CERNER CORP /MO/ (Form: 10-K, Received: 02/28/2007 16:53:42)
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 30, 2006
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 0-15386
CERNER CORPORATION
(Exact name of registrant as specified in its charter)
     
Delaware   43-1196944
(State or other jurisdiction of   (I.R.S. Employer
Incorporation or organization)   Identification No.)
     
2800 Rockcreek Parkway    
North Kansas City, MO   64117
(Address of principal executive offices)   (Zip Code)
(816) 221-1024
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value per share
(Title of Class)

Securities registered pursuant to Section 12(g) of the Act: None
     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes þ       No o
     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes o       No þ
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ       No o
     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ      Accelerated filer o      Non-accelerated filer o
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o      No þ
     As of June 30, 2006, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $2,063,790,353 based on the closing sale price as reported on the NASDAQ Global Market.
     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
     
Class   Outstanding at February 23, 2007
     
[Common Stock, $.01 par value per share]   78,884,801 shares
DOCUMENTS INCORPORATED BY REFERENCE
         
    Parts Into Which  
Document   Incorporated  
Proxy Statement for the Annual Shareholders’ Meeting to be held May 25, 2007 (Proxy Statement)
  Part III
 
 

 


TABLE OF CONTENTS

PART I
Item 1. Business
Item 1A. Risk Factors
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9.A. Controls and Procedures
Item 9.B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
SIGNATURES
Specimen Stock Certificate
Indemnification Agreement Form
Qualified Performance-Based Compensation Plan
Subsidiaries of Registrant
Consent of Independent Registered Public Accounting Firm
Certification of Neal L. Patterson Pursuant to Section 302
Certification of Marc G. Naughton Pursuant to Section 302
Certification Pursuant to Section 906
Certification Pursuant to Section 906


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PART I
Item 1. Business
Overview
Cerner Corporation (“Cerner” or the “Company”) is a Delaware business incorporated in 1980. The Company’s corporate headquarters are located at 2800 Rockcreek Parkway, North Kansas City, Missouri 64117. Its telephone number is (816) 221-1024. The Company’s Web site address is www.cerner.com. The Company makes available free of charge, on or through its Web site, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.
Cerner is a supplier of healthcare information technology (HIT), healthcare devices and related services. Organizations ranging from single-doctor practices, to hospitals, to corporations, to local, regional and national government agencies use Cerner ® solutions. Cerner’s solutions and services are designed to help our clients make healthcare safer, more efficient, and of higher quality.
The Company’s solutions have been designed and developed on the unified Cerner Millennium ® architecture. The person-centric solution framework combines clinical, financial and management information systems. It provides secure access to an individual’s electronic medical record at the point of care and organizes and proactively delivers information to meet the specific needs of the physician, nurse, laboratory technician, pharmacist or other care provider, front- and back-office professionals and even consumers. In addition, Cerner’s CareAware device architecture is designed to bridge the gap between medical devices and patient information by connecting information from various devices to the clinician workflow and electronic medical record. Cerner also offers a broad range of services including implementation and training, remote hosting, support and maintenance, healthcare data analysis and clinical process optimization.
The Healthcare and Healthcare IT Industry
Around the world, healthcare costs continue to rise as healthcare professionals work to uphold quality standards. The Centers for Medicare and Medicaid Services (CMS) has reported that, in the United States, healthcare represents 16 percent of the gross national product, which they project will reach 20 percent by 2015. In this climate, HIT is broadly seen as a way to curb these growing costs while improving the quality of care.
Policy Reforms
The federal government is currently using its position as the nation’s leading purchaser of healthcare products and services to promote HIT use. For example, CMS and the Office of the Inspector General (OIG) are allowing acute care organizations to help provide referring physicians with hardware, software, training and support necessary to implement e-prescribing or interoperable electronic medical record systems.
To increase the availability of healthcare pricing information, CMS posts information on what Medicare will pay for 30 common elective procedures and other hospital admissions. We believe this focus on transparency could incent healthcare organizations to use technology to improve safety and efficiency.
Private Sector Approaches
Healthcare costs are a significant issue for employers as well. According to the Journal of Occupational and Environmental Medicine, productivity losses related to personal and family health problems cost U.S. employers $1,685 per employee per year or about $226 billion annually. The cost of health insurance rose 7.7 percent in 2006, much higher than the overall rate of inflation (3.5 percent) or the increase in workers’ earnings (3.8 percent).
Faced with these costs, some large employers have become advocates of HIT. For example, Applied Materials, Inc., BP America, Inc., Cardinal Health, Inc., Intel Corporation, Pitney Bowes, Inc. and Wal-Mart Stores, Inc. founded an initiative in 2006 focused on creating personal health records for their employees. We believe this type of employer activism is a positive for the HIT industry as it supports wider-spread adoption of electronic medical records.

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Cerner Vision
Cerner’s vision has evolved from a fundamental thought: Healthcare should revolve around the individual, not the encounter. This concept led to Cerner’s vision of a Community Health Model and the creation of the unified Cerner Millennium architecture, the Company’s person-centric, enterprise-wide architecture. The Community Health Model encompasses four steps:
Automate the Care Process
Cerner offers a longitudinal, person-centric electronic medical record, giving clinicians electronic access to the right information at the right time and place to achieve the optimal health outcome.
Connect the Person
Cerner is dedicated to building a personal health system. Medical information and care regimens accessible from home empower consumers to effectively manage their conditions and adhere to treatment plans, creating a new medium between physicians and individuals.
Structure the Knowledge
Cerner is dedicated to building systems that help bring the best science to every medical decision by structuring, storing and studying the content surrounding each care episode to achieve optimal clinical and financial outcomes.
Close the Loop
Incorporating a medical discovery into daily practice can take as long as ten years. Cerner is dedicated to building systems that implement evidence-based medicine, reducing the average time from the discovery of an improved method to the change in the standard of care.
Cerner Strategy
Key elements of the Company’s business strategy include:
Leverage the unified Cerner Millennium architecture and the depth and breadth of Cerner solutions to continue expanding market share.
    Increase penetration of both large health systems and independent hospitals
    Further penetrate existing client base by cross-selling additional Cerner solutions and services
    Increase penetration of physician practices by offering a high-value suite of solutions with low up-front and recurring costs
    Continue to expand presence in non-U.S. markets
Continue to develop innovative solutions and services that leverage the Company’s technology and human capital expertise and that drive continued organic revenue growth.
    Innovative solutions for employers
    State and regional community health record initiatives
    Healthcare device innovation
    Clinical process optimization
    Solutions and services that leverage the data being captured in the digital healthcare environment
    More efficient methods of transacting healthcare
Offer more efficient and predictable implementations and systems that can be operated at lower costs to reduce total cost of ownership for the Company’s clients.
The Bedrock TM technology automates the implementation and management of the Cerner Millennium information platform.
CernerWorks SM managed services allow Cerner to manage complexity and technology risks for clients while providing more reliability and lower costs.
The MethodM SM approach is the Company’s single methodology to working with clients to deliver value through implementation of Cerner Millennium solutions.
Deliver optimal client experience that will allow critical relationships with the Company’s clients to continue growing.
    World-class support services
    Predictable and efficient implementations and upgrades
    Lower total cost of ownership

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    Commitment to research and development
Solution and Service Highlights
Foremost among the Company’s major accomplishments in 2006 was the release of Cerner Millennium 2007 . With the Millennium 2007 solutions, the Company delivered the largest set of new functions it has ever included in a single release. The Millennium 2007 solutions included a major change in design philosophy around role-venue-condition workflow that resulted in a new physician-user interface and workflow. We also redefined our approach to quality by implementing new testing and performance standards.
We are also improving the value of our solutions through CernerWorks , our six-year-old, remote-hosting business. Our system availability is now approaching 99.99 percent, or “four nines”, scheduled availability.
In 2006, we also introduced the Lights On Network, surveillance system and service. The network monitors client-hosted and Cerner-hosted systems in near real-time, predicting and helping to prevent future system issues.
Cerner made significant changes in our physician practice business, PowerWorks ® , in 2006. We went to market with a single price point for automating a physician practice's front office, clinical workflow and back office. We also redesigned our implementation approach, using a tele-service model and Web-based training, which significantly reduces, and in some cases eliminates, the need for on-site implementation consultants.
The Company is also enhancing its professional implementation and consulting services. Through our MethodM methodology, we give our clients a predictable approach to implementation that translates into a faster return on their investment. And we expanded the productivity gains we have made with our centralized implementation and upgrade centers and our Bedrock solution (our system of automated tools that guide clients through the design, build and maintenance of a Cerner Millennium system). With these initiatives and continued efficiencies in CernerWorks managed services, Cerner is striving to reduce the effort of implementing and operating the Company’s systems.
An area of focus for 2007 is Millennium Lighthouse , a consulting practice that works with clients to determine previously unidentified and unconnected relationships among healthcare processes and outcomes. Clients use the solutions to compare these relationships to similar organizations and implement measurable process changes.
Positioning for Continued Long-Term Growth
Cerner believes the market remains healthy for selling and delivering HIT solutions for acute care and physician organizations in the U.S. In addition, we are continuing to expand our boundaries. Four specific areas of focus include:
  1.   Continued expansion of our global reach
 
  2.   Healthcare data, using our extensive clinical databases to help pharmaceutical companies solve several issues such as getting drugs approved faster and safety monitoring
 
  3.   Creating connected healthcare devices
 
  4.   Reducing friction in healthcare through more efficient payment for services, community connectivity, a national record bank and a global record bank
Global Expansion
The Company continues to grow in global markets. Cerner provides software for England’s national Choose and Book scheduling system, which exceeded two million referrals during 2006. We also won a new contract to provide an imaging diagnostic solution in the southwest and northwest of England. Cerner also has contracts to provide HIT for approximately 40 percent of the country’s population, namely the Southern England and London clusters of the country’s Connecting for Health initiative.
Cerner is expanding its presence in Australia, with contracts to provide HIT in the two largest states, Victoria and New South Wales. We are also increasing our focus in other world markets, including France, the Middle East, Malaysia and Canada.

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Healthcare Data
Cerner’s Life Sciences business, which provides analysis services to pharmaceutical companies, continues to grow. In 2006, Cerner acquired Galt Associates, Inc. (now Cerner Galt, Inc.), a company that helps drug companies better understand the performance of their compounds through surveillance of adverse drug events. An important component of Cerner Life Sciences is the Health Facts ® solution, a data warehouse that captures and stores the data generated by Cerner solutions, aggregates it and develops reports that enable healthcare organizations to identify areas for intervention and improvement, and benchmark progress against regional and national data.
Connected Healthcare Devices
In 2006, Cerner extended Cerner Millennium with our CareAware healthcare device architecture and MDBus technology, a “USB for healthcare.” This innovation extends the reach of Cerner Millennium solutions, opening new opportunities for growth. The CareAware architecture allows for connection of healthcare devices to Cerner Millennium and non- Millennium systems. The Company also continued development of our new RxStation automated medication dispensing devices.
Reducing Friction
Healthe , our family of solutions and services for employers and governments, is another area of focus for the Company.
As an employer, Cerner has begun using the Health e Exchange, a wholly-owned subsidiary of the Company, as the third party administrator of our health plans. Cerner intends to begin offering the Health e Exchange third party administrator services to other employers. Also included in Healthe services is our on-site Health e Clinic.
Software Development
We commit significant resources to developing new health information system solutions. As of December 30, 2006, approximately 2,300 associates were engaged full-time in software solution development activities. Total expenditures for the development and enhancement of our software solutions were approximately $262,163,000, $225,606,000 and $188,264,000 during the 2006, 2005 and 2004 fiscal years, respectively. These figures include both capitalized and non-capitalized portions and exclude amounts amortized for financial reporting purposes.
The Company expects to continue investment and development efforts for its current and future solution offerings. As new clinical and management information needs emerge, Cerner intends to enhance its current software solution lines with new versions released to clients on a periodic basis. In addition, Cerner plans to: expand its current software solution lines by developing additional information systems for clinical, financial, operational and/or consumer use; continue to support simultaneous use of Cerner solutions across multiple facilities; and, continue to expand in the global marketplace.
The Company is committed to maintaining open attributes in its system architecture to achieve operability in a diverse set of technical and application environments. The Company strives to design its systems to co-exist with disparate applications developed and supported by other suppliers. This effort is exemplified by Cerner’s Open Engine Application Gateway™ , Open Port Interface™ and MillenniumObjects ® offerings.
Sales and Marketing
The markets for Cerner’s HIT solutions, healthcare devices and services include integrated delivery networks, physician groups and networks, managed care organizations, hospitals, medical centers, free-standing reference laboratories, home health agencies, blood banks, imaging centers, pharmacies, pharmaceutical manufacturers, employer coalitions and public health organizations. To date, a substantial portion of system sales have been in clinical solutions in hospital-based provider organizations. The Cerner Millennium architecture is highly scalable, with solutions being used in organizations ranging from several-doctor physician practices, to community hospitals, to complex integrated delivery networks, to local, regional and national government agencies. All Cerner Millennium solutions are designed to operate on HP or IBM platforms, thereby allowing Cerner to be price competitive across the full size and organizational structure range of healthcare providers. The sale of a Cerner software health information system usually takes approximately nine to 18 months, from the time of initial contact to the signing of a contract.

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The Company’s executive marketing management is located in its North Kansas City, Missouri, headquarters, while its client representatives are deployed across the United States and globally. In addition to the U.S., the Company, through subsidiaries and joint ventures, has sales associates and/or offices in Australia, Canada, France, Germany, Hong Kong, India, Saudi Arabia, Singapore, Malaysia, Spain, the United Kingdom and the United Arab Emirates. Cerner’s consolidated revenues include foreign sales of $207,367,000, $113,317,000 and $62,426,000 for the 2006, 2005 and 2004 fiscal years, respectively.
The Company supports its sales force with technical personnel who perform demonstrations of Cerner solutions and services and assist clients in determining the proper hardware and software configurations. The Company’s primary direct marketing strategy is to generate sales contacts from its existing client base and through presentations at industry seminars and tradeshows. Cerner utilizes telemarketing primarily for sales to physician practices. Cerner markets the PowerWorks solution, offered on a subscription basis, directly to the physician practice market. Cerner attends a number of major tradeshows each year and sponsors executive user conferences, which feature industry experts who address the HIT needs of large healthcare organizations.
Client Services
Substantially all of Cerner’s clients enter into software maintenance agreements with the Company for support of their Cerner systems. In addition to immediate software support in the event of problems, these agreements allow clients the use of new releases of the Cerner solutions covered by maintenance agreements. Each client has 24-hour access to the client support team located at Cerner’s world headquarters in North Kansas City, Missouri and the Company’s global support organization in the United Kingdom. Most of Cerner’s clients also enter into hardware maintenance agreements with Cerner. These arrangements normally provide for a fixed monthly fee for specified services. In the majority of cases, Cerner subcontracts hardware maintenance to the hardware manufacturer. Cerner also offers a set of managed services that include remote hosting, application management services and disaster recovery.
Backlog
At December 30, 2006, Cerner had a contract backlog of approximately $2,194,460,000 as compared to approximately $1,724,583,000 at December 31, 2005. Such backlog represents system sales and services from signed contracts, which have not yet been recognized as revenue. At December 30, 2006, the Company had approximately $132,748,000 of contracts receivable, which represents revenues recognized under the percentage of completion method but not yet billable under the terms of the contract. At December 30, 2006, Cerner had a software support and maintenance backlog of approximately $469,473,000 as compared to approximately $415,681,000 at December 31, 2005. Such backlog represents contracted software support and hardware maintenance services for a period of 12 months. The Company estimates that approximately 42 percent of the aggregate backlog at December 30, 2006 of $2,663,933,000 will be recognized as revenue during 2007.
Competition
The market for HIT solutions, devices and services is intensely competitive, rapidly evolving and subject to rapid technological change. Our principal existing competitors in the healthcare solutions and services market include: Eclipsys Corporation, Epic Systems Corporation, GE Healthcare Technologies, iSoft Corporation, McKesson Corporation, Medical Information Technology, Inc. (“Meditech”), Misys Healthcare Systems and Siemens Medical Solutions Health Services Corporation, each of which offers a suite of software solutions that compete with many of our software solutions and services. Other competitors focus on only a portion of the market that Cerner addresses. For example, competitors such as Allscripts Healthcare Solutions, Inc., Emdeon Corporation and Quality Systems, Inc. offer solutions to the physician practice market but do not currently have a significant presence in the health systems and independent hospital market. We view our principal competitors in the healthcare device market to include: Omnicell, Inc., Cardinal Health, Inc. and McKesson Corporation; and we view our principal competitors in the healthcare transactions market to include: ProxyMed, Inc., Emdeon Corporation, McKesson Corporation and The TriZetto Group, Inc., with almost all of these competitors being substantially larger or having more experience and market share than us in their respective market. In addition, we expect that major software information systems companies, large information technology consulting service providers, system integrators, managed care companies and others specializing in the healthcare industry may offer competitive software solutions, devices or services. The pace of change in the HIT market is rapid and there are frequent new software solution, device or service introductions, enhancements and evolving industry standards and requirements. We believe that the principal competitive factors in this market

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include the breadth and quality of solution and service offerings, the stability of the solution provider, the features and capabilities of the information systems and devices, the ongoing support for the systems and devices and the potential for enhancements and future compatible software solutions and devices.
Number of Employees (“Associates”)
As of December 30, 2006, the Company employed 7,419 associates worldwide.
Item 1A. Risk Factors
Risks Related to Cerner Corporation
We may be subject to product-related liabilities. Many of our software solutions, healthcare devices or services (including life sciences/research services) provide data for use by healthcare providers in providing care to patients. No claims have been brought against us to date regarding injuries related to the use of our software solutions, healthcare devices or services (including life sciences/research services), but such claims may be made in the future. Although we maintain liability insurance coverage in an amount that we believe is sufficient for our business, there can be no assurance that such coverage will cover a particular claim that may be brought in the future, prove to be adequate or that such coverage will continue to remain available on acceptable terms, if at all. A successful material claim brought against us, if uninsured or under-insured, could materially harm our business, results of operations and financial condition.
We may be subject to claims for system errors and warranties. Our software solutions and healthcare devices, particularly the Cerner Millennium versions, are very complex. As with complex software solutions and devices offered by others, our software solutions and healthcare devices may contain coding or other errors, especially when first introduced. Although we conduct extensive testing, we have discovered errors in our software solutions and healthcare devices after their introduction. Our software solutions and healthcare devices are intended for use in collecting and displaying clinical information used in the diagnosis and treatment of patients. Therefore, users of our software solutions and healthcare devices have a greater sensitivity to errors than the market for software products and devices generally. Our client agreements typically provide warranties concerning material errors and other matters. Failure of a client’s Cerner software solutions and/or healthcare devices to meet these warranties could constitute a material breach under the client agreement, allowing the client to terminate the agreement and possibly obtain a refund and/or damages, or might require us to incur additional expense in order to make the software solution or healthcare device meet these criteria. Our client agreements generally limit our liability arising from such claims but such limits may not be enforceable in certain jurisdictions or circumstances. A successful material claim brought against us, if uninsured or under-insured, could materially harm our business, results of operations and financial condition.
We may experience interruption at our data centers or client support facilities. We perform data center and/or hosting services for certain clients, including the storage of critical patient and administrative data. In addition, we provide support services to our clients through various client support facilities. We have redundancies, such as multiple backup generators and redundant telecommunications lines, as well as technical and physical security safeguards, built into our operations to reduce the likelihood of disruptions. However, complete failure of all generators, impairment of all telecommunications lines, severe damage (environmental, accidental, intentional or pandemic) to the buildings, the equipment inside the buildings housing our data centers, the client data contained therein and/or the personnel trained to operate such facilities could cause a disruption in operations and negatively impact clients who depend on us for data center and system support services. Any interruption in operations at our data centers and/or client support facilities could damage our reputation, cause us to lose existing clients, hurt our ability to obtain new clients, result in revenue loss, cause potential liability to our clients and us and increase insurance and other operating costs.
Our proprietary technology may be subjected to infringement claims or may be infringed upon. We rely upon a combination of license agreements, confidentiality procedures, employee nondisclosure agreements, confidentiality agreements with third parties and technical measures to maintain the confidentiality and trade secrecy of our proprietary information. We also rely on trademark and copyright laws to protect our intellectual property rights. We have initiated a patent program but currently have a

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

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success is dependent to a significant degree on the continued contributions of key management, sales, marketing, consulting and technical personnel. We have succession plans in place; however, the unexpected loss of key personnel could have a material adverse impact to our business and results of operations, and could potentially inhibit development and delivery of our solutions, devices and services and market share advances.
We significantly rely on third party suppliers. We license or purchase intellectual property and technology (such as software, hardware and content) from third parties, including some competitors, and incorporate it into or sell it in conjunction with our solutions, devices and services, some of which are critical to the operation and delivery of our solutions, devices and services. If any of the third party suppliers were to change product offerings, increase prices or terminate our licenses or supply contracts, we might need to seek alternative suppliers and incur additional internal or external development costs to ensure continued performance of our solutions, devices and services. Such alternatives may not be available on attractive terms, or may not be as widely accepted or as effective as the intellectual property or technology provided by our existing suppliers. If the cost of licensing, purchasing or maintaining the third party intellectual property or technology significantly increases, our gross margin levels could significantly decrease. In addition, interruption in functionality of our solutions, devices and services could adversely affect future sales of solutions, devices and services.
We intend to continue strategic business acquisitions which are subject to inherent risks. In order to expand our solutions, device offerings and services and grow our market and client base, we may continue to seek and complete strategic business acquisitions that we believe are complementary to our business. Acquisitions have inherent risks which may have a material adverse effect on our business, financial condition, operating results or prospects, including, but not limited to: 1) failure to successfully integrate the business and financial operations, services, intellectual property, solutions or personnel of the acquired business; 2) diversion of management’s attention from other business concerns; 3) entry into markets in which we have little or no direct prior experience; 4) failure to achieve projected synergies and performance targets; 5) loss of clients or key personnel of the acquired business; 6) incurrence of debt and/or assumption of known and unknown liabilities; 7) write-off of software development costs and amortization of expenses related to intangible assets; and, 8) dilutive issuances of equity securities. If we fail to successfully integrate acquired businesses or fail to implement our business strategies with respect to these acquisitions, we may not be able to achieve projected results or support the amount of consideration paid for such acquired businesses.
Risks Related to the Healthcare Information Technology, Healthcare Device and Healthcare Transaction Industry
The healthcare industry is subject to changing political, economic and regulatory influences. For example, the Balanced Budget Act of 1997 (Public Law 105-32) contained significant changes to Medicare and Medicaid and had an impact for several years on healthcare providers’ ability to invest in capital intensive systems. In addition, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) is having a direct impact on the healthcare industry by requiring identifiers and standardized transactions/code sets and necessary security and privacy measures in order to ensure the protection of protected health information. These regulatory factors affect the purchasing practices and operation of healthcare organizations. Federal and state legislatures have periodically considered programs to reform or amend the U.S. healthcare system at both the federal and state level and to change healthcare financing and reimbursement systems. These programs may contain proposals to increase governmental involvement in healthcare, lower reimbursement rates or otherwise change the environment in which healthcare industry participants operate. Healthcare industry participants may respond by reducing their investments or postponing investment decisions, including investments in our software solutions and services.
Many healthcare providers are consolidating to create integrated healthcare delivery systems with greater market power. These providers may try to use their market power to negotiate price reductions for our software solutions and services. As the healthcare industry consolidates, our client base could be eroded, competition for clients could become more intense and the importance of acquiring each client becomes greater.
The healthcare industry is highly regulated at the local, state and federal level. We are subject to a significant and wide-ranging number of regulations both within the United States and elsewhere, such as

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

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There have been eight FDA inspections since 1998 at various Cerner sites. Inspections conducted at our world headquarters in 1999 and our prior Houston facility in 2002 each resulted in the issuance of an FDA Form 483 that we responded to promptly. The FDA has taken no further action with respect to either of the Form 483s that were issued in 1999 and 2002. The remaining six FDA inspections, including inspections at our world headquarters in 2006, resulted in no issuance of a Form 483. We remain subject to periodic FDA inspections and we could be required to undertake additional actions to comply with the Act and any other applicable regulatory requirements. Our failure to comply with the Act and any other applicable regulatory requirements could have a material adverse effect on our ability to continue to manufacture and distribute our solutions. The FDA has many enforcement tools including recalls, seizures, injunctions, civil fines and/or criminal prosecutions. Any of the foregoing could have a material adverse effect on our business, results of operations and financial condition.
Security and Privacy of Patient Information. State and federal laws regulate the confidentiality of patient records and the circumstances under which those records may be released. These regulations govern both the disclosure and use of confidential patient medical record information and require the users of such information to implement specified security measures. Regulations currently in place governing electronic health data transmissions continue to evolve and are often unclear and difficult to apply.
HIPAA requires national standards for some types of electronic health information transactions and the data elements used in those transactions, security standards to ensure the integrity and confidentiality of health information and standards to protect the privacy of individually identifiable health information. Covered entities under HIPAA, which include healthcare organizations such as our clients, were required to comply with the privacy standards by April 2003, the transaction regulations by October 2003 and the security regulations by April 2005. As a business associate of the covered entities, we, in most instances, must also ensure compliance with the HIPAA regulations as it pertains to our clients.
The effect of HIPAA on our business is difficult to predict, and there can be no assurances that we will adequately address the business risks created by HIPAA and its implementation, or that we will be able to take advantage of any resulting business opportunities. Furthermore, we are unable to predict what changes to HIPAA, or the regulations issued pursuant to HIPAA, might be made in the future or how those changes could affect our business or the costs of compliance with HIPAA. Evolving HIPAA-related laws or regulations could restrict the ability of our clients to obtain, use or disseminate patient information. This could adversely affect demand for our solutions if they are not re-designed in a timely manner in order to meet the requirements of any new regulations that seek to protect the privacy and security of patient data or enable our clients to execute new or modified healthcare transactions. We may need to expend additional capital, research and development and other resources to modify our solutions and devices to address these evolving data security and privacy issues.
We operate in intensely competitive and dynamic industries, and our ability to successfully compete and continue to grow our business depends on our ability to respond quickly to market changes and changing technologies and to bring competitive new solutions, devices, features and services to market in a timely fashion. The market for healthcare information systems, healthcare devices, healthcare transactions and life sciences consulting services are intensely competitive, dynamically evolving and subject to rapid technological and innovative changes. Development of new proprietary technology or services is complex, entails significant time and expense and may not be successful. We cannot guarantee that we will be able to introduce new solutions, devices or services on schedule, or at all, nor can we guarantee that, despite extensive testing, errors will not be found in our new solution releases, devices or services before or after commercial release, which could result in solution, device or service delivery redevelopment costs and loss of, or delay in, market acceptance.
We believe that the principal competitive factors in the healthcare information market include the ease of implementation, the breadth and quality of system and software solution offerings, the stability of the information system provider, the ongoing support for the system and the potential for enhancements and future compatible software solutions. Certain of our competitors have greater financial, technical, product development, marketing and other resources than us and some of our competitors offer software solutions that we do not offer. Our principal existing competitors in the healthcare solutions and services market include: Eclipsys Corporation, Epic Systems Corporation, GE Healthcare Technologies, iSoft Corporation, McKesson Corporation, Medical Information Technology, Inc. (“Meditech”), Misys Healthcare Systems and Siemens Medical Solutions Health Services Corporation, each of which offers a suite of

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software solutions that compete with many of our software solutions and services. There are other competitors that offer a more limited number of competing software solutions and services, including, without limitation: Allscripts Healthcare Solutions, Inc., Emdeon Corporation and Quality Systems, Inc. We view our principal competitors in the healthcare device market to include: Omnicell, Inc., Cardinal Health, Inc. and McKesson Corporation; and we view our principal competitors in the healthcare transactions market to include: ProxyMed, Inc., Emdeon Corporation, McKesson Corporation and The TriZetto Group, Inc., with almost all of these competitors being substantially larger or having more experience and market share than us in their respective market.
In addition, we expect that major software information systems companies, large information technology consulting service providers and system integrators, Internet-based start-up companies and others specializing in the healthcare industry may offer competitive software solutions, devices or services. The pace of change in the healthcare information systems market is rapid and there are frequent new software solution introductions, software solution enhancements, device introductions, device enhancements and evolving industry standards and requirements. As a result, our success will depend upon our ability to keep pace with technological change and to introduce, on a timely and cost-effective basis, new and enhanced software solutions, devices and services that satisfy changing client requirements and achieve market acceptance.
Risks Related to the Company’s Stock
Our quarterly operating results may vary which could adversely affect our stock price. Our quarterly operating results have varied in the past and may continue to vary in future periods, including, variations from guidance, expectations or historical results or trends. Quarterly operating results may vary for a number of reasons including accounting policy changes, any material weaknesses identified in our internal controls, demand for our solutions, devices and services, the financial condition of our clients and potential clients, our long sales cycle, potentially long installation and implementation cycles for larger, more complex and higher-priced systems and other factors described in this section and elsewhere in this report. As a result of healthcare industry trends and the market for our Cerner Millennium solutions, a large percentage of our revenues are generated by the sale and installation of larger, more complex and higher-priced systems. The sales process for these systems is lengthy and involves a significant technical evaluation and commitment of capital and other resources by the client. Sales may be subject to delays due to changes in clients’ internal budgets, procedures for approving large capital expenditures, competing needs for other capital expenditures, availability of personnel resources and by actions taken by competitors. Delays in the expected sale, installation or implementation of these large systems may have a significant impact on our anticipated quarterly revenues and consequently our earnings, since a significant percentage of our expenses are relatively fixed.
We recognize software revenue upon the completion of standard milestone conditions and the amount of revenue recognized in any quarter depends upon our and our clients’ abilities to meet project milestones. Delays in meeting these milestone conditions or modification of the contract could result in a shift of revenue recognition from one quarter to another and could have a material adverse effect on results of operations for a particular quarter.
Our revenues from system sales historically have been lower in the first quarter of the year and greater in the fourth quarter of the year, primarily as a result of clients’ year-end efforts to make all final capital expenditures for the then-current year.
Our sales forecasts may vary from actual sales in a particular quarter. We use a “pipeline” system, a common industry practice, to forecast sales and trends in our business. Our sales associates monitor the status of all sales opportunities, such as the date when they estimate that a client will make a purchase decision and the potential dollar amount of the sale. These estimates are aggregated periodically to generate a sales pipeline. We compare this pipeline at various points in time to evaluate trends in our business. This analysis provides guidance in business planning and forecasting, but these pipeline estimates are by their nature speculative. Our pipeline estimates are not necessarily reliable predictors of revenues in a particular quarter or over a longer period of time, partially because of changes in the pipeline and in conversion rates of the pipeline into contracts that can be very difficult to estimate. A negative variation in the expected conversion rate or timing of the pipeline into contracts, or in the pipeline itself, could cause our plan or forecast to be inaccurate and thereby adversely affect business

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results. For example, a slowdown in information technology spending, adverse economic conditions or a variety of other factors can cause purchasing decisions to be delayed, reduced in amount or cancelled, which would reduce the overall pipeline conversion rate in a particular period of time. Because a substantial portion of our contracts are completed in the latter part of a quarter, we may not be able to adjust our cost structure quickly enough in response to a revenue shortfall resulting from a decrease in our pipeline conversion rate in any given fiscal
quarter(s).
The trading price of our common stock may be volatile. The market for our common stock may experience significant price and volume fluctuations in response to a number of factors including actual or anticipated variations in operating results, rumors about our performance or solutions, devices and services, changes in expectations of future financial performance or estimates of securities analysts, governmental regulatory action, healthcare reform measures, client relationship developments, changes occurring in the securities markets in general and other factors, many of which are beyond our control. As a matter of policy, we do not generally comment on our stock price or rumors.
Furthermore, the stock market in general, and the markets for software, healthcare and information technology companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of particular companies. These broad market and industry fluctuations may adversely affect the trading price of our common stock, regardless of actual operating performance.
Our Directors have authority to issue preferred stock and our corporate governance documents contain anti-takeover provisions. Our Board of Directors has the authority to issue up to 1,000,000 shares of preferred stock and to determine the preferences, rights and privileges of those shares without any further vote or action by the shareholders. The rights of the holders of common stock may be harmed by rights granted to the holders of any preferred stock that may be issued in the future.
In addition, some provisions of our Certificate of Incorporation and Bylaws could make it more difficult for a potential acquirer to acquire a majority of our outstanding voting stock. This includes, but is not limited to, provisions that: provide for a classified board of directors, prohibit shareholders from taking action by written consent and restrict the ability of shareholders to call special meetings. We are also subject to provisions of Delaware law that prohibit us from engaging in any business combination with any interested shareholder for a period of three years from the date the person became an interested shareholder, unless certain conditions are met, which could have the effect of delaying or preventing a change of control.
Factors that may Affect Future Results of Operations, Financial Condition or Business
Statements made in this report, the Annual Report to Shareholders in which this report is made a part, other reports and proxy statements filed with the Securities and Exchange Commission, communications to shareholders, press releases and oral statements made by representatives of the Company that are not historical in nature, or that state the Company’s or management’s intentions, hopes, beliefs, expectations or predictions of the future, may constitute “forward-looking statements” within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements can often be identified by the use of forward-looking terminology, such as “could,” “should,” “will,” “intended,” “continue,” “believe,” “may,” “expect,” “hope,” “anticipate,” “goal,” “forecast,” “plan,” “guidance” or “estimate” or the negative of these words, variations thereof or similar expressions. Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. It is important to note that any such performance and actual results, financial condition or business, could differ materially from those expressed in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Item 1A. Risk Factors and elsewhere herein or in other reports filed with the SEC. Other unforeseen factors not identified herein could also have such an effect. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results, financial condition or business over time.
Item 2. Properties
World Headquarters
Our world headquarters offices are located in a Company-owned office park in North Kansas City, Missouri, containing approximately 1,006,467 gross square feet of useable space (the “Campus”), inclusive of the new data center and clinic buildings described below. As of December 30, 2006, we were

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using approximately 867,619 square feet of such useable space for our U.S. corporate headquarter operations and 3,687 square feet of the remaining space was leased to Executive Travel, a third party company.
In February 2006, we completed construction on the Campus of a 13,136 square foot addition to the 2901 Rockcreek Parkway building to house Health e Clinic, a wholly-owned subsidiary, which provides primary care services for our associates and their family members.
In 2006, the Company began construction of the world headquarters Technology Center, a 135,161 square foot data center facility on the Campus. Construction is expected to be complete June 2007.
In 2004, we purchased approximately 12 acres of unimproved real estate adjacent to the Campus for campus expansion. This land was purchased to provide a secondary entry into the Campus and to provide for future building development as needed. The first phase of development was the roadway extension and second entry point into the Campus. The second phase of development is the data center facility described above. Future development of this land is undetermined at this time.
Other Properties
In February 2007, we entered into a long-term lease for 480,700 gross square feet of property located in Kansas City, Missouri. The office space, known as the Innovation Campus, will house associates from our intellectual property organizations.
In June 2005, we purchased 263,512 gross square feet of property located in Kansas City, Missouri. The office space, known as the Cerner Oaks Campus, houses associates from the CernerWorks and TechnologyWorks groups and associates of Cerner’s wholly-owned subsidiary, Health e Exchange.
We also own property located along the north riverbank of the Missouri River, approximately two miles from the Campus. This property consists of a 96,318 gross square foot building and a 1,300-car parking garage. The building has been renovated for use as a corporate training, meeting and event center for the Company and third parties. We have also made use of the parking garage to meet overflow-parking demands on the Campus.
In 2006, we acquired leases on two additional offices in Sterling, Virginia and Blue Bell, Pennsylvania, as part of the Galt Associates, Inc. acquisition.
As of the end of February 2007, the Company leased office space in: Birmingham, Alabama; Beverly Hills and Garden Grove, California; Denver, Colorado; Overland Park, Kansas; Waltham, Massachusetts; Bel Air, Maryland; Minneapolis and Rochester, Minnesota; Kansas City, Missouri; Charlotte, North Carolina; Beaverton, Oregon; Blue Bell, Pennsylvania; and Sterling and Vienna, Virginia. The Company operates its primary solutions center (or data center) in leased space in Lee’s Summit, Missouri. Globally, the Company also leases office space in: Sydney and Melbourne, Australia; Brussels, Belgium; London-Ontario, Canada; Paris, France; Aachen and Idstein, Germany; Hong Kong; Bangalore, India; Kuala Lumpur, Malaysia; Ngee Ann City, Singapore; Barcelona and Madrid, Spain; London and Slough, United Kingdom; and, Abu Dhabi and Dubai Internet City, United Arab Emirates.
In 2006, our Daytona Beach, Florida office was closed as we relocated many associates and/or the necessary business functions to other Company offices.
Item 3. Legal Proceedings
We have no material pending litigation.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the shareholders of the Company during the fourth quarter of the fiscal year ended December 30, 2006.

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PART II
Item 5.   Market for the Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s common stock trades on The NASDAQ Global Select Market ® under the symbol CERN. The following table sets forth the high, low and last sales prices for the fiscal quarters of 2006 and 2005 as reported by The NASDAQ National Market System . These quotations represent prices between dealers and do not include retail mark-up, mark-down or commissions, and do not necessarily represent actual transactions.
                                                 
    2006   2005
    High   Low   Last   High   Low   Last
First quarter
  $ 49.38       40.33       47.45       27.48       23.60       26.04  
Second quarter
    47.99       34.70       37.20       34.74       25.69       33.86  
Third quarter
    47.75       32.50       45.40       43.72       34.03       43.47  
Fourth quarter
    50.58       44.11       45.50       49.26       40.76       45.46  
At February 23, 2007, there were approximately 1,400 owners of record . To date, the Company has paid no cash dividends and it does not intend to pay cash dividends in the foreseeable future. Management believes it is in the shareholders’ best interest for the Company to reinvest funds in the operation of the business.
Item 6. Selected Financial Data
                                         
    2006   2005   2004   2003   2002
(In thousands, except per share data)   (2)(3)   (4)(5)   (6)(7)           (8)(9)(10)
Statements of Earnings Data:
                                       
Revenues
  $ 1,378,038       1,160,785       926,356       839,587       780,262  
Operating earnings
    166,167       140,436       111,464       78,097       90,820  
Earnings before income taxes and cumulative effect of a change in accounting principle
    167,544       135,244       107,920       71,222       80,625  
Cumulative effect of a change in accounting for goodwill, net of $486 income tax benefit
                            (786 )
Net earnings
    109,891       86,251       64,648       42,791       48,022  
 
                                       
Earnings per share: (Note 1)
                                       
Basic
    1.41       1.16       .90       .61       .68  
Diluted
    1.34       1.10       .86       .59       .65  
 
                                       
Weighted average shares outstanding: (Note 1)
                                       
Basic
    77,691       74,144       72,174       70,710       70,916  
Diluted
    81,723       78,090       75,142       72,712       74,100  
 
                                       
Balance Sheet Data:
                                       
Working capital
  $ 444,656       391,541       310,229       246,412       282,135  
Total assets
    1,491,390       1,303,629       982,265       854,252       779,279  
Long-term debt, excluding current installments
    187,391       194,265       108,804       124,570       136,636  
Shareholders’ equity
    918,132       760,533       597,485       494,680       441,244  

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(1)   Reflects the effect of a 2-for-1 stock split distributed on January 9, 2006.
 
(2)   Includes share-based compensation expense recognized in accordance with Statement of Financial Accounting Standards No. 123R. The impact of including this expense is a $11.7 million decrease, net of $7.3 million tax benefit, in net earnings and a decrease to diluted earnings per share of $.14.
 
(3)   Includes a tax benefit of $2.0 million for adjustments relating to prior periods. This results in an increase to diluted earnings per share of $.02.
 
(4)   Includes a tax benefit of $4.8 million relating to the carryback of a capital loss generated by the sale of Zynx Health Incorporated in the first quarter of 2004. The impact of this refund claim is a $4.8 million increase in net earnings and an increase in diluted earnings per share of $.06 for 2005.
 
(5)   Includes a charge for the write-off of acquired in process research and development related to the acquisition of the medical business division of VitalWorks, Inc. The impact of this charge is a $3.9 million decrease, net of $2.4 million tax benefit, in net earnings and a decrease to diluted earnings per share of $.05 for 2005.
 
(6)   Includes a gain on the sale of Zynx Health Incorporated. The impact of this gain is a $3.0 million increase in net earnings and increase to diluted earnings per share of $.04 for 2004.
 
(7)   Includes a charge for vacation accrual of $3.3 million included in general and administrative. The impact of this charge is a $2.1 million decrease, net of $1.2 million tax benefit, in net earnings and a decrease to diluted earnings per share of $.03 for 2004.
 
(8)   Includes a gain on the sale of shares of WebMD common stock. The impact of this gain is a $3.3 million, net of $1.9 million tax expense, increase in net earnings and an increase to diluted earnings per share of $.05 for 2002.
 
(9)   Includes a charge for impairment of investments. The impact of this charge is a $6.3 million, net of $3.6 million tax benefit, decrease in net earnings and a decrease to diluted earnings per share of $.09 for 2002.
 
(10)   Includes the cumulative effect of a change in accounting for goodwill. The impact of this change is a $.8 million, net of $.5 million tax benefit, decrease in net earnings and a decrease to diluted earnings per share of $.01 for 2002.

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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
Cerner Corporation (“Cerner” or the “Company”) is headquartered in North Kansas City, Missouri. The Company primarily derives revenue by selling, implementing and supporting software solutions, hardware, healthcare devices and services that give healthcare providers secure access to clinical, administrative and financial data in real time, allowing them to improve the quality, safety and efficiency in the delivery of healthcare. We implement the healthcare solutions as stand-alone, combined or enterprise-wide systems. Cerner Millennium software solutions can be managed by the Company’s clients or in the Company’s data center via a managed services model.
Results Overview
The Company delivered strong results in 2006. Total revenues for 2006 were $1,378,038,000, an increase of 19% over 2005 revenues of $1,160,785,000. Net Earnings for 2006 were $109,891,000, an increase of 27% over 2005 net earnings of $86,251,000. Total new business bookings, which reflect the value of executed contracts for software, hardware, content subscriptions, services and managed services (hosting of clients’ software in the Company’s data center), was a Company record at $1,469,300,000 in 2006, an increase of 8% compared to $1,355,000,000 in 2005.
In 2006, the Company generated $232,718,000 of cash flow from operations, with record cash collections of approximately $1,457,600,000 and days sales outstanding (DSO) decreasing from 89 days at the end of 2005 to 87 days at the end of 2006.
Healthcare Information Technology Market
2006 continued a trend of positive developments in the healthcare information technology (HIT) marketplace and for the Company. Around the world, healthcare costs continue to rise as healthcare professionals work to uphold quality standards. The Centers for Medicare and Medicaid Services (CMS) has reported that, in the United States, healthcare represents 16 percent of the gross national product, which they project will reach 20 percent by 2015. In this climate, HIT is broadly seen as a way to curb these growing costs while improving the quality of care.
Results of Operations
Year Ended December 30, 2006, Compared to Year Ended December 31, 2005
The Company’s net earnings increased 27% to $109,891,000 in 2006 compared to $86,251,000 in 2005. Net earnings for 2006 include adjustments for approximately $1,994,000 of tax benefit for items relating to prior periods. 2006 net earnings also reflect the impact of adopting Statement of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment,” which requires the expensing of stock options. Adoption of SFAS 123R reduced 2006 net earnings by $11,746,000 (net of taxes). Net earnings for 2005 included an adjustment in the third quarter of 2005 related to a prior period for a tax benefit from the carry back of a capital loss generated by the sale of Zynx Health Incorporated (Zynx) of $4,794,000 and the write-off of acquired in-process research and development in the first quarter of 2005 of $3,941,000, net of a $2,441,000 tax benefit. Adjusting for these items, 2006 net earnings increased 40% to $119,643,000 compared to 2005 net earnings of $85,398,000.
Revenues - The Company’s revenues increased 19% to $1,378,038,000 in 2006 from $1,160,785,000 in 2005. The revenue composition for 2006 was $505,743,000 in system sales, $340,416,000 in support and maintenance, $492,828,000 in services and $39,051,000 in reimbursed travel.
System sales increased 12% to $505,743,000 in 2006 from $449,734,000 in 2005. Included in system sales are revenues from the sale of software, hardware and sublicensed software, installation fees, transaction processing and subscriptions. System sales growth in 2006 was driven by strong growth of software, hardware and subscriptions.

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Support, maintenance and service revenues increased 23% to $833,244,000 in 2006 from $677,664,000 in 2005. Support and maintenance revenues were $340,416,000 and $296,716,000 in 2006 and 2005, respectively. Services revenues were $492,828,000 and $380,948,000 in 2006 and 2005, respectively. Included in support, maintenance and service revenues are support and maintenance of software and hardware, professional services, excluding installation and remote hosting services. These increases were driven by strong performance in delivering Cerner Millennium solutions to clients and the continued success of the CernerWorks remote hosting services.
Contract backlog, which reflects new business bookings that have not yet been recognized as revenue, increased 27% in 2006 compared to 2005. This increase is due to a strong increase in new business bookings in 2006 compared to 2005. At December 30, 2006, the Company had $2,194,460,000 in contract backlog and $469,473,000 in support and maintenance backlog, compared to $1,724,583,000 in contract backlog and $415,681,000 in support and maintenance backlog at the end of 2005.
Cost of Revenues - The cost of revenues includes the cost of reimbursed travel expense, third party consulting services and subscription content, computer hardware and sublicensed software purchased from hardware and software manufacturers for delivery to clients. It also includes the cost of hardware maintenance and sublicensed software support subcontracted to the manufacturers. The cost of revenues was 21% of total revenues in 2006 and 22% of total revenues in 2005. Such costs, as a percent of revenues, typically have varied as the mix of revenue (software, hardware, services and support) components carrying different margin rates changes from period to period. The decrease in the cost of revenue as a percent of total revenues resulted principally from strong levels of software sales and strong growth in services that do not have a high level of associated third party costs.
Sales and Client Service - Sales and client service expenses include salaries of client service personnel, communications expenses and unreimbursed travel expenses. Also included are sales and marketing salaries, travel expenses, tradeshow costs and advertising costs. These expenses as a percent of total revenues were 42% and 40% in 2006 and 2005, respectively. The increase in total sales and client service expenses to $578,050,000 in 2006 from $466,206,000 in 2005 was primarily due to an increase in personnel expenses associated with the strong growth in our professional services and managed services businesses and an increased presence in the global market. In addition, 2006 sales and client service expense includes $11,412,000 of expense related to the adoption of SFAS 123R.
Software Development - Software development expenses include salaries, documentation and other direct expenses incurred in software development and amortization of software development costs. Total expenditures for software development, including both capitalized and noncapitalized portions, for 2006 and 2005 were $262,163,000 and $225,606,000, respectively. Capitalized software costs were $60,943,000 and $62,039,000 for 2006 and 2005, respectively. Amortization of capitalized software costs was $45,750,000 and $47,888,000 in 2006 and 2005, respectively, leading to total recognized software development expense of $246,970,000 and $211,455,000 in 2006 and 2005, respectively. The increase in aggregate expenditures in software development in 2006 was due to continued development of Cerner Millennium solutions. In addition, 2006 software development expense includes $4,269,000 of expense related to the adoption of SFAS 123R.
General and Administrative - General and administrative expenses include salaries for corporate, financial and administrative staffs, utilities, communications expenses, professional fees and the transaction gains or losses on foreign currency. These expenses as a percent of total revenues were 7% in both 2006 and 2005. Total general and administrative expenses were $95,881,000 and $81,620,000 for 2006 and 2005, respectively. The Company had net transaction gains on foreign currency of $3,764,000 for 2006 compared to $2,700,000 for 2005. 2006 general and administrative expense includes $3,340,000 of expense related to the adoption of SFAS 123R.
Interest Expense, Net Net interest expense was $697,000 in 2006 compared to $5,858,000 in 2005. Interest income increased to $11,877,000 in 2006 from $3,871,000 in 2005, due primarily to higher interest rates and a higher cash balance. Interest expense increased to $12,574,000 in 2006 from $9,729,000 in 2005, due primarily to a higher level of debt during 2006.
Other Income, Net - Other income was $2,074,000 in 2006 compared to $666,000 in 2005. Included in other income is income from office space leased to third parties. 2006 other income also includes a gain recorded in the first quarter of 2006 related to the renegotiation of a supplier contract that eliminated a

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liability related to unfavorable future commitments due to that supplier. The Company was able to renegotiate the contract to eliminate certain minimum volume requirements and reduce pricing to market rates leading to the elimination of the previously recorded liability. The increase in other income in 2006 was driven by this gain and by higher lease income.
Income Taxes - The Company’s effective tax rate was 34% and 36% in 2006 and 2005, respectively. Tax expense for 2006 includes benefits of approximately $1,994,000 for adjustments relating to prior periods. Tax expense for 2005 includes an adjustment that reduced tax expense related to a prior period for a tax benefit from the carry back of a capital loss generated by the sale of Zynx of $4,749,000. Adjusting for these items, the effective tax rates were 36% and 40% in 2006 and 2005, respectively.
Operations by Segment
The Company has two operating segments, Domestic and Global. Beginning in 2006 we began allocating certain expenses related to our managed services that were previously classified as Other to the geographic segment to which they relate. As a result, the prior periods have been retroactively adjusted to reflect the change in reportable segments.
The following table presents a summary of the operating information for 2006 and 2005 (in thousands):
                                 
    Operating Segments  
2006   Domestic     Global     Other     Total  
Revenues
  $ 1,166,662       207,367       4,009       1,378,038  
 
                       
 
                               
Cost of revenues
    251,574       39,224       172       290,970  
Operating expenses
    308,085       107,571       505,245       920,901  
 
                       
Total costs and expenses
    559,659       146,795       505,417       1,211,871  
 
                               
 
                       
Operating earnings
  $ 607,003       60,572       (501,408 )     166,167  
 
                       
                                 
    Operating Segments  
2005   Domestic     Global     Other     Total  
Revenues
  $ 1,043,804       113,317       3,664       1,160,785  
 
                       
 
                               
Cost of revenues
    238,096       17,189       (599 )     254,686  
Operating expenses
    288,098       48,098       429,467       765,663  
 
                       
Total costs and expenses
    526,194       65,287       428,868       1,020,349  
 
                       
 
                               
 
                       
Operating earnings
  $ 517,610     $ 48,030     $ (425,204 )   $ 140,436  
 
                       
Operating earnings in the Domestic segment increased $89,393,000 for the year ended December 30, 2006 compared to the year ended December 31, 2005. Total Domestic segment revenues increased $122,858,000 in the 2006 period compared to the 2005 period driven by strong bookings growth. Costs of revenues were basically unchanged at 22% and 23% of total Domestic segment revenues for the year ended 2006 and 2005, respectively. Domestic segment operating expenses in 2006 increased $19,987,000 compared to 2005, primarily driven by spending to support growth in professional services and managed services.
Operating earnings in the Global segment increased $12,542,000 for the year ended December 30, 2006 compared to the year ended December 31, 2005. Total revenues increased $94,050,000 in the 2006 period compared to the 2005 period. 2006 revenues included approximately $69 million from the Company’s major contracts in London and Southern England. The revenues from these contracts did not change operating earnings as the Company is accounting for them using a zero-margin approach of applying percentage-of-completion accounting until the software customization and development services are completed. Once software customization and development services are completed, which is expected in 2008, the remaining unrecognized portion of the fee will be recognized ratably over the remaining term of the arrangement, which expires in 2014. Costs of revenues were 19% and 15% of total Global segment revenues for the year ended 2006 and 2005, respectively. The increase in costs of revenues as a

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percent of total revenues was driven by a much higher level of global hardware sales in 2006 compared to 2005. Operating expenses in the 2006 period increased $59,473,000 compared to the 2005 period primarily due to hiring personnel for the projects in England and supporting growth in other global regions.
Operating losses in Other increased $76,204,000 for the year ended December 30, 2006 compared to the year ended December 31, 2005. Included in Other are revenues and expenses not tracked by geographic segment. Operating expenses increased $75,778,000 in 2006 compared to 2005. This increase in operating expenses is due to an increase in expenses such as software development, marketing, general and administrative, share-based compensation expense and depreciation. Operating expenses in the 2005 period includes the write-off of acquired in-process research and development of $6,382,000.
Year Ended December 31, 2005, Compared to Year Ended January 1, 2005
The Company’s net earnings increased 33% to $86,251,000 in 2005 compared to $64,648,000 in 2004. Net earnings for 2005 included an adjustment in the third quarter of 2005 related to a prior period for a tax benefit from the carry back of a capital loss generated by the sale of Zynx of $4,749,000 and the write-off of acquired in-process research and development in the first quarter of 2005 of $3,941,000, net of a $2,441,000 tax benefit. Included in 2004 net earnings are an adjustment in the third quarter of 2004 related to a prior period vacation pay accrual that reduced net earnings by $2,076,000, net of $1,270,000 of tax, and a gain on the sale of Zynx, in the first quarter of 2004 that increased net earnings by $3,023,000. Excluding these four items, 2005 net earnings would have increased 34% to $85,443,000 compared to 2004 net earnings of $63,701,000.
Revenues - The Company’s revenues increased 25% to $1,160,785,000 in 2005 from $926,356,000 in 2004. Revenues for 2005 included revenues from the acquired medical business division of VitalWorks, Inc. (VitalWorks), which closed on January 3, 2005 . Excluding the revenue from the medical business division of VitalWorks, 2005 revenues increased 18% over 2004. The revenue composition for 2005 was $449,734,000 in system sales, $296,716,000 in support and maintenance, $380,948,000 in services and $33,387,000 in reimbursed travel.
System sales increased 28% to $449,734,000 in 2005 from $351,861,000 in 2004. Included in system sales are revenues from the sale of software, hardware and sublicensed software, installation fees, transaction processing and subscriptions, with each component growing at least 12% in 2005. This increase is due primarily to an increase in new business bookings and the inclusion of revenue from the medical business division of VitalWorks in 2005. Excluding revenue from the medical business division of VitalWorks, system sales would have increased 17%.
Support, maintenance and service revenues increased 25% to $677,664,000 in 2005 from $542,414,000 in 2004. Support and maintenance revenues were $296,716,000 and $241,439,000 in 2005 and 2004, respectively. Services revenues were $380,948,000 and $300,975,000 in 2005 and 2004, respectively. Included in support, maintenance and service revenues are support and maintenance of software and hardware, professional services excluding installation, and managed services. These increases were driven by strong performance in delivering Cerner Millennium solutions to clients and the inclusion of revenue from the acquired medical business division of VitalWorks. Excluding revenue from the medical business division of VitalWorks, support, maintenance and service sales would have increased 19%.
Contract backlog, which reflects new business bookings that have not yet been recognized as revenue, increased 45% in 2005 compared to 2004. This increase is due to an increase in new business bookings in 2005 compared to 2004. At December 31, 2005, the Company had $1,724,583,000 in contract backlog and $415,681,000 in support and maintenance backlog, compared to $1,191,170,000 in contract backlog and $347,662,000 in support and maintenance backlog at the end of 2004.
Cost of Revenues - The cost of revenues includes the cost of reimbursed travel expense, third party consulting services and subscription content, computer hardware and sublicensed software purchased from hardware and software manufacturers for delivery to clients. It also includes the cost of hardware maintenance and sublicensed software support subcontracted to the manufacturers. The cost of revenues was 22% of total revenues in 2005 and 21% of total revenues in 2004. Such costs, as a percent of revenues, typically have varied as the mix of revenue (software, hardware, services and support) components carrying different margin rates changes from period to period. The increase in the

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cost of revenue as a percent of total revenues resulted principally from higher levels of hardware sales at lower than historical levels of margin for hardware.
Sales and Client Service - Sales and client service expenses include salaries of client service personnel, communications expenses and unreimbursed travel expenses. Also included are sales and marketing salaries, travel expenses, tradeshow costs and advertising costs. These expenses as a percent of total revenues were 40% and 41% in 2005 and 2004, respectively. The increase in total sales and client service expenses to $466,206,000 in 2005 from $383,628,000 in 2004 was primarily due to an increase in personnel, personnel related expenses and increased presence in the global market. The decrease in this spending as a percent of total revenue reflects the Company’s ability to get better utilization of its resources and leverage this spending over a larger revenue stream.
Software Development - Software development expenses include salaries, documentation and other direct expenses incurred in software development and amortization of software development costs. Total expenditures for software development, including both capitalized and noncapitalized portions, for 2005 and 2004 were $225,606,000 and $188,264,000, respectively. These amounts exclude amortization. Capitalized software costs were $62,039,000 and $58,912,000 for 2005 and 2004, respectively. The increase in aggregate expenditures in software development in 2005 was due to continued development of Cerner Millennium solutions.
General and Administrative - General and administrative expenses include salaries for corporate, financial and administrative staffs, utilities, communications expenses, professional fees and the transaction gains or losses on foreign currency. These expenses as a percent of total revenues were 7% in both 2005 and 2004. Total general and administrative expenses were $81,620,000 and $63,327,000 for 2005 and 2004, respectively. General and administrative expenses for 2004 include an adjustment to increase the vacation pay accrual of $3,346,000, related to prior periods. Excluding the adjustment to increase the vacation pay accrual, general and administrative expenses as a percent of revenues were 6% in 2004. The Company had net transaction gains on foreign currency of $2,700,000 for 2005 compared to net transaction losses on foreign currency of $479,000 for 2004.
The write-off of in-process research and development in 2005 is an expense resulting from the acquired medical business division of VitalWorks.
Interest Expense, Net - Interest income was $3,871,000 in 2005 compared to $3,022,000 in 2004. This increase is due primarily to higher interest rates, and a higher cash balance fed by cash collections. Interest expense was $9,729,000 in 2005 compared to $9,174,000 in 2004.
Other Income, Net - Other income was $666,000 in 2005 compared to $2,608,000 in 2004. Other income in 2004 included a gain on the sale of Zynx. Also included in other income are revenues from office space leased to third parties.
Income Taxes - The Company’s effective tax rate was 36% and 40% in 2005 and 2004, respectively. Tax expense for 2005 includes an adjustment that reduced tax expense related to a prior period for a tax benefit from the carry back of a capital loss generated by the sale of Zynx of $4,749,000. Excluding this adjustment, the Company’s effective tax rate was 40% for 2005.

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Operations by Segment
The Company has two operating segments, Domestic and Global. Beginning in 2006, we began allocating certain expenses related to our managed services that were previously classified as Other to the geographic segment to which they relate. As a result, the prior periods have been retroactively adjusted to reflect the change in reportable segments.
                                 
    Operating Segments  
2005   Domestic     Global     Other     Total  
Revenues
  $ 1,043,804       113,317       3,664       1,160,785  
 
                       
 
                               
Cost of revenues
    238,096       17,189       (599 )     254,686  
Operating expenses
    288,098       48,098       429,467       765,663  
 
                       
Total costs and expenses
    526,194       65,287       428,868       1,020,349  
 
                       
 
                               
 
                       
Operating earnings
  $ 517,610     $ 48,030     $ (425,204 )   $ 140,436  
 
                       
                                 
    Operating Segments  
2004   Domestic     Global     Other     Total  
Revenues
  $ 862,276       62,426       1,654       926,356  
 
                       
 
                               
Cost of revenues
    187,114       7,582       1,652       196,348  
Operating expenses
    201,721       33,989       382,834       618,544  
 
                       
Total costs and expenses
    388,835       41,571       384,486       814,892  
 
                       
 
                               
 
                       
Operating earnings
  $ 473,441     $ 20,855     $ (382,832 )   $ 111,464  
 
                       
Operating earnings in the Domestic segment increased 9% for the year ended December 31, 2005 compared to the year ended January 1, 2005. Total Domestic segment revenues increased 21% in the 2005 period compared to the 2004 period driven by strong bookings growth. Cost of revenues were basically unchanged at 23% and 22% of total Domestic segment revenues for the year ended 2005 and 2004, respectively. Domestic segment revenues, cost of revenues and operating expenses for 2005 included revenues from the acquired medical business division of VitalWorks, which closed on January 3, 2005. Domestic segment operating expenses in 2005 increased 43% compared to the 2004 period as a result of hiring additional personnel and the inclusion of expenses from the medical business division of VitalWorks.
Operating earnings in the Global segment increased 130% for the year ended December 31, 2005 compared to the year ended January 1, 2005. Total revenues increased 82% in the 2005 period compared to the 2004 period. The Company’s replacement of a competitor in the Southern region of England was a large contributor to the global success in 2005, with this contract contributing more than $14 million of revenue. The revenues from this contract did not change operating earnings as the Company is accounting for it using a zero-margin approach of applying percentage-of-completion accounting until the Software Customization and development services are completed. Once software customization and development services are completed, which is expected in 2008, the remaining unrecognized portion of the fee will be recognized ratably over the remaining term of the arrangement, which expires in 2014. Other regions in our global business also had an outstanding year. On strength in the Middle East, Asia Pacific, France and Canada, Global segment revenue grew more than 50% excluding revenue from the Company’s United Kingdom contract. Cost of revenues were 15% and 12% of total Global segment revenues for the years ended 2005 and 2004, respectively. Operating expenses in the 2005 period increased 42% compared to the 2004 period due to hiring personnel for the higher level of activity outside the United States.
Operating losses in Other increased 11% for the year ended December 31, 2005 compared to the year ended January 1, 2005. Included in Other are revenues and expenses not tracked by geographic segment. Operating expenses increased 12% in the 2005 period compared to the 2004 period. This increase in operating expenses was due to an increase in expenses such as software development, marketing, general and administrative and depreciation in the 2005 period compared to the 2004 period. Operating expenses in the 2005 period included the write-off of acquired in-process research and development of $6,382,000.

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Liquidity and Capital Resources
The Company’s liquidity is influenced by many factors, including the amount and timing of the Company’s revenues, its cash collections from its clients and the amounts the Company invests in software development, acquisitions and capital expenditures.
The Company’s principal source of liquidity is its cash, cash equivalents and short-term investments. The majority of the Company’s cash and cash equivalents consist of U.S. Government Federal Agency Securities, short-term marketable securities and overnight repurchase agreements. At December 30, 2006 the Company had cash and cash equivalents of $162,545,000, short-term investments of $146,239,000 and working capital of $444,656,000 compared to cash and cash equivalents of $113,057,000, short-term investments of $161,230,000 and working capital of $391,541,000 at December 31, 2005.
The Company generated cash of $232,718,000, $228,865,000 and $168,304,000 from operations in 2006, 2005 and 2004, respectively. Cash flow from operations increased in 2006 due primarily to a stronger performance in net earnings and increased collections of receivables. The Company has periodically provided long-term financing options to creditworthy clients through third party financing institutions and has directly provided extended payment terms to clients from contract date. These extended payment term arrangements typically provide for date based payments over periods ranging from 12 months to five years. Pursuant to SOP 97-2, because a significant portion of the fee is due beyond one year, we have analyzed our history with these types of arrangements and have concluded that we do have a standard business practice of using extended payment term arrangements and have a long history of successfully collecting under the original payment terms for arrangements with similar clients, product offerings, and economics without granting concessions. Accordingly, we consider the fee to be fixed and determinable in these extended payment term arrangements and, thus, the timing of revenue is not impacted by the existence of extended payments. Some of these payment streams have been assigned on a non-recourse basis to third party financing institutions. The Company has provided its usual and customary performance guarantees to the third party financing institutions in connection with its on-going obligations under the client contract. During 2006, 2005 and 2004, the Company received total client cash collections of $1,457,600,000, $1,200,595,000 and $937,600,000, respectively, of which approximately 8%, 7% and 6% were received from third party client financing arrangements and non-recourse payment assignments. Days sales outstanding decreased from 89 days at the end of 2005 to 87 days at the end of 2006. Revenues provided under support and maintenance agreements represent recurring cash flows. Support and maintenance revenues increased 15% in 2006 and 23% in 2005, and the Company expects these revenues to continue to grow as the base of installed systems grows.
Cash used in investing activities consisted primarily of the purchase of short-term investments of $161,230,000 in 2005, the acquisition of businesses of $13,731,000 in 2006 and $119,683,000 in 2005, capitalized software development costs of $61,223,000 and $62,523,000 in 2006 and 2005, respectively and purchases of capital equipment, land and buildings of $131,478,000 and $100,583,000 in 2006 and 2005, respectively. In 2006, a source of cash in investing activities consisted of net proceeds from the sale of investment of $29,112,000.
The Company’s financing activities for 2006 primarily consisted of proceeds from the exercise of options of $21,704,000 and repayment of long-term debt of $30,783,000. In 2005 the Company’s financing activities consisted primarily of the repayment of proceeds from the issuance of long-term debt of $111,827,000 and the proceeds from the exercise of stock options of $51,744,000, and repayment of a revolving line of credit and long-term debt of $91,848,000 and proceeds from a revolving line of credit of $70,000,000.
In November 2005, the Company completed a £65,000,000 ($127,322,000 at December 30, 2006) private placement of debt at 5.54% pursuant to a Note Agreement. The Note Agreement is payable in seven equal annual installments beginning in November 2009. The proceeds were used to repay the outstanding amount under the Company’s credit facility and for general corporate purposes. The Note Agreement contains certain net worth and fixed charge coverage covenants and provides certain restrictions on the Company’s ability to borrow, incur liens, sell assets and pay dividends. The Company was in compliance with all covenants at December 30, 2006.
In December 2002, the Company completed a $60,000,000 private placement of debt pursuant to a Note Agreement. The Series A Senior Notes, with a $21,000,000 principal amount at 5.57%, are payable in three equal installments that commenced in December 2006. The Series B Senior notes, with a

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$39,000,000 principal amount at 6.42%, are payable in four equal annual installments beginning December 2009. The proceeds were used to repay the outstanding amount under the Company’s credit facility and for general corporate purposes. The Note Agreement contains certain net worth and fixed charge coverage covenants and provides certain restrictions on the Company’s ability to borrow, incur liens, sell assets and pay dividends. The Company was in compliance with all covenants at December 30, 2006.
In May 2002, the Company expanded its credit facility by entering into an unsecured credit agreement with a group of banks led by US Bank. This agreement was amended and restated on November 30, 2006 and provides for a current revolving line of credit for working capital purposes. The current revolving line of credit is unsecured and requires monthly payments of interest only. Interest is payable at the Company’s option at a rate based on prime (8.25% at December 30, 2006) or LIBOR (5.32% at December 30, 2006) plus 1.55%. The interest rate may be reduced by up to 1.15% if certain net worth ratios are maintained. The agreement contains certain net worth, current ratio, and fixed charge coverage covenants and provides certain restrictions on the Company’s ability to borrow, incur liens, sell assets and pay dividends. A commitment fee of 2/10% is payable quarterly based on the usage of the revolving line of credit. The revolving line of credit matures on May 31, 2010. On January 10, 2005, the Company drew down $35,000,000 from its revolving line of credit in connection with the acquisition of the medical business division of VitalWorks. (See Note 2 to the consolidated financial statements.) This amount was paid in full as of December 31, 2005. At December 30, 2006, the Company had no outstanding borrowings under this agreement and had $90,000,000 available for working capital purposes. The Company was in compliance with all covenants at December 30, 2006.
In April 1999, the Company completed a $100,000,000 private placement of debt pursuant to a Note Agreement. The Series A Senior Notes, with a $60,000,000 principal amount at 7.14%, were paid in full in 2006. The Series B Senior Notes, with a $40,000,000 principal amount at 7.66%, are payable in six equal annual installments which commenced in April 2004. The proceeds were used to retire the Company’s existing $30,000,000 of debt, and the remaining funds were used for capital improvements and to strengthen the Company’s cash position. The Note Agreement contains certain net worth, current ratio, and fixed charge coverage covenants and provides certain restrictions on the Company’s ability to borrow, incur liens, sell assets and pay dividends. The Company was in compliance with all covenants at December 30, 2006.
The Company believes that its present cash position, together with cash generated from operations and, if necessary, its lines of credit, will be sufficient to meet anticipated cash requirements during 2007.
The following table represents a summary of the Company’s contractual obligations and commercial commitments, excluding interest, as of December 30, 2006, except short-term purchase order commitments arising in the ordinary course of business.
                                                         
    Payments due by period
                                            2012 and    
Contractual Obligations (in thousands)   2007   2008   2009   2010   2011   thereafter   Total
 
Long-term debt obligations
    18,667       13,667       34,604       27,939       27,939       82,506       205,322  
Capital lease obligations
    1,575       728       8                         2,311  
Operating lease obligations
    17,567       15,615       12,387       10,512       10,154       45,482       111,717  
Purchase obligations
    13,642       3,945       1,176       484       508             19,755  
Other
    100       25                               125  
 
Total
    51,551       33,980       48,175       38,935       38,601       127,988       339,230  
The Company is currently constructing a new data center on its campus in North Kansas City, Missouri at an approximate cost of $60,000,000 of which approximately $34,000,000 has been spent as of December 30, 2006. This commitment is not included in the above table. The construction is expected to be completed in 2007.
The effects of inflation on the Company’s business during 2006, 2005 and 2004 were not significant.

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Recent Accounting Pronouncements
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 allows registrants to record a one time cumulative effect adjustment to beginning retained earnings in the year of adoption to correct errors existing in prior years deemed to be material in the current year that previously had been considered immaterial. SAB 108 is effective for the fiscal year ending December 30, 2006. The Company assessed the impact of adoption of SAB 108 on its consolidated financial statements and determined there were no uncorrected misstatements deemed to be material under the new interpretive guidance provided in SAB108.
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes,” which defines the threshold for recognizing the benefits of tax-return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. FIN 48 also prescribes a method for computing the tax benefit of such tax positions to be recognized in the financial statements. In addition, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company is currently assessing the impact of adoption of FIN 48 on its results of operations and its financial position and was required to adopt FIN 48 as of the first day of the 2007 fiscal year.
Critical Accounting Policies
The Company believes that there are several accounting policies that are critical to understanding the Company’s historical and future performance, as these policies affect the reported amount of revenue and other significant areas involving management’s judgments and estimates. These significant accounting policies relate to revenue recognition, software development, concentrations, allowance for doubtful accounts and potential impairments of goodwill. These policies and the Company’s procedures related to these policies are described in detail below and under specific areas within this “Management Discussion and Analysis of Financial Condition and Results of Operations.” In addition, Note 1 to the consolidated financial statements expands upon discussion of the Company’s accounting policies.
Revenue Recognition
The Company recognizes its multiple element arrangements, including software and software-related services, using the residual method under SOP 97-2, “Software Revenue Recognition,” as amended by SOP No. 98-4, SOP 98-9 and clarified by Staff Accounting Bulletin’s (SAB) 101 “Revenue Recognition in Financial Statements” and SAB No. 104 “Revenue Recognition” and Emerging Issues Task Force 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). Key factors in the Company’s revenue recognition model are management’s assessments that installation services are essential to the functionality of the Company’s software whereas implementation services are not; and the length of time it takes for the Company to achieve its delivery and installation milestones for its licensed software. If the Company’s business model were to change such that implementation services are deemed to be essential to the functionality of the Company’s software, the period of time over which the Company’s licensed software revenue would be recognized would lengthen. The Company generally recognizes combined revenue from the sale of its licensed software and related installation services over two key milestones, delivery and installation, based on percentages that reflect the underlying effort from planning to installation. Additionally, if the time to achieve the Company’s delivery and installation milestones for its licensed software were to be accelerated or decelerated, its milestones would be adjusted and the timing of revenue recognition for its licensed software could materially change.
Software Development Costs
Costs incurred internally in creating computer software solutions and enhancements to those solutions are expensed until completion of a detailed program design, which is when the Company determines that technological feasibility has been established. Thereafter, all software development costs are capitalized until such time as the software solutions and enhancements are available for general release, and the capitalized costs subsequently are reported at the lower of amortized cost or net realizable value. Net realizable value is computed as the estimated gross future revenues from each software solution less the amount of estimated future costs of completing and disposing of that product. Because the development of projected net future revenues related to our software solutions used in our net realizable value computation is based on estimates, a significant reduction in our future revenues could impact the realizability of our capitalized software development costs. We historically have not experienced significant inaccuracies in computing the net realizable value of our software solutions and the difference

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between the net realizable value and the unamortized cost has grown over the past three years. We expect that trend to continue in the future. If we missed our estimates of net future revenues by up to 10%, the amount of our capitalized software development costs would not be impaired. Capitalized costs are amortized based on current and expected net future revenue for each software solution with minimum annual amortization equal to the straight-line amortization over the estimated economic life of the software solution. The Company is amortizing capitalized costs over five years. The five year period over which capitalized software development costs are amortized is an estimate based upon the Company’s forecast of a reasonable useful life for the capitalized costs. Historically, use of the Company’s software programs by its clients has exceeded five years and is capable of being used a decade or more.
The Company expects that major software information systems companies, large information technology consulting service providers and systems integrators and others specializing in the healthcare industry may offer competitive products or services. The pace of change in the healthcare information technology market is rapid and there are frequent new product introductions, product enhancements and evolving industry standards and requirements. As a result, the capitalized software solutions may become less valuable or obsolete and could be subject to impairment.
Concentrations
Substantially all of the Company’s clients are integrated delivery networks, physicians, hospitals and other healthcare related organizations. If significant adverse macro-economic factors were to impact these organizations it could materially adversely affect the Company. The Company’s access to certain software and hardware components is dependent upon single and sole source suppliers. The inability of any supplier to fulfill supply requirements of the Company could affect future results.
Allowance for Doubtful Accounts
If the creditworthiness of the Company’s clients were to weaken or the Company’s collections results relative to historical experience were to decline, it could have a material adverse impact on operations and cash flows.
Goodwill
The Company accounts for its goodwill under the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” As a result, goodwill and intangible assets with indefinite lives are not amortized but are evaluated for impairment annually or whenever there is an impairment indicator. All goodwill is assigned to a reporting unit, where it is subject to an impairment test based on fair value. The Company again assessed its goodwill for impairment in the second quarters of 2006 and 2005 and concluded that no goodwill was impaired. The Company used a discounted cash flow analysis to determine the fair value of the reporting units for all periods. The Company completed nine acquisitions and one divestiture subsequent to June 30, 2001, which resulted in approximately $106 million of goodwill that was not amortized in accordance with SFAS 142. Goodwill amounted to $128,819,000 and $116,142,000 at December 30, 2006 and December 31, 2005, respectively. If future, anticipated cash flows from the Company’s reporting units that recognized goodwill do not materialize as expected the Company’s goodwill could be impaired, which would result in significant write-offs.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
At December 30, 2006, the Company had a £65,000,000 note payable outstanding through a private placement with an interest rate of 5.54%. The note is payable in seven equal installments beginning in November 2009. Because the borrowing is denominated in pounds, the Company is exposed to movements in the foreign currency exchange rate between the U.S. dollar and the Great Britain pound. Changes in the portion of the foreign-denominated debt that was not designated as a hedging instrument were included in foreign currency transaction gains and losses and were immaterial in 2006.
Item 8. Financial Statements and Supplementary Data
The Financial Statements and Notes required by this Item are submitted as a separate part of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

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Item 9.A. Controls and Procedures
  a)   Evaluation of disclosure controls and procedures. The Company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO) have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by the Annual Report (the “Evaluation Date”). They have concluded that, as of the Evaluation Date, these disclosure controls and procedures were effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities and would be disclosed on a timely basis. The CEO and CFO have concluded that the Company’s disclosure controls and procedures are designed, and are effective, to give reasonable assurance that the information required to be disclosed by the Company in reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the rules and forms of the SEC. They have also concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act are accumulated and communicated to the Company’s management, including the CEO and CFO, to allow timely decisions regarding required disclosure.
 
  b)   There were no changes in the Company’s internal controls over financial reporting during the three months ended December 30, 2006 that have materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting.
 
  c)   The Company’s management, including its Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at that reasonable assurance level. However, the Company’s management can provide no assurance that our disclosure controls and procedures or our internal control over financial reporting can prevent all errors and all fraud under all circumstances. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been or will be detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 30, 2006. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in its Internal Control-Integrated Framework. The Company’s management has concluded that, as of December 30, 2006, the Company’s internal control over financial reporting is effective based on these criteria. The Company’s independent registered public accounting firm that audited the consolidated financial statements included in the annual report has issued an audit report on the Company’s assessment of its internal control over financial reporting, which is included herein under “Report of Independent Registered Public Accounting Firm”.
Item 9.B. Other Information
None.

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PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item 10 regarding our Directors will be set forth under the caption “Election of Directors” in our Proxy Statement in connection with the 2007 Annual Shareholders’ Meeting scheduled to be held May 25, 2007, and is incorporated in this Item 10 by reference. The information required by this Item 10 concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 will be set forth under the caption “Compliance with Section 16(a) of the Securities Exchange Act of 1934” in our Proxy Statement in connection with the 2007 Annual Shareholders’ Meeting scheduled to be held May 25, 2007, and is incorporated in this Item 10 by reference.
The information required by this Item 10 concerning our Code of Business Conduct and Ethics will be set forth under the caption “Code of Business Conduct and Ethics” in our Proxy Statement in connection with the 2007 Annual Shareholders’ Meeting scheduled to be held May 25, 2007, and is incorporated in this Item 10 by reference. The information required by this Item 10 concerning our Audit Committee and our Audit Committee financial expert will be set forth under the caption “Audit Committee” in our Proxy Statement in connection with the 2007 Annual Shareholders’ Meeting scheduled to be held May 25, 2007, and is incorporated in this Item 10 by reference.
There have been no material changes to the procedures by which security holders may recommend nominees to our Board of Directors since our last disclosure thereof.
The following table set forth the names, ages, positions and certain other information regarding the Company’s executive officers as of February 23, 2007. Officers are elected annually and serve at the discretion of the Board of Directors.
             
Name   Age   Positions
Neal L. Patterson
    57     Chairman of the Board of Directors and Chief Executive Officer
 
           
Clifford W. Illig
    56     Vice Chairman of the Board of Directors
 
           
Earl H. Devanny, III
    55     President
 
           
Paul M. Black
    48     Executive Vice President and Chief Operating Officer
 
           
Douglas M. Krebs
    49     Senior Vice President Cerner and General Manager of Cerner Europe, Middle East and Asia Pacific Organization
 
           
Marc G. Naughton
    51     Senior Vice President and Chief Financial Officer
 
           
Jeffrey A. Townsend
    43     Executive Vice President
 
           
Mike Valentine
    38     Senior Vice President and General Manager of U.S. Client Organization
 
           
Randy D. Sims
    46     Vice President, Chief Legal Officer and Secretary
 
           
Julia M. Wilson
    44     Vice President and Chief People Officer
Neal L. Patterson has been Chairman of the Board of Directors and Chief Executive Officer of the Company for more than five years. Mr. Patterson also served as President of the Company from March of 1999 until August of 1999.
Clifford W. Illig has been a Director of the Company for more than five years. He also served as Chief Operating Officer of the Company for more than five years until October 1998 and as President of the Company for more than five years until March of 1999. Mr. Illig was appointed Vice Chairman of the Board of Directors in March of 1999.

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Earl H. Devanny, III joined the Company in August of 1999 as President. Mr. Devanny also served as interim President of Cerner Southeast from January 2003 through July 2003. Prior to joining the Company, Mr. Devanny served as president of ADAC Healthcare Information Systems, Inc. Prior to joining ADAC, Mr. Devanny served as a Vice President of the Company from 1994 to 1997. Prior to that he spent 17 years with IBM Corporation.
Paul M. Black joined the Company in February of 1994 as a Regional Vice President. He was promoted in June 1998 to Senior Vice President and in January 1999 to Chief Sales Officer and to Executive Vice President in September of 2000. In January of 2003 Mr. Black was named Executive Vice President of the U.S. Client Organization. In February 2005 Mr. Black was named Chief Operating Officer. Prior to joining the Company, he spent 12 years with IBM Corporation.
Douglas M. Krebs joined the Company in June 1994 as a Regional Vice President. He was promoted to Senior Vice President and Area Manager in April 1999. In February 2000, Mr. Krebs was appointed as President of Cerner Global and in January 2005, Mr. Krebs was appointed General Manager of the Company’s Europe, Middle East and Asia Pacific Organization. Prior to joining Cerner, he spent 15 years with IBM Corporation.
Marc G. Naughton joined the Company in November 1992 as Manager of Taxes. In November 1995 he was named Chief Financial Officer and in February 1996 he was promoted to Vice President. He was promoted to Senior Vice President in March 2002.
Jeffrey A. Townsend joined the Company in June 1985. Since that time he has held several positions in the Intellectual Property Organization and was promoted to Vice President in February 1997. He was appointed Chief Engineering Officer in March 1998, promoted to Senior Vice President in March 2001 and promoted to Executive Vice President in March 2005.
Mike Valentine joined the Company in December 1998 as Director of Technology. He was promoted to Vice President in 2000 and to President of Cerner Mid America in January of 2003. In February 2005, he was named General Manager of the U.S. Client Organization and was promoted to Senior Vice President in March 2005. Prior to joining the Company, Mr. Valentine was with Accenture Consulting.
Randy D. Sims joined the Company in March 1997 as Vice President and Chief Legal Officer. Prior to joining the Company, Mr. Sims worked at Farmland Industries, Inc. for three years where he served most recently as Associate General Counsel. Prior to Farmland, Mr. Sims was in-house legal counsel at The Marley Company for seven years, holding the position of Assistant General Counsel when he left to join Farmland.
Julia M. Wilson joined the Company in November 1995. Since that time, she has held several positions in the Functional Group Organization. She was promoted to Vice President and Chief People Officer in August 2003.
Item 11. Executive Compensation
The information required by this Item 11 concerning our executive compensation will be set forth under the caption “Compensation Discussion and Analysis” in our Proxy Statement in connection with the 2007 Annual Shareholders’ Meeting scheduled to be held May 25, 2007, and is incorporated in this Item 11 by reference. The information required by this Item 11 concerning Compensation Committee interlocks and Insider Participation will be set forth under the caption “Compensation Committee Interlocks and Insider Participation” in our Proxy Statement in connection with the 2007 Annual Shareholders’ Meeting scheduled to be held May 25, 2007, and is incorporated in this Item 11 by reference. The information required by this Item 11 concerning Compensation Committee report will be set forth under the caption “Compensation Committee Report” in our Proxy Statement in connection with the 2007 Annual Shareholders’ Meeting scheduled to be held May 25, 2007, and is incorporated in this Item 11 by reference.
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

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The information required by this Item 12 will be set forth under the caption “Voting Securities and Principal Holders Thereof” in our Proxy Statement in connection with the 2007 Annual Shareholders’ Meeting scheduled to be held May 25, 2007, and is incorporated in this Item 12 by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item 13 concerning our transactions with related parties will be set forth under the caption “Certain Transactions” in our Proxy Statement in connection with the 2007 Annual Shareholders’ Meeting scheduled to be held May 25, 2007, and is incorporated in this Item 13 by reference. The information required by this Item 13 concerning director independence will be set forth under the caption “Director Independence” in our Proxy Statement in connection with the 2007 Annual Shareholders’ Meeting of scheduled to be held May 25, 2007, and is incorporated in this Item 13 by reference.
Item 14. Principal Accountant Fees and Services
The information required by this Item 14 will be set forth under the caption “Relationship with Independent Registered Public Accounting Firm” in our Proxy Statement in connection with the 2007 Annual Shareholders’ Meeting scheduled to be held May 25, 2007, and is incorporated in this Item 14 by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
  (a)   Financial Statements and Exhibits.
 
  (1)   Consolidated Financial Statements:
 
      Reports of Independent Registered Public Accounting Firm
 
      Consolidated Balance Sheets -
December 30, 2006 and December 31, 2005
 
      Consolidated Statements of Operations -
Years Ended December 30, 2006, December 31, 2005 and January 1, 2005
 
      Consolidated Statements of Changes in Equity
Years Ended December 30, 2006, December 31, 2005 and January 1, 2005
 
      Consolidated Statements of Cash Flows
Years Ended December 30, 2006, December 31, 2005 and January 1, 2005
 
      Notes to Consolidated Financial Statements
 
  (2)   The following financial statement schedule and Report of Independent Registered Public Accounting Firm of the Registrant for the three-year period ended December 30, 2006 are included herein:
 
      Schedule II — Valuation and Qualifying Accounts,
 
      Report of Independent Registered Public Accounting Firm
 
      All other schedules are omitted, as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes.
 
  (3)   The exhibits required to be filed by this item are set forth below:

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Number   Description
3(a)
  Second Restated Certificate of Incorporation of the Registrant, dated December 5, 2003 (filed as exhibit 3(a) to Registrant’s Annual Report on Form 10-K for the year ended January 3, 2004 and incorporated herein by reference).
 
   
3(b)
  Amended and Restated Bylaws, dated September 11, 2006 (filed as Exhibit 3.1 to Registrant’s Form 8-K filed on September 15, 2006 and incorporated herein by reference).
 
   
4(a)
  Specimen stock certificate.
 
   
4(b)
  Amended and Restated Credit Agreement between Cerner Corporation and U.S. Bank N.A., LaSalle Bank National Association, Commerce Bank, N.A. and UMB Bank, N.A., dated as of November 30, 2006 (filed as Exhibit 99.1 to Registrant’s Form 8-K filed on December 6, 2006, and incorporated herein by reference).
 
   
4(c)
  Cerner Corporation Note Agreement dated as of April 1, 1999 among Cerner Corporation, Principal Life Insurance Company, Principal Life Insurance Company, on behalf of one or more separate accounts, Commercial Union Life Insurance Company of America, Nippon Life Insurance Company of America, John Hancock Mutual Life Insurance Company, John Hancock Variable Life Insurance Company, and Investors Partner Life Insurance Company (filed as Exhibit 4(e) to Registrant’s Form 8-K dated April 23, 1999, and incorporated herein by reference).
 
   
4(d)
  Note Purchase Agreement between Cerner Corporation and the purchasers therein, dated December 15, 2002 (filed as Exhibit 10(x) to Registrant’s Annual Report on Form 10-K for the year ended December 28, 2002, and incorporated herein by reference).
 
   
4(e)
  Cerner Corporation Note Purchase Agreement dated as of November 1, 2005 among Cerner Corporation, as issuer, and AIG Annuity Insurance Company, American General Life Insurance Company and Principal Life Insurance Company, as purchasers, (filed as Exhibit 99.1 to Registrant’s Form 8-K filed on November 7, 2005, and incorporated herein by reference).
 
   
10(a)
  Indemnification Agreement Form for use between the Registrant and its Directors.*
 
   
10(b)
  Employment Agreement of Earl H. Devanny, III dated August 13, 1999 (filed as Exhibit 10(q) to Registrant’s Annual Report on Form 10-K for the year ended January 1, 2000 and incorporated herein by reference).*
 
   
10(c)
  Employment Agreement of Neal L. Patterson dated November 10, 2005 (filed as Exhibit 99.1 to Registrant’s Form 8-K on November 17, 2005 and incorporated herein by reference).*
 
   
10(d)
  Amended Stock Option Plan D of Registrant as of December 8, 2000 (filed as Exhibit 10(f) to Registrant’s Annual Report on Form 10-K for the year ended December 30, 2000 and incorporated herein by reference).*
 
   
10(e)
  Amended Stock Option Plan E of Registrant as of December 8, 2000 (filed as Exhibit 10(g) to Registrant’s Annual Report on Form 10-K for the year ended December 30, 2000 and incorporated herein by reference).*
 
   
10(f)
  Cerner Corporation 2001 Long-Term Incentive Plan F (filed as Annex I to Registrant’s 2001 Proxy Statement and incorporated herein by reference).*
 
   
10(g)
  Cerner Corporation 2004 Long-Term Incentive Plan G (filed as Exhibit 4.5 to Registrant’s Registration Statement on Form S-8 (File No. 333-125492) on June 3, 2005 and incorporated herein by reference).*

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Number   Description
10(h)
  Cerner Corporation 2001 Associate Stock Purchase Plan (filed as Annex II Registrant’s 2001 Proxy Statement and incorporated herein by reference).*
 
   
10(i)
  Qualified Performance-Based Compensation Plan dated December 11, 2006.*
 
   
10(j)
  2006 Executive Performance Plan (filed as Exhibit 99.1 to Registrant’s Form 8-K on March 16, 2006 and incorporated herein by reference).*
 
   
10(k)
  Cerner Corporation Executive Deferred Compensation Plan (filed as Exhibit 10(y) to Registrant’s Annual Report on Form 10-K for the year ended December 28, 2002 and incorporated herein by reference).
 
   
10(l)
  Cerner Corporation 2005 Enhanced Severance Pay Plan as Amended and Restated dated September 12, 2005 (filed as Exhibit 10.1 on Form 8-K filed on September 12, 2005 and incorporated herein by reference).*
 
   
10(m)
  Cerner Corporation 2001 Long-Term Incentive Plan F Nonqualified Stock Option Agreement (filed as Exhibit 10(v) to Registrant’s Annual Report on Form 10-K for the year ended January 1, 2005 and incorporated herein by reference). *
 
   
10(n)
  Cerner Corporation 2001 Long-Term Incentive Plan F Nonqualified Stock Option Grant Certificate (filed as Exhibit 10(a) to Registrant’s Quarterly Report on Form 10-Q for the quarter ended October 1, 2005, and incorporated herein by reference).*
 
   
10(o)
  Cerner Corporation 2001 Long-Term Incentive Plan F Nonqualified Stock Option Director Agreement (filed as Exhibit 10(x) to Registrant’s Annual Report on Form 10-K for the year ended January 1, 2005 and incorporated herein by reference).*
 
   
10(p)
  Cerner Corporation 2001 Long-Term Incentive Plan F Director Restricted Stock Agreement (filed as Exhibit 10(w) to Registrant’s Annual Report on Form 10-K for the year ended January 1, 2005, and incorporated herein by reference).*
 
   
10(q)
  Cerner Corporation 2004 Long-Term Incentive Plan G Nonqualified Stock Option Grant Certificate (filed as Exhibit 10(b) to Registrant’s Quarterly Report on Form 10-Q for the quarter ended October 1, 2005, and incorporated herein by reference).*
 
   
10(r)
  Time Sharing Agreements between the Registrant and Neal L. Patterson and Clifford W. Illig, both dated February 7, 2007 (filed as Exhibits 10.2 and 10.3, respectively, to Registrant’s Form 8-K filed on February 9, 2007 and incorporated herein by reference).
 
   
10(s)
  Aircraft Services Agreement between the Registrant’s wholly owned subsidiary, Rockcreek Aviation, Inc., and PANDI, Inc., dated February 6, 2007 (filed as Exhibit 10.1 to Registrant’s Form 8-K filed on February 9, 2007 and incorporated herein by reference).
 
   
*
  Management contracts or compensatory plans or arrangements required to be identified by Item15(a)(3)
 
   
11
  Computation of Registrant’s Earnings Per Share. (Exhibit omitted. Information contained in notes to consolidated financial statements.)
 
   
21
  Subsidiaries of Registrant.
 
   
23
  Consent of Independent Registered Public Accounting Firm.
 
   
31.1
  Certification of Neal L. Patterson pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
31.2
  Certification of Marc G. Naughton pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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Number   Description
32.1
  Certification pursuant to 18 U.S.C. Section. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
   
32.2
  Certification pursuant to 18 U.S.C. Section. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  (b)   Exhibits.
 
      The response to this portion of Item 15 is submitted as a separate section of this report.
 
  (c)   Financial Statement Schedules.
 
      The response to this portion of Item 15 is submitted as a separate section of this report.

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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
             
    CERNER CORPORATION    
 
           
Dated: February 28, 2007
  By:   /s/Neal L. Patterson
 
Neal L. Patterson
   
 
      Chairman of the Board and Chief Executive Officer    
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
         
Signature and Title       Date
 
/s/Neal L. Patterson
 
Neal L. Patterson, Chairman of the Board and Chief Executive Officer (Principal Executive Officer)
      February 28, 2007
 
       
/s/Clifford W. Illig
 
Clifford W. Illig, Vice Chairman and Director
      February 28, 2007
 
       
/s/Marc G. Naughton
 
Marc G. Naughton, Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
      February 28, 2007
 
       
/s/Gerald E. Bisbee, Jr.
 
Gerald E. Bisbee, Jr., Ph.D., Director
      February 28, 2007
 
       
/s/John C. Danforth
 
John C. Danforth, Director
      February 28, 2007
 
       
/s/Nancy-Ann DeParle
 
Nancy-Ann DeParle, Director
      February 28, 2007
 
       
/s/Michael E. Herman
 
Michael E. Herman, Director
      February 28, 2007
 
       
/s/William B. Neaves
 
William B. Neaves, Ph.D., Director
      February 28, 2007
 
       
/s/William D. Zollars
 
William D. Zollars, Director
      February 28, 2007

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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Cerner Corporation:
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting , appearing in Item 9.A. Controls and Procedures, that Cerner Corporation (the Corporation) maintained effective internal control over financial reporting as of December 30, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Corporation’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Cerner Corporation maintained effective internal control over financial reporting as of December 30, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Cerner Corporation maintained, in all material respects, effective internal control over financial reporting as of December 30, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Cerner Corporation and subsidiaries as of December 30, 2006 and December 31, 2005, and the related consolidated statements of operations, changes in equity, and cash flows for each of the years in the three-year period ended December 30, 2006, and our report dated February 28, 2007 expressed an unqualified opinion on those consolidated financial statements.
(signed) KPMG LLP
Kansas City, Missouri
February 28, 2007

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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Cerner Corporation:
We have audited the accompanying consolidated balance sheets of Cerner Corporation and subsidiaries (the Corporation) as of December 30, 2006 and December 31, 2005, and the related consolidated statements of operations, changes in equity, and cash flows for each of the years in the three-year period ended December 30, 2006. These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cerner Corporation and subsidiaries as of December 30, 2006 and December 31, 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 30, 2006, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Corporation adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” effective January 1, 2006.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Cerner Corporation’s internal control over financial reporting as of December 30, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 28, 2007 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
(signed) KPMG LLP
Kansas City, Missouri
February 28, 2007
Management’s Report
The management of Cerner Corporation is responsible for the consolidated financial statements and all other information presented in this report. The financial statements have been prepared in conformity with U.S. generally accepted accounting principles appropriate to the circumstances, and, therefore, included in the financial statements are certain amounts based on management’s informed estimates and judgments. Other financial information in this report is consistent with that in the consolidated financial statements. The consolidated financial statements have been audited by Cerner Corporation’s independent registered public accountants and have been reviewed by the Audit Committee of the Board of Directors.

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Consolidated Balance Sheets
December 30, 2006 and December 31, 2005
                 
(In thousands except shares and per share data)   2006   2005
     
Assets
               
Current Assets:
               
Cash and cash equivalents
  $ 162,545       113,057  
Short-term investments
    146,239       161,230  
Receivables, net
    361,424       316,965  
Inventory
    18,084       9,585  
Prepaid expenses and other
    55,272       42,685  
Deferred income taxes
    2,423       8,109  
     
 
               
Total current assets
    745,987       651,631  
 
               
Property and equipment, net
    357,942       292,608  
Software development costs, net
    187,788       172,548  
Goodwill, net
    128,819       116,142  
Intangible assets, net
    54,428       60,448  
Other assets
    16,426       10,252  
     
 
               
Total assets
  $ 1,491,390       1,303,629  
     
 
               
Liabilities and Stockholders’ Equity
               
Current Liabilities:
               
Accounts payable
  $ 79,735       65,377  
Current installments of long-term debt
    20,242       28,743  
Deferred revenue
    93,699       79,890  
Accrued payroll and tax withholdings
    77,914       66,002  
Other accrued expenses
    29,741       20,078  
     
 
               
Total current liabilities
    301,331       260,090  
 
               
Long-term debt
    187,391       194,265  
Deferred income taxes
    68,693       72,922  
Deferred revenue
    14,557       14,533  
 
               
Minority owners’ equity interest in subsidiary
    1,286       1,286  
 
               
Stockholders’ Equity:
               
Common stock, $.01 par value,150,000,000 shares authorized, 78,392,071 and 77,011,464 shares issued in 2006 and 2005, respectively
    784       770  
Additional paid-in capital
    376,595       325,134  
Retained earnings
    540,153       430,262  
Accumulated other comprehensive income:
               
Foreign currency translation adjustments
    600       4,367  
     
 
               
Total stockholders’ equity
    918,132       760,533  
     
 
               
Commitments
               
Total liabilities and stockholders’ equity
  $ 1,491,390       1,303,629  
     
See notes to consolidated financial statements.

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C onsolidated Statements of Operations
For the years ended December 30, 2006, December 31, 2005 and January 1, 2005
                         
(In thousands, except per share data)   2006   2005   2004
     
Revenues
                       
System sales
  $ 505,743       449,734       351,861  
Support, maintenance and services
    833,244       677,664       542,414  
Reimbursed travel
    39,051       33,387       32,081  
     
 
                       
Total revenues
    1,378,038       1,160,785       926,356  
     
 
                       
Costs and expenses
                       
Cost of system sales
    194,646       171,073       115,803  
Cost of support, maintenance and services
    57,273       50,226       48,464  
Cost of reimbursed travel
    39,051       33,387       32,081  
Sales and client service
    578,050       466,206       383,628  
Software development
    246,970       211,455       171,589  
General and administrative
    95,881       81,620       63,327  
Write-off of in process research and development
          6,382        
     
 
                       
Total costs and expenses
    1,211,871       1,020,349       814,892  
     
 
                       
Operating earnings
    166,167       140,436       111,464  
 
                       
Other income (expense):
                       
Interest expense, net
    (697 )     (5,858 )     (6,152 )
Other income, net
    2,074       666       2,608  
     
Total other income (expense), net
    1,377       (5,192 )     (3,544 )
     
 
                       
Earnings before income taxes
    167,544       135,244       107,920  
Income taxes
    (57,653 )     (48,993 )     (43,272 )
     
 
                       
Net earnings
  $ 109,891       86,251       64,648  
     
 
                       
Basic earnings per share
  $ 1.41       1.16       0.90  
 
                       
Diluted earnings per share
  $ 1.34       1.10       0.86  
See notes to consolidated financial statements.

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Consolidated Statements of Changes in Equity
For the years ended December 30, 2006, December 31, 2005 and January 1, 2005
                                                 
                                    Accumulated        
                    Additional             Other        
    Common Stock     paid-in     Retained     Comprehensive     Comprehensive  
(In thousands)   Shares     Amount     capital     Earnings     Income     Income  
     
Balance at January 3, 2004
    71,108     $ 711       209,835       279,363       4,770          
     
 
                                               
Exercise of options
    2,166       22       25,524                      
Employee stock option compensation expense
                173                      
Tax benefit from disqualifying disposition of stock options
                9,191                      
Associate stock purchase plan discounts
                (752 )                    
Foreign currency translation adjustment
                            4,000       4,000  
Net earnings
                      64,648             64,648  
     
Comprehensive income
                                            68,648  
 
                                             
 
                                               
Balance at January 1, 2005
    73,274     $ 733       243,971       344,011       8,770          
 
                                               
Exercise of options
    3,737       37       50,926                      
Employee stock option compensation expense
                780                      
Tax benefit from disqualifying disposition of stock options
                30,289                      
Associate stock purchase plan discounts
                (832 )                    
Foreign currency translation adjustment
                            (4,403 )     (4,403 )
Net earnings
                      86,251             86,251  
     
Comprehensive income
                                            81,848  
 
                                             
 
                                               
Balance at December 31, 2005
    77,011     $ 770       325,134       430,262       4,367          
 
                                               
Exercise of options
    1,381       14       21,333                      
Employee stock option expense
                18,787                      
Non-employee stock option expense
                959                      
Third party warrants
                1,010                      
Excess tax benefit from disqualifying disposition of stock options
                9,372                      
Foreign currency translation adjustment, net of taxes of $7,189
                            (3,767 )     (3,767 )
Net earnings
                      109,891             109,891  
     
Comprehensive income
                                            106,124  
 
                                             
 
                                               
Balance at December 30, 2006
    78,392     $ 784       376,595       540,153       600          
             
See notes to consolidated financial statements.

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Consolidated Statements of Cash Flows
For the years ended December 30, 2006, December 31, 2005 and January 1, 2005
                         
(In thousands)   2006   2005   2004
     
CASH FLOWS FROM OPERATING ACTIVITIES
                       
Net earnings
  $ 109,891       86,251       64,648  
Adjustments to reconcile net earnings to net cash provided by operating activities:
                       
Depreciation and amortization
    125,254       114,055       90,802  
Share-based compensation expense
    19,021              
Gain on sale of business
                (3,023 )
Write-off of acquired in process research and development
          6,382        
Non-employee stock option compensation expense
    698              
Provision for deferred income taxes
    2,503       (6,874 )     295  
Tax benefit from disqualifying dispositions of stock options
    7,923       30,289       9,191  
Excess tax benefits from share based compensation
    (7,068 )            
Changes in operating assets and liabilities (net of businesses acquired):
                       
Receivables, net
    (38,918 )     (22,502 )     (24,747 )
Inventory
    (8,405 )     (2,078 )     3,924  
Prepaid expenses and other
    (22,008 )     (18,781 )     (20,743 )
Accounts payable
    14,465       14,382       9,474  
Accrued income taxes
    8,900       13,594       15,919  
Deferred revenue
    12,002       949       16,055  
Other current liabilities
    8,460       13,198       6,509  
     
Total adjustments
    122,827       142,614       103,656  
     
Net cash provided by operating activities
    232,718       228,865       168,304  
     
 
                       
CASH FLOWS FROM INVESTING ACTIVITIES
                       
Purchase of capital equipment
    (70,299 )     (64,785 )     (44,214 )
Purchase of land, buildings, and improvements
    (61,179 )     (35,798 )     (12,276 )
Purchase of Intangibles
    (254 )            
Acquisition of businesses, net of cash received
    (13,731 )     (119,683 )     (1,957 )
Proceeds from the sale of business
                12,000  
Net decrease (increase) in short-term investments
    29,122       (161,230 )      
Repayment of notes receivable
          51       1,977  
Capitalized software development costs
    (61,223 )     (62,523 )     (58,912 )
     
Net cash used in investing activities
    (177,544 )     (443,968 )     (103,382 )
     
 
                       
CASH FLOWS FROM FINANCING ACTIVITIES
                       
Financing of receivables
    137              
Proceeds from issuance of long-term debt
          111,827        
Proceeds from revolving line of credit
          70,000        
Repayment of revolving line of credit and long-term debt
    (30,783 )     (91,848 )     (24,879 )
Proceeds from third party warrants
    1,010              
Proceeds from excess tax benefits from share-based comp
    7,068              
Proceeds from exercise of options
    21,704       51,744       25,717  
Associate stock purchase plan discounts
          (832 )     (752 )
     
Net cash provided by (used in) financing activities
    (865 )     140,891       86  
     
Effect of exchange rate changes on cash
    (4,821 )     (2,515 )     2,937  
Net increase (decrease) in cash and cash equivalents
    49,488       (76,727 )     67,945  
Cash and cash equivalents at beginning of year
    113,057       189,784       121,839  
     
Cash and cash equivalents at end of year
  $ 162,545       113,057       189,784  
     
 
                       
Supplemental disclosures of cash flow information
                       
Cash paid during the year for:
                       
Interest
  $ 12,568       8,157       8,614  
Income taxes, net of refund
    27,847       13,591       21,865  
 
                       
Noncash investing and financing activities
                       
Issuance of note payable for unused software credits
  $             7,500  
Acquisition of equipment through capital leases
          89       2,075  
 
                       
Non-cash changes resulting from acquisitions
                       
Increase in accounts receivable
    618       11,621       1,019  
Increase in property and equipment, net
    205       2,355       65  
Increase in goodwill and intangibles
    13,599       124,921       2,187  
Increase in deferred revenue
    (150 )     (10,979 )     (1,004 )
Increase in long term debt
    (27 )     (3,111 )     (5 )
Decrease in other working capital components
    (514 )     (5,124 )     (305 )
     
Total
    13,731       119,683       1,957  
     
See notes to consolidated financial statements.

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1 Summary of Significant Accounting Policies
(a) Principles of Consolidation - The consolidated financial statements include the accounts of Cerner Corporation and its wholly-owned subsidiaries (the “Company”). All significant intercompany transactions and balances have been eliminated in consolidation.
(b) Nature of Operations - The Company designs, develops, markets, installs, hosts and supports software information technology, healthcare devices and content solutions for healthcare organizations and consumers. The Company also provides a wide range of value-added services, including implementing solutions as individual, combined or enterprise-wide systems; hosting solutions in its data center; and clinical process optimization services.
(c) Revenue Recognition - Revenues are derived primarily from the sale of clinical, financial and administrative information systems and solutions. The components of the system sales revenues are the licensing of computer software, installation, content subscriptions, transaction processing and the sale of computer hardware and sublicensed software. The components of support, maintenance and service revenues are software support and hardware maintenance, remote hosting and managed services, training, consulting and implementation services. The Company provides several models for the procurement of its clinical, financial and administrative information systems. The predominant method is a perpetual software license agreement, project-related installation services, implementation and consulting services, software support and either remote hosting services or computer hardware and sublicensed software.
The Company recognizes revenue in accordance with the provisions of Statement of Position (SOP) 97-2, “Software Revenue Recognition,” as amended by SOP 98-4, SOP 98-9 and clarified by Staff Accounting Bulletin’s (SAB) 101 “Revenue Recognition in Financial Statements” and SAB No. 104 “Revenue Recognition” and Emerging Issues Task Force Issue No. 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). SOP 97-2, as amended, generally requires revenue earned on software arrangements involving multiple-elements to be allocated to each element based on the relative fair values of those elements if fair values exist for all elements of the arrangement. Pursuant to SOP 98-9, the Company recognizes revenue from multiple-element software arrangements using the residual method. Under the residual method, revenue is recognized in a multiple-element arrangement when Company-specific objective evidence of fair value exists for all of the undelivered elements in the arrangement (i.e. professional services, software support, hardware maintenance, hardware and sublicensed software), but does not exist for one or more of the delivered elements in the arrangement (i.e. software solutions including project-related installation services). The Company allocates revenue to each undelivered element in a multiple-element arrangement based on the element’s respective fair value, with the fair value determined by the price charged when that element is sold separately. Specifically, the Company determines the fair value of the software support and maintenance, hardware and sublicensed software support, remote hosting and subscriptions portions of the arrangement based on the renewal price for these services charged to clients; professional services (including training and consulting) portion of the arrangement, other than installation services, based on hourly rates which the Company charges for these services when sold apart from a software license; and, the hardware and sublicensed software, based on the prices for these elements when they are sold separately from the software. The residual amount of the fee after allocating revenue to the fair value of the undelivered elements is attributed to the software solution, including project-related installation services. If evidence of the fair value cannot be established for the undelivered elements of a license agreement, the entire amount of revenue under the arrangement is deferred until these elements have been delivered or objective evidence can be established.
The Company provides project-related installation services, which include project-scoping services, conducting pre-installation audits and creating initial environments. Because installation services are deemed to be essential to the functionality of the software, the Company recognizes the software license and installation services fees over the software installation period using the percentage of completion method pursuant to Statement of Position 81-1 (SOP 81-1), Accounting

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

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When revenue is deferred all direct and incremental costs associated with the arrangement are capitalized and amortized over the contractual term once revenue recognition commences.
In the United Kingdom the Company has contracted with a third party to customize software and provide implementation and support services under a long term arrangement (nine years). Because the arrangement requires customization and development of software, and fair value for the support services does not exist in this arrangement, the entire arrangement is being accounted for as a single unit of accounting under SOP 81-1. Also, because the Company believes it is reasonably assured that no loss will be incurred under this arrangement, it is using the zero margin approach of applying percentage-of-completion accounting until the software customization and development services are completed. Once software customization and development services are completed, the remaining unrecognized portion of the fee will be recognized ratably over the remaining term of the arrangement. As of December 30, 2006 and December 31, 2005, approximately $69,000,000 and $14,181,000, respectively of revenue and expense has been recognized in the accompanying Consolidated Statement of Operations.
Deferred revenue is comprised of deferrals for license fees, support, maintenance and other services for which payment has been received and for which the service has not yet been performed and revenue has not been recognized. Long-term deferred revenue at December 30, 2006, represents amounts received from license fees, maintenance and other services to be earned or provided beginning in periods on or after December 29, 2007.
The Company incurs out-of-pocket expenses in connection with its client service activities, primarily travel, which are reimbursed by its clients. The amounts of ”out-of-pocket” expenses and equal amounts of related reimbursements were $39,051,000, $33,387,000 and $32,081,000 for the years ended December 30, 2006, December 31, 2005 and January 1, 2005, respectively.
The Company’s arrangements with clients typically include a deposit due upon contract signing and date-based licensed software payment terms and payments based upon delivery for services, hardware and sublicensed software. The Company has periodically provided long-term financing options to creditworthy clients through third party financing institutions and has directly provided extended payment terms to clients from contract date. These extended payment term arrangements typically provide for date based payments over periods ranging from 12 months up to five years. Pursuant to SOP 97-2, because a significant portion of the fee is due beyond one year, the Company has analyzed its history with these types of arrangements and has concluded that it does have a standard business practice of using extended payment term arrangements and have a long history of successfully collecting under the original payment terms for arrangements with similar clients, product offerings, and economics without granting concessions. Accordingly, the Company considers the fee to be fixed and determinable in these extended payment term arrangements and, thus, the timing of revenue is not impacted by the existence of extended payments. Some of these payment streams have been assigned on a non-recourse basis to third party financing institutions. The Company accounts for the assignment of these receivables as “true sales” as defined in FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Provided all revenue recognition criteria have been met, the Company recognizes revenue for these arrangements under its normal revenue recognition criteria, net of any payment discounts from financing transactions.
The terms of the Company’s software license agreements with its clients generally provide for a limited indemnification of such intellectual property against losses, expenses and liabilities arising from third-party claims based on alleged infringement by the Company’s solutions of an intellectual property right of such third party. The terms of such indemnification often limit the scope of and remedies for such indemnification obligations and generally include a right to replace or modify an infringing solution. To date, the Company has not had to reimburse any of its

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clients for any losses related to these indemnification provisions pertaining to third-party intellectual property infringement claims. For several reasons, including the lack of prior indemnification claims and the lack of a monetary liability limit for certain infringement cases under the terms of the corresponding agreements with its clients, the Company cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions.
(d)  Fiscal Year - The Company’s fiscal year ends on the Saturday closest to December 31. All references to years in these notes to consolidated financial statements represent fiscal years unless otherwise noted.
(e)  Software Development Costs - Costs incurred internally in creating computer software products are expensed until technological feasibility has been established upon completion of a detailed program design. Thereafter, all software development costs are capitalized and subsequently reported at the lower of amortized cost or net realizable value. Capitalized costs are amortized based on current and expected future revenue for each product with minimum annual amortization equal to the straight-line amortization over the estimated economic life of the product. The Company is amortizing capitalized costs over five years. During 2006, 2005 and 2004, the Company capitalized $60,943,000, $62,039,000 and $62,523,000, respectively, of total software development costs of $262,163,000, $225,606,000 and $188,264,000, respectively. Amortization expense of capitalized software development costs in 2006, 2005 and 2004 was $45,750,000, $47,888,000 and $47,740,000, respectively, and accumulated amortization was $303,010,000, $255,122,000 and $207,382,000, respectively.
(f)  Cash Equivalents – Cash equivalents consist of short-term marketable securities with original maturities less than 90 days.
(g)  Short-term Investments – The Company’s short-term investments are primarily invested in auction rate securities which are debt and preferred stock instruments having longer-dated (in most cases, many years) legal maturities, but with interest rates that are generally reset every 28-49 days under an auction system. Because auction rate securities are frequently re-priced, they trade in the market on par-in, par-out basis. Because the Company regularly liquidates its investments in these securities for reasons including, among others, changes in market interest rates and changes in the availability of and the yield on alternative investments, the Company has classified these securities as available-for-sale securities. As available-for-sale securities, these investments are carried at fair value, which approximates cost. Despite the liquid nature of these investments, the Company categorizes them as short-term investments instead of cash and cash equivalents due to the underlying legal maturities of such securities. However, they have been classified as current assets as they are generally available to support the Company’s current operations. There have been no realized gains or losses on these investments.
(h)  Inventory - Inventory consists primarily of computer hardware and sub-licensed software held for resale and is recorded at the lower of cost (first-in, first-out) or market.
(i)  Property and Equipment - Property, equipment and leasehold improvements are stated at cost. Depreciation of property and equipment is computed using the straight-line method over periods of two to 50 years. Amortization of leasehold improvements is computed using a straight-line method over the shorter of the lease terms or the useful lives, which range from periods of two to 15 years.
(j)  Earnings per Common Share – Basic earnings per share (EPS) excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of

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the Company. A reconciliation of the numerators and the denominators of the basic and diluted per-share computations is as follows:
(In thousands, except per share data)
                                                                             
    2006       2005       2004  
    Earnings     Shares     Per-Share       Earnings     Shares     Per-Share       Earnings     Shares     Per-Share  
    (Numerator)     (Denominator)     Amount       (Numerator)     (Denominator)     Amount       (Numerator)     (Denominator)     Amount  
                 
Basic earnings per share
                                                                           
Income available to common stockholders
  $ 109,891       77,691       1.41       $ 86,251       74,144       1.16       $ 64,648       72,174     $ 0.90  
 
                                                                     
 
                                                                           
Effect of dilutive securities stock options
          4,032                       3,946                       2,968          
 
                                                                           
Diluted earnings per share
                                                                           
                 
Income available to common stockholders including assumed conversions
  $ 109,891       81,723       1.34       $ 86,251       78,090       1.10       $ 64,648       75,142     $ 0.86  
                 
Options to purchase 1,121,000, 166,000 and 3,138,000 shares of common stock at per share prices ranging from $33.86 to $136.86, $38.32 to $136.86 and $22.50 to $136.86, were outstanding at the end of 2006, 2005 and 2004, respectively, but were not included in the computation of diluted earnings per share because they were antidilutive.
(k)  Foreign Currency - Assets and liabilities of foreign subsidiaries whose functional currency is the local currency are translated into U.S. dollars at exchange rates prevailing at the balance sheet date. Revenues and expenses are translated at average exchange rates during the year. The net exchange differences resulting from these translations are reported in accumulated other comprehensive income. Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations. The net gain (loss) resulting from foreign currency transactions is included in general and administrative expenses in the consolidated statements of operations and amounted to $3,764,000, $2,700,000 and ($479,000) in 2006, 2005 and 2004, respectively.
(l)  Income Taxes - Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
(m)  Goodwill and Other Intangible Assets – The Company accounts for goodwill under the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” As a result, goodwill and intangible assets with indefinite lives are not amortized but are evaluated for impairment annually or whenever there is an impairment indicator. All goodwill is assigned to a reporting unit, where it is subject to an impairment test based on fair value. The Company assesses its goodwill for impairment in the second quarter of its fiscal year. There was no impairment of goodwill in 2006 and 2005. The Company used a discounted cash flow analysis to determine the fair value of the reporting units for all periods tested. The Company’s intangible assets, other than goodwill or intangible assets with indefinite lives, are all subject to amortization and are summarized as follows:

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(In thousands)
                                         
            December 30, 2006     December 31, 2005  
    Weighted                            
    Average     Gross             Gross        
    Amortization     Carrying     Accumulated     Carrying     Accumulated  
    Period (Yrs)     Amount     Amortization     Amount     Amortization  
Purchased software
    5.0     $ 56,663       36,031       53,307       29,690  
Customer lists
    5.0       47,793       19,688       45,642       10,514  
Patents
    17.0       6,136       1,198       1,556       133  
Non-compete agreements
    3.0       1,118       364       382       102  
 
                             
Total
    5.64     $ 111,709       57,281       100,887       40,439  
 
                               
Amortization expense was $16,842,000, $17,258,000 and $6,679,000 for the years ended 2006, 2005 and 2004, respectively.
Estimated aggregate amortization expense for each of the next five years is as follows:
                 
For year ended:
    2007     $ 16,704  
 
    2008       14,241  
 
    2009       12,523  
 
    2010       2,116  
 
    2011       25  
The changes in the carrying amount of goodwill for the 12 months ended December 30, 2006 are as follows:
         
Balance as of December 31, 2005
  $ 116,142  
Goodwill acquired
    9,298  
Foreign currency translation adjustment and other
    3,379  
 
     
Balance as of December 30, 2006
  $ 128,819  
 
     
At December 30, 2006 and December 31, 2005, goodwill of $112,312,000 and $101,262,000 has been allocated to the Domestic segment respectively. The 2006 and 2005 amounts of goodwill allocated to the Global segment was $16,507,000 and $14,880,000, respectively.
The Company recorded $1,362,000 of additional goodwill in the first quarter of 2006 to adjust for the impact of accounting for deferred tax liabilities associated with intangible assets in connection with previous stock acquisitions of businesses. At the date of acquisitions prior to 2006, the Company had not recognized deferred tax liabilities related to the difference between the book and tax basis of certain intangible assets. The impact on net earnings related to this oversight was insignificant.
(n)  Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(o)  Concentrations – Substantially all of the Company’s cash and cash equivalents and short-term investments, are held at three major U.S. financial institutions. The majority of the Company’s cash equivalents consist of U.S. Government Federal Agency Securities, short-term marketable securities, and overnight repurchase agreements. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally these deposits may be redeemed upon demand and, therefore, bear minimal risk.

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Substantially all of the Company’s clients are integrated delivery networks, physicians, hospitals and other healthcare related organizations. If significant adverse macro-economic factors were to impact these organizations it could materially adversely affect the Company. The Company’s access to certain software and hardware components is dependent upon single and sole source suppliers. The inability of any supplier to fulfill supply requirements of the Company could affect future results.
(p)  Accounting for Share-based payments — On January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payments,” using the modified prospective method of adoption. SFAS 123R replaces SFAS 123, “Accounting for Stock-Based Compensation,” and supersedes Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123R addresses the accounting for share-based payment transactions with employees and other third parties and requires that the compensation costs relating to such transactions be recognized in the consolidated statement of earnings.
The impact of adopting SFAS 123R had the following cumulative effects:
(In thousands, except per share data)
         
    December 30,
    2006
Decrease in income before income taxes
  $ 19,021  
Decrease in net earnings
    11,746  
Decrease in cash flows from operations
    7,068  
Increase in cash flows from financing activities
    7,068  
Decrease in basic earnings per share
    .15  
Decrease in diluted earnings per share
    .14  
Prior to the adoption of SFAS 123R, the Company applied the intrinsic-value-based method of accounting prescribed by APB Opinion No. 25 to account for its fixed-plan stock options. Under this method, compensation expense was recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. As previously allowed under SFAS 123, the Company only adopted the disclosure requirements of SFAS 123, which established a fair-value-based method of accounting for stock-based employee compensation plans. The following is a reconciliation of reported net earnings to adjusted net earnings had the Company recorded compensation expense based on the fair value at the grant date for its stock options under SFAS 123 for the years ended 2005 and 2004.
(In thousands, except per share data)
                 
    2005     2004  
Reported net earnings
  $ 86,251       64,648  
Less: stock-based compensation expense determined under fair-value-based method for all awards, net of tax
    (10,971 )     (7,903 )
 
           
Adjusted net earnings
    75,280       56,745  
 
           
 
               
Basic earnings per share:
               
 
               
Reported net earnings
  $ 1.16       .90  
Less: stock-based compensation expense determined under fair-value-based method for all awards, net of tax
    (.14 )     (.11 )
 
           
Adjusted net earnings
    1.02       .79  
 
           
 
               
Diluted earnings per share:
               
 
               
Reported net earnings
  $ 1.10       .86  
Less: stock-based compensation expense determined under fair-value-based method for all awards
    (.14 )     (.11 )
 
           
Adjusted net earnings
    .96       .75  
 
           

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(q)  Reclassifications – Certain prior year amounts in our segment disclosures have been reclassified to conform to the current year presentation.
(r) Derivative Instruments and Hedging Activities — The Company follows Statement of Financial Accounting Standards No. 133 (SFAS 133), “Accounting for Derivative Investments and Hedging Activities,” as amended, to account for its derivatives and hedging activities.
The Company has issued foreign-denominated debt to manage its foreign currency exposure related to its net investment in its subsidiary in the United Kingdom (UK). Beginning in 2006, at the beginning of each quarterly period, the Company designated a portion (between £60 million and £63 million during the year) of its debt (£65 million), that is denominated in Great Britain Pounds, to hedge its net investment in the UK. At December 30, 2006 approximately $9 million, net of approximately $6 million of tax, of increases in the debt related to changes in the foreign currency exchange rate were included in accumulated other comprehensive income. Changes in the portion of the foreign-denominated debt that was not designated as a hedging instrument were included in foreign currency transaction gains and losses and were immaterial in 2006.
(s) Recent Accounting Pronouncements — In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 allows registrants to record a one time cumulative effect adjustment to beginning retained earnings in the year of adoption to correct errors existing in prior years deemed to be material in the current year that previously had been considered immaterial. SAB 108 is effective for the fiscal year ending December 30, 2006. The Company assessed the impact of adoption of SAB 108 on its consolidated financial statements and determined there were no uncorrected misstatements deemed to be material under the new interpretive guidance provided in SAB 108.
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes,” which defines the threshold for recognizing the benefits of tax-return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. FIN 48 also prescribes a method for computing the tax benefit of such tax positions to be recognized in the financial statements. In addition, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company is currently assessing the impact of adoption of FIN 48 on its results of operations and its financial position and was required to adopt FIN 48 as of the first day of the 2007 fiscal year.
2 Business Acquisitions and Divestiture
During the three years ended December 30, 2006, the Company completed six acquisitions, which were accounted for under the purchase method of accounting. The results of each acquisition are included in the Company’s Consolidated statements of operations from the date of each acquisition.
On July 5, 2006, the Company completed the purchase of Galt Associates, Inc. (“Galt”) for $13,766,000, net of cash acquired. Galt is a provider of safety and risk management solutions for pharmaceutical, medical device and biotechnology companies. The acquisition of Galt will enhance the Company’s LifeSciences portfolio by adding solutions and services that use medical event data to monitor and manage the safety and effectiveness of various therapies. The allocation of the purchase price to the estimated fair values of the identified tangible and intangible assets acquired and liabilities assumed, resulted in goodwill of $9,298,000 and $4,266,000 in intangible assets. The intangible assets are being amortized over periods between two and five years. Pro-forma results of operations have not been presented because the effect of this acquisition was not material to the Company.
On January 3, 2005, the Company completed the purchase of assets of the medical business division of VitalWorks, Inc. for approximately $100,000,000, which was funded with existing cash of approximately $65,000,000 and borrowings on the revolving line of credit of approximately $35,000,000. The medical business consists of delivering and supporting physician practice management, electronic medical record, electronic data interchange and emergency department information solutions and related products and services to physician practices, hospital emergency departments, management service organizations and other related entities. The acquisition of VitalWorks’ medical division expanded the Company’s presence in the physician practice market. $6,382,000 of the purchase price was allocated to in-process research and development that had not reached technological feasibility and is reflected as a charge to earnings in 2005. The allocation of the purchase price to the estimated fair values of the identified tangible and intangible assets acquired and liabilities assumed, resulted in goodwill of $55,166,000 and $43,450,000 in intangible assets that will be amortized over five years.

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On March 15, 2004 the Company sold the referential content portion of Zynx Health Incorporated (Zynx) for $12,000,000. The Company retained the life sciences portion of the business, which is engaged in selling life sciences data to pharmaceutical companies for use in research, and the Company retained the rights to use the Zynx content in its solutions going forward. The sale of Zynx resulted in a gain of $3,023,000, and has been included in Other Income, net in the accompanying consolidated statements of operations.
In connection with filing the Company’s 2004 income tax return, management determined that the sale of Zynx in the first quarter of 2004 resulted in a tax capital loss. This tax capital loss was carried back against capital gains previously realized resulting in tax benefits of $4,794,000. The tax benefit was not recorded in the 2004 consolidated financial statements.
The tax benefit, if properly recorded in 2004, would have increased 2004 net earnings by $4,794,000. As the impact to prior year’s annual consolidated financial statements was not material, the Company recorded this tax benefit of $4,794,000 in the third quarter of 2005 (an increase to 2005 net earnings of $0.06 per share on a diluted basis for the year ended December 31, 2005).
A summary of the Company’s purchase acquisitions for the three years ended December 30, 2006, is included in the following table (in millions, except share amounts):
                                                 
                    Goodwill                
Entity Name, Description of Business                   (Tax           Developed   Form of
Acquired, and Reason Business Acquired   Date   Consideration   Basis)   Intangibles   Technology   Consideration
Fiscal 2006 Acquisition
                                               
Galt Associates, Inc.
    7/06     $ 13.7     $ 9.3     $ 2.7     $ 1.6     $13.7 cash
 
                                               
Safety and risk management software for pharmaceutical, medical device and biotechnology companies
                    (0 )                        
 
                                               
Integrate technology into Cerner Millennium
                                               
Fiscal 2005 Acquisition
                                               
Bridge Medical, Inc.
    7/05     $ 11     $ 5.4   $ 5.5     $ 2.9     $11 cash
 
                                               
Leader in point-of-care software market
                  ($ 5.4 )                        
 
                                               
Integrate technology into Cerner Millennium
                                               
DKE SARL (Axya Systemes)
    5/05     $ 5.2     $ 1.2     $ 1.8     $ 1.5     $5.2 cash
 
                                               
Financial, Administrative, and Clinical Solutions in Europe
                    (0 )                        
 
                                               
Integrate technology into Cerner Millennium
                                               
Medical Division of VitalWorks, Inc.
    1/05     $ 100     $ 55.2   $ 35.1     $ 8.4     $100 cash
 
                                               
Physician Practice Solutions
                  ($ 55.2 )                        
 
                                               
Integrate technology into Cerner Millennium
                                               
Fiscal 2004 Acquisition
                                               
Gajema Software, LLC
    8/04     $ 1.5     $ .6         $ .8     $1.5 cash
 
                                               
Laboratory information management and logistics
                  ($ .6 )                        
 
                                               
Integrate technology into Cerner Millennium
                                               
Project IMPACT CCM, Inc.
    2/04     $ .3     $ .7           $ .6     $.3 cash
 
                                               
ICU performance analysis and benchmarking
                    (0 )                        
 
                                               
Integrate technology into Cerner Millennium
                                               

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Amounts allocated to intangibles are amortized on a straight-line basis over five to seven years. Amounts allocated to software are amortized based on current and expected future revenues for each product with minimum annual amortization equal to the straight-line amortization over the estimated economic life of the product.
(a) The assets and liabilities of the acquired companies at the date of acquisition are as follows:
                                                 
                            Medical        
                            Division of   Project    
    Galt   Bridge   Axya   VitalWorks,   IMPACT   Gajema
    Associates, Inc.   Medical, Inc.   Systemes   Inc.   CCM, Inc.   Software
Current Assets
    751,000       1,172,000       2,680,000       11,404,000       644,000       72,000  
Total Assets
    15,372,000       15,802,000       7,209,000       120,175,000       1,867,000       1,551,000  
Current Liabilities
    1,606,000       4,748,000       2,244,000       17,064,000       1,050,000       51,000  
Total Liabilities
    1,606,000       4,783,000       2,483,000       19,877,000       1,201,000       51,000  
On February 22, 2007, the Company completed the purchase of assets of Etreby Computer Company, Inc. (“Etreby”), for $25,100,000. Etreby is a software provider of retail pharmacy management systems. Cerner is in the process of determining its allocation of the purchase price to the net assets acquired.
3 Receivables
Receivables consist of accounts receivable and contracts receivable. Accounts receivable represent recorded revenues that have been billed. Contracts receivable represent recorded revenues that are billable by the Company at future dates under the terms of a contract with a client. Billings and other consideration received on contracts in excess of related revenues recognized are recorded as deferred revenue. A summary of receivables is as follows:
(In thousands)
                 
    2006     2005  
     
Accounts receivable, net of allowance
  $ 228,676       216,248  
Contracts receivable
    132,748       100,717  
 
           
 
               
Total receivables, net
  $ 361,424       316,965  
 
           
Substantially all receivables are derived from sales and related support and maintenance of the Company’s clinical, administrative and financial information systems and solutions to healthcare providers located throughout the United States and in certain foreign countries. Included in receivables at the end of 2006 and 2005 are amounts due from healthcare providers located in foreign countries of $76,805,000 and $32,533,000, respectively. Consolidated revenues include foreign sales of $207,367,000, $113,314,000 and $62,426,000 during 2006, 2005 and 2004, respectively. Consolidated long-lived assets at the end of 2006 and 2005 include foreign long-lived assets of $15,055,000 and $9,723,000, respectively. Revenues and long-lived assets from any one foreign country are not material.
The Company performs ongoing credit evaluations of its clients and generally does not require collateral from its clients. The Company provides an allowance for estimated uncollectible accounts based on specific identification, historical experience and management’s judgment. At the end of 2006 and 2005 the allowance for estimated uncollectible accounts was $14,628,000 and $18,855,000, respectively. The decline in the allowance for estimated uncollectible accounts from 2005 to 2006 was primarily driven by the improved aging of receivables, as reflected in a lower level of past due accounts as well write-off of accounts for which specific reserves had been established.
During 2006 and 2005, the Company received total client cash collections of $1,457,600,000 and $1,200,600,000, respectively, of which $108,814,000 and $82,355,000 were received from third party arrangements with non-recourse payment assignments.

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4 Property and Equipment
A summary of property, equipment, and leasehold improvements stated at cost, less accumulated depreciation and amortization, is as follows:
(In thousands)
                     
    Depreciable lives   2006     2005  
Furniture and fixtures
  5 – 12 yrs   $ 41,914       42,458  
Computer and communications equipment
  2 - 5 yrs     308,370       246,973  
Leasehold improvements
  2 – 15 yrs     95,433       69,633  
Capital lease equipment
  3 – 5 yrs     17,333       14,705  
Land, buildings, and improvements
  12 – 50 yrs     144,820       126,195  
Other Equipment
  5 – 20 yrs     4,299       3,310  
 
               
 
        612,169       503,274  
Less accumulated depreciation and amortization
        254,227       210,666  
 
               
 
                   
Total property and equipment, net
      $ 357,942       292,608  
 
               
Depreciation expense for the years ended December 30, 2006, December 31, 2005 and January 1, 2005, was $61,380,000, $49,057,000 and $41,886,000, respectively.
5 Indebtedness
In November 2005, the Company completed a £65,000,000 ($127,322,000 at December 30, 2006) private placement of debt at 5.54% pursuant to a Note Agreement. The Note Agreement is payable in seven equal annual installments beginning in November 2009. The proceeds were used to repay the outstanding amount under the Company’s credit facility and for general corporate purposes. The Note Agreement contains certain net worth and fixed charge coverage covenants and provides certain restrictions on the Company’s ability to borrow, incur liens, sell assets and pay dividends. The Company was in compliance with all covenants at December 30, 2006.
In December 2002, the Company completed a $60,000,000 private placement of debt pursuant to a Note Agreement. The Series A Senior Notes, with a $21,000,000 principal amount at 5.57%, are payable in three equal installments beginning in December 2006. The Series B Senior notes, with a $39,000,000 principal amount at 6.42%, are payable in four equal annual installments beginning December 2009. The proceeds were used to repay the outstanding amount under the Company’s credit facility and for general corporate purposes. The Note Agreement contains certain net worth and fixed charge coverage covenants and provides certain restrictions on the Company’s ability to borrow, incur liens, sell assets and pay dividends. The Company was in compliance with all covenants at December 30, 2006.
In May 2002, the Company expanded its credit facility by entering into an unsecured credit agreement with a group of banks led by US Bank. This agreement was amended and restated on November 30, 2006 and provides for a current revolving line of credit for working capital purposes. The current revolving line of credit is unsecured and requires monthly payments of interest only. Interest is payable at the Company’s option at a rate based on prime (8.25% at December 30, 2006) or LIBOR (5.32% at December 30, 2006) plus 1.55%. The interest rate may be reduced by up to 1.15% if certain net worth ratios are maintained. The agreement contains certain net worth, current ratio, and fixed charge coverage covenants and provides certain restrictions on the Company’s ability to borrow, incur liens, sell assets, and pay dividends. A commitment fee of 2/10% is payable quarterly based on the usage of the revolving line of credit. The revolving line of credit matures on May 31, 2010. On January 10, 2005, the Company drew down $35,000,000 from its revolving line of credit in connection with the acquisition of the medical business division of VitalWorks. (See Note 2 to the consolidated financial statements.) This amount was paid in full as of December 31, 2005. At December 30, 2006, the Company had no outstanding borrowings under this agreement and had $90,000,000 available for working capital purposes. The Company was in compliance with all covenants at December 30, 2006.

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In April 1999, the Company completed a $100,000,000 private placement of debt pursuant to a Note Agreement. The Series A Senior Notes, with a $60,000,000 principal amount of 7.14% were paid in full in 2006. The Series B Senior Notes, with a $40,000,000 principal amount at 7.66%, are payable in six equal annual installments which commenced in April 2004. The proceeds were used to retire the Company’s existing $30,000,000 of debt, and the remaining funds were used for capital improvements and to strengthen the Company’s cash position. The Note Agreement contains certain net worth, current ratio, and fixed charge coverage covenants and provides certain restrictions on the Company’s ability to borrow, incur liens, sell assets, and pay dividends. The Company was in compliance with all covenants at December 30, 2006.
In March 2004, the Company issued a $7,500,000 promissory note to Cedars-Sinai Medical Center of which $2,500,000 was repaid in October 2004. The balance of the note will be payable on April 30, 2007.
The Company also has capital lease obligations amounting to $2,311,000, payable over the next three years.
The aggregate maturities for the Company’s long-term debt, including capital lease obligations, is as follows (in thousands):
         
2007
    20,242  
2008
    14,395  
2009
    34,612  
2010
    27,939  
2011
    27,939  
2012 and thereafter
    82,506  
 
     
 
  $ 207,633  
 
     
The Company estimates the fair value of its long-term, fixed-rate debt using a discounted cash flow analysis based on the Company’s current borrowing rates for debt with similar maturities. The fair value of the Company’s long-term debt was approximately $185,154,000 and $206,904,000 at December 30, 2006 and December 31, 2005, respectively.
6 Interest Income (Expense)
A summary of interest income and expense is as follows:
(In thousands)
                         
    2006     2005     2004  
     
Interest income
  $ 11,877       3,871       3,022  
Interest expense
    (12,574 )     (9,729 )     (9,174 )
 
                 
 
                       
Interest expense, net
  $ (697 )     (5,858 )     (6,152 )
 
                 
7 Stock Options and Equity
At the end of 2006 and 2005, the Company had 1,000,000 shares of authorized but unissued preferred stock $.01, par value.

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As of December 30, 2006, the Company had four fixed stock option and equity plans in effect for associates. Amounts recognized in the consolidated financial statements with respect to these plans are as follows:
                         
    2006     2005     2004  
     
Total cost of share-based payments for the period
  $ 19,973,000     $ 727,000     $ 225,000  
Amounts capitalized in software development costs
    (952,000 )            
 
                 
Amounts charged against earnings, before income tax benefit
    19,021,000       727,000       225,000  
 
                 
Amount of related income tax benefit recognized in earnings
  $ 7,275,000     $ 278,000     $ 86,100  
 
                 
During 2006, the Company had two long-term incentive plans from which it could issue grants.
Under the 2001 Long-Term Incentive Plan F, the Company is authorized to grant to associates, directors and consultants 4,000,000 shares of common stock awards taking into account the stock-split effective January 10, 2006. Awards under this plan may consist of stock options, restricted stock and performance shares, as well as other awards such as stock appreciation rights, phantom stock and performance unit awards which may be payable in the form of common stock or cash. However, not more than 1,000,000 of such shares will be available for granting any types of grants other than options or stock appreciation rights. Options under Plan F are exercisable at a price not less than fair market value on the date of grant as determined by the Stock Option Committee. Options under this plan typically vest over a period of five years as determined by the Stock Option Committee and are exercisable for periods of up to 25 years.
Long-Term Incentive Plan G was approved by the Company’s shareholders on May 28, 2004. Under the 2004 Long-Term Incentive Plan G, the Company is authorized to grant to associates and directors 4,000,000 shares of common stock awards taking into account the stock-split effective January 10, 2006. Awards under this plan may consist of stock options, restricted stock and performance shares, as well as other awards such as stock appreciation rights, phantom stock and performance unit awards which may be payable in the form of common stock or cash. Options under Plan G are exercisable at a price not less than fair market value on the date of grant as determined by the Stock Option Committee. Options under this plan typically vest over a period of five years as determined by the Stock Option Committee and are exercisable for periods of up to 12 years.
In addition to the stock option plans, the Company has also granted 1,708,170 other non-qualified stock options over time through December 30, 2006, under separate agreements to employees and certain third parties. These options are exercisable at a price equal to or greater than the fair market value on the date of grant. These options vest over periods of up to six years and are exercisable for periods of up to ten years.
The fair value of each stock option award is estimated on the date of grant using a lattice option-pricing model for 2006 and using the Black-Scholes option-pricing model for 2005 and 2004 based on the assumptions noted in the following table. Expected volatilities under the lattice model are based on an equal weighting of implied volatilities from traded options on the Company’s shares and historical volatility. Expected volatilities under the Black-Scholes model were based entirely on historical volatility. The Company uses historical data to estimate stock option exercise and associate departure behavior used in the lattice model; groups of associates (executives and non-executives) that have similar historical behavior are considered separately for valuation purposes. The expected term of stock options granted is derived from the output of the lattice option-pricing model and represents the period of time that stock options granted are expected to be outstanding; the range given below results from certain groups of associates exhibiting different post-vesting behaviors. The expected term under the Black-Scholes model was determined using the simplified method of estimating the term as described in Staff

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Accounting Bulletin 107. The risk-free rate used in 2006, 2005 and 2004 is based on the zero-coupon U.S. Treasury bond with a term equal to the expected term of the awards.
                         
    2006   2005   2004
Expected volatility
    46.83% - 48.15 %     45.38% - 49.10 %     67.3 %
Expected term (in years)
    8.0-8.7       6.6       4.7  
Risk-free rate
    4.9 %     4.1 %     4.3 %
A combined summary of the stock option activity of the Company’s four fixed stock option and equity plans (Non-Qualified Stock option Plans D and E were in effect during 2003 and 2004; no grants were permitted to be issued from Plans D and E after January 1, 2005 pursuant to the terms of the Plans) and other stock options at the end of 2006, 2005 and 2004 are presented below:
                                                         
    2006   2005   2004
            Weighted-   Aggregate           Weighted-           Weighted-
    Number of   average   Intrinsic   Number of   average   Number of   average
Fixed options   Shares   exercise price   Value   Shares   exercise price   Shares   exercise price
         
Outstanding at beginning of year
    11,039,522     $ 18.51               14,545,148     $ 16.25       16,287,228     $ 15.19  
Granted
    1,044,230       42.63               1,341,286       33.77       1,787,586       22.32  
Exercised
    (1,352,318 )     15.78               (4,272,960 )     15.62       (2,165,034 )     11.82  
Forfeited
    (298,986 )     24.32               (573,952 )     18.18       (1,364,632 )     18.03  
         
Outstanding at end of year
    10,432,448     $ 21.11     $ 177,409,878       11,039,522     $ 18.51       14,545,148     $ 16.25  
 
                                                       
Options exercisable at year-end
    5,391,750     $ 15.98     $ 116,135,878       4,813,058     $ 15.56       6,986,934     $ 15.72  
The following table summarizes information about fixed and other stock options outstanding at December 30, 2006.
                                                 
Options outstanding   Options exercisable
                                    Weighted    
    Number   Weighted-average   Weighted-   Number   average   Weighted-
Range of   outstanding   remaining   average   exercisable at   remaining   average
exercise prices   at 12/30/06   contractual life   exercise price   12/30/06   contractual life   exercise price
$6.25-12.00
    2,750,478       7.90 years   $ 9.53       1,784,766             $ 9.38  
12.16-20.99
    2,966,525       7.68       16.81       2,076,983               16.13  
21.00-31.40
    3,238,541       6.46       25.44       1,524,897               23.37  
31.75-136.86
    1,476,904       9.13       41.83       5,104               58.69  
 
                                               
 
    10,432,448       7.57       21.11       5,391,750       7.44 years     15.98  
 
                                               
The weighted-average grant date fair value of stock options granted during 2006, 2005 and 2004 was $22.02, $17.86 and $12.88, respectively. The total intrinsic value of stock options exercised in 2006 and 2005 was $39,276,000 and $81,720,000, respectively. The Company issues new shares to satisfy option exercises.
The Company established an Associate Stock Purchase Plan (ASPP) in 2001, which qualifies under Section 423 of the Internal Revenue Code. Each individual employed by the Company and associates of the Company’s United States based subsidiaries, except as provided below, shall be eligible to participate in the Plan (“Participants”). The following individuals shall be excluded from participation: (a) persons who, as of the beginning of a purchase period under the Plan, have been continuously employed by the Company or its domestic subsidiaries for less than two weeks; (b) persons who, as of the beginning of a purchase period, own directly or indirectly, or

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hold options or rights to acquire under any agreement or Company plan, an aggregate of 5% or more of the total combined voting power or value of all outstanding shares of all classes of Company Common Stock; and, (c) persons who are customarily employed by the Company for less than 20 hours per week or for less than five months in any calendar year. Participants may elect to make contributions from 1% to 20% of compensation to the ASPP, subject to annual limitations determined by the Internal Revenue Service. Participants may purchase Company Common Stock at a 15% discount on the last day of the purchase period. The purchase of the Company’s common stock is made through the ASPP on the open market and subsequently reissued to the associates. Under FAS123R, the difference of the open market purchase and the participant’s purchase price is being recognized as compensation expense.
The Company granted 15,000 shares of restricted stock from Plan F to members of the Board of Directors on July 6, 2004 valued at $21.16 and vesting on May 26, 2005. The Company made additional grants of restricted stock from Plan F to members of the Board of Directors during 2005. 5,000 shares of restricted stock were granted on April 4, 2005 valued at $26.19, vesting as follows: 1,666 on February 2, 2006; 1,666 on February 2, 2007; and 1,668 on February 2, 2008. 25,000 shares of restricted stock were granted on June 3, 2005 valued at $31.41, vesting on May 25, 2006. The Company granted 5,000 shares of restricted stock from Plan G to a member of the Board of Directors on June 3, 2005 valued at $31.41, vesting as follows: 1,666 on May 25, 2006; 1,666 on May 24, 2007; and 1,668 on May 22, 2008. The Company granted 5,000 shares of restricted stock from Plan F to an employee on June 13, 2005 valued at $31.79. In 2006, the Company granted: 15,000 shares of restricted stock from Plan F to members of the Board of Directors on May 26, 2006 valued at $36.61 and vesting on May 24, 2007, and 6,000 shares of restricted stock from Plan F to members of the Board of Directors on July 25, 2006 valued at $38.75 and vesting on May 24, 2007. All grants were valued at the fair market value on the date of grant and vest provided the recipient has continuously served on the Board of Directors through such vesting date or in the case of an employee provided that performance measures are attained. The expense associated with these grants is being recognized over the period from the date of grant to the vesting date. The Company recognized expenses related to the restricted stock of $853,000 and $780,000 in 2006 and 2005, respectively.
A summary of the Company’s nonvested shares as of December 30, 2006 is presented below:
                 
            Weighted-Average
    Number of   Grant Date
Nonvested stock   Shares   Fair Value
 
Outstanding at January 1, 2006
    40,000     $ 30.80  
Granted
    21,000     $ 37.22  
Vested
    (28,332 )   $ 31.10  
Forfeited
           
 
               
Outstanding at December 30, 2006
    32,668     $ 34.67  
 
               
As of December 30, 2006 there was $32,522,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements (including stock option and nonvested share awards) granted under all plans. That cost is expected to be recognized over a weighted-average period of 1.74 years. The total fair value of shares vested during 2006 was $1,031,000. The total fair value of shares vested during 2005 was $494,400.
8 Foundations Retirement Plan
The Cerner Corporation Foundations Retirement Plan (the Plan) is established under Section 401(k) of the Internal Revenue Code. All associates over age 18 and not a member of an excluded class are eligible to participate. Participants may elect to make pretax contributions from 1% to 80% of eligible compensation to the Plan, subject to annual limitations determined by the Internal Revenue Service. Participants may direct contributions into mutual funds, a money

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market fund, or a Company stock fund. The Company makes matching contributions to the Plan, on behalf of participants, in an amount equal to 33% of the first 6% of the participant’s salary contribution. The Company’s expense for the plan amounted to $7,791,000, $7,130,000 and $5,994,000 for 2006, 2005 and 2004, respectively.
The Company added a discretionary match to the Plan in 2000. Contributions are based on attainment of established earnings per share goals for the year or the established financial metric for the plan. Only participants in the Plan are eligible to receive the discretionary match contribution. For the years ended 2006, 2005 and 2004 the Company expensed $6,638,000, $5,783,000 and $5,186,000 for discretionary distributions, respectively.
9 Income Taxes
Income tax expense (benefit) for the years ended 2006, 2005 and 2004 consists of the following:
(In thousands)
                         
    2006     2005     2004  
     
Current:
                       
Federal
  $ 44,139       47,499       37,524  
State
    7,855       7,549       6,756  
Foreign
    (2,987 )     819       (1,303 )
 
                 
Total current expense
    49,007       55,867       42,977  
 
                 
 
                       
Deferred:
                       
Federal
    6,586       (2,964 )     1,712  
State
    (1,431 )     (2,382 )     174  
Foreign
    3,491       (1,528 )     (1,591 )
 
                 
Total deferred expense (benefit)
    8,646       (6,874 )     295  
 
                 
 
                       
Total income tax expense
  $ 57,653       48,993       43,272  
 
                 
Temporary differences between the financial statement carrying amounts and tax basis of assets and liabilities that give rise to significant portions of deferred income taxes at the end of 2006 and 2005 relate to the following:
(In thousands)
                 
    2006     2005  
     
Deferred Tax Assets
               
 
               
Accrued expenses
  $ 15,224       17,178  
Separate return net operating losses
    8,129       6,822  
Hedge of net investment in foreign subsidiary
    7,189        
Other
    4,336       3,633  
 
           
Total deferred tax assets
    34,878       27,633  
 
           
 
               
Deferred Tax Liabilities
               
 
               
Software development costs
    (71,035 )     (65,885 )
Contract and service revenues and costs
    (12,881 )     (7,433 )
Depreciation and amortization
    (17,138 )     (17,389 )
Other
    (94 )     (1,739 )
 
           
Total deferred tax liabilities
    (101,148 )     (92,446 )
 
           
 
               
Net deferred tax liability
  $ (66,270 )     (64,813 )
 
           
Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are expected to be deductible, as well as the scheduled reversal of deferred tax liabilities, management believes it is more likely than not the Company will realize the benefit of these deductible differences. At December 30, 2006, the Company has net operating loss carryforwards subject to Section 382 of the Internal Revenue Code for Federal income tax purposes of $21.3 million which are available to offset future Federal taxable income, if any, through 2020.

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The effective income tax rates for 2006, 2005 and 2004 were 34%, 36%, and 40%, respectively. These effective rates differ from the federal statutory rate of 35% as follows:
(In thousands)
                         
    2006     2005     2004  
     
Tax expense at statutory rates
  $ 58,640       47,335       37,772  
State income tax, net of federal benefit
    4,176       4,396       3,507  
Zynx tax benefit adjustment
          (4,794 )     1,551  
Prior period adjustment
    (1,994 )            
Other, net
    (3,169 )     2,056       442  
 
                 
 
                       
Total income tax expense (benefit)
  $ 57,653       48,993       43,272  
 
                 
The 2006 tax expense includes the recognition of approximately $1,994,000 of tax benefits for items related to prior periods. The adjustments were recorded primarily to recognize tax credits taken on prior income tax returns and to correct an error in prior years’ effective foreign tax rate. These differences have accumulated over several years, and the impact to any one of these prior years is insignificant.
Income taxes payable are reduced by the tax benefit resulting from disqualifying dispositions of stock acquired under the Company’s stock option plans. The 2006, 2005 and 2004 benefits of $9,372,000, $30,289,000 and $9,191,000, respectively, are treated as increases to additional paid-in capital.
10 Related Party Transactions
The Company leases an airplane from a company owned by Mr. Neal L. Patterson and Mr. Clifford W. Illig. the Company’s Chairman/CEO and Vice Chairman of the Board, respectively. The airplane is leased on a per mile basis with no minimum usage guarantee. The lease rate is believed to approximate fair market value for this type of aircraft. During 2006 and 2005, respectively, the Company paid an aggregate of $670,000 and $812,000 for the rental of the airplane. The airplane is used principally by Mr. Paul Black, Chief Operating Officer, and Mr. Trace Devanny, President, to make client visits.
11 Commitments
The Company leases space to unrelated parties in its North Kansas City headquarters complex and in other business locations under noncancelable operating leases. Included in other revenues is rental income of $305,000, $583,000 and $63,000 in 2006, 2005 and 2004, respectively.
The Company is committed under operating leases for office space and computer equipment through December 2023. Rent expense for office and warehouse space for the Company’s regional and global offices for 2006, 2005, and 2004 was $11,391,000, $9,056,000 and $6,470,000, respectively. Aggregate minimum future payments (in thousands) under these noncancelable operating leases are as follows:
         
    Aggregate
    minimum
    future
Years   payments
 
2007
    17,567  
2008
    15,615  
2009
    12,387  
2010
    10,512  
2011
    10,154  
2012 and thereafter
    45,482  
12 Segment Reporting
The Company has two operating segments, Domestic and Global. Beginning in 2006, we began allocating certain expenses related to our managed services that were previously classified as Other to the geographic segment to which they relate. As a result, the prior periods have been retroactively adjusted to reflect the change in reportable segments. Revenues are derived primarily from the sale of clinical, financial and administrative information systems and solutions. The cost of revenues includes the cost of third party consulting services, computer hardware and sublicensed software purchased from computer and software manufacturers for delivery to clients. It also includes the cost of hardware

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maintenance and sublicensed software support subcontracted to the manufacturers. Operating expenses incurred by the geographic business segments consist of sales and client service expenses including salaries of sales and client service personnel, communications expenses and unreimbursed travel expenses. Performance of the segments is assessed at the operating earnings level and, therefore, the segment operations have been presented as such. “Other” includes revenues not generated by the operating segments and expenses such as software development, marketing, general and administrative and depreciation that have not been allocated to the operating segments. The Company does not track assets by geographical business segment.
Accounting policies for each of the reportable segments are the same as those used on a consolidated basis. The following table presents a summary of the operating information for the years ended December 30, 2006 and December 31, 2005.
                                 
    Operating Segments  
2006   Domestic     Global     Other     Total  
Revenues
  $ 1,166,662       207,367       4,009       1,378,038  
 
                       
 
                               
Cost of revenues
    251,574       39,224       172       290,970  
Operating expenses
    308,085       107,571       505,245       920,901  
 
                       
Total costs and expenses
    559,659       146,795       505,417       1,211,871  
 
                               
 
                       
Operating earnings
  $ 607,003       60,572       (501,408 )     166,167  
 
                       
                                 
    Operating Segments  
2005   Domestic     Global     Other     Total  
Revenues
  $ 1,043,804       113,317       3,664       1,160,785  
 
                       
 
                               
Cost of revenues
    238,096       17,189       (599 )     254,686  
Operating expenses
    288,098       48,098       429,467       765,663  
 
                       
Total costs and expenses
    526,194       65,287       428,868       1,020,349  
 
                       
 
                               
 
                       
Operating earnings
  $ 517,610     $ 48,030     $ (425,204 )   $ 140,436  
 
                       
                                 
    Operating Segments  
2004   Domestic     Global     Other     Total  
Revenues
  $ 862,276       62,426       1,654       926,356  
 
                       
 
                               
Cost of revenues
    187,114       7,582       1,652       196,348  
Operating expenses
    201,721       33,989       382,834       618,544  
 
                       
Total costs and expenses
    388,835       41,571       384,486       814,892  
 
                       
 
                               
 
                       
Operating earnings
  $ 473,441     $ 20,855     $ (382,832 )   $ 111,464  
 
                       

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13 Accrued Vacation Pay Adjustment
In conjunction with a review of the process for calculating the liability for accrued vacation pay at the end of the third quarter of 2004, the Company determined that the liability on the balance sheet relating to periods prior to 2004 was understated by $3,346,000. While the Company was fully accrued for all vested vacation that would be subject to payout upon termination, the Company understated the liability for accumulated vacation that could be used in subsequent periods by associates in excess of the vested amount payable upon termination.
The expense, if properly recorded in 2000 through 2003, would have increased 2003 net earnings by $0.1 million and would have decreased net earnings by $0.4 million in 2002, $0.6 million in 2001, and $1.2 million in 2000. The cumulative impact on net earnings is a decrease of $2.1 million for this four-year period. The impact on 2004 net earnings is a positive $8 thousand. As the impact to prior year’s annual financial statements was not material, Cerner recorded additional expense of $3,346,000, $2,076,000 million after-tax, in the 2004 third quarter to appropriately reflect the liability as of October 2, 2004. The Company has revised its process for calculating the liability for accumulated vacation to accurately report this information in the future.
14 Stock Split
On December 14, 2005 the Company’s Board of Directors announced a two-for-one stock split, payable on January 9, 2006 in the form of a one hundred percent (100%) stock dividend to shareholders of record on December 30, 2005. In connection with the stock split, a portion of the distribution of the stock dividend came from 1,502,999 treasury shares previously reflected in the consolidated balance sheets. All share and per share data have been retroactively adjusted for all periods presented to reflect the stock split including the use of treasury shares, as if the stock split had occurred at the beginning of the earliest period presented. The number of common shares issued and outstanding at December 31, 2005 previously presented in the Company’s 2005 Annual Report on Form 10-K was overstated by 1,502,999 shares. This has been corrected in the accompanying consolidated balance sheet and statement of changes in equity noting the correct number of common shares issued and outstanding at December 31, 2005, January 1, 2005 and January 3, 2004 was 77,011,464, 73,273,938 and 71,108,730, respectively.

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15 Quarterly Results (unaudited)
Selected quarterly financial data for 2006 and 2005 is set forth below:
(In thousands, except per share data)
                                         
                            Basic     Diluted  
            Earnings     Net     Earnings     Earnings  
    Revenues     before income taxes     earnings     per share (5)     per share (5)  
     
2006 quarterly results: (1)
                                       
 
                                       
April 1
  $ 321,224       33,426       20,144       .26       .25  
July 1
    330,572       39,368       23,873       .31       .29  
Sept. 30
    345,452       43,831       26,728       .34       .33  
December 30 (2)
    380,790       50,919       39,146       .50       .48  
 
 
                                       
Total
  $ 1,378,038       167,544       109,891                  
 
                                 
 
                                       
2005 quarterly results:
                                       
 
                                       
April 2 (3)
  $ 262,354       20,941       12,520       .17       .16  
July 2
    277,815       32,889       19,803       .27       .26  
October 1 (4)
    294,622       36,149       26,556       .36       .34  
December 31
    325,814       45,265       27,372       .36       .34  
 
 
                                       
Total
  $ 1,160,785       135,244       86,251                  
 
                                 
 
(1)   Includes share-based compensation expense. The impact of this expense a decrease in net earnings and a decrease to diluted earnings per share by quarter as follows.
 
    (In millions, except per share data)
    Net earnings,              
    net of tax     Tax     Diluted Earnings  
    benefit     benefit     per share  
     
2006 quarterly results:
                       
April 1
  $ 2.9       1.8       .03  
July 1
    3.1       2.0       .04  
Sept. 30
    2.9       1.8       .03  
December 30
    2.8       1.7       .03  
     
(2)   Includes a tax benefit of $7.9 million related to the extension of the Federal research and development credit, the recognition of certain state tax benefits and adjustments to correct certain federal and foreign items unrelated to the fourth quarter of 2006. This results in an increase to diluted earnings per share of $.10.
 
(3)   Includes a charge for the write-off of acquired in process research and development related to the acquisition of the medical business division of VitalWorks, Inc. The impact of this charge is a $3.9 million decrease, net of $2.4 million tax benefit, in net earnings and a decrease to diluted earnings per share of $.05 for the first quarter and 2005.
 
(4)   Includes a tax benefit of $4.8 million relating to the carryback of a capital loss generated by the sale of Zynx Health Incorporated in the first quarter of 2004. The impact of this refund claim is a $4.8 million increase in net earnings and an increase in diluted earnings per share of $.06 for the third quarter and 2005.
 
(5)   Reflects the effect of a split distributed on January 9, 2006.

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Table of Contents

     
Cerner Corporation
   
Valuation and Qualifying Accounts
  Schedule II
                                         
            Additions                
    Balance at   Charged to   Additions            
    Beginning   Costs and   Through           Balance at
Description   of Period   Expenses   Acquisitions   Deductions   End of Period
 
For Year Ended January 1, 2005
                                       
 
                                       
Doubtful Accounts and Sale Allowances
  $ 12,056,000     $ 8,144,000     $     $ (2,617,000 )   $ 17,583,000  
                                         
                    Additions            
                    Through            
            Additions   Acquisitions and            
    Balance at   Charged to   Consolidation of            
    Beginning   Costs and   Variable Interest           Balance at
Description   of Period   Expenses   Entity   Deductions   End of Period
 
For Year Ended December 31, 2005
                                       
 
                                       
Doubtful Accounts and Sale Allowances
  $ 17,583,000     $ 5,758,000     $ 3,136,000     $ (7,622,000 )   $ 18,855,000  
                                         
            Additions                
    Balance at   Charged to   Additions            
    Beginning   Costs and   Through           Balance at
Description   of Period   Expenses   Acquisitions   Deductions   End of Period
 
For Year Ended December 30, 2006
                                       
 
                                       
Doubtful Accounts and Sale Allowances
  $ 18,855,000     $ 3,258,000     $ 34,000     $ (7,519,000 )   $ 14,628,000  

 


Table of Contents

Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Cerner Corporation:
Under date of February 28, 2007, we reported on the consolidated balance sheets of Cerner Corporation and subsidiaries (the Corporation) as of December 30, 2006 and December 31, 2005, and the related consolidated statements of operations, changes in equity, and cash flows for each of the years in the three-year period ended December 30, 2006, which are included in the Corporation’s 2006 annual report on Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related consolidated financial statement schedule as listed under Item 15(a)(2). This consolidated financial statement schedule is the responsibility of the Corporation’s management. Our responsibility is to express an opinion on this consolidated financial statement schedule based on our audits.
In our opinion, this consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Our report dated February 28, 2007 on the consolidated financial statements contains an explanatory paragraph that states that as discussed in Note 1 to the consolidated financial statements the Corporation adopted Statement of Financial Standards No. 123 (revised 2004), “Share-Based Payment” effective January 1, 2006.
(signed) KPMG LLP
 
Kansas City, Missouri
February 28, 2007

 

Exhibit 4a
(CERITIFICATE)

 


 

CERNER CORPORATION
     The Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.
     The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:
                 
TEN COM
    as tenants in common   UNIF GIFT MIN ACT–                        Custodian                     
TEN ENT
    as tenants by the entireties            (Cust)                      (Minor)
JT TEN
    as joint tenants with right       under Uniform Gifts to Minors
 
      of survivorship and not as        
 
      tenants in common       Act                                               
 
                                  (State)
Additional abbreviations may also be used though not in the above list.
(CERNER CORPORATION FORM)

      

THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION PURSUANT TO S.E.C. RULE 17AD-15.
 
SIGNATURE(S) GUARANTEED BY:

 

 

Exhibit 10(a)
INDEMNIFICATION AGREEMENT
     THIS AGREEMENT is made and entered into this            day of                      ,            , between Cerner Corporation, a Delaware corporation (“Corporation”), and                                           (“Indemnitee”).
     WITNESSETH:
     WHEREAS, Indemnitee is a member of the board of directors of the Corporation and as such is performing a valuable service for the Corporation; and
     WHEREAS, although Indemnitee has certain rights to indemnification under the Bylaws and Certificate of Incorporation of the Corporation, such Bylaws and Certificate of Incorporation specifically provide that they are not exclusive and thereby contemplate that the Corporation may enter into agreements with its officers and directors; and
     WHEREAS, the Corporation and Indemnitee desire to enter into this Agreement to provide to Indemnitee additional rights to indemnification in consideration of Indemnitee’s acceptance of his/her position with and his/her continued service to the Corporation as a director;
     NOW, THEREFORE, inconsideration of Indemnitee’s acceptance of his/her position with and his/her continued service as a director of the Corporation after the date hereof and for and in consideration of the premises and the covenants contained herein, the Corporation and Indemnitee do hereby promise and agree as follows:
     1. Indemnification. The Corporation hereby agrees to hold harmless and indemnify Indemnitee to the fullest extent permitted by Section 145, Title 8 of the Delaware Code, as in effect on the date of the execution of this Agreement and as it may hereafter be amended, or any other statutory provision permitting or authorizing such indemnification which is adopted subsequent to the execution of this Agreement.
     2. Maintenance of Insurance. So long as Indemnitee shall continue to serve as a director of the Corporation (or shall continue at the request of the Corporation or on behalf of the Corporation to serve as a director, officer, employee or agent to any Other Enterprise) and thereafter so long as Indemnitee shall be subject to any possible claim or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, investigative or appellate by reason of the fact that Indemnitee is or was a director of the Corporation (or is or was serving in any of said other capacities at the request of the Corporation), the Corporation may maintain director liability insurance if such insurance becomes reasonably available and if, in the business judgment of the board of directors of the Corporation as it may exist from time to time, both (i) the premium cost for such insurance is reasonable, and (ii) the coverage provided by such insurance is not so limited by exclusions that there is insufficient benefit provided by such director liability insurance.
     3. Additional Indemnification. Subject only to the provisions in Sections 4, 5, 6 and 7 of this Agreement, the Corporation hereby further agrees to hold harmless and indemnify Indemnitee:

 


 

Exhibit 10(a)
     (a) Against any and all liabilities and expenses, including without limitation, judgments, amounts paid in settlement (provided that such settlement and all amounts paid in connection therewith are approved in advance by the Corporation, which approval shall not be unreasonably withheld), attorneys’ fees, ERISA excise taxes or penalties, fines and other expenses actually and reasonably incurred by Indemnitee in connection with any threatened, pending or completed action, suit or proceeding (including without limitation the investigation, defense, settlement or appeal of such action, suit or proceeding), whether civil, criminal, administrative, investigative or appellate (including an action by or in the right of the Corporation) to which Indemnitee is, was or at any time becomes a party, or is threatened to be made a party, by reason of the fact that Indemnitee is, was or at any time becomes a director of the Corporation, or is or was serving at the request of the Corporation as a director, officer, agent or employee of any Other Enterprise; and
     (b) Otherwise to the fullest extent as may be provided to Indemnitee by the Corporation pursuant to the non-exclusivity provisions of paragraph 28 of the Corporation’s Bylaws and subsection (f) of Section 145, Title 8 of the Delaware Code relating to indemnification.
     4. Limitations on Additional Indemnification. (a) The Corporation will not hold Indemnitee harmless or provide indemnification pursuant to Section 3 hereof:
(1) except to the extent that the aggregate amount of losses to be indemnified thereunder exceeds the amount of such losses for which Indemnitee is indemnified either pursuant to (i) the Corporation’s Certificate of Incorporation, Bylaws, vote of stockholders or disinterested directors or other agreement, (ii) Sections 1 or 2 hereof, (iii) pursuant to any director liability insurance purchased and maintained by or on behalf of Indemnitee by the Corporation, or (iv) otherwise than pursuant to this Agreement;
(2) in respect of remuneration paid to Indemnitee if it shall be determined by a final judgment or other final adjudication that such remuneration was in violation of law;
(3) on account of any suit for an accounting of profits made from the purchase or sale by Indemnitee of securities of the Corporation pursuant to Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state or local law;
(4) on account of Indemnitee’s conduct which is finally adjudged by a court to have been knowingly fraudulent, deliberately dishonest or willful misconduct; or
(5) if a final adjudication by a court having jurisdiction in the matter shall determine that such indemnification is not lawful.
     (c) Notwithstanding any other provisions of this Agreement, if the Indemnitee is or was serving as a director of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of any Other Enterprise, and has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 3 of this Agreement (including the dismissal of any such action, suit or proceeding without prejudice), or in defense of any claim, issue or matter therein, he/she shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by him/her in connection therewith to the extent he/she has not been fully indemnified therefor otherwise than pursuant to this Agreement.

2


 

Exhibit 10(a)
     5. Advancement of Expenses. Expenses (including attorneys’ fees) actually and reasonably incurred by an Indemnitee who may be entitled to indemnification hereunder in defending an action, suit or proceeding, whether civil, criminal, administrative, investigative or appellate, shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such Indemnitee to repay such amount if it shall ultimately be determined that the Indemnitee is not entitled to indemnification by the Corporation. Notwithstanding the foregoing, no advance shall be made by the Corporation if a determination is reasonably and promptly made by (i) the board of directors by a majority vote of a quorum consisting of directors who were not parties to the action, suit or proceeding from which the advancement is requested, or (ii) if a quorum is not obtainable, or even if obtainable, if a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (iii) by the stockholders, that, based upon the facts known to the board, counselor stockholders at the time such determination is made, such Indemnitee acted in bad faith and in a manner that such Indemnitee did not believe to be in or not opposed to the best interests of the Corporation, or, with respect to any criminal proceeding, that such Indemnitee believed or had reasonable cause to believe his/her conduct was unlawful. In no event shall any advance be made in instances where the board, stockholders or independent legal counsel reasonably determines that such Indemnitee deliberately breached his/her duty to the Corporation or its stockholders.
     6. Notification and Defense of Claim. Promptly after receipt by Indemnitee of notice of the commencement of any action, suit or proceeding, Indemnitee will, if a claim in respect thereof is to be made against the Corporation under this Agreement, notify the Corporation of the commencement thereof; but the omission so to notify the Corporation will not relieve it from any liability which it may have to Indemnitee otherwise than under this Agreement. With respect to any such action, suit or proceeding as to which Indemnitee notifies the Corporation of the commencement thereof:
  (a)   The Corporation will be entitled to participate therein at its own expense;
 
  (b)   Except as otherwise provided below, to the extent that it may wish, the Corporation jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof, with counsel satisfactory to Indemnitee. After notice from the Corporation to Indemnitee of its election so to assume the defense thereof, the Corporation will not be liable to Indemnitee under this Agreement for any legal or other expenses subsequently incurred by Indemnitee in connection with the defense thereof other than reasonable costs of investigation or as otherwise provided below. Indemnitee shall have the right to employ his/her own counsel in such action, suit or proceeding but the fees and expenses of such counsel incurred after notice from the Corporation of its assumption of the defense thereof shall be at the expense of Indemnitee unless (i) the employment of counsel by Indemnitee has been authorized by the Corporation, (ii) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Corporation and Indemnitee in the conduct of the defense of such action, or (iii) the Corporation shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of counsel shall be at the expense of the Corporation. The Corporation shall not be entitled to assume the defense of any action, suit or proceeding brought by or on behalf of the Corporation or as to which Indemnitee shall have made the conclusion provided for in (ii) above; and

3


 

Exhibit 10(a)
  (c)   The Corporation shall not be liable to indemnify Indemnitee under this Agreement for any amounts paid in settlement of any action or claim effected without its prior written consent. The Corporation shall not settle any action or claim in any manner which would impose any penalty or limitation on Indemnitee without Indemnitee’s written consent. Neither the Corporation nor Indemnitee will unreasonably withhold their consent to any proposed settlement.
     7. Determination of Right to Indemnification. Prior to indemnifying an Indemnitee pursuant to this Agreement, unless ordered by a court, the Corporation shall determine that such Indemnitee is entitled thereto under the terms of this Agreement. Any determination that a person shall or shall not be indemnified under this Agreement shall be made by the board of directors by a majority vote of a quorum consisting of directors who were not parties to the action, suit or proceeding, or if such quorum is not obtainable, or even if obtainable, if a quorum of disinterested directors so directs, by independent legal counsel in a written opinion or by the stockholders, and such determination shall be final and binding upon the Corporation; provided, however, that in the event such determination is adverse to the Indemnitee, such Indemnitee shall have the right to maintain an action in any court of competent jurisdiction against the Corporation to determine whether or not such Indemnitee is entitled to such indemnification hereunder. If such court action is successful and the Indemnitee is determined to be entitled to such indemnification, such Indemnitee shall be reimbursed by the Corporation for all fees and expenses (including attorneys’ fees) actually and reasonably incurred in connection with any such action (including without limitation the investigation, defense, settlement or appeal of such action). This Agreement shall be applicable to any claim asserted after the date hereof whether such claim arises from acts or omissions occurring before or after the date hereof.
     8. Certain Definitions. For purposes of this Agreement, references to “Other Enterprise” shall include without limitation any other corporation, partnership, joint venture, trust or employee benefit plan; references to “fine” or “fines” shall include any excise taxes assessed on Indemnitee with respect to any employee benefit plan; references to “defense” shall include investigations of any action, suit or proceeding as well as appeals in any threatened, pending or completed action, suit or proceeding and shall also include any defensive assertion of a cross claim or counterclaim; and references to “serving at the request of the Corporation” shall include any service as a director of the Corporation which imposes duties on, or involves services by, Indemnitee with respect to an employee benefit plan, its participants or beneficiaries; and if Indemnitee acted in good faith and in a manner he/she reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan he/she shall be deemed to have acted in a manner “not opposed to the best interests of the Corporation” as referred to in this Agreement. For the purpose of this Agreement, unless the board of directors of the Corporation shall determine otherwise, any Indemnitee who shall serve as an officer or director of any Other Enterprise of which the Corporation, directly or indirectly, is a stockholder or creditor, or in which the Corporation is in any way interested, shall be presumed to be serving as such director or officer at the request of the Corporation. In all other instances where any Indemnitee shall serve as a director, officer, employee or agent of an Other Enterprise, if it is not otherwise established that such Indemnitee is or was serving as such director, officer, employee or agent at the request of the Corporation, the board of directors of the Corporation shall determine whether such Indemnitee is or was serving at the request of the Corporation, and it shall not be necessary to show any actual or prior request for such service, which determination shall be final and binding on the Corporation and the Indemnitee seeking indemnification.
     9. Continuation and Enforcement of Indemnification.

4


 

Exhibit 10(a)
  (a)   The Corporation expressly confirms and agrees that it has entered into this Agreement and assumes the obligations imposed on the Corporation hereby in order to induce Indemnitee to continue as a director of the Corporation and acknowledges that Indemnitee is relying upon this Agreement in continuing in such capacity. The rights to indemnification and advancement of expenses created by or provided pursuant to this Agreement are bargained-for conditions of Indemnitee’s acceptance and/or maintenance of his/her election or appointment as a director of the Corporation and such rights shall continue after Indemnitee has ceased to be a director of the Corporation or a director, officer, employee or agent of any Other Enterprise and shall inure to the benefit of Indemnitee’s heirs, executors, administrators and estate.
 
  (b)   Indemnitee expressly confirms and agrees that under no circumstances shall the language or any of the promises and covenants contained in this Agreement be construed or interpreted as creating a contract of employment.
 
  (c)   To the fullest extent permitted by the laws of the State of Delaware, Indemnitee shall have the right to maintain an action in any court of competent jurisdiction to enforce and/or recover damages for breach of the rights to indemnification created by or provided pursuant to the terms of this Agreement. If such court action is successful, Indemnitee shall be reimbursed by the Corporation for all fees and expenses (including attorneys’ fees) actually and reasonably incurred in connection with such action (including without limitation the investigation, defense, settlement or appeal of such action).
     10. Non-Exclusivity. The right to indemnification pursuant to this Agreement shall not be deemed exclusive of any other rights of indemnification to which Indemnitee may be entitled under any statute, other agreement, the Certificate of Incorporation, Bylaws, pursuant to a vote of stockholders or disinterested directors, insurance policy or otherwise, both as to actions in his/her official capacity and as to action in another capacity while holding his/her directorship, and shall not limit in any way any right the Corporation may have to create additional or independent or supplementary obligations to indemnify Indemnitee.
     11. Severability. Each of the provisions of this Agreement is a separate and distinct agreement independent of the others, and if any provision of this Agreement or the application of any provision hereof to any person or circumstance is held invalid, illegal or unenforceable by a court for any reason whatsoever, the remaining provisions of this Agreement and the application of such provision to other persons or circumstances shall not be affected thereby. The parties hereto expressly agree that any provision hereof held invalid, illegal or unenforceable shall be construed and modified by the court finding such provision invalid, illegal or unenforceable to the extent necessary so as to render such provision valid and enforceable as against all persons or entities and to provide the maximum possible protection to the person subject to indemnification hereunder within the bounds of validity, legality and enforceability. Without limiting the generality of the foregoing, if the Indemnitee is entitled to indemnification under this Agreement by the Corporation for some or a portion of the judgments, amounts paid in settlement, attorneys’ fees, ERISA excise taxes or penalties, fines or other expenses actually and reasonably incurred by the Indemnitee in connection with any threatened, pending or completed action, suit or proceeding (including without limitation, the investigation, defense, settlement or appeal of such action, suit or proceeding), whether civil, criminal, administrative, investigative or appellate, but not, however, for all of the

5


 

Exhibit 10(a)
total amount thereof, the Corporation shall nevertheless indemnify the Indemnitee for the portion thereof to which such person is entitled.
     12. Governing Law. This Agreement shall be governed, interpreted and construed in accordance with the laws of the State of Delaware without regard to any of its conflict of law rules.
     13. Modification; Survival. This Agreement constitutes the entire agreement of the parties relating to the subject matter hereof and no amendment, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by both parties hereto. The provisions of this Agreement shall survive the termination of Indemnitee’s service as a director and/or officer of the Corporation with respect to actions, suits or proceedings brought or instituted in respect of any action taken or the failure to take any action occurring prior to such termination of service.
     IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement and affixed their signatures hereto as of the date first above written.
         
 
 
 
        , Indemnitee
   
 
       
 
  CERNER CORPORATION,
a Delaware corporation
   
 
       
 
 
 
   
[SEAL]
       
 
       
ATTEST:
       
 
       
 
        , Secretary
       

6

 

Exhibit 10(i)
CERNER CORPORATION
PERFORMANCE-BASED COMPENSATION PLAN
Amended December 11, 2006
1.   Name . The name of the Plan is the Cerner Corporation Performance Plan (the “Plan”).
 
2.   Basic Function . The Plan provides for payment of quarterly and annual bonuses to select key associates of Cerner Corporation (the “Company”) and its subsidiaries, depending upon the financial performance of the Company or certain subsidiaries or business units and/or the job performance of the individual associates in question. Bonuses, if paid, may be paid on a quarterly or annual basis and determined based on the actual performance of the Company or its subsidiaries or business units or on one or more pre-established financial or operational goals or targets. Payments of awards to certain executives are made pursuant to the “Executive Award Feature” (see Section 10). All bonuses will be calculated as soon as administratively practicable following the end of the quarter or year for which the bonus is based. All quarterly and annual bonuses will be paid out no later than March 15 th of the calendar year following the year in which such bonus determination is made.
 
3.   Purpose . The purpose of the Plan is to provide a meaningful incentive on both a quarterly and annual basis to key associates and officers of the Company and to motivate them to assist the Company in achieving ambitious and attainable short-term goals. Individual payments made under the Plan will vary, depending upon individual performance and, in some cases, business unit operational achievements.
 
4.   Termination; Amendment . The Plan shall continue to be in effect, unless and until terminated by the Compensation Committee of the Board of Directors of the Company. The Executive Award Feature of the Plan is subject to the approval of the shareholders of the Company, every five (5) years in accordance with Section 162(m) of the Internal Revenue Code, as amended (the “Code”) by the affirmative vote of the holders of a majority of the shares present in person or represented by proxy, and entitled to vote thereon, at a meeting of the shareholders at which a quorum is present or represented. The Plan may be further amended from time to time by the Compensation Committee provided that any amendment which, if effected without the approval of the shareholders of the Company, would result in the loss of an exemption from federal income tax deduction limitations under Section 162(m) of the Code, for amounts payable thereunder but would not result in such loss if approved by the shareholders, shall become effective only upon approval thereof by the shareholders of the Company within the meaning of Section 162(m).
 
5.   Administration . The Plan is administered by the Compensation Committee, which has the sole authority to make all discretionary determinations under the Plan. In suitable circumstances, the Compensation Committee may evaluate and use the Company’s management’s input as well as input and other relevant information from any outside parties it deems appropriate.
 
6.   Participation . Key associates and officers eligible for participation in the Plan will be determined by the Compensation Committee on an annual basis. Executive officers eligible to receive awards under the Executive Award Feature of the Plan will be identified each year by the Compensation Committee as described in Section 10 below.
 
7.   General Feature; Determination of Annual Targets . The Compensation Committee will determine the measure or measures of financial performance and/or the target levels of performance, the attainment of which in any quarter or year will result in the payment of awards to all eligible participants except for those executives covered by the Executive Award Feature. Such determinations on financial or operational performance measures or target levels may be made,

 


 

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

 


 

Exhibit 10(i)
and deemed satisfied by using the same accounting principles in effect and relied upon when such Executive Target was established.
     (ii) The Earnings Per Share Target shall be expressed as a specific target earnings per share for the Company’s common stock on a fully diluted basis, before the after-tax effect of any extraordinary items, the cumulative effect of accounting changes, or other nonrecurring items of income or expense including restructuring charges.
     (iii) The Company Operating Margin Target shall be expressed as a target percentage reflecting the leverage of the Company’s revenue relative to the expense associated with that revenue.
     (iv) The Agreement Margin Targets shall be expressed as a dollar amount of booking margins on specified types of sales, adjusted for the costs associated with delivery of the solutions.
     (v) The Other Targets shall be determined based solely on the following list of targets:
     (a) Total shareholder return
     (b) Stock price increase
     (c) Return on equity
     (d) Return on capital
     (e) Cash flow, including collection of cash, operating cash flows, free cash flow, discounted cash flow return on investment, and cash flow in excess of cost of capital
     (f) Economic value added
     (g) Market share
     (h) Client/associate satisfaction
     (i) Revenue levels
     (j) Employee retention
     (k) Productivity measures
     (l) Diversification of business opportunities
     (m) Price to earnings ratio
     (n) Expense ratios
     (o) Total expenditures
     (p) Completion of key projects
     (q) Operating margin
     (vi) If at the end of each fiscal quarter (in the case of quarterly-based performance targets) or at the end of the fiscal year (in the case of annual-based or combination of annual and quarterly based performance targets) any of the Executive Targets established by the Compensation Committee have been met, the maximum amount payable to the Covered Executives in any calendar year shall be as follows: (a) for the Chief Executive Officer, 200% of the Chief Executive Officer’s base salary at the time the Executive Targets are established, and (b) for all other executive officers, 175% of such individual’s base salary at the time the Executive Targets are established. The Compensation Committee has discretion to reduce the amount of the bonus payable; provided, however, under no circumstances may the Compensation Committee increase the amount of the bonus payment beyond its maximum limit. The amount of the bonus reduction, if any, will depend upon a subjective bonus reduction factor, formally known as an Annual Performance Evaluation (APE) Factor, which will be determined at the Covered Executive’s end-of-the-year evaluation. This factor will range from 100% of the maximum bonus amount for demonstrated distinguished performance to 40% if performance does not satisfy the required standard.

 


 

Exhibit 10(i)
11.   Certification . Prior to any payment to any Covered Executive of any amount accrued under Section 10 of this Plan, the Compensation Committee (or its delegated subcommittee) shall certify in writing that an Executive Target has been satisfied. For purposes of this certification, approved minutes of the Compensation Committee meeting in which the certification is made shall satisfy this Plan certification requirement.
 
12.   Code Section 409A . In the event that any provision of this Plan shall be determined to contravene Code section 409A, the regulations promulgated thereunder, regulatory interpretations or announcements with respect to section 409A or applicable judicial decisions construing section 409A, any such provision shall be void and have no effect. Moreover, this Plan shall be interpreted at all times in such a manner that the terms and provisions of the Plan comply with Code section 409A, the regulations promulgated thereunder, regulatory interpretations or announcements with respect to section 409A and applicable judicial decisions construing section 409A.

 

 

Exhibit 21
SUBSIDIARIES OF REGISTRANT
         
    Name   State/Country of
        Incorporation
 
       
1.
  Cerner BeyondNow, Inc.   Kansas
 
       
2.
  Cerner Belgium, Inc.   Delaware
 
       
3.
  Cerner Campus Redevelopment Corporation   Missouri
 
       
4.
  Cerner Canada Limited   Delaware
 
       
5.
  Cerner Corporation PTY Limited   New South Wales (Australia)
 
       
6.
  Cerner Deutschland GmbH   Germany
 
       
7.
  Cerner DHT, Inc.   Delaware
 
       
8.
  Cerner France SAS   France
 
       
9.
  Cerner Galt, Inc.   Delaware
 
       
10.
  Cerner Healthcare Solutions Private Limited   India
 
       
11.
  Cerner Health Connections, Inc.   Delaware
 
       
12.
  Cerner Iberia, S.L.   Spain
 
       
13.
  Cerner Innovation, Inc.   Delaware
 
       
14.
  Cerner International, Inc.   Delaware
 
       
15.
  Cerner Investment Corp.   Nevada
 
       
16.
  Cerner Limited   United Kingdom
 
       
17.
  Cerner Ireland Limited   Ireland
 
       
18.
  Cerner Middle East FZ-LLC   Emirate of Dubai, UAE
 
       
19.
  Cerner Middle East, Ltd.   Cayman Islands
 
       
20.
  Cerner Multum, Inc.   Delaware
 
       
21.
  Cerner Physician Practice, Inc.   Delaware
 
       
22.
  Cerner Project IMPACT, Inc.   Delaware
 
       
23.
  Cerner Properties, Inc.   Delaware
 
       
24.
  Cerner, SAS   France
 
       
25.
  Cerner Singapore Limited   Delaware
 
       
26.
  Cerner (Malaysia) SDN BHD   Malaysia
 
       
27.
  The Health Exchange, Inc.   Missouri
 
       
28.
  Rockcreek Aviation, Inc.   Delaware

 

 

Exhibit 23
Consent of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Cerner Corporation:
We consent to the incorporation by reference in the Registration Statements (No. 333-125492, 333-77029, No. 333-93379, No. 333-63226, No. 333-24899, No. 333-24909, No. 333-75308, No. 333-70170, No. 33-56868, No. 33-55082, No. 33-41580, No. 33-39777, No. 33-39776, No. 33-20155, No. 33-15156, and No. 333-40156) on Form S-8, and Registration Statement No. 333-72024, and No. 333-40156, on Form S-4 of Cerner Corporation of our reports dated February 28, 2007, with respect to the consolidated balance sheets of Cerner Corporation and subsidiaries as of December 30, 2006 and December 31, 2005, and the related consolidated statements of operations, changes in equity, and cash flows for each of the years in the three-year period ended December 30, 2006, and the related consolidated financial statement schedule, management’s assessment of the effectiveness of internal control over financial reporting as of December 30, 2006 and the effectiveness of internal control over financial reporting as of December 30, 2006, which reports appear in the 2006 annual report on Form 10-K of Cerner Corporation. Our report dated February 28, 2007 on the consolidated financial statements contains an explanatory paragraph that states that as discussed in Note 1 to the consolidated financial statements, the Corporation adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment” effective January 1, 2006.
(signed) KPMG LLP
Kansas City, Missouri
February 28, 2007

 

Exhibit 31.1
CERTIFICATION
     I, Neal L. Patterson, certify that:
     1. I have reviewed this annual report on Form 10-K of Cerner Corporation;
     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
     4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
     a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
     5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
     a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
     b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
       Date: February 28, 2007
/s/ Neal L. Patterson
Neal L. Patterson
Chief Executive Officer

 

 

Exhibit 31.2
CERTIFICATION
     I, Marc G. Naughton, certify that:
     1. I have reviewed this annual report on Form 10-K of Cerner Corporation;
     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
     4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
     a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
     5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
     a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
     b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
       Date: February 28, 2007
/s/ Marc G. Naughton
Marc G. Naughton
Chief Financial Officer

 

 

Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION. 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the Annual Report on Form 10-K for the fiscal year ended December 30, 2006 (the Report) by Cerner Corporation (the Company), the undersigned, as the Chief Executive Officer of the Company, hereby certifies pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Neal L. Patteron
Neal L. Patterson, Chairman of the Board
and Chief Executive Officer
February 28, 2007
A signed original of this written statement required by Section 906 has been provided to Cerner Corporation and will be retained by Cerner Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

 

 

Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION. 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the Annual Report on Form 10-K for the fiscal quarter ended December 30, 2006 (the Report) by Cerner Corporation (the Company), the undersigned, as the Chief Financial Officer of the Company, hereby certifies pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Marc G. Naughton
Marc G. Naughton, Senior Vice President,
Treasurer and Chief Financial Officer
February 28, 2007
A signed original of this written statement required by Section 906 has been provided to Cerner Corporation and will be retained by Cerner Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

 


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