentlyreviewstheCompany’sresultsintermsofallocatingresourcesandassessingperformance.ThischangeeffectivelypresentstheCompany’soperatingresultsbyitstwogeographicaloperatingsegments,DomesticandGlobal.Asaresult,thepriorperiodshavebeenretroactivelyadjustedtoreflectthechangeinreportablesegments.

Thefollowingtablepresentsasummaryoftheoperatinginformationfor2005and2004(inthousands):

OperatingSegments

2005 Domestic Global Other Total

Revenues $1,046,180 $ 113,314 $ 1,290 $1,160,785

Costofrevenues 231,977 16,981 5,728 254,686

Operatingexpenses 209,747 47,691 508,224 765,663

Totalcostsandexpenses 441,724 64,672 513,952 1,020,349

Operatingearnings $ 604,456 $ 48,642 $(512,662) $ 140,436

OperatingSegments

2004 Domestic Global Other Total

Revenues $ 858,945 $ 63,622 $ 3,789 $ 926,356

Costofrevenues 183,266 7,809 5,273 196,348

Operatingexpenses 156,888 38,411 423,245 618,544

Totalcostsandexpenses 340,154 46,220 428,518 814,892

Operatingearnings $518,791 $ 17,402 $(424,729) $ 111,464

OperatingearningsintheDomesticsegmentincreased17%fortheyearendedDecember31,2005comparedtotheyearendedJanuary1,2005.TotalDomesticsegmentrevenuesincreased22%inthe2005periodcomparedtothe2004perioddrivenbystrongbookingsgrowth.Costofrevenueswerebasicallyunchangedat22%and21%oftotalDomesticsegmentrevenuesfortheyearended2005and2004,respectively.Domesticsegmentrevenues,costofrevenuesandoperatingexpensesfor2005includedrevenuesfromtheacquiredmedicalbusinessdivisionofVitalWorks,whichclosedonJanuary3,2005.Domesticsegmentoperatingexpensesin2005increased34%comparedtothe2004periodasaresultofhiringadditionalpersonnelandtheinclusionofexpensesfromthemedicalbusinessdivisionofVitalWorks.

OperatingearningsintheGlobalsegmentincreased180%fortheyearendedDecember31,2005comparedtotheyearendedJanuary1,2005.Totalrevenuesincreased78%inthe2005periodcomparedtothe2004period.TheCompany’sreplacementofacompetitorintheSouthernregionofEnglandwasabigpartofitsglobalsuccessin2005,withthiscontractcontributingmorethan$14millionofrevenue.Otherregionsinourglobalbusinessalsohadanoutstandingyear.OnstrengthintheMiddleEast,AsiaPacific,FranceandCanada,Globalsegmentrevenuegrewmorethan50percentexcludingrevenuefromtheCompany’sUnitedKingdomcontract.Costofrevenueswere15%and12%oftotalGlobalsegmentrevenuesfortheyearended2005and2004,respectively.Operatingexpensesinthe2005periodincreased24%comparedtothe2004periodduetohiringpersonnelforthehigherlevelofactivityoutsidetheUnitedStates.

OperatinglossesinOtherincreased21%fortheyearendedDecember31,2005comparedtotheyearendedJanuary1,2005.IncludedinOtherarerevenuesandexpensesnottrackedbygeographicsegment.Operatingexpensesincreased20%inthe2005periodcomparedtothe2004period.Thisincreaseinoperatingexpensesisduetoanincreaseinexpensessuchassoftwaredevelopment,marketing,generalandadministrativeanddepreciationinthe2005periodcomparedtothe2004period.Operatingexpensesinthe2005periodincludesthewrite-offofacquiredin-processresearchanddevelopmentof$6,382,000.

Page 39: Download the Full Report - Cerner Corporation

��

Year Ended January 1, 2005, Compared to Year Ended January 3, 2004

TheCompany’srevenuesincreased10%to$926,356,000in2004from$839,587,000in2003.TheCompanyhadnetearningsof$64,648,000in2004comparedto$42,791,000in2003.Includedin2004netearningsareanadjustmentinthethirdquarterof2004relatedtoapriorperiodvacationpayaccrualthatreducednetearningsby$2,076,000,netof$1,270,000oftax,andagainonthesaleofZynx,inthefirstquarterof2004thatincreasednetearningsby$3,023,000.Excludingthesetwoitems,2004netearningswouldhavebeen$947,000lower,or$63,701,000.

Revenues - In 2004, revenues increased due to an increase in system sales, support of installed systems and an increase in services. Support,maintenanceandservicerevenuesincreased14%to$542,414,000in2004from$476,795,000in2003.Supportandmaintenancerevenueswere$241,439,000 and $209,876,000 in 2004 and 2003, respectively. Service revenues were $300,975,000 and $266,918,000 in 2004 and 2003,respectively.Includedinsupport,maintenanceandservicerevenuesaresupportandmaintenanceofsoftwareandhardware,managedservicesandprofessionalservices,excludinginstallation.TheincreaseinsupportandmaintenancerevenuewasdueprimarilytotheincreaseintheCompany’sinstalledandconvertedclientbase,thatwasdrivenbybringingarecordnumberofCernerMillenniumsolutionslivein2003and2004.Theincreaseinservicerevenuewasdrivenbyincreasedprofessionalservicesbillablehoursandastrongincreaseinmanagedservices.

Systemsalesincreased6%to$351,861,000in2004from$332,349,000in2003.Includedinsystemsalesarerevenuesfromthesaleofsoftware,hardwareandsublicensedsoftware. This increaseisdueprimarilytoanincreasein licensedsoftwaresalesthatwaspartiallyoffsetbydeclines inhardwaresales.

At January 1, 2005, the Company had $1,191,170,000 in contract backlog and $347,662,000 in support and maintenance backlog, compared to$938,221,000incontractbacklogand$312,887,000insupportandmaintenancebacklogattheendof2003.

Cost of Revenues -Thecostof revenues includes thecostof reimbursed travelexpense, thirdpartyconsultingservicesandsubscriptioncontent,hardwareandsublicensedsoftwarepurchasedfromhardwareandsoftwaremanufacturersfordeliverytoclients.Italsoincludesthecostofhardwaremaintenanceandsublicensedsoftwaresupportsubcontractedtothemanufacturers.Thecostofrevenueswas21%oftotalrevenuesin2004,and23%oftotalrevenuesin2003.Suchcosts,asapercentofrevenues,typicallyhavevariedasthemixofrevenue(software,hardware,servicesandsupport)componentscarryingdifferentmarginrateschangesfromperiodtoperiod.Thedecreaseinthecostofrevenueasapercentoftotalrevenuesresultedprincipallyfromadecreaseinthepercentofrevenuefromhardwareandsublicensedsoftware,whichcarryahighercostofrevenuepercentage.

Sales and Client Service -Salesandclientserviceexpensesincludesalariesofclientservicepersonnel,communicationsexpensesandunreimbursedtravelexpenses.Alsoincludedaresalesandmarketingsalaries,travelexpenses,tradeshowcostsandadvertisingcosts.Theseexpensesasapercentoftotalrevenueswere41%and42%in2004and2003,respectively.Theincreaseintotalsalesandclientserviceexpensesto$383,628,000in2004from$352,728,000in2003isprimarilyduetoanincreaseinpersonnelandpersonnelrelatedexpenses.ThedecreaseinthisspendingasapercentoftotalrevenuereflectstheCompany’sabilitytogetbetterutilizationofitsresourcesandleveragethisspendingoveralargerrevenuestream.

Software Development - Softwaredevelopmentexpensesincludesalaries,documentationandotherdirectexpensesincurredinsoftwaredevelopmentandamortizationofsoftwaredevelopmentcosts.Totalexpendituresforsoftwaredevelopment,includingbothcapitalizedandnoncapitalizedportions,for2004and2003were$188,264,000and$179,999,000,respectively.Theseamountsexcludeamortization.Capitalizedsoftwarecostswere$58,912,000and $58,736,000 for 2004 and 2003, respectively. The increase in aggregate expenditures in software development in 2004 is due to continueddevelopmentofCerner Millenniumsolutions.

General and Administrative - General and administrative expenses include salaries for corporate, financial and administrative staffs, utilities,communicationsexpenses,foreigncurrencytransactiongainsandlossesandprofessionalfees.Theseexpensesasapercentoftotalrevenueswere7%inboth2004and2003.Totalgeneralandadministrativeexpenseswere$63,327,000and$58,236,000for2004and2003,respectively.Generalandadministrativeexpensesfor2004includethevacationpayaccrualadjustmentof$3,346,000,whichismorefullydescribedinnote14totheconsolidatedfinancialstatements.Excludingtheadjustmenttoincreasethevacationpayaccrual,generalandadministrativeexpensesasapercentofrevenueswere6%in2004.TheCompanyhadnettransactionlossesonforeigncurrencyof$479,000for2004comparedtonettransactiongainsonforeigncurrencyof$1,376,000for2003.

Interest Expense, Net -Interestincomewas$3,022,000in2004comparedto$1,219,000in2003.Thisincreaseisdueprimarilytohigherinterestrates,andahighercashbalancefedbycashcollections.Interestexpensewas$9,174,000in2004comparedto$8,236,000in2003.

Other Income, Net -Otherincomeincreasedfrom$142,000in2003to$2,608,000in2004.ThisincreaseisdueprimarilytoagainonthesaleofZynx.Alsoincludedinotherincomearerevenuesfromofficespaceleasedtothirdparties.

Page 40: Download the Full Report - Cerner Corporation

��

Operations by Segment

Thefollowingtablepresentsasummaryoftheoperatinginformationfor2004and2003(inthousands):

OperatingSegments

2004 Domestic Global Other Total

Revenues $858,945 $63,622 $ 3,789 $926,356

Costofrevenues 183,266 7,809 5,273 196,348

Operatingexpenses 156,888 38,411 423,245 618,544

Totalcostsandexpenses 340,154 46,220 428,518 814,892

Operatingearnings $ 518,791 $ 17,402 $(424,729) $ 111,464

OperatingSegments

2003 Domestic Global Other Total

Revenues $ 782,434 $ 54,191 $ 2,963 $ 839,587

Costofrevenues 180,681 13,450 159 194,290

Operatingexpenses 134,177 35,814 397,209 567,200

Totalcostsandexpenses 314,858 49,264 397,368 761,490

Operatingearnings $467,576 $ 4,927 $(394,405) $ 78,097

OperatingearningsintheDomesticsegmentincreased11%fortheyearendedJanuary1,2005comparedtotheyearendedJanuary3,2004.TotalrevenuesfortheDomesticsegmentincreased10%inthe2004periodcomparedtothe2003period.Costofrevenueswere21%and23%oftotalDomesticsegmentrevenuesduetothedeclineinthirdpartycosts.Domesticsegmentoperatingexpenseswere18%and17%oftotalDomesticsegmentrevenuesfor2004and2003,respectively.

OperatingearningsintheGlobalsegmentincreased253%fortheyearendedJanuary1,2005comparedtotheyearendedJanuary3,2004.Thislargeincreaseisduetothesmallbasein2003comparedto2004.Totalrevenuesincreased17%in2004comparedto2003.Theincreaseintotalrevenuesisdueprimarilytoanincreaseinprofessionalservicesin2004comparedto2003.Costofrevenueswere12%and25%oftotalGlobalsegmentrevenues.Operatingexpensesincreased7%in2004comparedto2003.Theseincreasesaredueprimarilytoanincreasedpresenceintheglobalmarket.

OperatinglossesinOtherincreased8%fortheyearendedJanuary1,2005comparedtotheyearendedJanuary3,2004.Thisincreaseisduetoanincreaseintotalcostsandexpensesof8%in2004comparedto2003.Theincreaseinoperatingexpensesisduetoanincreaseinexpensessuchassoftwaredevelopment,marketing,generalandadministrativeanddepreciationin2004comparedto2003.

Liquidity and Capital ResourcesTheCompany’sliquidityisinfluencedbymanyfactors,includingtheamountandtimingoftheCompany’srevenues,itscashcollectionsfromitsclientsandtheamountstheCompanyinvestsinsoftwaredevelopment,acquisitionsandcapitalexpenditures.

TheCompany’sprincipalsourceofliquidityisitscash,cashequivalentsandshort-terminvestments.ThemajorityoftheCompany’scashandcashequivalentsconsistofU.S.GovernmentFederalAgencySecurities,short-termmarketablesecuritiesandovernightrepurchaseagreements.AtDecember31,2005theCompanyhadcashandcashequivalentsof$113,057,000,short-terminvestmentsof$161,230,000andworkingcapitalof$391,541,000comparedtocashandcashequivalentsof$189,784,000andworkingcapitalof$310,229,000atJanuary1,2005.

TheCompanygeneratedcashof$228,865,000,$168,304,000and$134,150,000fromoperationsin2005,2004and2003,respectively.Cashflowfromoperationsincreasedin2005dueprimarilytoastrongerperformanceinnetearningsandincreasedcollectionsofreceivables.TheCompanyhasperiodicallyprovidedlong-termfinancingoptionstocreditworthyclientsthroughthirdpartyfinancinginstitutionsandhasonoccasiondirectlyprovidedextendedpaymenttermsfromcontractdate.Someofthesepaymentstreamshavebeenassignedonanon-recoursebasistothirdpartyfinancinginstitutions.TheCompanyhasprovided itsusualandcustomaryperformanceguarantees to the thirdpartyfinancing institutions inconnectionwithitson-goingobligationsundertheclientcontract.During2005and2004,theCompanyreceivedtotalclientcashcollectionsof$1,200,595,000and$937,600,000,respectively,ofwhich7%and6%werereceivedfromthirdpartyclientfinancingarrangementsandnon-recoursepaymentassignments.Dayssalesoutstandingdecreasedfrom104daysattheendof2004to89daysattheendof2005.Revenuesprovidedundersupportandmaintenance

Page 41: Download the Full Report - Cerner Corporation

��

agreementsrepresentrecurringcashflows.Supportandmaintenancerevenuesincreased23%in2005and15%in2004,andtheCompanyexpectstheserevenuestocontinuetogrowasthebaseofinstalledsystemsgrows.

Cash used in investing activities consisted primarily of the purchase of short-term investments of $161,230,000, the acquisition of businesses of$119,683,000in2005andcapitalizedsoftwaredevelopmentcostsof$62,523,000and$58,912,000andpurchasesofcapitalequipment, landandbuildingsof$100,583,000and$56,490,000in2005and2004,respectively.TheCompanycompletedthesaleofZynxinthefirstquarterof2004for$12,000,000.

TheCompany’sfinancingactivitiesfor2005primarilyconsistedofproceedsfromtheissuanceof long-termdebtof$111,827,000andtheexerciseofoptionsof$51,744,000,repaymentofarevolvinglineofcreditandlong-termdebtof$91,817,000andproceedsfromarevolvinglineofcreditof$70,000,000. In2004 theCompany’sfinancingactivitiesconsistedprimarilyof the repaymentofdebtof$24,879,000and theproceeds from theexerciseofstockoptionsof$25,717,000.

InNovember2005,theCompanycompleteda£65,000,000($112,002,000atDecember31,2005)privateplacementofdebtat5.54%pursuanttoaNoteAgreement.TheNoteAgreementispayableinsevenequalannualinstallmentsbeginninginNovember2009.TheproceedswereusedtorepaytheoutstandingamountundertheCompany’screditfacilityandforgeneralcorporatepurposes.TheNoteAgreementcontainscertainnetworthandfixedchargecoveragecovenantsandprovidescertainrestrictionsontheCompany’sabilitytoborrow,incurliens,sellassetsandpaydividends.TheCompanywasincompliancewithallcovenantsatDecember31,2005.

InDecember2002,theCompanycompleteda$60,000,000privateplacementofdebtpursuanttoaNoteAgreement.TheSeriesASeniorNotes,witha$21,000,000principalamountat5.57%,arepayableinthreeequal installmentsbeginninginDecember2006.TheSeriesBSeniornotes,witha$39,000,000principalamountat6.42%,arepayableinfourequalannualinstallmentsbeginningDecember2009.TheproceedswereusedtorepaytheoutstandingamountundertheCompany’screditfacilityandforgeneralcorporatepurposes.TheNoteAgreementcontainscertainnetworthandfixedchargecoveragecovenantsandprovidescertainrestrictionsontheCompany’sabilitytoborrow,incurliens,sellassetsandpaydividends.TheCompanywasincompliancewithallcovenantsatDecember31,2005.

InMay2002,theCompanyexpandeditscreditfacilitybyenteringintoanunsecuredcreditagreementwithagroupofbanksledbyUSBank.Thisagreementprovidesforacurrentrevolvinglineofcreditforworkingcapitalpurposes.Thecurrentrevolvinglineofcreditisunsecuredandrequiresmonthlypaymentsofinterestonly.InterestispayableattheCompany’soptionataratebasedonprime(7.25%atDecember31,2005)orLIBOR(4.39%atDecember31,2005)plus2%.Theinterestratemaybereducedbyupto1.15%ifcertainnetworthratiosaremaintained.Theagreementcontainscertainnetworth,currentratio,andfixedchargecoveragecovenantsandprovidescertainrestrictionsontheCompany’sabilitytoborrow,incurliens,sellassets,andpaydividends.Acommitmentfeeof3/10%to1/2%ispayablequarterlybasedontheusageoftherevolvinglineofcredit.TherevolvinglineofcreditmaturesonMay31,2007.AtDecember31,2005,theCompanyhadnooutstandingborrowingsunderthisagreementandhad$90,000,000availableforworkingcapitalpurposes.OnJanuary10,2005,theCompanydrewdown$35,000,000fromitsrevolvinglineofcreditinconnectionwiththeacquisitionofthemedicalbusinessdivisionofVitalWorks.(SeeNote2totheconsolidatedfinancialstatements.)ThisamountwaspaidinfullasofDecember31,2005.TheCompanywasincompliancewithallcovenantsatDecember31,2005.

InApril1999,theCompanycompleteda$100,000,000privateplacementofdebtpursuanttoaNoteAgreement.TheSeriesASeniorNotes,witha$60,000,000principalamountat7.14%,arepayable infiveequalannual installmentsthatbegan inApril2002. TheSeriesBSeniorNotes,witha$40,000,000principalamountat7.66%,arepayableinsixequalannualinstallmentswhichcommencedinApril2004.TheproceedswereusedtoretiretheCompany’sexisting$30,000,000ofdebt,andtheremainingfundswereusedforcapitalimprovementsandtostrengthentheCompany’scashposition.TheNoteAgreementcontainscertainnetworth,currentratio,andfixedchargecoveragecovenantsandprovidescertainrestrictionsontheCompany’sabilitytoborrow,incurliens,sellassets,andpaydividends.TheCompanywasincompliancewithallcovenantsatDecember31,2005.

TheCompanybelievesthatitspresentcashposition,togetherwithcashgeneratedfromoperationsand,ifnecessary,itslineofcredit,willbesufficienttomeetanticipatedcashrequirementsduring2006.

ThefollowingtablerepresentsasummaryoftheCompany’scontractualobligationsandcommercialcommitments,excludinginterest,asofDecember31,2005,exceptshort-termpurchaseordercommitmentsarisingintheordinarycourseofbusiness.

Paymentsduebyperiod

2011 and ContractualObligations(inthousands) 200� 200� 200� 200� 2010 thereafter Total

Long-TemDebtObligations 25,667 19,507 13,960 32,417 25,750 100,341 217,642

LeaseObligations 3,076 1,565 720 5 - - 5,366

Acquisition/DivestitureRelatedCommitments 17,605 12,418 11,348 7,288 5,661 29,026 83,346

SupplierSoftwarePurchaseCommitments 13,339 2,493 - - - - 15,832

Other 1,800 100 25 - - - 1,925

Total 61,487 36,083 26,053 39,710 31,411 129,367 324,111

Page 42: Download the Full Report - Cerner Corporation

��

TheCompanyiscurrentlyplanningtoconstructanewdatacenteronitscampusinNorthKansasCityatanapproximatecostof$60,000,000,whichamountisnotincludedabove.TheconstructionisexpectedtostartinMay2006andtobecompletedin2007.

TheeffectsofinflationontheCompany’sbusinessduring2005,2004and2003werenotsignificant.

Recent Accounting PronouncementsInDecember2004,theFASBissuedStatementofFinancialAccountingStandards(“SFAS”)No.123(revised2004),ShareBasedPayments(“SFASNo.123(R)”)whichreplacesSFAS123,AccountingforStock-BasedCompensation,andsupersedesAPBOpinionNo.25,“AccountingforStockIssuedtoEmployees.”SFASNo.123(R)addressestheaccountingforshare-basedpaymentstransactionswithemployeesandotherthirdparties,eliminatestheabilitytoaccountforshare-basedcompensationtransactionsusingAPB25andrequiresthatthecompensationcostsrelatingtosuchtransactionsberecognizedintheconsolidatedstatementofearnings.InApril2005,theSecuritiesandExchangeCommissionannouncedtheadoptionofanewrulethatamendedtheeffectivedateofSFAS123(R).TheeffectivedateofthenewstandardunderthesenewrulesfortheCompany’sconsolidatedfinancialstatementswasJanuary1,2006.TheCompanyhaselectedtoadoptthestandardusingthemodifiedprospectiveapplicationunderthebi-nomialmethodandiscurrentlyassessingtheimpactthattheStatementwillhaveonitsconsolidatedfinancialstatements.

Critical Accounting PoliciesTheCompanybelievesthatthereareseveralaccountingpoliciesthatarecriticaltounderstandingtheCompany’shistoricalandfutureperformance,asthesepoliciesaffectthereportedamountofrevenueandothersignificantareasinvolvingmanagement’sjudgmentsandestimates.Thesesignificantaccountingpoliciesrelate torevenuerecognition,softwaredevelopment,concentrations,allowancefordoubtfulaccountsandpotential impairmentsofgoodwill.ThesepoliciesandtheCompany’sproceduresrelatedtothesepoliciesaredescribedindetailbelowandunderspecificareaswithinthis“ManagementDiscussionandAnalysisofFinancialConditionandResultsofOperations.”Inaddition,Note1totheconsolidatedfinancialstatementsexpandsupondiscussionoftheCompany’saccountingpolicies.

Revenue Recognition

TheCompanyrecognizesitsmultipleelementarrangements,includingsoftwareandsoftware-relatedservices,usingtheresidualmethodunderSOP97-2,“SoftwareRevenueRecognition,”asamendedbySOPNo.98-4,SOP98-9andclarifiedbyStaffAccountingBulletin’s(SAB)101“RevenueRecognitioninFinancialStatements”andSABNo.104“RevenueRecognition”andEmergingIssuesTaskForce00-21“AccountingforRevenueArrangementswithMultipleDeliverables”(“EITF00-21”).KeyfactorsintheCompany’srevenuerecognitionmodelaremanagement’sassessmentsthatinstallationservicesareessentialtothefunctionalityoftheCompany’ssoftwarewhereasimplementationservicesarenot.IftheCompany’sbusinessmodelweretochangesuchthatimplementationservicesbecameessentialtothefunctionalityoftheCompany’ssoftware,theperiodoftimeoverwhichtheCompany’slicensedsoftwarerevenueweretoberecognizedwouldlengthen.TheCompanygenerallyrecognizesrevenuefromthesaleofitslicensedsoftwareovertwokeymilestones,deliveryandinstallation,basedonpercentagesthatreflecttheunderlyingeffortfromplanningtoinstallation.Additionally,ifthetimetoachievetheCompany’sdeliveryandinstallationmilestonesforitslicensedsoftwareweretobeacceleratedordecelerated,itsmilestoneswouldbeadjustedandthetimingofrevenuerecognitionforitslicensedsoftwarecouldmateriallychange.

Software Development Costs

Costs incurred internally increatingcomputer softwaresolutionsareexpenseduntil technological feasibilityhasbeenestablisheduponcompletionofadetailedprogramdesign.Thereafter,allsoftwaredevelopmentcostsarecapitalizedandsubsequentlyreportedatthelowerofamortizedcostornetrealizablevalue.Capitalizedcostsareamortizedbasedoncurrentandexpectedfuturerevenueforeachsoftwaresolutionwithminimumannualamortizationequaltothestraight-lineamortizationovertheestimatedeconomiclifeofthesoftwaresolution.TheCompanyisamortizingcapitalizedcostsoverfiveyears.

TheCompany expects thatmajor software information systems companies, large information technology consulting service providers and systemsintegratorsandothersspecializinginthehealthcareindustrymayoffercompetitiveproductsorservices.Thepaceofchangeinthehealthcareinformationtechnologymarketisrapidandtherearefrequentnewproductintroductions,productenhancementsandevolvingindustrystandardsandrequirements.Asaresult,thecapitalizedsoftwaresolutionsmaybecomelessvaluableorobsoleteandcouldbesubjecttoimpairment.

Concentrations

SubstantiallyalloftheCompany’sclientsareintegrateddeliverynetworks,hospitalsandotherhealthcarerelatedorganizations.Ifsignificantadversemacro-economicfactorsweretoimpacttheseorganizationsitcouldmateriallyadverselyaffecttheCompany.TheCompany’saccesstocertainsoftwareandhardwarecomponentsisdependentuponsingleandsolesourcesuppliers.TheinabilityofanysuppliertofulfillsupplyrequirementsoftheCompanycouldaffectfutureresults.

Allowance for Doubtful Accounts

IfthecreditworthinessoftheCompany’sclientsweretoweakenortheCompany’scollectionsresultsrelativetohistoricalexperienceweretodecline,itcouldhaveamaterialadverseimpactonoperationsandcashflows.

Page 43: Download the Full Report - Cerner Corporation

�0

Goodwill

TheCompanyaccountsforitsgoodwillundertheprovisionsofStatementofFinancialAccountingStandards(SFAS)No.142,“GoodwillandOtherIntangibleAssets.”Asaresult,goodwillandintangibleassetswithindefinitelivesarenolongeramortizedbutareevaluatedforimpairmentannuallyorwheneverthereisanimpairmentindicator.Allgoodwillisassignedtoareportingunit,whereitissubjecttoanimpairmenttestbasedonfairvalue.TheCompanyagainassesseditsgoodwillforimpairmentinthesecondquartersof2005and2004andconcludedthatnogoodwillwasimpaired.TheCompanyusedadiscountedcashflowanalysistodeterminethefairvalueofthereportingunitsforallperiods.TheCompanycompletedeightacquisitionsandonedivestituresubsequenttoJune30,2001,whichresultedinapproximately$97millionofgoodwillthatwasnotamortizedinaccordancewithSFAS142.Goodwillamountedto$116,142,000and$54,600,000atDecember31,2005andJanuary1,2005,respectively.Iffuture,anticipatedcashflowsfromtheCompany’sreportingunitsthatrecognizedgoodwilldonotmaterializeasexpectedtheCompany’sgoodwillcouldbeimpaired,whichwouldresultinsignificantwrite-offs.

Factors that may Affect Future Results of Operations, Financial Condition or Business Statementsmadeinthisreport,theAnnualReporttoShareholdersinwhichthisreportismadeapart,otherreportsandproxystatementsfiledwiththeSecuritiesandExchangeCommission,communicationstoshareholders,pressreleasesandoralstatementsmadebyrepresentativesoftheCompanythatarenothistoricalinnature,orthatstatetheCompany’sormanagement’sintentions,hopes,beliefs,expectationsorpredictionsofthefuture,mayconstitute“forward-lookingstatements”withinthemeaningofSection21EoftheSecuritiesandExchangeActof1934,asamended(the“ExchangeAct”).Forward-lookingstatementscanoftenbeidentifiedbytheuseofforward-lookingterminology,suchas“could,”“should,”“will,”“intended,”“continue,”“believe,”“may,”“expect,”“hope,”“anticipate,”“goal,”“forecast,”“plan,”“guidance”or“estimate”orthenegativeofthesewords,variationsthereoforsimilarexpressions.Forward-lookingstatementsarenotguaranteesoffutureperformanceorresults.Theyinvolverisks,uncertaintiesandassumptions.Itisimportanttonotethatanysuchperformanceandactualresults,financialconditionorbusiness,coulddiffermateriallyfromthoseexpressedinsuchforward-lookingstatements.Factorsthatcouldcauseorcontributetosuchdifferencesinclude,butarenotlimitedto,thosediscussedinItem1A.RiskFactorsandelsewherehereinorinotherreportsfiledwiththeSecuritiesandExchangeCommission.Otherunforeseenfactorsnotidentifiedhereincouldalsohavesuchaneffect.TheCompanyundertakesnoobligationtoupdateorreviseforward-lookingstatementstoreflectchangedassumptions,theoccurrenceofunanticipatedeventsorchangesinfutureoperatingresults,financialconditionorbusinessovertime.

Item �A. Quantitative and Qualitative Disclosures about Market RiskAtDecember31,2005,theCompanyhada£65,000,000notepayableoutstandingthroughaprivateplacementwithaninterestrateof5.54%.ThenoteispayableinsevenequalinstallmentsbeginninginNovember2009.Becausetheborrowingisdenominatedinpounds,theCompanyisexposedtomovementsintheforeigncurrencyexchangeratebetweentheU.S.dollarandtheGreatBritainpound.A1%changeintheforeigncurrencyexchangeratebetweentheU.S.dollarandtheGreatBritainpoundatDecember31,2005wouldhavehadanapproximate$1,118,000changeinthebalanceofthereportedamountofthenotepayableinU.S.dollars.

Item �. Financial Statements and Supplementary DataTheFinancialStatementsandNotesrequiredbythisItemaresubmittedasaseparatepartofthisreport.

Item �. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.

Item �.A. Controls and Proceduresa)Evaluationofdisclosurecontrolsandprocedures.TheCompany’sChiefExecutiveOfficer(CEO)andChiefFinancialOfficer(CFO)haveevaluatedtheeffectivenessoftheCompany’sdisclosurecontrolsandprocedures(asdefinedintheExchangeActRules13a-15(e)and15d-15(e))asoftheendoftheperiodcoveredbytheAnnualReport(the“EvaluationDate”).Theyhaveconcludedthat,asoftheEvaluationDate,thesedisclosurecontrolsandprocedureswereeffectivetoensurethatmaterialinformationrelatingtotheCompanyanditsconsolidatedsubsidiarieswouldbemadeknowntothembyotherswithinthoseentitiesandwouldbedisclosedonatimelybasis.

b)TherewerenochangesintheCompany’sinternalcontrolsoverfinancialreportingduringthequarterendedDecember31,2005thathavemateriallyaffected,orarereasonablylikelytomateriallyaffect,itsinternalcontrolsoverfinancialreporting.

c) TheCompany’smanagement, including itsCEOandCFO, cannotprovidecompleteassurance that itsdisclosurecontrols andproceduresor theCompany’s internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide onlyreasonable,notabsolute,assurancethattheobjectivesofthecontrolsystemaremet.Further,thedesignofacontrolsystemmustreflectthefactthatthereareresourceconstraints,andthebenefitsofcontrolsmustbeconsideredrelativetotheircosts.Becauseoftheinherentlimitationsinallcontrolsystems,noevaluationofcontrolscanprovideabsoluteassurancethatallcontrolissuesandinstancesoffraud,ifany,withintheCompanyhavebeendetected.

Page 44: Download the Full Report - Cerner Corporation

�1

Management’s Report on Internal Control over Financial Reporting

TheCompany’smanagementisresponsibleforestablishingandmaintainingadequateinternalcontroloverfinancialreporting(asdefinedinRule13a-15(f)undertheSecuritiesExchangeActof1934,asamended).TheCompany’smanagementassessedtheeffectivenessoftheCompany’sinternalcontroloverfinancialreportingasofDecember31,2005.Inmakingthisassessment,theCompany’smanagementusedthecriteriasetforthbytheCommitteeofSponsoringOrganizationsof theTreadwayCommission (“COSO”) in its InternalControl-IntegratedFramework. TheCompany’smanagementhasconcludedthat,asofDecember31,2005,theCompany’sinternalcontroloverfinancialreportingiseffectivebasedonthesecriteria.TheCompany’sindependentregisteredpublicaccountingfirmthatauditedtheconsolidatedfinancialstatementsincludedintheannualreporthasissuedanauditreportontheCompany’sassessmentofitsinternalcontroloverfinancialreporting,whichisincludedhereinunder“ReportofIndependentRegisteredPublicAccountingFirm”.

Item �.B. Other InformationNone.

Page 45: Download the Full Report - Cerner Corporation

�2

PART IIIItem 10. Directors and Executive Officers of the RegistrantTheRegistrant’sProxyStatementtobeusedinconnectionwiththeAnnualMeetingofShareholderstobeheldonMay26,2006,willcontainunderthecaption“ElectionofDirectors”certaininformationrequiredbyItem10ofForm10-Kandsuchinformationisincorporatedhereinbythisreference.TheinformationrequiredbyItem10ofForm10-KastoexecutiveofficersissetforthinItem4AofPartIhereof.

TheRegistrant’sProxyStatementtobeusedinconnectionwiththeAnnualMeetingofShareholderstobeheldonMay26,2006,willcontainunderthecaption“CompliancewithSection16(a)oftheSecuritiesExchangeActof1934”certaininformationrequiredbyItem10ofForm10-Kandsuchinformationisincorporatedhereinbythisreference.

Audit Committee Financial Expert

TheBoardofDirectorshasdeterminedthatGeraldE.Bisbee,Jr.,Ph.D.,amemberoftheCompany’sAuditCommittee,isanauditcommitteefinancialexpertasthattermisdefinedunderItem401(h)ofRegulationS-K.

Code of Conduct; Corporate Governance Guidelines and Committee Charters

TheBoardofDirectorsoftheCompanyhasadoptedaCodeofConductthatappliestotheCompany’sprincipalexecutiveofficer,principalfinancialofficer,controllerandallotherassociatesoftheCompany,includingitsdirectorsandotherofficers.TheCompanyhaspostedthetextoftheCodeofConductonitsWebsiteatwww.cerner.comunder“AboutCerner/Investors/CorporateGovernance.”

TheBoardofDirectorsoftheCompanyhasalsoadoptedCorporateGovernanceGuidelines,whicharepostedontheCompany’sWebsiteatwww.cerner.comunder“AboutCerner/Investors/CorporateGovernance.”

ThechartersfortheAuditCommittee,theCompensationCommitteeandtheNominating,Governance&PublicPolicyCommitteearealsoavailableontheCompany’sWebsiteatwww.cerner.comunder“AboutCerner/Investors/CorporateGovernance.”

Aprintedcopyof theCodeofConductand theCorporateGovernanceGuidelinesarealsoavailable to thepublicatnochargebywriting toCernerCorporation,Attn.HumanResources,2800RockcreekParkway,NorthKansasCity,Missouri,64117,orcallingtheCompany’sheadquartersat(816)221-1024.

Item 11. Executive CompensationTheRegistrant’sProxyStatementtobeusedinconnectionwiththeAnnualMeetingofShareholderstobeheldonMay26,2006,willcontainunderthecaption“ExecutiveCompensation”theinformationrequiredbyItem11ofForm10-Kandsuchinformationisincorporatedhereinbythisreference.

Item 12. Security Ownership of Certain Beneficial Owners and ManagementTheRegistrant’sProxyStatementtobeusedinconnectionwiththeAnnualMeetingofShareholderstobeheldonMay26,2006,willcontainunderthecaption“VotingSecuritiesandPrincipalHoldersThereof”theinformationrequiredbyItem12ofForm10-Kandsuchinformationisincorporatedhereinbythisreference.

Item 1�. Certain Relationships and Related TransactionsTheRegistrant’sProxyStatementtobeusedinconnectionwiththeAnnualMeetingofShareholderstobeheldonMay26,2006,willcontainunderthecaption“CertainTransactions”theinformationrequiredbyItem13ofForm10-Kandsuchinformationisincorporatedhereinbythisreference.

Item 1�. Principal Accountant Fees and ServicesTheRegistrant’sProxyStatementtobeusedinconnectionwiththeAnnualMeetingofShareholderstobeheldonMay26,2006,willcontainunderthecaption“AuditandNon-AuditFees”theinformationrequiredbyItem14ofForm10-Kandsuchinformationisincorporatedhereinbythisreference.

Page 46: Download the Full Report - Cerner Corporation

��

PART IVItem 15. Exhibits and Financial Statement Schedules (a)FinancialStatementsandExhibits.

(1) ConsolidatedFinancialStatements: ReportsofIndependentRegisteredPublicAccountingFirm

ConsolidatedBalanceSheets- December31,2005andJanuary1,2005

ConsolidatedStatementsofOperations- YearsEndedDecember31,2005,January1,2005andJanuary3,2004

ConsolidatedStatementsofChangesinEquity YearsEndedDecember31,2005,January1,2005andJanuary3,2004

ConsolidatedStatementsofCashFlows YearsEndedDecember31,2005,January1,2005andJanuary3,2004

NotestoConsolidatedFinancialStatements

(2) ThefollowingfinancialstatementscheduleandReport ofIndependentRegisteredPublicAccountingFirmofthe Registrantforthethreeyearperiodended December31,2005areincludedherein:

ScheduleII-ValuationandQualifyingAccounts,

ReportofIndependentRegisteredPublicAccountingFirm

All other schedules are omitted, as the required information is inapplicable or the information is presented in the consolidated financialstatementsorrelatednotes.

(3) Theexhibitsrequiredtobefiledbythisitemaresetforthbelow:

Number Description

3(a) SecondRestatedCertificateofIncorporationoftheRegistrant,datedDecember5,2003(filedasexhibit3(a)toRegistrant’sAnnualReportonForm10-KfortheyearendedJanuary3,2004andincorporatedhereinbyreference).

3(b) AmendedandRestatedBylaws,datedMarch9,2001(filedasExhibit4.2toRegistrant’sFormS-8filedonSeptember26,2001andincorporatedhereinbyreference).

4(a) AmendedandRestatedRightsAgreement,datedasofMarch12,1999,betweenCernerCorporationandUMBBank,n.a.,asRightsAgents,whichincludestheFormofCertificateofDesignation,PreferencesandRightsofSeriesAPreferredStockofCernerCorporation,asExhibitA,andtheFormofRightsCertificate,asExhibitB(filedasanExhibittoRegistrant’scurrentreportonForm8A/AdatedMarch31,1999andincorporatedhereinbyreference).

4(b) Specimenstockcertificate(filedasExhibit4(a)toRegistrant’sRegistrationStatementonFormS8(FileNo.3315156)datedApril10,1997andincorporatedhereinbyreference).

4(c) CreditAgreementbetweenCernerCorporationandU.S.BankNationalAssociationasadministrativeagentandheadarranger,andLaSalleBankNationalAssociation,asdocumentagent,datedasofMay31,2002(filedasExhibit4(a)toRegistrant’sQuarterlyReportonForm10-QforthequarterendedJune29,2002,andincorporatedhereinbyreference).

4(d) FirstAmendmenttoCreditAgreementbetweenCernerCorporationandU.S.BankNationalAssociationasadministrativeagentandheadarranger,andLaSalleBankNationalAssociation,asdocumentationagent,datedasofJuly22,2002(filedasExhibit4(d)toRegistrant’sAnnualReportonForm10-KfortheyearendedDecember28,2002,andincorporatedhereinbyreference).

4(e) SecondAmendmenttoCreditAgreementbetweenCernerCorporationandU.S.BankNationalAssociationasadministrativeagentandheadarranger,andLaSalleBankNationalAssociation,asdocumentationagent,datedasofApril30,233(filedasExhibit4(f)toRegistrant’sQuarterlyReportonForm10-QforthequarterendedMarch29,2003andincorporatedhereinbyreference).

4(f) ThirdAmendmenttoCreditAgreementbetweenCernerCorporationandU.S.BankNationalAssociationasadministrativeagentandheadarranger,andLaSalleBankNationalAssociation,asdocumentationagent,datedasofSeptember1,2004(filedasExhibit99.1toRegistrant’sForm8-KfiledonSeptember8,2004,andincorporatedhereinbyreference).

Page 47: Download the Full Report - Cerner Corporation

��

4(g) FourthAmendmenttoCreditAgreementbetweenCernerCorporationandU.S.BankNationalAssociationasadministrativeagentandheadarranger,andLaSalleBankNationalAssociation,asdocumentationagent,datedasofDecember28,2004(filedasExhibit99.1toRegistrant’sForm8-KfiledonJanuary4,2005,andincorporatedhereinbyreference).

4(h) FifthAmendmenttoCreditAgreementbetweenCernerCorporationandU.S.BankNationalAssociationasadministrativeagentandheadarranger,andLaSalleBankNationalAssociation,asdocumentationagent,datedasofDecember28,2005(filedasExhibit99.1toRegistrant’sForm8-KfiledonJanuary4,2006,andincorporatedhereinbyreference).

4(i) CernerCorporationNoteAgreementdatedasofApril1,1999amongCernerCorporation,PrincipalLifeInsuranceCompany,PrincipalLifeInsuranceCompany,onbehalfofoneormoreseparateaccounts,CommercialUnionLifeInsuranceCompanyofAmerica,NipponLifeInsuranceCompanyofAmerica,JohnHancockMutualLifeInsuranceCompany,JohnHancockVariableLifeInsuranceCompany,andInvestorsPartnerLifeInsuranceCompany(filedasExhibit4(e)toRegistrant’sForm8-KdatedApril23,1999,andincorporatedhereinbyreference).

4(j) Note Purchase Agreement between Cerner Corporation and the purchasers therein, dated December 15, 2002 (filed as Exhibit 10(x) toRegistrant’sAnnualReportonForm10-KfortheyearendedDecember28,2002,andincorporatedhereinbyreference).

4(k) CernerCorporationNotePurchaseAgreementdatedasofNovember1,2005amongCernerCorporation,asissuer,andAIGAnnuityInsuranceCompany,AmericanGeneralLifeInsuranceCompanyandPrincipalLifeInsuranceCompany,aspurchasers,(filedasExhibit99.1toRegistrant’sForm8-KfiledonNovember7,2005,andincorporatedhereinbyreference).

10(a) IncentiveStockOptionPlanCofRegistrant(filedasExhibit10(f)toRegistrant’sAnnualReportonForm10-KfortheyearendedDecember31,1993,andincorporatedhereinbyreference).*

10(b) IndemnificationAgreementsbetweentheRegistrantandNealL.Patterson,CliffordW.IlligandGeraldE.Bisbee,Jr.,Ph.D.datedJune1,1987,June1,1987andFebruary9,1988,respectively(filedasExhibit10(i)toRegistrant’sAnnualreportonForm10-KfortheyearendedDecember31,1992,andincorporatedhereinbyreference).*

10(c) IndemnificationAgreementbetweenMichaelE.HermanandRegistrantdatedMay16,1995(filedasExhibit10(i)(a)toRegistrant’sQuarterlyReportonForm10-QfortheyearendedJune29,1996andincorporatedhereinbyreference).*

10(d) IndemnificationAgreementbetweenJohnC.DanforthandRegistrantdatedMay14,1996(filedasExhibit10(i)(b)toRegistrant’sQuarterlyReportonForm10-QfortheyearendedJune29,1996andincorporatedhereinbyreference).*

10(e) IndemnificationAgreementbetweenJohnC.DanforthandRegistrantdatedFebruary3,2005(filedasExhibit99.1totheRegistrant’sForm8-KdatedFebruary3,2005andincorporatedhereinbyreference).*

10(f) IndemnificationAgreementbetweenJeffC.Goldsmith,Ph.D.andRegistrantdatedNovember18,1999(filedasExhibit10(e)toRegistrant’sAnnualReportonForm10-KfortheyearendedJanuary1,2000andincorporatedhereinbyreference).*

10(g) IndemnificationAgreementbetweenWilliamB.Neaves,Ph.D.andNancy-AnnDeParleandRegistrantbothdatedSeptember20,2001(filedasExhibits10.1and10.2toRegistrant’sForm10-QforthequarterendedSeptember29,2001andincorporatedhereinbyreference).*

10(h) IndemnificationAgreementbetweenWilliamD.ZollarsandRegistrantdatedMay27,2005(filedasExhibit99.1toRegistrant’sForm8-KonJune3,2005andincorporatedhereinbyreference).*

10(i) AmendedStockOptionPlanDofRegistrantasofDecember8,2000(filedasExhibit10(f)toRegistrant’sAnnualReportonForm10-KfortheyearendedDecember30,2000,andincorporatedhereinbyreference).*

10(j) AmendedStockOptionPlanEofRegistrantasofDecember8,2000(filedasExhibit10(g)toRegistrant’sAnnualReportonForm10-KfortheyearendedDecember30,2000,andincorporatedhereinbyreference).*

10(k) CernerCorporationExecutiveStockPurchasePlandatedApril23,1999(filedasExhibit4(g)toRegistrant’sRegistrationStatementonFormS-8(FileNo.333-77029)andincorporatedhereinbyreference).*

10(l) FormofStockPledgeAgreement forCernerCorporationExecutiveStockPurchasePlan (filedasExhibit 4(h) toRegistrant’sRegistrationStatementonFormS-8(FileNo.333-77029)andincorporatedhereinbyreference).*

10(m) FormofPromissoryNoteforCernerCorporationExecutiveStockPurchasePlan(filedasExhibit4(i)toRegistrant’sRegistrationStatementonFormS-8(FileNo.333-77029)andincorporatedhereinbyreference).*

10(n) EmploymentAgreementofEarlH.Devanny,IIIdatedAugust13,1999(filedasExhibit10(q)toRegistrant’sAnnualReportonForm10-KfortheyearendedJanuary1,2000,andincorporatedhereinbyreference).*

10(o) EmploymentAgreementofNealL.PattersondatedNovember10,2005(filedasExhibit99.1toRegistrant’sForm8-KonNovember17,2005andincorporatedhereinbyreference).*

10(p) CernerCorporation2001Long-Term IncentivePlanF (filedasAnnex I toRegistrant’s2001ProxyStatement and incorporatedhereinbyreference).*

Page 48: Download the Full Report - Cerner Corporation

�5

10(q) CernerCorporation2004Long-TermIncentivePlanG(filedasExhibit4.5toRegistrant’sRegistrationStatementonFormS-8(FileNo.333-125492)onJune3,2005andincorporatedhereinbyreference).*

10(r) CernerCorporation2001AssociateStockPurchasePlan (filedasAnnex IIRegistrant’s2001ProxyStatementand incorporatedhereinbyreference).*

10(s) Qualified Performance-Based Compensation Plan (filed as Exhibit 10(v) to Registrant’s Annual Report on Form 10-K for the year endedDecember30,2000,andincorporatedhereinbyreference).*

10(t) 2006 Executive Compensation Plan (filed as Exhibit 99.2 to Registrant’s Form 8-K on March 10, 2006 and incorporated herein byreference).*

10(u) CernerCorporationExecutiveDeferredCompensationPlan(filedasExhibit10(y)toRegistrant’sAnnualReportonForm10-KfortheyearendedDecember28,2002,andincorporatedhereinbyreference).

10(v) CernerCorporation2005EnhancedSeverancePayPlanasAmendedandRestateddatedSeptember12,2005(filedasExhibit10.1onForm8-KfiledonSeptember12,2005andincorporatedhereinbyreference).*

10(w) CernerCorporation2001Long-TermIncentivePlanFNonqualifiedStockOptionAgreement(filedasExhibit10(v)toRegistrant’sAnnualReportonForm10-KfortheyearendedJanuary1,2005,andincorporatedhereinbyreference).*

10(x) CernerCorporation2001Long-TermIncentivePlanFNonqualifiedStockOptionGrantCertificate(filedasExhibit10(a)toRegistrant’sQuarterlyReportonForm10-QforthequarterendedOctober1,2005,andincorporatedhereinbyreference).*

10(y) CernerCorporation2001Long-Term IncentivePlanFNonqualifiedStockOptionDirectorAgreement (filedasExhibit10(x) toRegistrant’sAnnualReportonForm10-KfortheyearendedJanuary1,2005,andincorporatedhereinbyreference).*

10(z) CernerCorporation2001Long-TermIncentivePlanFDirectorRestrictedStockAgreement(filedasExhibit10(w)toRegistrant’sAnnualReportonForm10-KfortheyearendedJanuary1,2005,andincorporatedhereinbyreference).*

10(aa) CernerCorporation2004Long-TermIncentivePlanGNonqualifiedStockOptionGrantCertificate(filedasExhibit10(b)toRegistrant’sQuarterlyReportonForm10-QforthequarterendedOctober1,2005,andincorporatedhereinbyreference).*

* ManagementcontractsorcompensatoryplansorarrangementsrequiredtobeidentifiedbyItem15(a)(3)(b)

11 ComputationofRegistrant’sEarningsPerShare.(Exhibitomitted.Informationcontainedinnotestoconsolidatedfinancialstatements.)

21 SubsidiariesofRegistrant.

23 ConsentofIndependentRegisteredPublicAccountingFirm.

31.1 CertificationofNealL.Patterson,ChairmanoftheBoardandChiefExecutiveOfficer,pursuanttoSection302oftheSarbanes-OxleyActof2002.

31.2 CertificationofMarcG.Naughton,ChiefFinancialOfficer,pursuanttoSection302oftheSarbanes-OxleyActof2002.

32.1 Certificationpursuantto18U.S.C.Section.1350,asadoptedpursuanttoSection906oftheSarbanes-OxleyActof2002.

32.2 Certificationpursuantto18U.S.C.Section.1350,asadoptedpursuanttoSection906oftheSarbanes-OxleyActof2002.

(b) Exhibits.

TheresponsetothisportionofItem15issubmittedasaseparatesectionofthisreport.

(c) FinancialStatementSchedules.

TheresponsetothisportionofItem15issubmittedasaseparatesectionofthisreport.

Page 49: Download the Full Report - Cerner Corporation

��

SIGNATURESPursuanttotherequirementsofSection13or15(d)oftheSecuritiesExchangeActof1934,theregistranthasdulycausedthisreporttobesignedonitsbehalfbytheundersigned,thereuntodulyauthorized.

CERNERCORPORATION

Dated:March16,2006 By:_/s/NealL.Patterson

NealL.Patterson

ChairmanoftheBoardand ChiefExecutiveOfficer

Pursuant to the requirementsof theSecuritiesExchangeActof1934, this reporthasbeensignedbelowby the followingpersonsonbehalfof theregistrantandinthecapacitiesandonthedatesindicated:

SignatureandTitle Date

____/s/NealL.Patterson March16,2006

NealL.Patterson,ChairmanoftheBoardand

ChiefExecutiveOfficer(PrincipalExecutiveOfficer)

____/s/CliffordW.Illig March16,2006

CliffordW.Illig,ViceChairmanandDirector

____/s/MarcG.Naughton March16,2006

MarcG.Naughton,SeniorVicePresidentand

ChiefFinancialOfficer(PrincipalFinancialandAccountingOfficer)

____/s/MichaelE.Herman March16,2006

MichaelE.Herman,Director

____/s/GeraldE.Bisbee March16,2006

GeraldE.Bisbee,Jr.,Ph.D.,Director

____/s/JohnC.Danforth March16,2006

JohnC.Danforth,Director

____/s/WilliamB.Neaves March16,2006

WilliamB.Neaves,Ph.D.,Director

____/s/Nancy-AnnDeParle March16,2006

Nancy-AnnDeParle,Director

____/s/WilliamD.Zollars March16,2006

WilliamD.Zollars,Director

Page 50: Download the Full Report - Cerner Corporation

��

Report of Independent Registered Public Accounting Firm TheBoardofDirectorsandStockholders

CernerCorporation:

Wehaveauditedmanagement’sassessment,includedintheaccompanyingManagement’sReportonInternalControloverFinancialReportingappearingin Item 9.A. Controls and Procedures, that Cerner Corporation (the Corporation) maintained effective internal control over financial reporting as ofDecember31,2005,basedoncriteriaestablishedinInternal Control—Integrated FrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(COSO).TheCorporation’smanagementisresponsibleformaintainingeffectiveinternalcontroloverfinancialreportingandforitsassessmentoftheeffectivenessofinternalcontroloverfinancialreporting.Ourresponsibilityistoexpressanopiniononmanagement’sassessmentandanopinionontheeffectivenessoftheCorporation’sinternalcontroloverfinancialreportingbasedonouraudit.

WeconductedourauditinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhethereffectiveinternalcontroloverfinancialreportingwasmaintainedinallmaterialrespects.Ourauditincludedobtaininganunderstandingofinternalcontroloverfinancialreporting,evaluatingmanagement’sassessment,testingandevaluatingthedesignandoperatingeffectivenessofinternalcontrol,andperformingsuchotherproceduresasweconsiderednecessaryinthecircumstances.Webelievethatourauditprovidesareasonablebasisforouropinion.

Acompany’sinternalcontroloverfinancialreportingisaprocessdesignedtoprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples.Acompany’sinternalcontroloverfinancialreportingincludesthosepoliciesandproceduresthat(1)pertaintothemaintenanceofrecordsthat,inreasonabledetail,accuratelyandfairlyreflectthetransactionsanddispositionsoftheassetsofthecompany;(2)providereasonableassurancethattransactionsarerecordedasnecessarytopermitpreparationoffinancialstatementsinaccordancewithgenerallyacceptedaccountingprinciples,andthatreceiptsandexpendituresof the companyare beingmadeonly in accordancewith authorizations ofmanagement anddirectors of the company; and (3) provide reasonableassuranceregardingpreventionortimelydetectionofunauthorizedacquisition,use,ordispositionofthecompany’sassetsthatcouldhaveamaterialeffectonthefinancialstatements.

Becauseofitsinherentlimitations,internalcontroloverfinancialreportingmaynotpreventordetectmisstatements.Also,projectionsofanyevaluationofeffectivenesstofutureperiodsaresubjecttotheriskthatcontrolsmaybecomeinadequatebecauseofchangesinconditions,orthatthedegreeofcompliancewiththepoliciesorproceduresmaydeteriorate.

Inouropinion,management’sassessmentthatCernerCorporationmaintainedeffectiveinternalcontroloverfinancialreportingasofDecember31,2005,isfairlystated,inallmaterialrespects,basedoncriteriaestablishedin Internal Control—Integrated FrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(COSO).Also,inouropinion,CernerCorporationmaintained,inallmaterialrespects,effectiveinternalcontroloverfinancialreportingasofDecember31,2005,basedoncriteriaestablishedinInternal Control—Integrated FrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(COSO).

Wealsohaveaudited,inaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates),theconsolidatedbalancesheetsofCernerCorporationandsubsidiariesasofDecember31,2005andJanuary1,2005,andtherelatedconsolidatedstatementsofoperations,changes inequity,andcashflowsforeachof theyears in the three-yearperiodendedDecember31,2005,andour reportdatedMarch16,2006expressedanunqualifiedopiniononthoseconsolidatedfinancialstatements.

(signed)KPMGLLP

KansasCity,Missouri

March16,2006

Report of Independent Registered Public Accounting Firm TheBoardofDirectorsandStockholders

CernerCorporation:

WehaveauditedtheaccompanyingconsolidatedbalancesheetsofCernerCorporationandsubsidiaries(theCorporation)asofDecember31,2005andJanuary1,2005,andtherelatedconsolidatedstatementsofoperations,changesinequity,andcashflowsforeachoftheyearsinthethree-yearperiodendedDecember31,2005.Theseconsolidatedfinancialstatementsaretheresponsibilityof theCorporation’smanagement.Ourresponsibility is toexpressanopinionontheseconsolidatedfinancialstatementsbasedonouraudits.

WeconductedourauditsinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatement.Anauditincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements.Anauditalsoincludesassessingthe

Page 51: Download the Full Report - Cerner Corporation

��

accountingprinciplesusedandsignificantestimatesmadebymanagement,aswellasevaluatingtheoverallfinancialstatementpresentation.Webelievethatourauditsprovideareasonablebasisforouropinion.

Inouropinion,theconsolidatedfinancialstatementsreferredtoabovepresentfairly,inallmaterialrespects,thefinancialpositionofCernerCorporationandsubsidiariesasofDecember31,2005andJanuary1,2005,andtheresultsoftheiroperationsandtheircashflowsforeachoftheyearsinthethree-yearperiodendedDecember31,2005,inconformitywithU.S.generallyacceptedaccountingprinciples.

Wealsohaveaudited,inaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates),theeffectivenessofCernerCorporation’sinternalcontroloverfinancialreportingasofDecember31,2005,basedoncriteriaestablishedin Internal Control—Integrated FrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(COSO),andourreportdatedMarch16,2006expressedanunqualifiedopiniononmanagement’sassessmentof,andtheeffectiveoperationof,internalcontroloverfinancialreporting.

(signed)KPMGLLP

KansasCity,Missouri

March16,2006

Management’s ReportThemanagementofCernerCorporationisresponsiblefortheconsolidatedfinancialstatementsandallotherinformationpresentedinthisreport.ThefinancialstatementshavebeenpreparedinconformitywithU.S.generallyacceptedaccountingprinciplesappropriatetothecircumstances,and,therefore,includedinthefinancialstatementsarecertainamountsbasedonmanagement’sinformedestimatesandjudgments.Otherfinancialinformationinthisreportisconsistentwiththatintheconsolidatedfinancialstatements.TheconsolidatedfinancialstatementshavebeenauditedbyCernerCorporation’sindependentregisteredpublicaccountantsandhavebeenreviewedbytheauditcommitteeoftheBoardofDirectors.

Page 52: Download the Full Report - Cerner Corporation

Consolidated Balance SheetsDecember31,2005andJanuary1,2005

2005 200� (In thousands except shares and per share data) Assets CurrentAssets: Cashandcashequivalents $ 113,057 189,784 Short-terminvestments 161,230 - Receivables,net 316,965 282,199 Inventory 9,585 7,373 Prepaidexpensesandother 42,685 30,117 Deferredincometaxes 8,109 - Totalcurrentassets 651,631 509,473 Propertyandequipment,net 292,608 230,440 Softwaredevelopmentcosts,net 172,548157,765 Goodwill,net 116,142 54,600 Intangibleassets,net 60,448 22,690 Otherassets 10,252 7,297

TotalAssets $ 1,303,629 982,265

LiabilitiesandStockholders’Equity CurrentLiabilities: Accountspayable $ 65,377 37,008 Currentinstallmentsoflong-termdebt 28,743 21,908 Deferredrevenue 79,890 77,445 Deferredincometaxes - 430 Accruedpayrollandtaxwithholdings 66,002 55,819 Otheraccruedexpenses 20,078 6,634 Totalcurrentliabilities 260,090 199,244 Long-termdebt 194,265 108,804 Deferredincometaxes 72,922 69,863 Deferredrevenue 14,533 5,703 Minorityowners’equityinterestinsubsidiary 1,286 1,166 Stockholders’Equity: Commonstock,$.01parvalue,150,000,000sharesauthorized, 78,514,463and74,776,763sharesissuedin2005and 2004,respectively 785 748 Additionalpaid-incapital 325,119 243,956 Retainedearnings 430,262 344,011 Accumulatedothercomprehensiveincome: Foreigncurrencyeffectsoncashandcashequivalents 4,367 8,770 Totalstockholders’equity 760,533 597,485

Commitments Totalliabilitiesandstockholders’equity $ 1,303,629 982,265

Seenotestoconsolidatedfinancialstatements.

��

Page 53: Download the Full Report - Cerner Corporation

50

Consolidated Statement of OperationsFortheyearsendedDecember31,2005,January1,2005andJanuary3,2004

2005 200� 200� (Inthousands,exceptpersharedata) Revenues Systemsales $ 449,734 351,861 332,349Support,maintenanceandservices 677,664 542,414 476,795Reimbursedtravel 33,387 32,081 30,443 Totalrevenues 1,160,785 926,356 839,587 CostsandexpensesCostofsystemsales 171,073 115,803 111,256 Costofsupport,maintenanceandservices 50,226 48,464 52,591Costofreimbursedtravel 33,387 32,081 30,443Salesandclientservice 466,206 383,628 352,728Softwaredevelopment 211,455 171,589 156,236Generalandadministrative 81,620 63,327 58,236Write-offofinprocessresearchanddevelopment 6,382 - - Totalcostsandexpenses 1,020,349 814,892 761,490

Operatingearnings 140,436 111,464 78,097 Otherincome(expense): Interestexpense,net (5,858) (6,152) (7,017)Otherincome,net 666 2,608 142 Totalotherexpense,net (5,192) (3,544) (6,875) Earningsbeforeincometaxes 135,244 107,920 71,222 Incometaxes (48,993) (43,272) (28,431) Netearnings $ 86,251 64,648 42,791 Basicearningspershare $ 1.16 0.90 0.61 Dilutedearningspershare $1.10 0.86 0.59

Seenotestoconsolidatedfinancialstatements.

Page 54: Download the Full Report - Cerner Corporation

Consolidated Statements of Changes In EquityFortheyearsendedDecember31,2005,January1,2005andJanuary3,2004

Accumulated Additional Other CommonStock paid-in Retained Comprehensive Comprehensive Shares Amount capital Earnings Income Income (Inthousands) BalanceatDecember28,2002 71,962 $720 199,767 236,572 (1,744) Exerciseofoptions 649 6 6,695 - - -Purchaseoftreasuryshares - - - - - -Non-employeestockoptioncompensationexpense - - 34 - - -Taxbenefitfromdisqualifyingdispositionofstockoptions - - 1,876 - - -Associatestockpurchaseplandiscounts - - (604) - - -Thirdpartywarrants - - 2,052 - - -Foreigncurrencytranslationadjustment - - - - 6,438 6,438Unrealizedgainonavailable-for-saleequity securities,netofdeferredbenefitof$14 - - - - 76 76Netearnings - - - 42,791 - 42,791Comprehensiveincome 49,305 BalanceatJanuary3,2004 72,611 $726 209,820 279,363 4,770 Exerciseofoptions 2,166 22 25,524 - - -Employeestockoptioncompensationexpense - - 173 - - -Taxbenefitfromdisqualifyingdispositionofstockoptions - - 9,191 - - -Associatestockpurchaseplandiscounts - -(752) - - -Foreigncurrencytranslationadjustment - - - - 4,000 4,000Netearnings - - - 64,648 - 64,648Comprehensiveincome 68,648 BalanceatJanuary1,2005 74,777 $748 243,956 344,011 8,770 Exerciseofoptions 3,737 37 50,926 - - -Employeestockoptioncompensationexpense - - 780 - - -Taxbenefitfromdisqualifyingdispositionofstockoptions - - 30,289 - - -Associatestockpurchaseplandiscounts - -(832) - - -Foreigncurrencytranslationadjustment - - - - (4,403) (4,403)Netearnings - - - 86,251 - 86,251Comprehensiveincome 81,848 BalanceatDecember31,2005 78,514 $785 325,119 430,262 4,367

Seenotestoconsolidatedfinancialstatements.

51

Page 55: Download the Full Report - Cerner Corporation

Consolidated Statements of Cash FlowsFortheyearsendedDecember31,2005,January1,2005andJanuary3,2004

2005 200� 200�(Inthousands) CASHFLOWSFROMOPERATINGACTIVITIES Netearnings $ 86,251 64,648 42,791Adjustmentstoreconcilenetearningsto netcashprovidedbyoperatingactivities: Depreciationandamortization 114,055 90,802 69,330Gainonsaleofbusiness - (3,023) -Write-offofacquiredinprocessresearchanddevelopment 6,382 - -Non-employeestockoptioncompensationexpense - - 34Provisionfordeferredincometaxes (6,874) 295 21,317Taxbenefitfromdisqualifyingdispositionsofstockoptions 30,289 9,191 1,876Changesinoperatingassetsandliabilities(netofbusinessesacquired): Receivables,net(22,502) (24,747) 20,723Inventory (2,078) 3,924 (3,393)Prepaidexpensesandother(18,781) (20,743) (201)Accountspayable 14,382 9,474 (30,663)Accruedincometaxes 13,594 15,919 (5,187)Deferredrevenue 949 16,055 22,561Othercurrentliabilities 13,198 6,509 (5,038)Totaladjustments 142,614 103,656 91,359Netcashprovidedbyoperatingactivities 228,865 168,304 134,150CASHFLOWSFROMINVESTINGACTIVITIES Purchaseofcapitalequipment (64,785) (44,214) (26,831)Purchaseofland,buildings,andimprovements (35,798) (12,276) (56,752)Acquisitionofbusinesses,netofcashreceived (119,683) (1,957) (6,380)Proceedsfromthesaleofbusiness - 12,000 -Netincreaseinshort-terminvestments (161,230) - -Repaymentofnotesreceivable 51 1,977 651Capitalizedsoftwaredevelopmentcosts (62,523) (58,912) (58,736)Netcashusedininvestingactivities (443,968) (103,382) (148,048)CASHFLOWSFROMFINANCINGACTIVITIES Proceedsfromissuanceoflong-termdebt 111,827 - 320Proceedsfromrevolvinglineofcredit 70,000 - -Repaymentofrevolvinglineofcreditandlong-termdebt (91,848) (24,879) (13,238)Proceedsfromthirdpartywarrants - - 2,052Purchaseoftreasuryshares - - (5,930)Proceedsfromexerciseofoptions 51,744 25,717 6,703Associatestockpurchaseplandiscounts (832) (752) (604)Netcashprovidedby(usedin)financingactivities 140,891 86 (10,697)Effectofexchangeratechangesoncash (2,515) 2,937 3,740Increaseincashfromtheconsolidationofavariableinterestentity - - 151Netincrease(decrease)incashandcashequivalents (76,727) 67,945 (20,704)Cashandcashequivalentsatbeginningofyear 189,784 121,839 142,543Cashandcashequivalentsatendofyear $ 113,057 189,784 121,839Supplementaldisclosuresofcashflowinformation Cashpaidduringtheyearfor: Interest $ 8,157 8,614 7,984Incometaxes,netofrefund 13,591 21,865 10,426Noncashinvestingandfinancingactivities Issuanceofnotepayableforunusedsoftwarecredits $ - 7,500 -Acquisitionofequipmentthroughcapitalleases 89 2,075 9,811Non-cashchangesresultingfromacquisitions Increaseinaccountsreceivable 11,621 1,019 298Increaseinpropertyandequipment,net 2,355 65 431Increaseingoodwillandintangibles 124,921 2,187 6,234Increaseindeferredrevenue (10,979) (1,004) 485Increaseinlongtermdebt (3,111) (5) -Decreaseinotherworkingcapitalcomponents (5,124) (305) (1,068)Total $ 119,683 1,957 6,380

Seenotestoconsolidatedfinancialstatements.52

Page 56: Download the Full Report - Cerner Corporation

5�

Notes to Consolidated Financial Statements

1 Summary of Significant Accounting Policies(a) Principles of Consolidation -TheconsolidatedfinancialstatementsincludetheaccountsofCernerCorporationanditswholly-ownedsubsidiaries(the“Company”).Allsignificantintercompanytransactionsandbalanceshavebeeneliminatedinconsolidation.

(b) Nature of Operations - TheCompanydesigns,develops,markets,installs,hostsandsupportssoftwareinformationtechnologyandcontentsolutionsforhealthcareorganizationsandconsumers.TheCompanyalsoimplementsthesesolutionsasindividual,combinedorenterprise-widesystems.

(c) Revenue Recognition -Revenuesarederivedprimarilyfromthesaleofclinical,financialandadministrativeinformationsystemsandsolutions.The components of the system sales revenues are the licensing of computer software, installation, subscription content and the sale of computerhardwareandsublicensedsoftware.Thecomponentsofsupport,maintenanceandservicerevenuesaresoftwaresupportandhardwaremaintenance,remotehostingandmanagedservices,training,consultingandimplementationservices.TheCompanyprovidesseveralmodelsfortheprocurementof its clinical, financial and administrative information systems. The predominant method is a perpetual software license agreement, project-relatedinstallationservices,implementationandconsultingservices,softwaresupportandeitherremotehostingservicesorcomputerhardwareandsublicensedsoftware.

TheCompanyrecognizesrevenueinaccordancewiththeprovisionsofStatementofPosition(SOP)97-2,“SoftwareRevenueRecognition,”asamendedbySOP98-4,SOP98-9andclarifiedbyStaffAccountingBulletin’s(SAB)101“RevenueRecognitioninFinancialStatements”andSABNo.104“RevenueRecognition”andEmergingIssuesTaskForceIssueNo.00-21“AccountingforRevenueArrangementswithMultipleDeliverables”(“EITF00-21”).SOP97-2,asamended,generallyrequiresrevenueearnedonsoftwarearrangementsinvolvingmultiple-elementstobeallocatedtoeachelementbasedontherelativefairvaluesofthoseelementsiffairvaluesexistforallelementsofthearrangement.PursuanttoSOP98-9,theCompanyrecognizesrevenuefrommultiple-elementsoftwarearrangementsusing the residualmethod. Under the residualmethod, revenue is recognized inamultiple-elementarrangementwhenCompany-specificobjectiveevidenceof fairvalueexists forallof theundeliveredelements in thearrangement (i.e.professionalservices,softwaresupport,hardwaremaintenance,hardwareandsublicensedsoftware),butdoesnotexistforoneormoreofthedeliveredelementsinthearrangement(i.e.softwaresolutionsincludingproject-relatedinstallationservices).TheCompanyallocatesrevenuetoeachundeliveredelementinamultiple-elementarrangementbasedontheelement’srespectivefairvalue,withthefairvaluedeterminedbythepricechargedwhenthatelementissoldseparately.Specifically,theCompanydeterminesthefairvalueofthesoftwaresupportandmaintenanceportionofthearrangementbasedontherenewalpriceofthesoftwaresupportandmaintenancechargedtoclients;professionalservicesportionofthearrangement,otherthaninstallationservices, based on hourly rates which the Company charges for these services when sold apart from a software license; and, the hardware andsublicensedsoftware,basedonthepricesfortheseelementswhentheyaresoldseparatelyfromthesoftware.Theresidualamountofthefeeafterallocatingrevenuetothefairvalueoftheundeliveredelementsisattributedtothesoftwaresolution,includingproject-relatedinstallationservices.Ifevidenceofthefairvaluecannotbeestablishedfortheundeliveredelementsofalicenseagreement,theentireamountofrevenueunderthearrangementisdeferreduntiltheseelementshavebeendeliveredorobjectiveevidencecanbeestablished.

TheCompanyprovidesproject-relatedinstallationservices,whichincludeproject-scopingservices,conductingpre-installationauditsandcreatinginitialenvironments.Becauseinstallationservicesaredeemedtobeessentialtothefunctionalityofthesoftware,theCompanyrecognizesthesoftwarelicenseandinstallationservicesfeesoverthesoftwareinstallationperiodusingthepercentageofcompletionmethodpursuanttoStatementofPosition81-1(SOP81-1),Accounting for Performance of Construction-Type and Certain Production-Type Contracts,asprescribedbySOP97-2.TheCompanymeasuresthepercentageofcompletionbasedonoutputmeasureswhichreflectdirectlaborhoursincurred,beginningatsoftwaredeliveryandculminatingatcompletionofinstallation.Theinstallationservicesprocesslengthisdependentuponclientspecificfactorsandcanoccurinashortperiodoftimeorrangeuptooneyearinlength.

TheCompanyalsoprovidesimplementationandconsultingservices,whichincludeconsultingactivitiesthatfalloutsideofthescopeofthestandardinstallationservices. Theseservicesvarydependingonthescopeandcomplexityrequestedbytheclient. Examplesofsuchservicesmay includeadditionaldatabaseconsulting,systemconfiguration,projectmanagement,testingassistance,networkconsulting,postconversionreviewandapplicationmanagementservices.Implementationandconsultingservicesgenerallyarenotdeemedtobeessentialtothefunctionalityofthesoftware,andthusdoesnotimpactthetimingofthesoftwarelicenserecognition,unlesssoftwarelicensefeesaretiedtoimplementationmilestones.Inthoseinstances,theportionofthesoftwarelicensefeetiedtoimplementationmilestonesisdeferreduntiltherelatedmilestoneisaccomplishedandrelatedfeesbecomebillableandnon-forfeitable.Implementationfeesarerecognizedovertheserviceperiod,whichmayextendfromninemonthstothreeyearsformulti-phasedprojects.

Managedservicesaremarketedunderlong-termarrangementsgenerallyoverperiodsoffiveto10years.TheseservicesaretypicallyprovidedtoclientsthathaveacquiredaperpetuallicenseforlicensedsoftwareandhavecontractedwiththeCompanytohostthesoftwareinitsdatacenter.Underthesearrangements,theclienthasthecontractualrighttotakepossessionofthelicensedsoftwareatanytimeduringthehostingperiodwithoutsignificantpenaltyanditisfeasiblefortheclienttoeitherrunthesoftwareonitsownequipmentorcontractwithanotherpartyunrelatedtotheCompanytohostthesoftware.Assuch,theCompanyaccountsforthesearrangementsunderSOP97-2,asprescribedbyEITFIssueNo.00-3,ApplicationofAICPAStatementofPosition97-2 toArrangementsThat Include theRight toUseSoftwareStoredonAnotherEntity’sHardware. Becausevendor-specificobjectiveevidenceforhostingandmanagedservicesisestablishedthroughrenewalratesinthearrangements,theCompanyusestheresidualmethodtorecognizerevenueforthesoftwareelement.Thehostingandmanagedservicesarerecognizedastheservicesareperformed.

Page 57: Download the Full Report - Cerner Corporation

5�

TheCompanyalsooffersitssolutionsonanapplicationserviceprovider(“ASP”)oratermlicensebasis,makingavailableCompanysoftwarefunctionalityonaremoteprocessingbasisfromtheCompany’sdatacenters.Thedatacentersprovidesystemandadministrativesupportaswellasprocessingservices.RevenueonsoftwareandservicesprovidedonanASPortermlicensebasisisrecognizedonamonthlybasisoverthetermofthecontract.TheCompanycapitalizesrelateddirectcostsconsistingofthird-partycostsanddirectsoftwareinstallationandimplementationcosts.Thesecostsareamortizedoverthetermofthearrangement.

Softwaresupportfeesaremarketedunderannualandmulti-yeararrangementsandarerecognizedasrevenueratablyoverthecontractedsupportterm.Hardwaremaintenancerevenuesarebilledandrecognizedmonthlyoverthecontractedmaintenanceterm.

Subscriptionandcontentfeesaregenerallymarketedunderannualandmulti-yearagreementsandarerecognizedratablyoverthecontractedterms.

Hardwareandsublicensedsoftwaresalesaregenerallyrecognizedwhentitlepassestotheclient.

WheretheCompanyhascontractuallyagreedtodevelopneworcustomizedsoftwarecodeforaclientasasingleelementarrangement,theCompanyutilizespercentageofcompletionaccountinginaccordancewithSOP81-1.Ifacontractincludesmultipleelements,includingoneormoreundeliveredelement,oriftheagreementincludescontingentrevenue(asdefinedinEITF00-21),theCompanycomplieswiththeprovisionsofEITF00-21anddelaysrevenuerecognitionuntilundeliveredelementsaredeliveredandrevenuecontingenciesexpire.Whenrevenueisdeferredalldirectandincrementalcostsassociatedwiththearrangementarecapitalizedandamortizedoverthecontractualtermoncerevenuerecognitioncommences.

IntheUnitedKingdomtheCompanyhascontractedwithathirdpartytocustomizesoftwareandprovideimplementationandsupportservicesunderalongtermarrangement(nineyears).Becausethearrangementrequirescustomizationanddevelopmentofsoftware,andfairvalueforthesupportservices does not exist in this arrangement, the entire arrangement is being accounted for as a single unit of accounting under SOP 81-1. Also,becausetheCompanybelievesitisreasonablyassuredthatnolosswillbeincurredunderthisarrangement,itisusingthezeromarginapproachofapplyingpercentage-of-completionaccountinguntilthesoftwarecustomizationanddevelopmentservicesarecompleted.Oncesoftwarecustomizationanddevelopment servicesarecompleted, the remainingunrecognizedportionof the feewill be recognized ratablyover the remaining termof thearrangement.AsofDecember31,2005,$14,181,000ofrevenueandexpensehavebeenrecognizedintheaccompanyingConsolidatedStatementofOperations.

Deferredrevenueiscomprisedofdeferralsforlicensefees,support,maintenanceandotherservicesforwhichpaymenthasbeenreceivedandforwhichtheservicehasnotyetbeenperformedandrevenuehasnotbeenrecognized.Long-termdeferredrevenueatDecember31,2005,representsamountsreceivedfromlicensefees,maintenanceandotherservicestobeearnedorprovidedbeginninginperiodsonorafterDecember31,2006.

TheCompanyincursout-of-pocketexpensesinconnectionwithitsclientserviceactivities,primarilytravel,whicharereimbursedbyitsclients.Theamountsof”out-of-pocket”expensesandequalamountsofrelatedreimbursementswere$33,387,000,$32,081,000and$30,443,000fortheyearsendedDecember31,2005,January1,2005andJanuary3,2004,respectively.

TheCompany’sarrangementswithclientstypicallyincludeadepositdueuponcontractsigninganddate-basedlicensedsoftwarepaymenttermsandpaymentsbasedupondeliveryforservices,hardwareandsublicensedsoftware.TheCompanyhasperiodicallyprovidedlong-termfinancingoptionstocreditworthyclientsthroughthirdpartyfinancinginstitutionsandhasonoccasiondirectlyprovidedextendedpaymenttermsfromcontractdate.Certainofthesereceivableshavebeenassignedonanon-recoursebasistothirdpartyfinancinginstitutions.TheCompanyaccountsfortheassignmentofthesereceivablesas“truesales”asdefinedinFASBStatementNo.140,AccountingforTransfersandServicingofFinancialAssetsandExtinguishmentsofLiabilities.Providedallrevenuerecognitioncriteriahavebeenmet,theCompanyrecognizesrevenueforthesearrangementsunderitsnormalrevenuerecognitioncriteria,netofanypaymentdiscountsfromfinancingtransactions.

ThetermsoftheCompany’ssoftwarelicenseagreementswithitsclientsgenerallyprovideforalimitedindemnificationofsuchintellectualpropertyagainst losses,expensesand liabilitiesarising from third-partyclaimsbasedonalleged infringementby theCompany’s solutionsofan intellectualproperty rightofsuch thirdparty.The termsofsuch indemnificationoften limit thescopeofandremedies forsuch indemnificationobligationsandgenerallyincludearighttoreplaceormodifyaninfringingsolution.Todate,theCompanyhasnothadtoreimburseanyofitsclientsforanylossesrelatedtotheseindemnificationprovisionspertainingtothird-party intellectualproperty infringementclaims.Forseveralreasons, includingthelackofpriorindemnificationclaimsandthelackofamonetaryliabilitylimitforcertaininfringementcasesunderthetermsofthecorrespondingagreementswithitsclients,theCompanycannotdeterminethemaximumamountofpotentialfuturepayments,ifany,relatedtosuchindemnificationprovisions.

(d) Fiscal Year - TheCompany’sfiscalyearendsontheSaturdayclosesttoDecember31.Fiscalyear2003consistedof53weeksandfiscalyears2005and2004consistedof52weekseach.Allreferencestoyearsinthesenotestoconsolidatedfinancialstatementsrepresentfiscalyearsunlessotherwisenoted.

(e) Software Development Costs -Costsincurredinternallyincreatingcomputersoftwareproductsareexpenseduntiltechnologicalfeasibilityhasbeenestablisheduponcompletionofadetailedprogramdesign.Thereafter,allsoftwaredevelopmentcostsarecapitalizedandsubsequentlyreportedatthelowerofamortizedcostornetrealizablevalue.Capitalizedcostsareamortizedbasedoncurrentandexpectedfuturerevenueforeachproductwithminimumannualamortizationequaltothestraight-lineamortizationovertheestimatedeconomiclifeoftheproduct.TheCompanyisamortizingcapitalizedcostsoverfiveyears.During2005,2004and2003,theCompanycapitalized$62,523,000,$58,912,000and$58,736,000,respectively,of totalsoftwaredevelopmentcostsof$226,238,000,$188,264,000and$179,999,000,respectively. Amortizationexpenseofcapitalizedsoftwaredevelopment costs in 2005, 2004 and 2003 was $47,740,000, $42,237,000 and $34,973,000, respectively, and accumulated amortization was$255,122,000,$207,382,000and$165,145,000,respectively.

Page 58: Download the Full Report - Cerner Corporation

(f) Cash Equivalents - Cashequivalentsconsistofshort-termmarketablesecuritieswithoriginalmaturitieslessthanninetydays.

(g) Short-term Investments - TheCompany’sshort-terminvestmentsareprimarilyinvestedinauctionratesecuritieswhicharedebtandpreferredstockinstrumentshavinglonger-dated(inmostcases,manyyears)legalmaturities,butwithinterestratesthataregenerallyresetevery28-49daysunderanauctionsystem. Becauseauctionratesecuritiesare frequentlyre-priced, theytrade in themarketonpar-in,par-outbasis. BecausetheCompanyregularlyliquidatesitsinvestmentsinthesesecuritiesforreasonsincluding,amongothers,changesinmarketinterestratesandchangesintheavailabilityofandtheyieldonalternativeinvestments,theCompanyhasclassifiedthesesecuritiesasavailable-for-salesecurities.Asavailable-for-salesecurities,theseinvestmentsarecarriedatfairvalue,whichapproximatescost.Despitetheliquidnatureoftheseinvestments,theCompanycategorizesthemasshort-terminvestmentsinsteadofcashandcashequivalentsduetotheunderlyinglegalmaturitiesofsuchsecurities.However,theyhavebeenclassifiedascurrentassetsastheyaregenerallyavailabletosupporttheCompany’scurrentoperations.Therehavebeennorealizedgainsorlossesontheseinvestments.

(h) Inventory -Inventoryconsistsprimarilyofcomputerhardwareandsub-licensedsoftwareheldforresaleandisrecordedatthelowerofcost(first-in,first-out)ormarket.

(i) Property and Equipment - Property,equipmentandleaseholdimprovementsarestatedatcost.Depreciationofpropertyandequipmentiscomputedusingthestraight-linemethodoverperiodsoftwoto50years.Amortizationofleaseholdimprovementsiscomputedusingastraight-linemethodovertheshorteroftheleasetermsortheusefullives,whichrangefromperiodsoftwoto15years.

(j) Earnings per Common Share - Basicearningspershare(EPS)excludesdilutionandiscomputedbydividingincomeavailabletocommonstockholdersbytheweighted-averagenumberofcommonsharesoutstandingfortheperiod.DilutedEPSreflectsthepotentialdilutionthatcouldoccurifsecuritiesorothercontractstoissuestockwereexercisedorconvertedintocommonstockorresultedintheissuanceofcommonstockthatthensharedintheearningsoftheCompany.Areconciliationofthenumeratorsandthedenominatorsofthebasicanddilutedper-sharecomputationsisasfollows:

(In thousands, except per share data)

2005 200� 200�

Earnings Shares Per-Share Earnings Shares Per-Share Earnings Shares Per-Share (Numerator) (Denominator) Amount (Numerator)(Denominator) Amount (Numerator)(Denominator) Amount

Basicearningspershare

Incomeavailableto commonstockholders $86,251 74,144 1.16 $64,648 72,174 $0.90 $42,791 70,710 $0.61 Effectofdilutivesecurities stockoptions - 3,946 - 2,968 - 2,002 Dilutedearningspershare

Incomeavailabletocommon

stockholdersincluding

assumedconversions $86,251 78,090 1.10 $64,648 75,142 $0.86 $42,791 72,712 $0.59

Options to purchase166,000, 3,138,000 and6,108,000 shares of common stock at per share prices ranging from$38.32 to $136.86, $22.50 to$136.86and$16.25to$287.41,wereoutstandingattheendof2005,2004and2003,respectively,butwerenotincludedinthecomputationofdilutedearningspersharebecausetheoptions’exercisepricewasgreaterthantheaveragemarketpriceofthecommonsharesfortheperiodandthuswereantidilutive.

(k) Foreign Currency -Assetsand liabilitiesof foreignsubsidiarieswhose functionalcurrency is the localcurrencyare translated intoU.S.dollarsatexchangeratesprevailingatthebalancesheetdate.Revenuesandexpensesaretranslatedataverageexchangeratesduringtheyear.Thenetexchangedifferencesresultingfromthesetranslationsarereportedinaccumulatedothercomprehensiveincome.Gainsandlossesresultingfromforeigncurrency transactionsare included in theconsolidatedstatementsofoperations. Thenetgain (loss) resulting fromforeigncurrency transactions isincludedingeneralandadministrativeexpensesintheconsolidatedstatementsofoperationsandamountedto$2,700,000,($479,000)and$1,376,000in2005,2004and2003,respectively.

(l) Income Taxes - Deferredtaxassetsandliabilitiesarerecognizedforthefuturetaxconsequencesattributabletodifferencesbetweenthefinancialstatementcarryingamountsofexistingassetsand liabilitiesand their respective taxbases. Deferred taxassetsand liabilitiesaremeasuredusingenactedtaxratesexpectedtoapplytotaxableincomeintheyearsinwhichthosetemporarydifferencesareexpectedtoberecoveredorsettled.

(m) Goodwill and Other Intangible Assets - TheCompanyaccountsforgoodwillundertheprovisionsofStatementofFinancialAccountingStandards(SFAS)No.142,“GoodwillandOther IntangibleAssets.” Asaresult,goodwilland intangibleassetswith indefinite livesarenot amortizedbutare

55

Page 59: Download the Full Report - Cerner Corporation

5�

evaluatedforimpairmentannuallyorwheneverthereisanimpairmentindicator.Allgoodwillisassignedtoareportingunit,whereitissubjecttoanimpairmenttestbasedonfairvalue.TheCompanyassessesitsgoodwillforimpairmentinthesecondquarterofitsfiscalyear.Therewasnoimpairmentofgoodwillin2005and2004.TheCompanyusedadiscountedcashflowanalysistodeterminethefairvalueofthereportingunitsforallperiodstested.TheCompany’sintangibleassets,otherthangoodwillorintangibleassetswithindefinitelives,areallsubjecttoamortizationandaresummarizedasfollows:

(Inthousands)

December �1, 2005 January 1, 2005

Weighted Average Gross Gross Amortization Carrying Accumulated Carrying Accumulated Period(Yrs) Amount Amortization Amount Amortization Purchasedsoftware 5.0 $ 53,307 29,690 40,966 20,792

Customerlists 5.0 45,642 10,514 3,700 2,240

Patents 14.0 1,556 133 1,080 109

Non-competeagreements 5.0 382 102 125 40

Total 5.14 $ 100,887 40,439 45,871 23,181

Amortizationexpensewas$17,258,000,$6,679,000and$6,592,000fortheyearsended2005,2004and2003,respectively.

Estimatedaggregateamortizationexpenseforeachofthenextfiveyearsisasfollows:

Foryearended: 2006 $ 17,359

2007 13,731

2008 13,466

2009 11,740

2010 860

Thechangesinthecarryingamountofgoodwillforthe12monthsendedDecember31,2005areasfollows:

BalanceasofJanuary1,2005 $ 54,600

Goodwillacquired 62,278

Foreigncurrencytranslationadjustmentandother (736)

BalanceasofDecember31,2005 $ 116,142

AtDecember31,2005andJanuary1,2005,goodwillof$111,036,000and$50,701,000hasbeenallocatedtotheDomesticsegmentrespectively.The2005and2004amountsofgoodwillallocatedtotheGlobalsegmentwas$5,106,000and$3,899,000,respectively.

(n) Use of Estimates - Thepreparationoffinancialstatements inconformitywithaccountingprinciplesgenerallyaccepted in theUnitedStatesofAmericarequiresmanagementtomakeestimatesandassumptionsthataffectthereportedamountsofassetsandliabilitiesanddisclosureofcontingentassetsandliabilitiesatthedateofthefinancialstatementsandthereportedamountsofrevenuesandexpensesduringthereportingperiod.Actualresultscoulddifferfromthoseestimates.

(o) Concentrations -SubstantiallyalloftheCompany’scashandcashequivalentsandshort-terminvestments,areheldatthreemajorU.S.financialinstitutions.ThemajorityoftheCompany’scashequivalentsconsistofU.S.GovernmentFederalAgencySecurities,short-termmarketablesecurities,andovernightrepurchaseagreements. Depositsheldwithbanksmayexceedtheamountof insuranceprovidedonsuchdeposits. Generallythesedepositsmayberedeemedupondemandand,therefore,bearminimalrisk.

SubstantiallyalloftheCompany’sclientsareintegrateddeliverynetworks,hospitalsandotherhealthcarerelatedorganizations.Ifsignificantadversemacro-economicfactorsweretoimpacttheseorganizationsitcouldmateriallyadverselyaffecttheCompany.TheCompany’saccesstocertainsoftwareandhardwarecomponentsisdependentuponsingleandsolesourcesuppliers.TheinabilityofanysuppliertofulfillsupplyrequirementsoftheCompanycouldaffectfutureresults.

(p) Accounting for Stock Options - TheCompanyappliestheintrinsic-value-basedmethodofaccountingprescribedbyAccountingPrinciplesBoard

Page 60: Download the Full Report - Cerner Corporation

5�

(APB)OpinionNo.25,“AccountingforStockIssuedtoEmployees,”andrelatedinterpretationsincludingFASBInterpretationNo.44,”AccountingforCertainTransactionsinvolvingStockCompensation,aninterpretationofAPBOpinionNo.25,”issuedinMarch2000,toaccountforitsfixed–planstockoptions.Underthismethodforfixedawards,compensationexpenseisrecordedonthedateofgrantonlyifthecurrentmarketpriceoftheunderlyingstockexceededtheexerciseprice.StatementofFinancialAccountingStandardsNo.123,“AccountingforStock-BasedCompensation,”establishedaccountinganddisclosurerequirementsusingafair-value-basedmethodofaccountingforstock-basedemployeecompensationplans.AsallowedbySFASNo.123,theCompanyhaselectedtocontinuetoapplytheintrinsic-value-basedmethodofaccountingdescribedabove,andhasadoptedonlythedisclosurerequirementsofSFASNo.123.ThefollowingisareconciliationofreportednetearningstoadjustednetearningshadtheCompanyrecordedcompensationexpensebasedonthefairvalueatthegrantdateforitsstockoptionsunderSFAS123fortheyearsended2005,2004and2003.

(Inthousands,exceptpersharedata)

2005 200� 200�

Reportednetearnings $ 86,251 64,648 42,791

Less:stock-basedcompensationexpensedetermined

underfair-value-basedmethodforallawards,netoftax (10,971) (7,903) (13,392)

Adjustednetearnings 75,280 56,745 29,399

Basicearningspershare:

Reportednetearnings $ 1.16 .90 .61

Less:stock-basedcompensationexpensedetermined

underfair-value-basedmethodforallawards,netoftax (.14) (.11) (.19)

Adjustednetearnings 1.02 .79 .42

Dilutedearningspershare:

Reportednetearnings $ 1.10 .86 .59

Less:stock-basedcompensationexpensedetermined

underfair-value-basedmethodforallawards (.14) (.11) (.18)

Adjustednetearnings .96 .75 .41

ProformanetearningsreflectonlyoptionsgrantedsinceJanuary1,1995.Therefore,thefullimpactofcalculatingcompensationexpenseforstockoptionsunderFAS123isnotreflectedintheproformanetearningsamountspresentedabove,becausecompensationcostisreflectedovertheoptions’vestingperiod.CompensationexpenseforoptionsgrantedpriortoJanuary1,1995isnotconsidered.

InDecember2004,theFASBissuedStatementofFinancialAccountingStandards(“SFAS”)No.123(revised2004),ShareBasedPayments(“SFASNo.123(R)”)whichreplacesSFAS123,AccountingforStock-BasedCompensation,andsupersedesAPBOpinionNo.25,“AccountingforStockIssuedtoEmployees.”SFASNo.123(R)addressestheaccountingforshare-basedpaymentstransactionswithemployeesandotherthirdparties,eliminatestheabilitytoaccountforshare-basedcompensationtransactionsusingAPB25andrequiresthatthecompensationcostsrelatingtosuchtransactionsberecognizedintheconsolidatedstatementofearnings.InApril2005,theSecuritiesandExchangeCommissionannouncedtheadoptionofanewrulethatamendedtheeffectivedateofSFAS123(R).TheeffectivedateofthenewstandardunderthesenewrulesfortheCompany’sconsolidatedfinancialstatementswasJanuary1,2006.TheCompanyhaselectedtoadoptthestandardusingthemodifiedprospectiveapplicationunderthebi-nomialmethodandiscurrentlyassessingtheimpactthattheStatementwillhaveonitsconsolidatedfinancialstatements.

(q) Reclassifications – Certainprioryearamountshavebeenreclassifiedtoconformtothecurrentyearconsolidatedfinancialstatementpresentation.

(r) Accounting for Variable Interest Entities - OnSeptember27,2003,theCompanyadoptedFinancialAccountingStandardsBoardInterpretationNo.46(“FIN46”)asamendedbyFIN46R,“ConsolidationofVariableInterestEntitiesanInterpretationofAPBNo.51.”TheInterpretationprovidesguidanceontheidentificationofentitiesforwhichcontrolisachievedthroughmeansotherthanthroughvotingrights(“variableinterestentities’”or“VIEs”)andhowtodeterminewhenandwhichbusinessenterprisesshouldconsolidatetheVIE(the“primarybeneficiary”).

Page 61: Download the Full Report - Cerner Corporation

5�

2 Business Acquisitions and DivestitureDuringthethreeyearsendedDecember31,2005,theCompanycompletedsixacquisitions,whichwereaccountedforunderthepurchasemethodofaccounting.

OnJanuary3,2005,theCompanycompletedthepurchaseofassetsofthemedicalbusinessdivisionofVitalWorks,Inc.forapproximately$100,000,000,whichwasfundedwithexistingcashofapproximately$65,000,000andborrowingsontherevolvinglineofcreditofapproximately$35,000,000.Themedicalbusinessconsistsofdeliveringandsupportingphysicianpracticemanagement, electronicmedical record, electronicdata interchangeandemergencydepartmentinformationsolutionsandrelatedproductsandservicestophysicianpractices,hospitalemergencydepartments,managementserviceorganizationsandotherrelatedentities. TheacquisitionofVitalWorks’medicaldivisionexpandedtheCompany’spresence in thephysicianpracticemarket.$6,382,000ofthepurchasepricewasallocatedtoin-processresearchanddevelopmentthathadnotreachedtechnologicalfeasibilityandisreflectedasachargetoearningsin2005.Theallocationofthepurchasepricetotheestimatedfairvaluesoftheidentifiedtangibleandintangibleassetsacquiredand liabilitiesassumed, resulted ingoodwill of$55,166,000and$43,450,000 in intangibleassets thatwill beamortizedoverfiveyears.

TheunauditedfinancialinformationinthetablebelowsummarizesthecombinedresultsofoperationsofCernerCorporationandthemedicalbusinessdivisionofVitalWorks,Inc.,onaproformabasis,asthoughthecompanieshadbeencombinedasofthebeginningoftheperiodspresented.TheproformafinancialinformationispresentedforinformationalpurposesonlyandisnotindicativeoftheresultsofoperationsthatwouldhavebeenachievediftheacquisitionandborrowingsundertheCompany’srevolvinglineofcredithadtakenplaceatthebeginningoftheperiodpresented.Theproformafinancialinformationfortheperiodpresentedincludesthepurchaseaccountingeffectofamortizationchargesfromacquiredintangibleassets,interestexpenseontheborrowingontherevolvinglineofcredit,andthechargeforthewriteoffofacquiredinprocessresearchanddevelopmentof$3,941,000,netofa$2,441,000taxbenefit.

(inthousands,exceptpersharedata) Twelvemonthsended January1,2005 Totalrevenues $997,449

NetIncome $64,578

Basicearningspershare $.89

Dilutedearningspershare $.86

ProformaresultsofoperationshavenotbeenpresentedforanyoftheotherfiveacquisitionsbecausetheeffectsoftheseacquisitionswerenotmaterialtotheCompanyoneitheranindividualoranaggregatebasis.TheresultsofoperationsofeachacquisitionareincludedintheCompany’sconsolidatedstatementofoperationsfromthedateofeachacquisition.

OnMarch15,2004theCompanysoldthereferentialcontentportionofZynxHealthIncorporated(Zynx)for$12,000,000.TheCompanyretainedthelifesciencesportionofthebusiness,whichisengagedinsellinglifesciencesdatatopharmaceuticalcompaniesforuseinresearch,andtheCompanyretainedtherightstousetheZynxcontentinitssolutionsgoingforward.ThesaleofZynxresultedinagainof$3,023,000,andhasbeenincludedinOtherIncome,netintheaccompanyingconsolidatedstatementsofoperations.

InconnectionwithfilingtheCompany’s2004incometaxreturn,managementdeterminedthatthesaleofZynxinthefirstquarterof2004resultedinataxcapitalloss.Thistaxcapitallosswascarriedbackagainstcapitalgainspreviouslyrealizedresultingintaxbenefitsof$4,794,000.Thetaxbenefitwasnotrecordedinthe2004consolidatedfinancialstatements.

Thetaxbenefit,ifproperlyrecordedin2004,wouldhaveincreased2004netearningsby$4,794,000.Astheimpacttoprioryear’sannualconsolidatedfinancialstatementswasnotmaterial,theCompanyrecordedthistaxbenefitof$4,794,000inthethirdquarterof2005(anincreaseto2005netearningsof$0.06pershareonadilutedbasisfortheyearendedDecember31,2005.)

AsummaryoftheCompany’spurchaseacquisitionsforthethreeyearsendedDecember31,2005,isincludedinthefollowingtable(inmillions,exceptshareamounts):

Page 62: Download the Full Report - Cerner Corporation

5�

Entity Name, Description of Business Acquired, Goodwill Developed Form of and Reason Business Acquired Date Consideration (Tax Basis) Intangibles Technology Consideration

Fiscal 2005 Acquisitions

BridgeMedical,Inc. 7/05 $11 $5.4 $5.5 $2.9 $11cash

Leaderinpoint-of-caresoftwaremarket ($5.4)

IntegratetechnologyintoCerner Millennium

DKESARL(AxyaSystemes) 5/05 $5.2 $1.2 $1.8 $1.5 $5.2cash

Financial,Administrative,andClinical SolutionsinEurope (0)

IntegratetechnologyintoCernerMillennium

MedicalDivisionofVitalWorks,Inc. 1/05 $100 $55.2 $35.1 $8.4 $100cash

PhysicianPracticeSolutions ($55.2)

IntegratetechnologyintoCernerMillennium

Fiscal 2004 Acquisitions

ProjectIMPACTCCM,Inc. 2/04 $.3 $.7 - $.6 $.3cash

ICUperformanceanalysisandbenchmarking (0)

IntegratetechnologyintoCerner Millennium

GajemaSoftware,LLC 8/04 $1.5 $.6 - $.8 $1.5cash

Laboratoryinformationmanagementandlogistics ($.6)

IntegratetechnologyintoCerner Millennium

Fiscal 2003 Acquisition

BeyondNowTechnologies(a) 9/03 $7.5 $3.0 - $3.2 $7.5cash

Homecaretechnologies (0)

IntegratetechnologyintoCerner Millennium

Amountsallocatedtointangiblesareamortizedonastraight-linebasisoverfivetosevenyears.Amountsallocatedtosoftwareareamortizedbasedoncurrentandexpectedfuturerevenuesforeachproductwithminimumannualamortizationequaltothestraight-lineamortizationovertheestimatedeconomiclifeoftheproduct.

(a) The assets and liabilities of the acquired companies at the date of acquisition are as follows:

Bridge Axya MedicalDivision ProjectIMPACT Gajema BeyondNow Medical,Inc. Systemes ofVitalWorks,Inc. CCM,Inc. Software TechnologiesCurrentAssets 1,172,000 2,680,000 11,404,000 644,000 72,000 1,977,000

TotalAssets 15,802,000 7,209,000 120,175,000 1,867,000 1,551,000 8,170,000

CurrentLiabilities 4,748,000 2,244,000 17,064,000 1,050,000 51,000 714,000

TotalLiabilities 4,783,000 2,483,000 19,877,000 1,201,000 51,000 714,000

� ReceivablesReceivablesconsistofaccountsreceivableandcontractsreceivable.Accountsreceivablerepresentrecordedrevenuesthathavebeenbilled.ContractsreceivablerepresentrecordedrevenuesthatarebillablebytheCompanyatfuturedatesunderthetermsofacontractwithaclient.Billingsandotherconsideration receivedon contracts in excessof related revenues recognizedare recordedasdeferred revenue. A summaryof receivables is asfollows:

(Inthousands) 2005 200�

Accountsreceivable,netofallowance $ 216,248 185,290

Contractsreceivable 100,717 96,909

Totalreceivables,net $ 316,965 282,199

Page 63: Download the Full Report - Cerner Corporation

�0

SubstantiallyallreceivablesarederivedfromsalesandrelatedsupportandmaintenanceoftheCompany’sclinical,administrativeandfinancialinformationsystemsandsolutionstohealthcareproviderslocatedthroughouttheUnitedStatesandincertainforeigncountries.Includedinreceivablesattheendof2005and2004areamountsduefromhealthcareproviderslocatedinforeigncountriesof$32,533,000and$33,304,000respectively.Consolidatedrevenuesincludeforeignsalesof$113,314,000,$63,622,000and$54,191,000during2005,2004and2003,respectively.Consolidatedlong-livedassetsattheendof2005and2004includeforeignlong-livedassetsof$9,723,000and$5,176,000respectively.Revenuesandlong-livedassetsfromanyoneforeigncountryarenotmaterial.

TheCompanyperformsongoingcreditevaluationsof itsclientsandgenerallydoesnotrequirecollateralfromitsclients.TheCompanyprovidesanallowanceforestimateduncollectibleaccountsbasedonspecificidentification,historicalexperienceandmanagement’sjudgment.Attheendof2005and2004theallowanceforestimateduncollectibleaccountswas$18,855,000and$17,583,000,respectively.

� Property and EquipmentAsummaryofproperty,equipment,andleaseholdimprovementsstatedatcost,lessaccumulateddepreciationandamortization,isasfollows:

(Inthousands) Depreciable lives 200� 200�

Furnitureandfixtures 5-12yrs $ 42,458 46,567

Computerandcommunicationsequipment 2-5yrs 246,973 197,352

Leaseholdimprovements 2-15yrs 69,633 61,190

Capitalleaseequipment 3-5yrs 14,705 14,836

Land,buildings,andimprovements 12-50yrs 126,195 95,029

OtherEquipment 5-20yrs 3,310 5,551

503,274 420,525

Lessaccumulateddepreciationandamortization 210,666 190,085

Totalpropertyandequipment,net $ 292,608 230,440

DepreciationexpensefortheyearsendedDecember31,2005,January1,2005andJanuary3,2004was$49,057,000,$41,886,000,and$27,765,000respectively.

5 IndebtednessInNovember2005,theCompanycompleteda£65,000,000($112,002,000atDecember31,2005)privateplacementofdebtat5.54%pursuanttoaNoteAgreement.TheNoteAgreementispayableinsevenequalannualinstallmentsbeginninginNovember2009.TheproceedswereusedtorepaytheoutstandingamountundertheCompany’screditfacilityandforgeneralcorporatepurposes.TheNoteAgreementcontainscertainnetworthandfixedchargecoveragecovenantsandprovidescertainrestrictionsontheCompany’sabilitytoborrow,incurliens,sellassetsandpaydividends.TheCompanywasincompliancewithallcovenantsatDecember31,2005.

InDecember2002,theCompanycompleteda$60,000,000privateplacementofdebtpursuanttoaNoteAgreement.TheSeriesASeniorNotes,witha$21,000,000principalamountat5.57%,arepayableinthreeequal installmentsbeginninginDecember2006.TheSeriesBSeniornotes,witha$39,000,000principalamountat6.42%,arepayableinfourequalannualinstallmentsbeginningDecember2009.TheproceedswereusedtorepaytheoutstandingamountundertheCompany’screditfacilityandforgeneralcorporatepurposes.TheNoteAgreementcontainscertainnetworthandfixedchargecoveragecovenantsandprovidescertainrestrictionsontheCompany’sabilitytoborrow,incurliens,sellassetsandpaydividends.TheCompanywasincompliancewithallcovenantsatDecember31,2005.

InMay2002,theCompanyexpandeditscreditfacilitybyenteringintoanunsecuredcreditagreementwithagroupofbanksledbyUSBank.Thisagreementprovidesforacurrentrevolvinglineofcreditforworkingcapitalpurposes.Thecurrentrevolvinglineofcreditisunsecuredandrequiresmonthlypaymentsofinterestonly.InterestispayableattheCompany’soptionataratebasedonprime(7.25%atDecember31,2005)orLIBOR(4.39%atDecember31,2005)plus2%.Theinterestratemaybereducedbyupto1.15%ifcertainnetworthratiosaremaintained.Theagreementcontainscertainnetworth,currentratio,andfixedchargecoveragecovenantsandprovidescertainrestrictionsontheCompany’sabilitytoborrow,incurliens,sellassets,andpaydividends.Acommitmentfeeof3/10%to1/2%ispayablequarterlybasedontheusageoftherevolvinglineofcredit.TherevolvinglineofcreditmaturesonMay31,2007.AtDecember31,2005,theCompanyhadnooutstandingborrowingsunderthisagreementandhad$90,000,000availableforworkingcapitalpurposes.OnJanuary10,2005,theCompanydrewdown$35,000,000fromitsrevolvinglineofcreditinconnectionwiththeacquisitionofthemedicalbusinessdivisionofVitalWorks,Inc.(SeeNote2totheconsolidatedfinancialstatements.)ThisamounthasbeenpaidinfullasofDecember31,2005.

Page 64: Download the Full Report - Cerner Corporation

�1

InApril1999,theCompanycompleteda$100,000,000privateplacementofdebtpursuanttoaNoteAgreement.TheSeriesASeniorNotes,witha$60,000,000principalamountat7.14%,arepayable infiveequalannual installmentsthatbegan inApril2002. TheSeriesBSeniorNotes,witha$40,000,000principalamountat7.66%,arepayableinsixequalannualinstallmentswhichcommencedinApril2004.TheproceedswereusedtoretiretheCompany’sexisting$30,000,000ofdebt,andtheremainingfundswereusedforcapitalimprovementsandtostrengthentheCompany’scashposition.TheNoteAgreementcontainscertainnetworth,currentratio,andfixedchargecoveragecovenantsandprovidescertainrestrictionsontheCompany’sabilitytoborrow,incurliens,sellassets,andpaydividends.TheCompanywasincompliancewithallcovenantsatDecember31,2005.

InMarch2004,theCompanyissueda$7,500,000promissorynotetoCedars-SinaiMedicalCenterofwhich$2,500,000wasrepaidinOctober2004.ThebalanceofthenotewillbepayableonApril30,2007.

TheCompanyalsohascapitalleaseobligationsamountingto$5,366,000,payableoverthenextfouryears.

TheaggregatematuritiesfortheCompany’slong-termdebt,includingcapitalleaseobligations,isasfollows(inthousands):

2006 $ 28,743

2007 21,072

2008 14,680

2009 32,422

2010 25,750

2011andthereafter 100,341

$ 223,008

TheCompanyestimatesthefairvalueofitslong-term,fixed-ratedebtusingadiscountedcashflowanalysisbasedontheCompany’scurrentborrowingratesfordebtwithsimilarmaturities.ThefairvalueoftheCompany’slong-termdebtwasapproximately$206,904,000and$109,746,000atDecember31,2005andJanuary1,2005,respectively.

� Interest Income (Expense)Asummaryofinterestincomeandexpenseisasfollows:

(Inthousands) 2005 200� 200�

Interestincome $ 3,871 3,022 1,219

Interestexpense (9,729) (9,174) (8,236)

Interestexpense,net $ (5,858) (6,152) (7,017)

� Stock Options, Warrants and EquityAttheendof2005and2004,theCompanyhad1,000,000sharesofauthorizedbutunissuedpreferredstock,$.01parvalue.

Duringfiscalyear2005,theCompanyhadtwolong-termincentiveplansfromwhichitcouldissuegrants.

Underthe2001Long-TermIncentivePlanF,theCompanyisauthorizedtogranttoassociates,directorsandconsultants4,000,000sharesofcommonstockawardstakingintoaccountthestock-spliteffectiveJanuary10,2006.Awardsunderthisplanmayconsistofstockoptions,restrictedstockandperformanceshares,aswellasotherawardssuchasstockappreciationrights,phantomstockandperformanceunitawardswhichmaybepayableintheformofcommonstockorcash.However,notmorethan1,000,000ofsuchshareswillbeavailabletograntinganytypesofgrantsotherthanoptionsorstockappreciationrights.OptionsunderPlanFareexercisableatapricenotlessthanfairmarketvalueonthedateofgrantandduringaperioddeterminedbytheStockOptionCommittee.OptionsunderthisplantypicallyvestoveraperiodoffiveyearsasdeterminedbytheStockOptionCommitteeandareexercisableforperiodsofupto25years.

Long-TermIncentivePlanGwasapprovedbytheCompany’sshareholdersonMay28,2004.Underthe2004Long-TermIncentivePlanG,theCompanyisauthorizedtogranttoassociatesanddirectors4,000,000sharesofcommonstockawardstakingintoaccountthestock-spliteffectiveJanuary10,2006.Awardsunderthisplanmayconsistofstockoptions,restrictedstockandperformanceshares,aswellasotherawardssuchasstockappreciationrights,phantomstockandperformanceunitawardswhichmaybepayableintheformofcommonstockorcash.OptionsunderPlanGareexercisableatapricenotlessthanfairmarketvalueonthedateofgrantandduringaperioddeterminedbytheStockOptionCommittee.OptionsunderthisplantypicallyvestoveraperiodoffiveyearsasdeterminedbytheStockOptionCommitteeandareexercisableforperiodsofupto12years.

Page 65: Download the Full Report - Cerner Corporation

�2

TheCompanygranted15,000sharesofrestrictedstockfromPlanFtomembersoftheBoardofDirectorsonJuly6,2004valuedat$21.16andvestingonMay26,2005.TheCompanymadeadditionalgrantsofrestrictedstockfromPlanFtomembersoftheBoardofDirectorsduring2005.5,000sharesofrestrictedstockweregrantedonApril4,2005valuedat$26.19,vestingasfollows:1,666onFebruary2,2006;1,666onFebruary2,2007;and,1,668onFebruary2,2008.25,000sharesofrestrictedstockweregrantedonJune3,2005valuedat$31.41,vestingonMay25,2006.TheCompanygranted5,000sharesofrestrictedstockfromPlanGtoamemberoftheBoardofDirectorsonJune3,2005valuedat$31.41,vestingasfollows:1,666onMay25,2006;1,666onMay24,2007;and,1,668onMay22,2008.AllgrantswerevaluedatthefairmarketvalueonthedateofgrantandvestprovidedtherecipienthascontinuouslyservedontheBoardofDirectorsthroughsuchdate.Theexpenseassociatedwiththesegrantsisbeingrecognizedovertheperiodfromthedateofgranttothevestingdate.TheCompanyrecognizedexpensesrelatedtotherestrictedstockof$780,000and$173,000in2005and2004,respectively.

TheCompanyhasalsogranted1,708,170othernon-qualifiedstockoptionsover time throughDecember31,2005,under separateagreements toemployeesandcertainthirdparties.Theseoptionsareexercisableatapriceequaltoorgreaterthanthefairmarketvalueonthedateofgrant.Theseoptionsvestoverperiodsofuptosixyearsandareexercisableforperiodsofupto10years.TheCompanyrecognizedexpensesrelatedtothenon-qualifiedstockoptionsof$34,000in2003.Noexpenserelatedtothenon-qualifiedstockoptionswasrecognizedin2004or2005becausetheoptionswerefullyvested.

AcombinedsummaryofthestatusoftheCompany’sfourfixedstockoptionplans(StockoptionPlansDandEwereineffectduring2003and2004,nograntswerepermittedtobeissuedfromPlansDandEafterJanuary1,2005pursuanttothetermsofthePlans)andotherstockoptionsattheendof2005,2004and2003,andchangesduringtheseyearsendedispresentedbelow:

2005 200� 200�

Weighted Weighted- Weighted Number average Number average Number average of exercise of exercise of exerciseFixedoption shares price shares price shares priceOutstandingatbeginningofyear 14,545,148 $16.25 16,287,228 $15.19 16,161,728 $15.64Granted 1,341,286 33.77 1,787,586 22.32 1,903,834 13.22

Exercised (4,272,960) 15.62 (2,165,034) 11.82 (649,244) 10.35

Forfeited (573,952) 18.18 (1,364,632) 18.03 (1,129,090) 20.58

Outstandingatendofyear 11,039,522 $18.51 14,545,148 $16.25 16,287,228 $15.19

Optionsexercisableatyear-end 4,813,058 $15.56 6,986,934 $15.72 6,479,172 $13.45

ThefollowingtablesummarizesinformationaboutfixedandotherstockoptionsoutstandingatDecember31,2005.

Options outstanding Options exercisable

Rangeof Number Weighted-average Number Exercise outstanding remaining Weighted-average exercisable Weighted-average Prices at1/1/05 contractuallife exerciseprice at1/1/05 exerciseprice $6.25-11.30 2,856,082 9.56years $9.06 1,393,448 $8.71

11.34-18.68 2,820,356 8.39 14.56 1,866,650 14.23

18.70-23.12 2,918,396 6.98 21.62 1,052,090 21.56

23.30-136.86 2,444,688 8.26 30.40 500,870 26.74

11,039,522 8.29 18.51 4,813,058 15.56

Thepershareweighted-averagefairvalueofstockoptionsgrantedduring2005,2004and2003was$17.86,$12.88and$7.67respectively,onthedateofgrantusingtheBlackScholesoption-pricingmodelwiththefollowingweighted-averageassumptions:

2005 200� 200�

Expectedyearsuntilexercise 6.6 4.7 4.7

Risk-freeinterestrate 4.3% 4.0% 3.8%

Expectedstockvolatility 45.4% 67.3% 71.2%

Expecteddividendyield 0% 0% 0%

Page 66: Download the Full Report - Cerner Corporation

��

For2005,theCompanyincorporatedanelementofimpliedvolatilityinadditiontoitshistoricalvolatilitytodeterminetheexpectedstockvolatilitywhereasinprioryearstheCompanyutilizedonlyhistoricalvolatilityforthisassumption.

� Associate Stock Purchase PlanTheCompanyestablishedanAssociateStockPurchasePlan(ASPP)in2001,whichqualifiesunderSection423oftheInternalRevenueCode.Allfull-timeUSDpaidassociatesareeligibletoparticipate.Participantsmayelecttomakecontributionsfrom1%to20%ofcompensationtotheASPP,subjecttoannuallimitationsdeterminedbytheInternalRevenueService.ParticipantsmaypurchaseCompanyCommonStockata15%discountonthelastdayofthepurchaseperiod.UnderAPBNo.25theASPPqualifiesasanon-compensatoryplanandnocompensationexpensehasbeenrecognized.ThepurchaseoftheCompany’scommonstockismadethroughtheASPPontheopenmarketandsubsequentlyreissuedtotheassociates.

� Foundations Retirement PlanTheCernerCorporationFoundationsRetirementPlan(thePlan)isestablishedunderSection401(k)oftheInternalRevenueCode.Allassociatesworking20hoursperweekormore,overage18andnotamemberofanexcludedclassareeligibletoparticipate. Participantsmayelect tomakepretaxcontributionsfrom1%to80%ofcompensationtothePlan,subjecttoannuallimitationsdeterminedbytheInternalRevenueService.Participantsmaydirectcontributionsintomutualfunds,amoneymarketfund,oraCompanystockfund.TheCompanymakesmatchingcontributionstothePlan,onbehalfofparticipants,inanamountequalto33%ofthefirst6%oftheparticipant’ssalarycontribution.TheCompany’sexpensefortheplanamountedto$7,130,000,$5,994,000and$5,325,000for2005,2004and2003,respectively.

TheCompanyaddedadiscretionarymatchtothePlanin2000.Contributionsarebasedonattainmentofestablishedearningspersharegoalsfortheyearortheestablishedfinancialmetricfortheplan.OnlyparticipantsinthePlanareeligibletoreceivethediscretionarymatchcontribution.Fortheyearsended2005,2004and2003theCompanyexpensed$5,783,000,$5,186,000and$0fordiscretionarydistributions,respectively.

10 Income TaxesIncometaxexpense(benefit)fortheyearsended2005,2004and2003consistsofthefollowing:

(Inthousands) 2005 200� 200�

Current: Federal $ 47,499 37,524 9,808

State 7,549 6,756 1,790

Foreign 819 (1,303) (4,484)

Totalcurrentexpense 55,867 42,977 7,114

Deferred: Federal (2,964) 1,712 19,040

State (2,382) 174 2,806

Foreign (1,528) (1,591) (529)

Totaldeferredexpense(benefit) (6,874) 295 21,317

Totalincometaxexpense $ 48,993 43,272 28,431

Temporarydifferencesbetweenthefinancialstatementcarryingamountsandtaxbasisofassetsandliabilitiesthatgiverisetosignificantportionsofdeferredincometaxesattheendof2005and2004relatetothefollowing:

(Inthousands) 2005 200�

DeferredTaxAssets

Accruedexpenses $ 17,178 13,673

Separatereturnnetoperatinglosses 6,822 8,004

Other 3,633 3,754

Totaldeferredtaxassets 27,633 25,431

DeferredTaxLiabilities

Softwaredevelopmentcosts (65,885) (61,146)

Contractandservicerevenuesandcosts (7,433) (13,526)

Depreciationandamortization (17,389) (20,825)

Other (1,739) (227)

Totaldeferredtaxliabilities (92,446) (95,724)

Netdeferredtaxliability $ (64,813) (70,293)

Page 67: Download the Full Report - Cerner Corporation

Baseduponthelevelofhistoricaltaxableincomeandprojectionsforfuturetaxableincomeovertheperiodswhichthedeferredtaxassetsareexpectedtobedeductible,aswellasthescheduledreversalofdeferredtaxliabilities,managementbelievesitismorelikelythannottheCompanywillrealizethebenefitofthesedeductibledifferences.AtDecember31,2005,theCompanyhasnetoperatinglosscarryforwardssubjecttoSection382oftheInternalRevenueCodeforFederalincometaxpurposesof$17.8millionwhichareavailabletooffsetfutureFederaltaxableincome,ifany,through2024.

Theeffectiveincometaxratesfor2005,2004and2003were36%,40%and40%,respectively.Theseeffectiveratesdifferfromthefederalstatutoryrateof35%asfollows:

(Inthousands) 2005 200� 200�

Taxexpenseatstatutoryrates $ 47,335 37,772 24,928

Stateincometax,netoffederalbenefit 4,396 3,507 2,315

Zynxtaxbenefitadjustment (4,794) 1,551 395

Other,net 2,056 442 793

Totalincometaxexpense(benefit) $ 48,993 43,272 28,431

IncometaxespayablearereducedbythetaxbenefitresultingfromdisqualifyingdispositionsofstockacquiredundertheCompany’sstockoptionplans.The2005,2004and2003benefitsof$30,289,000,$9,191,000and$1,876,000,respectively,aretreatedasincreasestoadditionalpaid-incapital.

11 Related Party TransactionsTheCompanyleasesanairplanefromacompanyownedbyMr.NealL.PattersonandMr.CliffordW.Illig.Theairplaneisleasedonapermilebasiswithnominimumusageguarantee.Theleaserateisbelievedtoapproximatefairmarketvalueforthistypeofaircraft.During2005and2004,respectively,theCompanypaidanaggregateof$812,000and$574,000fortherentaloftheairplane.TheairplaneisusedprincipallybyMr.PaulBlackandMr.TraceDevannytomakeclientvisits.

12 CommitmentsTheCompanyleasesspacetounrelatedparties in itsNorthKansasCityheadquarterscomplexandinotherbusinesslocationsundernoncancelableoperatingleases.Includedinotherrevenuesisrentalincomeof$583,000,$63,000and$145,000in2005,2004and2003,respectively.

TheCompanyiscommittedunderoperatingleasesforofficespaceandcomputerequipmentthroughDecember2023.RentexpenseforofficeandwarehousespacefortheCompany’sregionalandglobalofficesfor2005,2004and2003was$9,056,000,$6,470,000and$5,345,000,respectively.Aggregateminimumfuturepayments(inthousands)underthesenoncancelableoperatingleasesareasfollows:

Aggregateminimum Years futurepayments

2006 $ 17,605

2007 12,418

2008 11,348

2009 7,288

2010 5,661

2011andthereafter 29,026

��

Page 68: Download the Full Report - Cerner Corporation

1� Segment ReportingInthefourthquarterof2005,theCompanychangeditsreportablesegmentstoreflecthowthechiefoperatingdecisionmakercurrentlyreviewstheCompany’sresultsintermsofallocatingresourcesandassessingperformance.ThischangeeffectivelypresentstheCompany’soperatingresultsbyitstwogeographicaloperatingsegments,DomesticandGlobal.Asaresult,thepriorperiodshavebeenretroactivelyadjustedtoreflectthechangeinreportablesegments.

Revenuesarederivedprimarilyfromthesaleofclinical,financialandadministrativeinformationsystemsandsolutions.Thecostofrevenuesincludesthecostofthirdpartyconsultingservices,computerhardwareandsublicensedsoftwarepurchasedfromcomputerandsoftwaremanufacturersfordeliverytoclients.Italsoincludesthecostofhardwaremaintenanceandsublicensedsoftwaresupportsubcontractedtothemanufacturers.Operatingexpensesincurredby thegeographicbusinesssegmentsconsistofsalesandclientserviceexpenses includingsalariesofsalesandclientservicepersonnel,communicationsexpensesandunreimbursedtravelexpenses.Performanceofthesegmentsisassessedattheoperatingearningsleveland,therefore,thesegmentoperationshavebeenpresentedassuch. “Other” includesrevenuesnotgeneratedby theoperatingsegmentsandexpensessuchassoftwaredevelopment,marketing,generalandadministrativeanddepreciationthathavenotbeenallocatedtotheoperatingsegments.TheCompanydoesnottrackassetsbygeographicalbusinesssegment.

Accountingpoliciesforeachofthereportablesegmentsarethesameasthoseusedonaconsolidatedbasis.ThefollowingtablepresentsasummaryoftheoperatinginformationfortheyearsendedDecember31,2005andJanuary1,2005

OperatingSegments

2005 Domestic Global Other Total

Revenues $1,046,180 $ 113,314 $ 1,290 $1,160,785

Costofrevenues 231,977 16,981 5,728 254,686

Operatingexpenses 209,747 47,691 508,224 765,663

Totalcostsandexpenses 441,724 64,672 513,952 1,020,349

Operatingearnings $ 604,456 $ 48,642 $(512,662) $ 140,436

OperatingSegments

2004 Domestic Global Other Total

Revenues $ 858,945 $ 63,622 $ 3,789 $ 926,356

Costofrevenues 183,266 7,809 5,273 196,348

Operatingexpenses 156,888 38,411 423,245 618,544

Totalcostsandexpenses 340,154 46,220 428,518 814,892

Operatingearnings $518,791 $ 17,402 $(424,729) $ 111,464

OperatingSegments

2003 Domestic Global Other Total

Revenues $ 782,434 $ 54,191 $ 2,963 $ 839,587

Costofrevenues 180,681 13,450 159 194,290

Operatingexpenses 134,177 35,814 397,209 567,200

Totalcostsandexpenses 314,858 49,264 397,368 761,490

Operatingearnings $467,576 $ 4,927 $(394,405) $ 78,097

�5

Page 69: Download the Full Report - Cerner Corporation

��

1� Accrued Vacation Pay AdjustmentInconjunctionwithareviewoftheprocessforcalculatingtheliabilityforaccruedvacationpayattheendofthethirdquarterof2004,theCompanydeterminedthattheliabilityonthebalancesheetrelatingtoperiodspriorto2004wasunderstatedby$3,346,000.WhiletheCompanywasfullyaccruedforallvestedvacationthatwouldbesubjecttopayoutupontermination,theCompanyunderstatedtheliabilityforaccumulatedvacationthatcouldbeusedinsubsequentperiodsbyassociatesinexcessofthevestedamountpayableupontermination.

Theexpense, if properly recorded in2000 through2003,wouldhave increased2003net earningsby$0.1millionandwouldhavedecreasednetearningsby$0.4millionin2002,$0.6millionin2001,and$1.2millionin2000.Thecumulativeimpactonnetearningsisadecreaseof$2.1millionforthisfour-yearperiod.Theimpacton2004netearningsisapositive$8thousand.Astheimpacttoprioryear’sannualfinancialstatementswasnotmaterial,Cernerrecordedadditionalexpenseof$3,346,000,$2,076,000millionafter-tax,inthe2004thirdquartertoappropriatelyreflecttheliabilityasofOctober2,2004.TheCompanyhasreviseditsprocessforcalculatingtheliabilityforaccumulatedvacationtoaccuratelyreportthisinformationinthefuture.

15 Stock SplitOnDecember14,2005theCompany’sBoardofDirectorsannouncedatwo-for-onestocksplit,payableonJanuary9,2006intheformofaonehundredpercent(100%)stockdividendtostockholdersofrecordonDecember30,2005.Inconnectionwiththestocksplit,aportionofthedistributionofthestockdividendcamefrom1,502,999treasurysharespreviouslyreflectedintheconsolidatedbalancesheets.Allshareandpersharedatahavebeenretroactivelyadjustedforallperiodspresentedtoreflectthestocksplitincludingtheuseoftreasuryshares,asifthestocksplithadoccurredatthebeginningoftheearliestperiodpresented.

1� Quarterly Results (unaudited)Selectedquarterlyfinancialdatafor2005and2004issetforthbelow:

(Inthousands,exceptpersharedata) Basic Diluted Earnings Net earnings Earnings Revenues beforeincometaxes earnings pershare pershare 2005quarterlyresults: April2(1) $ 262,354 20,941 12,520 .17 .16

July2 277,815 32,889 19,803 .27 .26

October1(2) 294,622 36,149 26,556 .36 .34

December31 325,814 45,265 27,372 .36 .34

Total $ 1,160,785 135,244 86,251

2004quarterlyresults: April3(3) $ 218,728 23,412 14,129 .20 .19

July3 228,390 23,940 14,314 .20 .19

October2(4) 231,067 24,823 14,779 .20 .20

January1 248,171 35,745 21,426 .29 .28

Total $ 926,356 107,920 64,648

(1) IncludesachargeforthewriteoffofacquiredinprocessresearchanddevelopmentrelatedtotheacquisitionofthemedicalbusinessdivisionofVitalWorks,Inc.Theimpactofthischargeisa$3.9milliondecrease,netof$2.4milliontaxbenefit,innetearningsandadecreasetodilutedearningspershareof$.05forthefirstquarterand2005.

(2) Includesataxbenefitof$4.8millionrelatingtothecarrybackofacapitallossgeneratedbythesaleofZynxHealthIncorporatedinthefirstquarterof2004.Theimpactofthisrefundclaimisa$4.8millionincreaseinnetearningsandanincreaseindilutedearningspershareof$.06forthethirdquarterand2005.

(3) IncludesagainonthesaleofZynxHealthIncorporated.Theimpactofthisgainisa$3.0millionincreaseinnetearningsandincreasetodilutedearningspershareof$.04forthefirstquarterandfor2004.

(4) Includesachargeforvacationaccrualof$3.3millionincludedingeneralandadministrative.Theimpactofthischargewasa$2.1milliondecrease,netof$1.2milliontaxbenefit,innetearningsandadecreasetodilutedearningspershareof$.03forthethirdquarterandfor2004.

(5) Reflectstheeffectofa2-for-1stocksplitdistributedonJanuary9,2006.

Page 70: Download the Full Report - Cerner Corporation

��

Page 71: Download the Full Report - Cerner Corporation

��

Annual Meeting of ShareholdersTheAnnualMeetingofShareholderswillbeheldat10:00a.m.onMay26,2006,atTheCernerRoundauditoriumintheCernerVisionCenter,locatedontheCernercampusat2850RockcreekParkway,NorthKansasCity,Missouri.AformalnoticeoftheMeeting,withaProxyStatementandProxyform,willbemailed,toeachshareholderofrecord,inApril2006.

Annual Report/10-K ReportPublicationsofinteresttocurrentandpotentialCernerinvestorsareavailableuponwrittenrequestorviaCerner’sWebsiteatwww.cerner.com.TheseincludeannualandquarterlyreportsandtheForm10-KfiledwiththeSecuritiesandExchangeCommission.Writtenrequestsshouldbemadeto:CernerCorporationInvestorRelations2800RockcreekParkwayNorthKansasCity,MO64117-2551Inquiresofanadministrativenaturerelatingtoshareholderaccountingrecords,stocktransfer,changeofaddress,andmiscellaneousshareholderrequestsshouldbedirectedtothetransferagentandregistrar,UMBBank,at(816)8607786.

Transfer Agent and RegistrarSecuritiesTransferDivisionUMBBankP.O.Box410064KansasCity,MO64141-0064(816)8607786

Stock ListingsCernerCorporation’scommonstocktradesonTheNASDAQStockMarketunderthesymbolCERN.

Independent AccountantsKPMGLLPKansasCity,MO

Page 72: Download the Full Report - Cerner Corporation
Page 73: Download the Full Report - Cerner Corporation