s-4a
Table of Contents

As filed with the Securities and Exchange Commission on November 7, 2001
Registration No. 333-72024



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



AMENDMENT NO. 1
to
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933

CERNER CORPORATION
(Exact name of registrant as specified in its charter)
           
DELAWARE   7373   43-1196944
(State or other jurisdiction   (Primary Standard Industrial   (I.R.S. Employer
of incorporation or organization)   Classification Code Number)   Identification No.)


2800 Rockcreek Parkway
North Kansas City, Missouri 64117
(816) 221-1024
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)


MARC G. NAUGHTON
Vice President and Chief Financial Officer
2800 Rockcreek Parkway
North Kansas City, Missouri 64117
(816) 221-1024
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
     
CRAIG L. EVANS, ESQ.   RICHARD A. DENMON, ESQ.
Stinson, Mag & Fizzell, P.C.   Carlton Fields, P.A.
1201 Walnut Street, Suite 2800   One Harbour Place, 777 S. Harbour Island Blvd.
Kansas City, Missouri 64106   Tampa, Florida 33602
(816) 842-8600   (813) 223-7000
Facsimile: (816) 691-3495   Facsimile: (813) 229-4133
Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after this registration statement is declared effective and all other conditions to the merger (as described herein) have been satisfied or waived.
If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.OPEN BALLOT BOX
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.OPEN BALLOT BOX
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.OPEN BALLOT BOX

                The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.



 


Table of Contents

     
[Logo of Cerner]   [Logo of Dynamic Healthcare Technologies, Inc.]
PROSPECTUS OF   PROXY STATEMENT OF
CERNER CORPORATION   DYNAMIC HEALTHCARE TECHNOLOGIES, INC.

MERGER PROPOSED — YOUR VOTE IS VERY IMPORTANT

To the Shareholders of Dynamic Healthcare Technologies, Inc.

     The boards of directors of Cerner Corporation and Dynamic Healthcare Technologies, Inc. have approved a merger agreement that would result in Cerner acquiring Dynamic. The merger offers Dynamic shareholders the opportunity to become shareholders of Cerner, a more significant provider of information systems to the healthcare industry. Dynamic believes the combination of these two companies will result in an opportunity to create substantially more shareholder value than could be achieved by Dynamic individually.

     If we complete the merger, Dynamic shareholders will receive a number of shares of Cerner common stock equal to 362,791 divided by the number of Dynamic common shares issued and outstanding as of the close of business on the date that all of the conditions to the merger have been satisfied or waived. However, there is one exception. If the average of the closing sales price of Cerner common stock during the 15 consecutive trading day period ending on the first trading day immediately prior to the date that all of the conditions to the merger have been satisfied or waived is $64.50 or greater then the Dynamic shareholders will receive for each Dynamic common share that number of shares of Cerner common stock equal to:

    362,791 divided by the number of Dynamic common shares issued and outstanding on the date that all of the conditions to the merger have been satisfied or waived, multiplied by
 
    a fraction, the numerator of which is $64.50 and the denominator of which is the average of the closing sales price of Cerner common stock during such 15 day trading period.

                  Dynamic cannot complete the merger unless the shareholders holding a majority of the outstanding Dynamic common shares approve it. Dynamic will hold a meeting of its shareholders to vote on the merger. Your vote is very important. Whether or not you plan to attend the shareholder meeting, please vote by completing and mailing the enclosed proxy card to us. If you sign, date and mail your proxy card without indicating how you want to vote, your proxy will be counted as a vote in favor of the merger. Not returning your proxy card or not instructing your broker how to vote shares held for you in “street name” will have the same effect as voting those shares against the merger.

   
The date, time and place of the meeting is:
December 11, 2001
9:00 a.m.
615 Crescent Executive Court, Fifth Floor
Lake Mary, Florida

     This document provides you with detailed information about the proposed merger. Dynamic encourages you to read this entire document carefully.

     
[/s/ Neal L. Patterson]   [/s/ T. Christopher Assif]
Neal L. Patterson   T. Christopher Assif
Chairman of the Board and   Chief Executive Officer
Chief Executive Officer   Dynamic Healthcare Technologies, Inc.
Cerner Corporation    

  Cerner’s common stock and Dynamic’s common shares are quoted on the Nasdaq National Market under the symbols “CERN” and “DHTI,” respectively.

     For a discussion of certain risk factors that you should consider in evaluating the merger, see “Risk Factors” beginning on page 15.

Neither the Securities and Exchange Commission nor any state securities regulators has approved or disapproved of the Cerner common stock to be issued in the merger or determined whether this document is truthful or complete. Any representation to the contrary is a criminal offense.

This proxy statement/prospectus is dated November 8, 2001, and is being first mailed to shareholders on or about November 8, 2001.

 


Table of Contents

[Dynamic Healthcare Technologies, Inc. Logo]


     

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS OF
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.

To be held on December 11, 2001


     To the shareholders of Dynamic Healthcare Technologies, Inc.:

     We will hold a special meeting of shareholders of Dynamic Healthcare Technologies, Inc., a Florida corporation, on December 11, 2001, at 9:00 a.m., local time, at 615 Crescent Executive Court, Fifth Floor, Lake Mary, Florida, for the following purposes:

1.   To consider and vote upon a proposal to adopt the Agreement and Plan of Merger, dated September 5, 2001, by and among Cerner Corporation, Dynamic Healthcare Technologies, Inc. and Cerner Holdings, Inc., and the transactions contemplated thereby. Under the merger agreement:

    Dynamic Healthcare Technologies, Inc. will merge with and into Cerner Holdings, Inc., a wholly owned subsidiary of Cerner.
 
    Each issued and outstanding Dynamic Healthcare Technologies, Inc. common share will be converted into a number of shares of Cerner common stock determined by dividing 362,791 by the number of Dynamic common shares issued and outstanding as of the close of business on the date that all of the conditions to the merger have been satisfied or waived, unless the average of the closing sales price of Cerner common stock during the 15 consecutive trading day period ending on first trading day immediately prior to the date that all of the conditions to the merger have been satisfied or waived is $64.50 or greater, in which case each Dynamic common share will be converted into that number of shares of Cerner common stock equal to (a) 362,791 divided by the number of Dynamic common shares issued and outstanding on the date that all of the conditions to the merger have been satisfied or waived, multiplied by (b) a fraction, the numerator of which is $64.50 and the denominator of which is the average of the closing sales price of Cerner common stock during such 15 day trading period.
 
    Each share of Dynamic preferred stock will be redeemed at a price per share equal to $2.00 in cash, plus all unpaid accrued dividends to which holders of such preferred stock are entitled to receive.

2.   To transact any other business as may properly come before the special meeting or any adjournments or postponements of the special meeting.

     The merger agreement is described in the accompanying proxy statement/prospectus, and a copy of the merger agreement is attached as Appendix A to the proxy statement/prospectus. Please review these materials carefully and consider fully the information disclosed.

     Action may be taken on the above proposal at the special meeting on the date specified above or on any date or dates to which the special meeting may be adjourned. Only holders of record of Dynamic Healthcare Technologies, Inc. common shares at the close of business on November 5, 2001 are entitled to notice of, and to vote at, the special meeting or any adjournments or postponements of the special meeting. The affirmative vote of at least a majority of the outstanding Dynamic Healthcare Technologies, Inc. common shares entitled to vote is required for approval of the merger agreement and the transactions contemplated thereby, including the merger.

     The board of directors of Dynamic Healthcare Technologies, Inc. recommends that you vote FOR approval of the merger agreement and the transactions contemplated by the merger agreement.

     Your vote is important. Whether or not you plan to attend the special meeting in person, please complete, date, sign and return the accompanying proxy card promptly in the postage-paid enclosed envelope. Sending in your proxy now will not interfere with your right to attend the meeting or to vote your shares personally at the meeting if you wish to do so.

 


Table of Contents

If your shares are held in “street name” by your broker or other nominee, only that holder can vote your shares. You should follow the directions provided by your broker or other nominee regarding how to instruct them to vote your shares.

     You may revoke your proxy with respect to any proposal at any time prior to the completion of the voting on such proposal at the meeting, by following the procedures set forth in the accompanying proxy statement/prospectus.

     
    By Order of the Board of Directors  
 
/s/ Brian Greco
Brian Greco
Corporate Secretary
 
Lake Mary, Florida    
 
November 8, 2001    


PLEASE COMPLETE, SIGN, DATE, AND RETURN THE ENCLOSED
PROXY CARD, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING.


 


TABLE OF CONTENTS

WHAT DYNAMIC SHAREHOLDERS WILL RECEIVE IN THE MERGER
QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SHAREHOLDER MEETING
SUMMARY
SUMMARY FINANCIAL INFORMATION
Cerner Summary Historical Consolidated Financial Information
Dynamic Summary Historical Consolidated Financial Information
COMPARATIVE PER SHARE DATA
COMPARATIVE MARKET PRICE AND DIVIDEND INFORMATION
RECENT DEVELOPMENTS
RISK FACTORS
DYNAMIC SPECIAL MEETING
Date, Time, Place and Purpose of the Special Meeting
Record Date; Stock Entitled to Vote; Quorum
Vote Required
Security Ownership of Management
Voting of Proxies
THE MERGER
General
Exchange of Dynamic Shares
Dynamic Stock Options and Warrants
Exchange of Stock Certificates
Background of the Merger
Recommendation of the Dynamic Board and Reasons for the Merger
Cerner’s Reasons for the Merger
Opinion of SG Cowen Securities Corporation
FEDERAL SECURITIES LAWS CONSEQUENCES AND RESTRICTIONS ON RESALES BY AFFILIATES
Shareholders Agreement
Stock Option Agreement
Fees and Expenses of the Merger
Accounting Treatment
Federal Income Tax Consequences
Interests of Certain Persons in the Merger
Conditions to the Merger
Regulatory Approval
Conduct of Business Pending the Merger
No Solicitation
Waiver and Amendment
Termination of the Merger Agreement
Effect of Termination
Nasdaq National Market Listing
Effective Time
INFORMATION REGARDING DYNAMIC
DYNAMIC’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Results of Operations
Liquidity and Capital Resources
Quantitative and Qualitative Disclosures About Market Risk
Inflation and Changing Prices
Recent Accounting Pronouncements
INFORMATION REGARDING CERNER
COMPARATIVE RIGHTS OF SHAREHOLDERS
EXPERTS
LEGAL MATTERS
FUTURE SHAREHOLDER PROPOSALS
WHERE YOU CAN FIND MORE INFORMATION
INDEX TO FINANCIAL STATEMENTS OF DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
APPENDIX A AGREEMENT AND PLAN OF MERGER
Appendix B -- Agreement and Plan of Merger
APPENDIX C SHAREHOLDER AGREEMENT
APPENDIX D STOCK OPTION AGREEMENT
Consent of KPMG LLP
Consent of BDO Seidman, LLP
Consent of KPMG LLP
Form of Proxy of Dynamic Healthcare Technologies


Table of Contents

TABLE OF CONTENTS

   
Page
WHAT DYNAMIC SHAREHOLDERS WILL RECEIVE IN THE MERGER 1
QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SHAREHOLDER MEETING 2
SUMMARY 4
SUMMARY FINANCIAL INFORMATION 9
     Cerner Summary Historical Consolidated Financial Information 9
     Dynamic Summary Historical Consolidated Financial Information 11
COMPARATIVE PER SHARE DATA 12
COMPARATIVE MARKET PRICE AND DIVIDEND INFORMATION 13
RECENT DEVELOPMENTS 15
RISK FACTORS 15
DYNAMIC SPECIAL MEETING 19
     Date, Time and Place 19
     Record Date; Stock Entitled to Vote; Quorum 19
     Vote Required 19
     Security Ownership of Management 19
     Voting of Proxies 19
THE MERGER 21
     General 21
     Exchange of Dynamic Shares 21
     Dynamic Stock Options and Warrants 22
     Exchange of Stock Certificates 22
     Background of the Merger 23
     Recommendation of the Dynamic Board and Reasons for the Merger 24
     Cerner’s Reasons for the Merger 26
     Opinion of SG Cowen Securities Corporation 26
     Federal Securities Laws Consequences and Restrictions on Resales by Affiliates 33
     Shareholders Agreement 33
     Stock Option Agreement 34
     Fees and Expenses of the Merger 35
     Accounting Treatment 35
     Federal Income Tax Consequences 35
     Interests of Certain Persons in the Merger 37
     Conditions to the Merger 38
     Regulatory Approval 39
     Conduct of Business Pending the Merger 39
     No Solicitation 40
     Waiver and Amendment 41
     Termination of the Merger Agreement 41
     Effect of Termination 42
     Nasdaq National Market Listing 43
     Effective Time 43
INFORMATION REGARDING DYNAMIC 43
DYNAMIC’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
      RESULTS OF OPERATIONS
48
     General 48
     Results of Operation 49
     Liquidity and Capital Resources 53
     Quantitative and Qualitative Disclosures About Market Risk 54
     Inflation and Changing Prices 54
     Recent Accounting Pronouncements 54
INFORMATION REGARDING CERNER 54
COMPARATIVE RIGHTS OF SHAREHOLDERS 55
EXPERTS 61
LEGAL MATTERS 61
FUTURE SHAREHOLDER PROPOSALS 61
WHERE YOU CAN FIND MORE INFORMATION 61
INDEX TO FINANCIAL STATEMENTS OF DYNAMIC HEALTHCARE TECHNOLOGIES, INC. F-1
APPENDIX A — Agreement and Plan of Merger
APPENDIX B — Opinion of SG Cowen Securities Corporation
APPENDIX C — Shareholder Agreement
APPENDIX D — Stock Option Agreement

- i -


Table of Contents

WHAT DYNAMIC SHAREHOLDERS WILL RECEIVE IN THE MERGER

     We refer to the number of shares of Cerner common stock into which one Dynamic common share will be converted in the merger as the “exchange ratio.” If we complete the merger, Dynamic holders of common shares will receive an aggregate of 362,791 shares of Cerner common stock, unless the average of the closing sales price of Cerner common stock during the 15 consecutive trading day period ending immediately prior to the date that all conditions to the merger are satisfied or waived is $64.50 or greater. The number of shares of Cerner common stock that will be issued with respect to each Dynamic common share will be determined as follows:

    if the average of the closing sales price of Cerner common stock during the 15 consecutive trading day period ending immediately prior to the date that all conditions to the merger are satisfied or waived is less than $64.50, then the number of shares of Cerner common stock that a Dynamic shareholder will receive for each Dynamic common share will be an amount equal to 362,791 divided by the number of issued and outstanding Dynamic common shares; or
 
    if the average of the closing sales price of Cerner common stock during such 15 trading day period is $64.50 or greater, then the number of shares of Cerner common stock that a Dynamic shareholder will receive for each Dynamic common share will be an amount equal to (a) 362,791 divided by the number of issued and outstanding Dynamic common shares, multiplied by (b) a fraction, the numerator of which is $64.50 and the denominator of which is the average of the closing sales price of Cerner common stock during such 15 trading day period.

     Illustrations of the calculation of the exchange ratio are provided below, assuming there are 6,593,216 Dynamic common shares issued and outstanding on the effective date of the merger (which is the number of shares issued and outstanding on October 16, 2001).

                                   
(1)   (2)     (3)     (4)     (5)  
  Number of Dynamic     The number of shares of             The value of the merger  
If the average Cerner   common shares issued     Cerner common stock to     The exchange ratio (3     consideration per  
common stock price is:   and outstanding     be issued in the merger     divided by 2)     Dynamic share (1 times 4)  

 
   
   
   
 
 
$43.00
  6,593,216     362,791     0.0550     $2.37  
 
$45.00
  6,593,216     362,791     0.0550     $2.48  
 
$50.00
  6,593,216     362,791     0.0550     $2.75  
 
$55.00
  6,593,216     362,791     0.0550     $3.03  
 
$60.00
  6,593,216     362,791     0.0550     $3.30  
 
$65.00
  6,593,216     360,000(a)     0.0546     $3.55  
 
$70.00
  6,593,216     334,286(a)     0.0507     $3.55  


(a)   Calculated by multiplying 362,791 times a fraction, the numerator of which is $64.50 and the denominator is the amount in column 1.

     Because the trading price of Cerner common stock varies, the actual market value of the Cerner common stock you receive as merger consideration may differ from the calculated value of the merger consideration shown above, which is provided here for illustrative purposes only.

     Each share of Dynamic preferred stock will be redeemed at a price per share equal to $2.00 in cash, plus all unpaid accrued dividends which the holders of such preferred shares are entitled to receive.

- 1 -


Table of Contents

QUESTIONS AND ANSWERS
ABOUT THE MERGER AND THE SHAREHOLDER MEETING

Q:   Why are the two companies proposing to merge?
 
A:     We believe the proposed merger is in the best interests of both of the companies and their respective shareholders. The board of directors of Cerner believes that the merger will result in an addition to Cerner’s significant pathology, laboratory and radiology client base that primarily consists of larger hospitals, health systems and independent laboratories. The board of directors of Dynamic believes the merger provides significant value to Dynamic shareholders, provides them with greater liquidity for their investment, and enables them to participate in the opportunities for growth offered by Cerner.
 
    You should review the reasons for the merger described in greater detail at pages 24 through 26.
 
Q:    When and where is the special meeting?
 
A:    The Dynamic special meeting is scheduled to take place on December 11, 2001, at 9:00 a.m. local time, at 615 Crescent Executive Court, Fifth Floor, Lake Mary, Florida.
 
Q:    When do you expect the merger to be completed?
 
A:     We expect to complete the merger promptly after receiving shareholder approval at the special meeting.
 
Q:    What do I need to do now?
 
A:     You should carefully read and consider the information contained in this document. Then, please fill out, sign and mail your proxy card in the enclosed return envelope as soon as possible so that your shares may be represented at the special meeting. If the card is signed, dated and mailed, but does not specify a choice, it will be voted “FOR” approval of the merger and the transactions contemplated by the merger agreement.
 
Q:    What if I don’t vote or I abstain from voting?
 
A:    If you do not vote or you abstain from voting, the effect will be a vote against the merger and the transactions contemplated by the merger agreement.
 
Q:     If my shares are held by my broker in “street name,” will my broker vote my shares for me?
 
A:     Your broker will vote your shares only if you provide instructions on how to vote. You should follow the directions provided by your broker to vote your shares. If you do not provide your broker with instructions on how to vote your shares held in “street name,” your broker will not be permitted to vote your shares, which will have the effect of a vote against the merger and the transactions contemplated by the merger agreement.
 
Q:    May I change my vote after I have mailed my signed proxy card?
 
A:     Yes. You may change your vote at any time before your proxy is voted at the special meeting. You can do this in one of three ways. First, you can send a written notice stating that you would like to revoke your proxy. Second, you can complete and submit a new proxy card. If you choose either of these two methods, you must submit your notice of revocation or your new proxy card to Dynamic Healthcare Technologies, Inc., at 615 Crescent Executive Court, Fifth Floor, Lake Mary, Florida 32746, Attention: Brian Greco, Corporate Secretary, prior to the vote of the shareholders at the Special Meeting to be held on December 11, 2001. Third, you can attend the special meeting and vote in person. Simply attending the meeting, however, will not revoke your proxy; you must request a ballot and vote the ballot at the meeting. If you have instructed a broker to vote your shares, you must follow directions received from your broker to change your vote.
 
Q:     Are Dynamic shareholders entitled to dissenters’ rights?
 
A:     No. Under Florida law, Dynamic shareholders are not entitled to dissenters’ rights of appraisal or other rights to demand fair value for their shares in cash by reason of the merger.

- 2 -


Table of Contents

Q:    Should I send in my stock certificate now?
 
A:    No. After the merger is completed, you will receive written instructions for exchanging your stock certificates for certificates of Cerner common stock and the cash consideration for any fractional shares of Dynamic common stock.
 
Q:    Who can I call with questions about the special meeting or the merger?
 
A:    If you have any questions about the merger, or if you need additional copies of the proxy statement/prospectus or the enclosed proxy, you can contact Brian Greco, Corporate Secretary of Dynamic, at (407) 333-5300.

     This document incorporates important business and financial information about Cerner and Dynamic from documents filed with the SEC that have not been included in or delivered with this document. You may read and copy these documents at the SEC’s public reference facilities. Please call the SEC at 1-800-SEC-0330 for information about these facilities. This information also is available at the Internet site the SEC maintains at http:\\www.sec.gov. Reports and other information relating to Cerner and Dynamic also are available at the offices of the Nasdaq National Market. See “Where You Can Find More Information” on page 62.

     Cerner will provide you with copies of the documents relating to Cerner, without charge, upon written or oral request to:

Cerner Corporation
2800 Rockcreek Parkway
North Kansas City, Missouri 64117
(816) 221-1024
Attention: Randy D. Sims, Secretary

     Dynamic will provide you with copies of the documents relating to Dynamic, without charge, upon written or oral request to:

Dynamic Healthcare Technologies, Inc.
615 Crescent Executive Court
Fifth Floor
Lake Mary, Florida 32746
(407) 333-5300
Attention: Brian Greco, Secretary

     In order to receive timely delivery of the documents in advance of the special meeting of shareholders, you should make your request no later than December 5, 2001.

- 3 -


Table of Contents

SUMMARY

     This Summary, together with the preceding Question and Answer section, highlights selected information from this proxy statement/prospectus and may not contain all the information that is important to you. To better understand the merger and related transactions and for a more complete description of the legal terms of the merger and related transactions, you should carefully read this entire document and the documents to which we have referred you. See “Where You Can Find More Information” on page 62.

The Companies

Cerner Corporation
2800 Rockcreek Parkway
North Kansas City, Missouri 64117
(816) 221-1024

     Cerner, a Delaware corporation incorporated in 1980, is a leading supplier of clinical and management information and knowledge systems to healthcare organizations worldwide. Cerner’s mission is to connect the appropriate persons, knowledge and resources at the appropriate time and location to achieve the optimal health outcome.

Dynamic Healthcare Technologies, Inc.
615 Crescent Executive Court
Fifth Floor
Lake Mary, Florida 32746
(407) 333-5300

     Dynamic, a Florida corporation incorporated in 1977, is a provider of NT, UNIX and AS/400 based diagnostic workflow solutions for pathology, laboratory and radiology departments in approximately 640 customer sites, most located in the United States. Dynamic’s information systems contribute to higher quality and more cost-effective delivery of care and make it possible to have access to information across the entire continuum of care.

The Merger

     We have attached a copy of the Agreement and Plan of Merger to this document as Appendix A. We encourage you to read this merger agreement as it is the legal document that governs the merger.

Vote Required (see page 19)

     The affirmative vote of a majority of each of Dynamic’s outstanding classes of equity, the common shares and the preferred shares, voting as a separate class must approve the merger. As of the Dynamic record date, directors and executive officers of Dynamic owned or controlled approximately 1,347,486 Dynamic common shares, entitling them to exercise approximately 20.4% of the voting power of the Dynamic common shares entitled to vote at the Dynamic special meeting. In addition, at the time the merger agreement was entered into by Dynamic and Cerner, certain holders affiliated with directors of Dynamic that beneficially own in excess of a majority of the Dynamic preferred shares entered into a shareholder agreement with Cerner to vote their preferred shares in favor of the merger and have furnished Cerner with an irrevocable proxy to ensure such vote. A copy of the shareholder agreement is attached to this document as Appendix C.

Our Reasons for the Merger (see pages 24 through 26)

     We are proposing to merge because we believe that:

  by combining the companies we can create a stronger company that will provide benefits to both our shareholders and customers; and
 
  the merger will strengthen the combined company’s position as a competitor in the healthcare information management industry, which is rapidly changing and growing more competitive.

     In reaching its conclusions, the board of directors of Dynamic considered a number of factors, including:

    the anticipated merger consideration to be received by its shareholders in relation to book value, market value, and earnings per Dynamic common share,
 
    the available alternatives to enhance shareholder value,
 
    the opportunity for shareholders to realize a premium over recent historical market prices for the shares in a tax free exchange,
 
    the business, operations, financial condition, and future prospects of Dynamic as a stand alone company, including the attendant risks of such a strategy,
 
    an evaluation of the potential long-term prospects of Cerner,
 
    the complementary nature of the products offered by each of the companies and the access to additional channels of distribution for Dynamic’s products,
 
    Dynamic’s limited capital resources, as evidenced by its negative working capital, and the difficulty of raising additional capital on

- 4 -


Table of Contents

      satisfactory terms under current market conditions, and
 
    minimal disruption to, and the potential benefits to be received by Dynamic’s customers, employees, and the communities in which Dynamic operates.

Dynamic’s Board of Directors Recommends that Dynamic’s Shareholders Approve the Merger and Related Transactions (see pages 24 through 26)

     The Dynamic board of directors believes that the merger and the transactions contemplated thereby are fair to you and in your best interests and recommends that you vote “FOR” the proposal to approve and adopt the merger agreement and the transactions contemplated thereby.

What Dynamic’s Shareholders Will Receive (see page 1)

     If we complete the merger, the number of shares of Cerner common stock that a Dynamic shareholder will receive for each Dynamic common share will be an amount equal to 362,791 divided by the number of Dynamic common shares issued and outstanding as of the close of business on the date that all of the conditions to the merger have been satisfied or waived, unless the average of the closing sales price of Cerner common stock during the 15 consecutive trading day period ending immediately preceding the date that all conditions of the merger have been satisfied or waived is $64.50 or greater, in which case the Dynamic common shareholders will receive for each Dynamic common share that number of shares of Cerner common stock equal to (a) 362,791 divided by the number of Dynamic common shares issued and outstanding on the date that all conditions of the merger have been satisfied or waived multiplied by (b) a fraction, the numerator of which is $64.50 and the denominator of which is the average of the closing sales price of Cerner common stock during such 15 trading day period. Cerner will not issue any fractional shares in the merger. Instead, you will receive a small cash payment equal to the value of any fractional shares that otherwise would have been issued to you.

     Each share of Dynamic preferred stock will be redeemed at a price per share equal to $2.00 in cash, plus all unpaid accrued dividends to which holders of such preferred shares are entitled to receive.

     Following the merger, you will be entitled to exchange your Dynamic common shares for shares of Cerner common stock by sending your Dynamic common share certificates, and a form for exchanging the shares that we will send to you, to Cerner’s exchange agent, UMB Bank, n.a. Upon receipt of these documents, the exchange agent will exchange your Dynamic common shares for shares of Cerner common stock at the applicable exchange ratio. For more information on this procedure, see “THE MERGER — Exchange of Stock Certificates” on page 22.

Federal Income Tax Consequences (see pages 35 through 37)

     We expect that the holders of Dynamic common shares generally will not recognize any gain or loss for U.S. federal income tax purposes as a result of your exchange of Dynamic common shares for shares of Cerner common stock. You may, however, have to recognize gain or loss in connection with cash received in payment for any fractional share that may result from the exchange ratio of the merger. In addition, holders of the Dynamic preferred shares that are redeemed for cash in connection with the merger may have to recognize income, gain or loss in connection with such payment. The income tax treatment described above may not apply to all Dynamic common and preferred shareholders. Determining the actual income tax consequences of the merger to you can be complicated. You should consult your own tax advisor for a full understanding of the merger’s tax consequences that are particular to you. We will not be obligated to complete the merger unless we receive a legal opinion, dated the closing date, that the merger will be treated for federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code. In that case, the U.S. federal income tax treatment of the merger will be as we have described it above. This opinion, however, will not bind the Internal Revenue Service, which could take a different view.

No Dissenters’ Rights (see pages 55 through 57)

     Dynamic is incorporated under Florida law and under applicable Florida law Dynamic shareholders will not have any right of appraisal or other rights to demand fair value for their shares in cash in connection with the merger.

Opinion of SG Cowen Securities Corporation (see pages 26 through 33)

     In deciding to approve the merger, the Dynamic board considered the opinion from SG Cowen Securities Corporation as to the fairness, from a financial point of view to the holders of Dynamic common shares, of the exchange ratio at which Dynamic common shares will be converted into shares of Cerner common stock pursuant to the merger. A copy of this opinion is attached as Appendix B to this proxy statement/prospectus.

- 5 -


Table of Contents

Conditions to the Merger (see pages 38 through 39)

     The completion of the merger depends upon the satisfaction of a number of conditions, including the following:

  approval by Dynamic’s shareholders;
 
  the continued accuracy of each company’s representations and warranties and compliance by each company with its agreements contained in the merger agreement;
 
  receipt of a legal opinion from Cerner’s counsel as to the tax consequences of the merger;
 
  the average of the closing sales price of Cerner common stock for the 15 consecutive trading day period ending immediately prior to the closing date of the merger is $43.00 or more;
 
  receipt of any required regulatory approvals;
 
  there being no legal action or court order that prohibits the merger; and
 
  there having not been a material adverse change in the financial condition or assets of either Cerner or Dynamic.

Termination of the Merger Agreement (see pages 41 through 42)

     Cerner and Dynamic can agree to terminate the merger agreement without completing the merger even if Dynamic’s shareholders have approved it. Also, either of us can terminate the merger agreement on our own without completing the merger under various circumstances, including:

  if the merger has not been consummated by February 28, 2002;
 
  if there is any law that makes consummation of the merger illegal or otherwise prohibited;
 
  if the Dynamic shareholders do not approve the merger on or before February 28, 2002; or
 
  if the other company has materially breached its representations, warranties or obligations under the merger agreement.

     In addition, Cerner may decide not to complete the merger if (a) Dynamic’s board of directors changes, in a manner adverse to Cerner, its recommendation that Dynamic’s shareholders approve the merger, (b) Dynamic has entered into an agreement to be acquired by another party or if the Dynamic board or committee of the board approves such a transaction to be acquired, or (c) a tender offer or exchange offer for the common stock of Dynamic has been commenced and Dynamic has not sent to its shareholders, within ten business days after the commencement of such tender or exchange offer, a statement that Dynamic recommends rejection of such tender or exchange offer. Similarly, Dynamic may decide not to complete the merger if it receives an acquisition proposal from another party that the Dynamic board believes is superior to the merger, or Cerner does not close the merger within 15 business days after all conditions to its obligation to close have been satisfied, other than the condition that the average of the closing sales price of Cerner common stock for the 15 consecutive trading day period immediately prior to the date that all other conditions are satisfied is $43.00 or more.

Termination Fees; Liquidated Damages and Expenses (see pages 42 through 43)

     Dynamic is required to pay Cerner a termination fee of $2,000,000 if:

  Dynamic terminates the merger agreement or modifies or withdraws its recommendation of the merger and merger agreement because it received an acquisition proposal from another party that the Dynamic board believes is superior to the merger; or
 
  Cerner terminates the merger agreement because Dynamic (1) modified or withdrew its recommendation of the merger and merger agreement, (2) breached its obligations under certain provisions of the merger agreement relating to other acquisition proposals or the Dynamic recommendation of the merger and merger agreement, (3) approved an acquisition proposal from another party, or (4) failed to recommend to its shareholders rejection of a third party tender or exchange offer within ten business days after commencement of such offer, or (5) Dynamic’s directors have resolved to do any of the foregoing.

     In addition, if each of the conditions to a party’s obligation to consummate the merger under the merger agreement has been satisfied and that party does not perform its obligation to consummate the merger pursuant to the merger agreement, then that party is required to pay the other party liquidated damages in the amount of $2,000,000.

Dynamic Stock Options and Warrants (see page 22)

     If we complete the merger, each option and warrant to acquire Dynamic common shares that is outstanding and unexercised immediately before completing the

-6-


Table of Contents

merger will become an option or warrant to purchase Cerner common stock. The number of shares of Cerner common stock subject to such options and warrants, as well as the exercise prices, will be adjusted to account for the exchange ratio in the merger. Additionally, certain stock options held by Dynamic directors, officers, and employees contain provisions that cause the options to become fully vested upon a change in control. Therefore, those options will vest as a result of the merger, but cannot be exercised until 12 months after the original date of grant. The options, as adjusted, will continue to be governed by the terms of the Dynamic stock option plans and the agreements under which such options were granted.

We May Amend the Terms of the Merger Agreement and Waive Rights Under the Merger Agreement (see page 41)

     We may jointly amend the terms of the merger agreement, and either party may waive its right to require the other party to adhere to any of those terms, to the extent legally permissible. However, after the Dynamic shareholders approve the merger agreement, they must approve any amendment or waiver that would require such approval under any applicable law.

Stock Option Agreement (see pages 34 through 35)

     As a condition to the merger agreement, Dynamic granted Cerner an option to purchase up to 985,746 Dynamic common shares at an exercise price of $3.00 per share. Cerner may exercise this option upon the occurrence of certain events that are ordinarily associated with another party attempting to “break up” the merger and acquire Dynamic. As of this date, none of those events have occurred. The stock option, if exercised, would equal 15% of the total number of outstanding Dynamic common shares as of its date of exercise. The purpose of the stock option is to increase the likelihood that the merger will occur by making it more difficult for another party to acquire Dynamic. A copy of the stock option agreement is attached to this document as Appendix D.

Dynamic Officers and Directors Have Some Interests in the Merger That Are Different From or in Addition to Their Interests as Shareholders (see pages 37 through 38)

     Dynamic directors and officers have interests in the merger in addition to their interest as common shareholders of Dynamic. These interests exist because of employment and/or other agreements that Dynamic officers have entered into with Dynamic or Cerner and rights that Dynamic officers and directors have under certain benefit and compensation plans maintained by Dynamic.

     Following the merger, the combined company will indemnify, and provide directors and officers insurance for, the officers and directors of Dynamic for events occurring before the merger, including events that are related to the merger.

     In addition, some of the Dynamic directors and some of its former officers and directors also are the holders or beneficial owners of Dynamic preferred stock and they or the entities that they represent will receive a cash payment for their preferred stock in connection with the redemption of the preferred shares under the terms of the merger agreement.

     The Dynamic board of directors knew about these additional interests, and considered them, when it approved the merger agreement.

Certain Differences in the Rights of Shareholders (see pages 55 through 61)

     Once the merger occurs, Dynamic common shareholders will automatically become shareholders of Cerner and their rights will be governed by Delaware law and Cerner’s corporate governance documents rather than Florida law and Dynamic’s corporate governance documents, including its articles of incorporation and bylaws.

Comparative Market Price Information (see pages 13 through 14)

     The shares of Cerner and Dynamic common stock trade on the Nasdaq National Market under the symbols “CERN” and “DHTI,” respectively.

     The following table lists the closing prices of Cerner common stock and Dynamic common shares, and the equivalent per share value of a Dynamic common share, on September 5, 2001, the last trading day before we announced the merger, and on November 5, 2001. The “equivalent per share value of Dynamic common stock” at the specified dates represents the closing price of a share of Cerner common stock on that date multiplied by the exchange ratio of 0.0550 (which assumes that there are 6,593,216 Dynamic common shares issued and outstanding as of such dates).

                     
                  Equivalent Per
    Cerner     Dynamic   Share Value of
    Common     Common   Dynamic
    Stock     Stock   Common Stock
   
   
 
Sept. 5, 2001
  $ 48.06     $ 2.25   $ 2.64
Nov. 5, 2001
  $ 54.64     $ 2.70   $ 3.01

     You should obtain current stock price quotations for Cerner common stock and Dynamic common shares.

-7-


Table of Contents

You can get these quotations from a newspaper, on the Internet or by calling your broker.

Regulatory Approvals (see page 39)

     There are no material regulatory approvals required to consummate the merger or the transactions contemplated by the merger agreement.

Forward-Looking Statements May Prove Inaccurate (see “Risk Factors,” beginning on page 15)

     This proxy statement/prospectus, including information included or incorporated by reference in this document, contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of each of Cerner and Dynamic. Also, any statements preceded by, followed by or that include the words “believes,” “expects,” “anticipates,” “estimates” or similar expressions, are forward-looking statements. These forward-looking statements involve certain risks and uncertainties. The actual results may differ materially from those contemplated by the forward-looking statements due to various factors.

-8-


Table of Contents

SUMMARY FINANCIAL INFORMATION

     We are providing the following financial information to aid you in your analysis of the financial aspects of the merger. This information is only a summary and you should read it in conjunction with the historical financial statements of Cerner and Dynamic and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These items for Dynamic are contained under the caption “Dynamic’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 48 and in the Dynamic consolidated financial statements beginning on page F-2. All Dynamic per share data has been adjusted to reflect the Dynamic 1-for-3 reverse stock split effective June 28, 2001. These items for Cerner are contained in its annual, quarterly and other reports that Cerner has filed with the Securities and Exchange Commission that are incorporated herein by reference. See “Where You Can Find More Information” on page 62.

Cerner Summary Historical Consolidated Financial Information

     The historical consolidated financial information for Cerner reflects the following items that you should consider in making period-to-period comparisons. We derived the information below from the audited consolidated financial statements of Cerner for its fiscal years 2000, 1999, 1998, 1997, and 1996, and from the unaudited consolidated financial statements for the six months ended June 30, 2001 and July 1, 2000. The unaudited information contains all adjustments, consisting of normal recurring accruals, that Cerner considers necessary for a fair presentation of its financial position and results of operations as of such dates and for these periods. The results for the six months ended June 30, 2001 are not necessarily indicative of the results to be expected for the full year ending December 29, 2001.

                                                           
      Six Months                                          
      Ended (unaudited)     Fiscal Year Ended  
     
   
 
      June 30,     July 1,     Dec. 30,     Jan. 1,     Jan. 2,     Jan. 3,     Dec. 28,  
      2001 (1)     2000 (2)     2000 (2)(3)(4)     2000 (5)     1999(6)     1998     1996  
     
   
   
   
   
   
   
 
                      (In thousands, except per share data)                  
Statements of Earnings Data:
                                                       
Revenues
  $ 250,982     $ 180,609     $ 404,504     $ 340,197     $ 330,902     $ 245,057     $ 189,107  
Operating earnings
    25,014       5,815       25,602       3,698       33,530       22,170       10,601  
Earnings (loss) before income
taxes and extraordinary item
    (97,042 )     4,030       172,123       302       33,268       24,484       12,902  
Extraordinary item – early
extinguishment of debt
                      (1,395 )                  
Net earnings (loss)
    (62,655 )     (221 )     105,265       (1,211 )     20,589       15,148       8,251  
Earnings (loss) per share
before extraordinary item:
                                                       
 
Basic
  $ (1.80 )   $ (.01 )   $ 3.08     $ .01     $ .63     $ .46     $ .25  
 
Diluted
    (1.80 )     (.01 )     2.96       .01       .61       .45       .25  
Earnings (loss) per share:
                                                       
 
Basic
    (1.80 )     (.01 )     3.08       (.04 )     .63       .46       .25  
 
Diluted
    (1.80 )     (.01 )     2.96       (.04 )     .61       .45       .25  
Weighted average shares
outstanding:
                                                       
 
Basic
    34,826       33,804       34,123       33,623       32,825       32,881       32,729  
 
Diluted
    34,826       33,804       35,603       33,916       33,667       33,668       33,620  
                                                           
    June 30,     July 1,     Dec. 30,     Jan. 1,     Jan. 2,     Jan. 3,     Dec. 28,  
    2001     2000     2000     2000     1999     1998     1996  
   
   
   
   
   
   
   
 
    (unaudited)                                          
Balance Sheet Data:
                                                     
Working capital
$ 197,353     $ 154,707     $ 186,181     $ 170,053     $ 118,681     $ 156,808     $ 171,204  
Total assets
  629,177       660,069       616,411       660,891       436,485       331,781       314,753  
Long-term debt, net
  104,588       100,013       102,299       100,000       25,000       30,026       30,000  
Stockholders’ equity
  353,317       371,977       343,717       378,937       271,143       233,747       230,735  

-9-


Table of Contents


(1)   Includes a non-recurring charge of $81.4 million, net of $46.2 million tax benefit related to the other-than-temporary write-down of the WebMD shares. The impact of this non-recurring investment loss on diluted earnings per share was ($2.22) for the six months ended June 30, 2001. Also includes a non-recurring gain of $4.8 million, net of $2.7 million tax on the software license settlement with WebMD. The impact of this non-recurring investment gain on diluted earnings per share was $.13 for the six months ended June 30, 2001.
 
(2)   Includes a non-recurring charge of $6.7 million related to the write-down of intangible assets associated with the acquisition of Health Network Ventures, Inc. The impact of this non-recurring charge on diluted earnings per share was ($.19) for 2000.
 
(3)   Includes a non-recurring investment gain of $120.4 million, net of $68.3 million tax expense, related to the conversion of shares of CareInsite common stock to shares of WebMD common stock. The impact of this non-recurring investment gain on diluted earnings per share was $3.38 for 2000. Also includes a non-recurring investment loss of $24.5 million, net of $13.9 million tax benefit, related to the sale of shares of WebMD common stock. The impact of this non-recurring investment loss on diluted earnings per share was ($.69) for 2000.
 
(4)   Includes non-recurring acquisition charges of $3.2 million related to the acquisition of CITATION Computer Systems, Inc. and a charge of $1.0 million, net of $.7 million tax benefit, related to the acquisition of ADAC Healthcare Information Systems, Inc. The impact of these non-recurring charges on diluted earnings per share was ($.09) and ($.03) respectively for 2000.
 
(5)   Includes a non-recurring charge of $5.8 million, net of $3.6 million tax benefit, related to the cost in excess of revenues of completing fixed fee implementation contracts. The tax-effected impact of this non-recurring charge on diluted earnings per share was ($0.17) for 1999. Includes a non-recurring charge of $0.9 million, net of $0.5 million tax benefit, related to the accrual of branch restructuring costs. The tax-effected impact of this non-recurring charge on diluted earnings per share was ($0.03) for 1999.
 
(6)   Includes a non-recurring, acquisition-related charge of $3.1 million, net of $1.9 million tax benefit. The tax-effected impact of the non-recurring charge on diluted earnings per share was ($0.09) for 1998.

-10-


Table of Contents

Dynamic Summary Historical Consolidated Financial Information

     The historical consolidated financial information for Dynamic reflects the following items that you should consider in making period-to-period comparisons. We derived the information below from the audited consolidated financial statements of Dynamic for its fiscal years 2000, 1999, 1998, 1997 and 1996, and from the unaudited consolidated financial statements for the six months ended June 30, 2001 and June 30, 2000. The unaudited information contains all adjustments, consisting of normal recurring accruals, that Dynamic considers necessary for a fair presentation of its financial position and results of operations as of such dates and for these periods. All Dynamic per share data has been adjusted to reflect the Dynamic 1-for-3 reverse stock split effective June 28, 2001. The results for the six months ended June 30, 2001 are not necessarily indicative of the results to be expected for the full year ending December 31, 2001.

                                                           
      Six Months Ended                                          
      June 30, (unaudited)     Fiscal Year Ended December 31,  
     
   
 
      2001     2000     2000(1)     1999     1998     1997     1996(2)  
     
   
   
   
   
   
   
 
      (In thousands, except per share data)
Statements of Earnings Data:
                                                       
Revenues
  $ 12,552     $ 13,048     $ 25,659     $ 35,143     $ 25,829     $ 36,545     $ 19,826  
Operating (loss) earnings
    (1,412 )     (767 )     (8,430 )     1,056       (9,053 )     311       (15,639 )
Net (loss) earnings
    (1,476 )     (829 )     (8,621 )     854       (9,013 )     1,043       (15,618 )
Net (loss) earnings available to common shareholders
    (1,556 )     (909 )     (8,781 )     694       (9,080 )     1,043       (15,869 )
(Loss) earnings per share available to common shareholders:
                                                       
 
Basic
    (0.24 )     (0.14 )     (1.38 )     0.11       (1.50 )     .17       (5.16 )
 
Diluted
    (0.24 )     (0.14 )     (1.38 )     0.11       (1.50 )     .17       (5.16 )
Weighted average shares outstanding:
                                                       
 
Basic
    6,475       6,295       6,354       6,193       6,043       5,968       3,075  
 
Diluted
    6,475       6,295       6,354       6,291       6,043       6,144       3,075  
                                                           
    June 30,     December 31,  
   
   
 
    2001     2000     2000(1)     1999     1998     1997     1996(2)  
   
   
   
   
   
   
   
 
    (unaudited)                                          
Balance Sheet Data:
                                                       
Working capital
  $ (792 )   $ 2,088     $ (314 )   $ 2,078     $ (255 )   $ 6,534     $ 9,191  
Total assets
    18,342       28,071       22,505       29,660       30,604       32,977       31,825  
Long-term debt, net
    505       637       640       753       1,871       454       591  
Stockholders’ equity
    6,113       15,239       7,629       15,921       14,626       21,423       19,771  

(1)   Includes a non-recurring charge of $5.7 million in connection with the abandonment of specific products not in line with Dynamic’s strategic marketing efforts and its e-business initiatives.
 
(2)   Includes the operating results and related information since the acquisition of Dimensional Medicine, Inc. (“DMI”), on May 1, 1996 and Collaborative Medical Systems, Inc. (“CoMed”), on December 17, 1996, including the non-recurring write off of in-process research and development of $15.1 million or $1.63 per common share, in connection with the CoMed Acquisition. Both of these acquisitions were accounted for as purchase business combinations.

-11-


Table of Contents

COMPARATIVE PER SHARE DATA

     This table should be read in conjunction with the historical consolidated financial statements and notes thereto for Cerner and the historical consolidated financial statements for Dynamic incorporated by reference and contained herein. Pro forma combined and equivalent pro forma per share data reflect the combined results of Cerner and Dynamic presented as though they were one company for all periods shown. The acquisition of Dynamic will be accounted for under the purchase method of accounting. The purchase price of $22.9 million using the five day average of Cerner’s stock price surrounding the announcement of the merger on September 6, 2001, has been allocated to the assets and liabilities based on their estimated fair values with the resulting amount of goodwill of $5.2 million. Such allocations are preliminary and are subject to final determination. In accordance with the recently issued Statement of Financial Accounting Standards Number 141, “Business Combinations,” goodwill will not amortized, but will be subject to periodic tests for impairment. All Dynamic per share data has been adjusted to reflect the Dynamic 1-for-3 reverse stock split effective June 28, 2001. All amounts are unaudited.

                 
    Six Months Ended     Year Ended  
Cerner—Historical   June 30, 2001     December 30, 2000  
 
   
 
Book value per common share (at period end)
  $ 10.12     $ 9.89  
Basic earnings (loss) per share
    (1.80 )     3.08  
Diluted earnings (loss) per share
    (1.80 )     2.96  
Cash dividends declared per share
    0       0  
                 
    Six Months Ended     Year Ended  
Dynamic—Historical   June 30, 2001     December 31, 2000  
 
   
 
Book value per common share (at period end)
  $ 0.94     $ 1.18  
Basic loss per share
    (0.24 )     (1.38 )
Diluted loss per share
    (0.24 )     (1.38 )
Cash dividends declared per share
    0       0  
                 
    Six Months Ended     Year Ended  
Cerner—Pro Forma   June 30, 2001     December 30, 2000  
 
   
 
Book value per common share (at period end)
  $ 10.55     $ 10.32  
Basic earnings (loss) per share
    (1.84 )     2.77  
Diluted earnings (loss) per share
    (1.84 )     2.66  
Cash dividends declared per share
    0       0  
                 
    Six Months Ended     Year Ended  
Dynamic—Equivalent Pro Forma   June 30, 2001     December 31, 2000  
 
   
 
Book value per common share (at period end)
  $ 0.58     $ 0.57  
Basic earnings (loss) per share
    (0.10 )     0.15  
Diluted earnings (loss) per share
    (0.10 )     0.15  
Cash dividends declared per share
    0       0  

The Dynamic equivalent pro forma per share amounts were calculated by multiplying the Cerner pro forma per share amounts by the exchange ratio of 0.0550 (which assumes that the average sales price for Cerner common stock is less than $64.50 per share, and that there are 6,593,216 Dynamic common shares issued and outstanding on the closing date of the merger).

-12-


Table of Contents

COMPARATIVE MARKET PRICE AND DIVIDEND INFORMATION

     The shares of Cerner common stock are listed for trading under the symbol “CERN” on the Nasdaq National Market. The following table sets forth the quarterly high and low sales prices of Cerner common stock as reported on the Nasdaq National Market based on published financial sources. During the periods covered by the following table, Cerner has paid no cash dividends to holders of Cerner common stock.

                       
      Cerner Common Stock
     
      High   Low
     
 
Fiscal Year Ended January 1, 2000
First Quarter
$ 27  1/4   $ 12  7/8
 
Second Quarter
    23  1/2     12  1/2
 
Third Quarter
    19  15/16     14  1/4
Fourth Quarter
    20  3/4     12  15/16
 
 
Fiscal Year Ended December 30, 2000
 
First Quarter
$ 40  7/8   $ 17  7/8
 
Second Quarter
    32  9/64     19  3/4
 
Third Quarter
    48        26  5/16
 
Fourth Quarter
    64  7/8     40  1/2
 
 
Fiscal Year Ending December 29, 2001
First Quarter
$ 61. 50   $ 30. 81  
 
Second Quarter
    53. 43     28. 00  
 
Third Quarter
    57. 35     37. 31  
 
Fourth Quarter (through November 5, 2001)
    60. 00     45. 06  

     On September 5, 2001, the last full trading day prior to the public announcement of the merger, the reported closing price of Cerner common stock on the Nasdaq National Market was $48.06 per share. On November 5, 2001 (the latest practicable date prior to the printing of this proxy statement/prospectus), the reported closing price was $54.64.

-13-


Table of Contents

     The Dynamic common shares are listed for trading under the symbol “DHTI” on the Nasdaq National Market. The following table sets forth the quarterly high and low sales prices of Dynamic common shares as reported on the Nasdaq National Market based on published financial sources. During the periods covered by the following table, Dynamic has paid no cash dividends to holders of Dynamic common shares.

                   
      Dynamic Common Shares (1)  
     
 
      High     Low  
     
   
 
Fiscal Year Ended December 31, 1999
First Quarter
$ 6.375     $ 1.875  
 
Second Quarter
    8.250       5.439  
 
Third Quarter
    7.689       3.564  
 
Fourth Quarter
    5.625       3.375  
 
 
Fiscal Year Ended December 31, 2000
First Quarter
$ 11.718     $ 4.500  
 
Second Quarter
    6.189       2.718  
 
Third Quarter
    4.500       2.625  
 
Fourth Quarter
    5.250       1.032  
 
 
Fiscal Year Ending December 31, 2001
First Quarter
$ 2.813     $ 1.500  
 
Second Quarter
    2.250       1.140  
 
Third Quarter
    2.990       1.450  
 
Fourth Quarter (through November 5, 2001)
    2.920       2.000  

(1)   All Dynamic per share data has been adjusted to reflect the Dynamic 1-for-3 reverse stock split effective June 28, 2001.

     On September 5, 2001, the last full trading day prior to the public announcement of the merger, the reported closing price of Dynamic common stock on the Nasdaq National Market was $2.25 per share. On November 5, 2001 (the latest practicable date prior to the printing of this proxy statement/prospectus), the reported closing price was $2.70.

-14-


Table of Contents

RECENT DEVELOPMENTS

     On October 17, 2001, Cerner announced results for the third quarter ended September 29, 2001. Third quarter diluted earnings per share was $0.25, or 47 percent over the $0.17 (before non-recurring items) reported in the third quarter of 2000. Revenues for the third quarter were $139.8 million, an increase of 34 percent over the $104.3 million for the third quarter of 2000. Net earnings were $9.2 million, compared with $6.2 million for the third quarter of 2000. For the nine months ended September 29, 2001, revenues increased 37 percent to $390.8 million from $284.9 million in 2000. Net earnings (before non-recurring items) increased 83 percent to $23.2 million compared with $12.6 million in the prior year. Diluted earnings per share (before non-recurring items) was $0.63 per share as compared to $0.36 in the prior year.

RISK FACTORS

     You should carefully consider the following risk factors concerning Cerner in determining whether to vote to approve the merger and the transactions contemplated thereby. This proxy statement/prospectus contains forward-looking statements that involve risk and uncertainties. The words “could,” “should,” “will be,” “will lead,” “will assist,” “intended,” “continue,” “believe,” “may,” “expect,” “hope,” “anticipate,” “goal,” “forecast” and similar expressions are intended to identify such forward-looking statements. We caution you not to rely unduly on any forward-looking statements in this proxy statement/prospectus. Cerner’s actual results could differ materially from the forward-looking statements. The risk factors described below could cause or contribute to these differences and apply to all forward-looking statements wherever they appear in this proxy statement/prospectus. However, there could be other factors not listed below that may affect Cerner. We may not update these risk factors or publicly announce revisions to forward-looking statements contained in this proxy statement/prospectus.

     Quarterly operating results of Cerner may vary. Cerner’s quarterly operating results have varied in the past and may continue to vary in future periods. Quarterly operating results may vary for a number of reasons including demand for Cerner’s products and services, Cerner’s long sales cycle, the long installation and implementation cycle for these larger, more complex and costlier systems and other factors described in this section and elsewhere in this document. As a result of healthcare industry trends and the market for Cerner’s HNA Millennium® products, a large percentage of Cerner’s revenues are generated by the sale and installation of larger, more complex and costlier 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. The sale may be subject to delays due to clients’ internal budgets and procedures for approving large capital expenditures and by competing needs for other capital expenditures and deploying new technologies or personnel resources. Delays in the expected sale or installation of these large contracts may have a significant impact on Cerner’s anticipated quarterly revenues and consequently its earnings, since a significant percentage of Cerner’s expenses are relatively fixed.

     These larger, more complex and costlier systems are installed and implemented over time periods ranging from approximately six months to three years and involve significant efforts both by Cerner and the client. In addition, implementation of Cerner’s HNA Millennium products is a new and evolving process. Cerner recognizes revenue upon the completion of standard milestone conditions and the amount of revenue recognized in any quarter depends upon Cerner’s and the client’s ability to meet these project milestones. Delays in meeting these milestone conditions or modification of the contract relating to one or more of these systems 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. In addition, support payments by clients for Cerner’s products generally do not commence until the product is in use.

     Cerner’s revenues from system sales historically have been lower in the first quarter of the year and greater in the fourth quarter of the year.

     Cerner’s stock price may be volatile. The trading price of Cerner’s common stock may be volatile. The market for Cerner’s common stock may experience significant price and volume fluctuations in response to a number of factors including actual or anticipated quarterly variations in operating results, changes in expectations of future financial performance or changes in estimates of securities analysts, governmental regulatory action, healthcare reform measures, client relationship developments and other factors, many of which are beyond Cerner’s control.

     Furthermore, the stock market in general, and the market for software, healthcare and high technology companies in particular, has experienced extreme volatility that often has been unrelated to the operating performance of particular

-15-


Table of Contents

companies. These broad market and industry fluctuations may adversely affect the trading price of Cerner’s common stock, regardless of actual operating performance.

     Market risk may affect Cerner’s investment holdings and results of operations. Cerner accounts for its investments in equity securities which have readily determinable fair values as available-for-sale. Available-for-sale securities are reported at fair value with unrealized gains and losses reported, net of tax, as a separate component of accumulated other comprehensive income. Investments in the common stock of certain affiliates over which Cerner exerts significant influence are accounted for by the equity method. Investments in other equity securities are reported at cost. All equity securities are reviewed by Cerner for declines in fair value. If such declines are considered to be other than temporary, the cost basis of the individual security is written down to fair value as a new cost basis, and the amount of the write-down is included in earnings.

     As of June 30, 2001, Cerner owned 14,820,527 shares of common stock of WebMD Corporation, which as of June 30, 2001 had a cost basis of $85.8 million and a carrying value of $103.7 million as these shares are accounted for as available-for-sale.  2,000,000 shares of the shares of WebMD held by Cerner are not registered. At June 30, 2001, Cerner also held 1,048,783 warrants of WebMD with an exercise price of $3.08 and a cost basis and carrying value of $4.1 million. The warrants are carried at cost, as they do not have a fair value that is currently available on a securities exchange.

     On June 18, 2001 Cerner reached an agreement with WebMD regarding certain performance metrics related to specified levels of physician usage arising out of the original license transaction between Cerner and CareInsite, Inc., which has been merged into WebMD. Under the agreement, Cerner received 2,000,000 shares of WebMD stock, valued at $11.6 million, in exchange for $432,000 in cash and the cancellation of various obligations due to Cerner by WebMD. As a result of this agreement, Cerner recognized a non-recurring gain of $4.8 million, net of $2.7 million in tax. Cerner’s policy is to review declines in fair value of its marketable equity securities for declines that may be other than temporary. As a result of this policy, during the second quarter of 2001, Cerner recorded a write-down of its investment in WebMD from $15.00 to $5.79. Accordingly, Cerner recognized a charge to earnings of $81.4 million, net of $46.2 million in tax.

     At June 30, 2001, marketable securities (which consist of money market and commercial paper) of Cerner were recorded at cost, which approximates fair value of approximately $98 million, with an overall average return of approximately 5% and an overall weighted maturity of less than 90 days. The marketable securities held by Cerner are not subject to price risk as a result of the short-term nature of the investments.

     Cerner is not exposed to material future earnings or cash flow exposures from changes in interest rates on long-term debt since 100% of its long-term debt is at a fixed rate. To date, Cerner has not entered into any derivative financial instruments to manage interest rate risk.

     Cerner conducts business in several foreign jurisdictions. However, the business transacted is in the local functional currency and Cerner does not currently have any material exposure to foreign currency transaction gains or losses. All other business transactions are in U.S. dollars. To date, Cerner has not entered into any derivative financial instruments to manage foreign currency risk.

     Changes in the healthcare industry may adversely affect Cerner. The healthcare industry is highly regulated and is subject to changing political, economic and regulatory influences. For example, the Balanced Budget Act of 1997 (Public Law 105-32) contains significant changes to Medicare and Medicaid and began to have its initial impact in 1998 due to limitations on reimbursement, resulting cost containment initiatives, and effects on pricing and demand for capital intensive systems. In addition, the issued and pending rules under the Health Information Portability and Accountability Act of 1996 (HIPAA), will have a direct impact on the healthcare industry by requiring identifiers and standardized transactions/code sets and necessary security and privacy measures in order to ensure the protection of patient health information. These 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 Cerner’s products 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 Cerner’s products and services.

-16-


Table of Contents

As the healthcare industry consolidates, Cerner’s client base could be eroded, competition for clients could become more intense and the importance of acquiring each client becomes greater.

     Significant competition may adversely affect Cerner. The market for healthcare information systems is intensely competitive, rapidly evolving and subject to rapid technological change. Cerner believes that the principal competitive factors in this market include the breadth and quality of system and product offerings, the stability of the information systems provider, the features and capabilities of the information systems, the ongoing support for the system and the potential for enhancements and future compatible products.

     Certain of Cerner’s competitors have greater financial, technical, product development, marketing and other resources than Cerner and some of its competitors offer products that it does not offer. Cerner’s principal existing competitors include Siemens Medical Solutions Health Services Corporation, IDX Systems Corporation, McKesson HBOC, Inc. and Eclipsys Corporation, each of which offers a suite of products that compete with many of Cerner’s products. There are other competitors that offer a more limited number of competing products.

     In addition, Cerner expects 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 products or services. The pace of change in the healthcare information systems market is rapid and there are frequent new product introductions, product enhancements and evolving industry standards and requirements. As a result, Cerner’s success will depend upon its ability to keep pace with technological change and to introduce, on a timely and cost- effective basis, new and enhanced products that satisfy changing client requirements and achieve market acceptance.

     Proprietary technology may be subjected to infringement claims or may be infringed upon. Cerner relies upon a combination of trade secret, copyright and trademark laws, license agreements, confidentiality procedures, employee nondisclosure agreements and technical measures to maintain the trade secrecy of its proprietary information. Cerner recently initiated a patent program but currently has a very limited patent portfolio. As a result, Cerner may not be able to protect against misappropriation of its intellectual property.

     In addition, Cerner could be subject to intellectual property infringement claims as the number of competitors grows and the functionality of its products overlaps with competitive offerings. These claims, even if not meritorious, could be expensive to defend. If Cerner becomes liable to third parties for infringing their intellectual property rights, it could be required to pay a substantial damage award and to develop noninfringing technology, obtain a license or cease selling the products that contain the infringing intellectual property.

     Government regulation could increase the cost of Cerner’s products. The United States Food and Drug Administration (the “FDA”) has declared that software products intended for the maintenance of data used in making decisions regarding the suitability of blood donors and the release of blood or blood components for transfusion are medical devices under the Federal Food, Drug and Cosmetic Act (“Act”) and amendments to the Act. As a consequence, Cerner is subject to extensive regulation by the FDA with regard to its blood bank software. If other of Cerner’s products are deemed to be actively regulated medical devices by the FDA, Cerner could be subject to extensive requirements governing pre- and post- marketing requirements including premarket notification clearance prior to marketing. Complying with these FDA regulations would be time consuming and expensive. It is possible that the FDA may become more active in regulating computer software that is used in healthcare.

     Following an inspection by the FDA in March of 1998, Cerner received a Form FDA 483 (Notice of Inspectional Observations) alleging non-compliance with certain aspects of FDA’s Quality System Regulation with respect to Cerner’s PathNet HNAC Blood Bank Transfusion and Donor products (the “Blood Bank Products”). Cerner subsequently received a Warning Letter, dated April 29, 1998, as a result of the same inspection. Cerner responded promptly to the FDA and undertook a number of actions in response to the Form 483 and Warning Letter including an audit by a third party of Cerner’s Blood Bank Products and improvements to Cerner’s Quality System. A copy of the third party audit was submitted to the FDA in October of 1998 and, at the request of the FDA, additional information and clarification were submitted to the FDA in January of 1999.

     There can be no assurance, however, that Cerner’s actions taken in response to the Form 483 and Warning Letter will be deemed adequate by the FDA or that additional actions on behalf of Cerner will not be required. In addition, Cerner remains subject to periodic FDA inspections and there can be no assurances that Cerner will not be required to undertake additional actions to comply with the Act and any other applicable regulatory requirements. Any failure by Cerner to

-17-


Table of Contents

comply with the Act and any other applicable regulatory requirements could have a material adverse effect on Cerner’s ability to continue to manufacture and distribute its products. 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 Cerner’s business, results of operations or financial condition.

     Product related liabilities could affect the financial condition of Cerner. Many of Cerner’s products provide data for use by healthcare providers in providing care to patients. Although no such claims have been brought against Cerner to date regarding injuries related to the use of its products, such claims may be made in the future. Although Cerner maintains product liability insurance coverage in an amount that it believes is sufficient for its business, there can be no assurance that such coverage will prove to be adequate or that such coverage will continue to remain available on acceptable terms, if at all. A successful claim brought against Cerner which is uninsured or under-insured could materially harm its business, results of operations or financial condition.

     System errors and warranties could cause Cerner to incur additional expense under contracts. Cerner’s systems, particularly the HNA Millennium versions, are very complex. As with complex systems offered by others, Cerner’s systems may contain errors, especially when first introduced. Although Cerner conducts extensive testing, it has discovered software errors in its products after their introduction. Cerner’s systems are intended for use in collecting and displaying clinical information used in the diagnosis and treatment of patients. Therefore, users of Cerner products have a greater sensitivity to system errors than the market for software products generally. Cerner’s agreements with its clients typically provide warranties against material errors and other matters. Failure of a client’s system to meet these criteria could constitute a material breach under such contracts allowing the client to cancel the contract, or could require Cerner to incur additional expense in order to make the system meet these criteria. Cerner’s contracts with its clients generally limit Cerner’s liability arising from such claims but such limits may not be enforceable in certain jurisdictions.

     Anti-takeover defenses may delay or prevent the acquisition of Cerner. Cerner’s charter, bylaws, shareholders’ rights plan and certain provisions of Delaware law contain certain provisions that may have the effect of delaying or preventing an acquisition of Cerner. Such provisions are intended to encourage any person interested in acquiring Cerner to negotiate with and obtain the approval of the Board of Directors in connection with any such transaction. These provisions include (a) a Board of Directors that is staggered into three classes to serve staggered three-year terms, (b) blank check preferred stock, (c) supermajority voting provisions, (d) inability of shareholders to act by written consent or call a special meeting, (e) limitations on the ability of shareholders to nominate directors or make proposals at shareholder meetings and (f) triggering the exercisability of stock purchase rights on a discriminatory basis, which may invoke extensive economic and voting dilution of a potential acquirer if its beneficial ownership of Cerner’s common stock exceeds a specified threshold. Certain of these provisions may discourage a future acquisition of Cerner not approved by the Board of Directors in which shareholders might receive a premium value for their shares.

-18-


Table of Contents

DYNAMIC SPECIAL MEETING

Date, Time, Place and Purpose of the Special Meeting

     This proxy statement/prospectus is first being mailed by Dynamic to its common shareholders on or about November 8, 2001, and is accompanied by the notice of the Dynamic special meeting and form of proxy solicited by the board of directors of Dynamic for use at the Dynamic special meeting, to be held on December 11, 2001 at 9:00 a.m. local time, at 615 Crescent Executive Court, Fifth Floor, Lake Mary, Florida, and at any adjournments or postponements of that meeting. At the Dynamic special meeting, you will be asked to approve and adopt the merger agreement and the transactions contemplated by that agreement, including the merger, and to act on any other matters that may be properly submitted to a vote at the Dynamic special meeting.

Record Date; Stock Entitled to Vote; Quorum

     The Dynamic board of directors has fixed the close of business on November 5, 2001 as the record date for the determination of the Dynamic common shareholders entitled to notice of and to vote at the Dynamic special meeting. On that date, there were 6,593,216 Dynamic common shares outstanding held by approximately 497 holders of record. A majority of the shares of Dynamic issued and outstanding and entitled to vote on the record date must be represented in person or by proxy at Dynamic’s special meeting in order for a quorum to be present for purposes of transacting business at the meeting. In the event that a quorum is not present at the meeting, it is expected that the meeting will be adjourned or postponed to solicit additional proxies. Each Dynamic common share outstanding on the record date is entitled to one vote on each matter to be considered at Dynamic’s special meeting.

Vote Required

     Under Florida law, the approval of the merger agreement and the transactions contemplated thereby requires the affirmative vote of the holders of at least a majority of the outstanding Dynamic common shares entitled to vote at the Dynamic special meeting. Accordingly, the failure to vote your Dynamic common shares in favor of the merger for any reason whatsoever — whether by withholding the vote, by abstaining, or by causing a broker non-vote — will have the same effect as a vote against the merger agreement. Because approval of the merger requires the affirmative vote of a majority of all votes entitled to be cast at the Dynamic special meeting, the Dynamic board of directors urges you to complete, date and sign the accompanying proxy and return it promptly in the enclosed, postage-paid envelope. Shareholders of Cerner are not required to approve the merger and the transactions contemplated thereby.

     A broker non-vote generally occurs when a broker who holds shares in “street name” (i.e., in the name of a broker, bank of other record holder) for a customer does not have the authority to vote on certain non-routine matters because the customer has not provided any voting instructions with respect to the matter.

     In order to take action on any other matter that is properly submitted to Dynamic shareholders at a meeting where a quorum is present, the votes cast in favor of the action must exceed the votes cast opposing the action, unless the articles of incorporation or Florida law requires a greater number of votes. All abstentions and broker non-votes represented at the meeting will be counted as present for determining the presence of a quorum; but since they are neither a vote cast in favor of, nor votes cast opposing, a proposed action, abstentions and broker non-votes typically will have no impact on the outcome of the matter and will not be counted as a vote cast on such matter.

Security Ownership of Management

     As of the Dynamic record date, directors and executive officers of Dynamic owned or controlled approximately 1,347,486 Dynamic common shares, entitling them to exercise approximately 20.4% of the voting power of the Dynamic common shares entitled to vote at the Dynamic special meeting.

Voting of Proxies

     Submitting Proxies. Dynamic shareholders may vote their shares in person by attending the special meeting or by proxy by completing the enclosed proxy card, including signature and date, and mailing it to us in the enclosed postage-paid envelope. IF A DYNAMIC SHAREHOLDER SIGNS AND RETURNS A WRITTEN PROXY CARD

-19-


Table of Contents

WITHOUT INSTRUCTIONS, THE SHARES REPRESENTED BY THE PROXY WILL BE COUNTED AS A VOTE FOR THE MERGER AND THE TRANSACTIONS CONTEMPLATED THEREBY.

     For Dynamic shareholders whose shares are held in “street name” (i.e., in the name of a broker, bank or other record holder), not returning a proxy card or directing the record holder of their shares as to how to vote their shares will have the same effect as voting those shares against the merger.

     Revoking Proxies. Dynamic shareholders of record may revoke their proxies at any time before their proxies are voted at the special meeting. Proxies may be revoked by (1) submitting a written revocation to the Corporate Secretary of Dynamic, (2) duly executing another valid proxy bearing a later date or (3) attending the Dynamic special meeting and voting in person. A shareholder’s attendance at the Dynamic special meeting will not by itself revoke a proxy, the shareholder must obtain a ballot and vote at the special meeting. For any notice of revocation or later proxy to be valid, however, it must actually be received by Dynamic prior to the vote of the shareholders. Dynamic shareholders of record should address any change or revocation to:

 
Dynamic Healthcare Technologies, Inc.
615 Crescent Executive Court
Fifth Floor
Lake Mary, Florida 32746
Attention: Brian Greco, Secretary

     General Information. Dynamic is not aware of any matters expected to be presented for consideration at the special meeting other than the merger agreement and the transactions contemplated thereby. If any other matters are properly presented, the persons named as proxies will vote the proxies in their discretion in accordance with their best judgment with respect to such matters, unless authorization to use that discretion is withheld. However, no proxy having instructions to vote against the adoption of the merger agreement and the transactions contemplated thereby may be voted in favor of a motion to adjourn or postpone the meeting to another time or place.

Solicitation of Proxies

     In addition to solicitation by mail, the directors, officers and employees of Dynamic, who will receive no compensation for their services other than their regular salaries, may also solicit proxies from shareholders by telephone, telecopy, telegram, in person, or other form of communication. Dynamic has retained Morrow & Co., a proxy solicitation firm, to assist it in the solicitation of proxies for the special meeting of Dynamic shareholders at a fee of $7,500 plus reimbursement of reasonable out-of-pocket expenses and, if Dynamic requests Morrow & Co. to make calls to, or receive calls from, nonobjecting beneficial owners, an additional $5.00 per such phone call. Dynamic will request banks, brokerage houses and other custodians, nominees and fiduciaries to forward copies of these proxy materials to those persons for whom they hold shares, and to secure their voting instructions, if necessary, and will reimburse them for the expenses incurred in sending proxy materials to such beneficial owners. Dynamic will bear all costs of the solicitation of proxies from Dynamic shareholders.

     SHAREHOLDERS WHO SUBMIT PROXY CARDS SHOULD NOT SEND IN ANY STOCK CERTIFICATES WITH THEIR PROXY CARDS. A letter of transmittal with instructions for the surrender of certificates representing Dynamic common shares will be mailed by Cerner’s transfer agent to former Dynamic shareholders shortly after the merger is completed.

-20-


Table of Contents

THE MERGER

     The following description of the material information pertaining to the merger, including the summary of the material terms and provisions of the merger agreement and the related stock option agreement. The descriptions of the merger agreement and the related stock option agreement, which are incorporated herein by reference, are qualified in their entirety by reference to the merger agreement included in Appendix A and the stock option agreement included in Appendix D. We urge you to read the Appendices in their entirety.

General

     Dynamic is furnishing this document to its common shareholders in connection with the solicitation of proxies by its board of directors for use at its special meeting of its shareholders.

     At the Dynamic shareholders’ meeting, holders of Dynamic common stock will be asked to vote on the approval and adoption of the merger agreement and the transactions contemplated thereby. The number of shares needed to approve this proposal is at least a majority of the Dynamic common shares outstanding on November 5, 2001. In addition, the merger agreement and the transactions contemplated thereby must be approved by the holders of a majority of the outstanding Dynamic preferred stock. Pursuant to a shareholders agreement, holders of approximately 93% of the outstanding shares of Dynamic preferred stock have agreed to vote their shares in favor of the merger agreement and the transactions contemplated thereby. The merger will not be completed unless the merger agreement and the transactions contemplated thereby are approved and adopted by the Dynamic shareholders.

     The Cerner board of directors and the Dynamic board of directors each have approved the merger agreement, which provides for the merger of Dynamic with and into Cerner Holdings, Inc., a wholly-owned subsidiary of Cerner. Cerner Holdings, Inc. will be the surviving corporation in the merger, and its certificate of incorporation and bylaws will be the certificate of incorporation and bylaws of the combined company. Upon consummation of the merger, the shareholders of Dynamic will become shareholders of Cerner and the separate corporate existence of Dynamic will terminate. Each outstanding share of Cerner common stock will remain outstanding and unchanged as a result of the merger. The name of the surviving company will be Cerner DHT, Inc., which will continue as a wholly-owned subsidiary of Cerner.

Exchange of Dynamic Shares

     If you are a record holder of Dynamic common shares immediately prior to the effective time of the merger and the merger proposal is approved you will receive in exchange for each Dynamic common share approximately 0.0550 shares of Cerner based on certain assumptions described below and subject to certain adjustments. The exchange ratio that determines how many shares of Cerner common stock you will receive is determined by dividing 362,791 by the number of Dynamic common shares outstanding at the time all conditions to the merger have been waived or satisfied. As of October 16, 2001, there were 6,593,216 Dynamic common shares outstanding. Therefore, the basic exchange ratio (the ratio that would be applied if no adjustment is necessary as described further below) is 0.0550 (362,791 divided by 6,593,216). However, if the average trading price per share of Cerner common stock for the 15 trading day period ending on the day immediately prior to the date that all conditions to the merger are satisfied or waived is greater than $64.50, then the basic exchange ratio will be multiplied by a fraction the numerator of which is 64.50 and the denominator of which is the average Cerner stock price during such 15 day period. For example, if the average Cerner stock price as determined above is $68.00 then the exchange ratio would be 0.0522 (0.0550 (the basic exchange ratio) multiplied by 0.9485 (64.50 divided by 68.00)). The closing price of Cerner common stock on November 5, 2001 was $54.64.

     No fractional shares of Cerner common stock will be issued to any holder of Dynamic common shares upon completion of the merger. For each fractional share that would otherwise be issued, Cerner will pay in cash an amount equal to the fraction multiplied by the average of the closing sale prices of Cerner common stock as reported on the Nasdaq National Market for the 15 consecutive trading days immediately preceding the first trading day prior to the date all conditions to closing have been satisfied or waived. No interest will be paid or accrued on cash payable to holders in lieu of fractional shares.

     Pursuant to the merger agreement, at the closing of the merger each Dynamic preferred share will be redeemed at a price of $2.00 in cash, plus all unpaid and accrued dividends through the date of the merger.

-21-


Table of Contents

     For a description of the differences between the rights of the holders of Dynamic common shares and the holders of Cerner common stock, see “Comparative Rights of Shareholders” on page 55.

Dynamic Stock Options and Warrants

     Each outstanding option or warrant to acquire Dynamic common shares will be automatically converted at the effective time of the merger into options and warrants to purchase Cerner common stock. To the extent that any such options were issued under any Dynamic stock option or incentive plan, such options will continue to be governed by the terms of the Dynamic stock plan and related grant agreements under which they were granted, and the warrants will continue to be governed by any agreement pursuant to which they were issued, except in each case that:

    the number of shares of Cerner common stock subject to the new Cerner stock option or warrant will be equal to the product of the number of Dynamic common shares subject to the Dynamic stock option or warrant agreement and the exchange ratio as described above under “Exchange of Dynamic Shares,” rounded to the nearest whole share, and
 
    the exercise price per share of Cerner common stock subject to the new Cerner stock option or warrant will be equal to the exercise price per Dynamic common share under the Dynamic stock option or warrant agreement divided by the exchange ratio as described above under “Exchange of Dynamic Shares,” rounded to the nearest one-hundredth of a cent.

     In any event, stock options that are incentive stock options under the Internal Revenue Code of 1986, as amended, will be adjusted in the manner prescribed by the Internal Revenue Code.

     Additionally, stock options and warrants issued to and held by directors of Dynamic, as well as certain stock options held by officers and employees of Dynamic, will be fully vested upon consummation of the merger. The options, however, cannot be exercised until 12 months after the original date of grant. Accordingly, such warrants and options that have been outstanding for at least 12 months will be immediately exercisable for shares of Cerner common stock following the closing of the merger.

Exchange of Stock Certificates

     At or prior to the completion of the merger, Cerner will deposit with UMB Bank, n.a. certificates representing the shares of Cerner common stock to be issued in connection with the merger and the cash to be paid in lieu of any fractional shares to be issued in the merger. UMB Bank, n.a. will act as the exchange agent for the benefit of the holders of certificates of Dynamic common shares.

     Promptly after the completion of the merger, a form of transmittal letter will be mailed by UMB Bank, n.a. to each former Dynamic common shareholder. This transmittal letter will contain instructions for the surrender of certificates representing Dynamic common shares in exchange for shares of Cerner common stock and any cash in lieu of fractional shares.

     You should not return your Dynamic common share certificates with the enclosed proxy card, and you should not forward them to the exchange agent until you receive a letter of transmittal after completion of the merger.

     Until you surrender your Dynamic common share certificates for exchange after completion of the merger, you will accrue but will not be paid any dividends or other distributions declared after the effective time of the merger with respect to Cerner common stock into which your shares have been converted. When you surrender your certificates, Cerner will pay any unpaid dividends or other distributions, without interest. After the effective time of the merger, there will be no transfers on the stock transfer books of Dynamic of any Dynamic common shares. If certificates representing Dynamic common shares are presented for transfer after the completion of the merger, they will be cancelled and exchanged for a certificate representing the applicable number of shares of Cerner common stock and any cash in lieu of fractional shares.

     If a certificate of Dynamic common shares has been lost, stolen or destroyed, the exchange agent will issue the consideration properly payable under the merger agreement upon receipt of appropriate evidence as to that loss, theft or destruction, appropriate evidence as to the ownership of that certificate by the claimant, and appropriate and customary indemnification and/or a bond.

-22-


Table of Contents

Background of the Merger

     Over the past few years, Dynamic has monitored and analyzed the competition in its industry, and the advantages associated with the growth of Dynamic as a means to effectively compete for market share. In early 2000, Dynamic determined that it was in the best interests of the company and its shareholders to consider undertaking a significant and strategic transaction as a means of growing Dynamic, both in absolute size and in stature, and maximizing shareholder value. Three possible strategic alternatives were considered; namely, (1) to seek a significant and accretive acquisition candidate, (2) enter into a strategic cross marketing/distribution arrangement or (3) consider the sale of the business to a leading health information system provider or company in a related industry.

     Dynamic actively investigated each of these strategies during the first half of 2000 and met with several potential business partners or acquisition candidates, but no formal negotiations for any specific transaction was commenced and Dynamic was unable to reach any agreements. In July 2000, Dynamic was approached by ADAC Laboratories, Inc. through its investment banker, Bear Stearns & Co. and was offered an opportunity to acquire the assets and business of ADAC’s Healthcare Information Systems division in exchange for common shares of Dynamic. Negotiations and due diligence examinations took place from August 2000 through early October 2000. Following due diligence, the parties decided not to proceed with the proposed transaction.

     Following this decision, after a review of several merger and recapitalization opportunities, the board of directors determined that Dynamic should engage the services of an investment banking firm to evaluate the strategic alternatives available to it. Management and several board members interviewed or met with six potential investment banking firms and SG Cowen Securities Corporation was selected based on the strength of its investment banking presence in the healthcare information and e-health area. On October 6, 2000, Dynamic engaged SG Cowen to act as its financial advisor in connection with Dynamic’s general financial strategy and planning. On October 24, 2000, ADAC announced that it had agreed to sell the Healthcare Information Systems division to Cerner in an all cash transaction. On November 17, 2000, SG Cowen and Dynamic revised their relationship in a new agreement pursuant to which SG Cowen was to act as a financial advisor in connection with the possible sale of Dynamic or a suitable joint venture arrangement. SG Cowen subsequently contacted a number of companies that it believed might have an interest in such a transaction with Dynamic. Cerner was one of those companies contacted. In December 2000 and January 2001, after receipt of executed confidentiality agreements, SG Cowen distributed preliminary information about Dynamic to 12 companies expressing an interest in Dynamic. At that time, Cerner did not express any interest nor did it request any such information. On February 23, 2001, the Dynamic board of directors met to review the status of SG Cowen’s inquiries and solicitation of interest. SG Cowen identified each of the companies that had been contacted and those that had requested information about Dynamic, and advised the board that of the companies receiving such information, seven were still at various stages in their review and in some cases had requested and had been furnished with additional information.

     Although Cerner had not originally expressed an interest in pursuing a transaction with Dynamic, in May 2001 representatives of Cerner approached Dynamic to express such an interest. A confidentiality agreement between Dynamic and Cerner was executed on May 25, 2001 and during June 2001, Cerner and Dynamic exchanged pertinent financial and other information. On June 27, 2001, Cerner submitted a preliminary proposal to acquire Dynamic in a stock for stock transaction at a fixed exchange ratio which, on the date of the proposal, was equal to $0.50 per Dynamic common share (or $1.50 on a post-split basis), or an aggregate of approximately $12 million (including the redemption of the preferred shares at $2.00 per share). The proposal was conditioned upon, among other things, the due diligence review of Cerner. On July 2, 2001, the Dynamic board of directors, together with representatives of Carlton Fields, P.A., the company’s legal counsel, met by telephone conference to review the Cerner proposal. Representatives of Carlton Fields discussed with the board of directors the nature and scope of their fiduciary duties in considering the Cerner proposal. During the meeting, SG Cowen reviewed with the board some of the financial aspects of Cerner’s proposal, including a comparison of the proposed offering price with the historical prices for Dynamic common shares during the past 12 months, a review of premiums paid for other companies, and a review of financial aspects of other selected acquisitions in the healthcare information systems industry. SG Cowen also reviewed the prices of Cerner’s common stock since January 1, 2000, and provided a comparison of certain Cerner financial results to those of its competitors. After careful review of the Cerner offer and the information provided by SG Cowen, the board of directors of Dynamic rejected the proposal as being inadequate.

     The board of directors of Dynamic then formed a negotiating committee consisting of Jerry L. Carson, T. Christopher Assif and Daniel Raynor which was directed to meet with representatives of Cerner to explain the rationale for Dynamic’s position, determine whether any additional negotiation with Cerner would be useful, and determine whether any of the other companies that had requested information about Dynamic might be interested in commencing the negotiation of a transaction with Dynamic. Any potential transaction with Cerner or any other company was to be considered against

-23-


Table of Contents

the prospects of Dynamic continuing as an independent entity and the future shareholder value that would result from such a strategy. During this period of time, a member of the negotiating committee contacted several of the companies which had previously requested information about Dynamic to ascertain whether there might be an interest in pursuing a transaction with Dynamic. Following these contacts, Dynamic held informal discussions with several of these companies.

     On July 10, 2001, Mr. Assif met with representatives of Cerner to determine Cerner’s interest in continuing to pursue a potential transaction. On July 25, 2001, Cerner presented a revised proposal to purchase Dynamic at a purchase price on the date of the proposal equal to $2.92 per share (on a post-split basis) payable in Cerner common stock, or an aggregate value of approximately $20 million (including the redemption of the preferred shares at $2.00 per share), at a fixed exchange ratio which provided for adjustment upon certain changes in the price of Cerner common stock prior to the merger. The second proposal included the general terms of a transaction and the negotiating committee met with representatives of Cerner to discuss the proposal in greater detail. Further discussions between the parties were held during the next few days. During these negotiations, Cerner requested, as consideration for proceeding further, that Dynamic agree to discontinue any solicitation of other transactions for a limited period of time. On August 13, 2001, Dynamic entered into an agreement to this effect. This agreement also provided for a $500,000 break-up fee to be paid by Dynamic to Cerner if Dynamic executed an acquisition agreement with a third party before September 30, 2001.

     Between August 14, 2001 and September 4, 2001 representatives of Cerner and Dynamic undertook extensive bilateral due diligence and with the assistance of Stinson, Mag & Fizzell, P.C. and Carlton Fields, P.A., their respective legal counsels, they negotiated the terms of the merger agreement and related documents. On August 17, 2001, SG Cowen’s engagement as Dynamic’s financial advisor expired. Accordingly, on August 29, 2001, Dynamic entered into a new agreement engaging SG Cowen to render an opinion as to the fairness from a financial point of view of the proposed exchange ratio of the Cerner offer. The Dynamic board of directors held a special meeting on September 5, 2001, to review and consider Cerner’s offer and the material terms of the proposed definitive merger agreement. At this meeting, representatives of Carlton Fields reviewed in detail for the Dynamic board of directors the terms of the proposed merger agreement and other legal aspects of the Cerner transaction. SG Cowen then made a presentation to the board regarding its financial analyses with respect to the proposed exchange ratio. SG Cowen’s analyses are summarized in this proxy statement/prospectus under “— Opinion of SG Cowen Securities Corporation.” SG Cowen also delivered to the board of directors its opinion that, as of that date, the exchange ratio offered by Cerner was fair to the Dynamic common shareholders from a financial point of view. The board of directors asked numerous questions concerning the analysis and to ascertain whether the proposed purchase price adequately reflected the value of Dynamic and its perceived growth potential (and the risks associated therewith), and how the current offer compared with other recent transactions. The board of directors also thoroughly reviewed and considered the conditions of the offer, the form of consideration offered (Cerner common stock), the structure of the offer, including price protections, and the possibility of obtaining a higher offer in the future. After further discussion, the board of directors voted to approve the merger agreement and later on September 5, 2001, the parties executed the merger agreement.

Recommendation of the Dynamic Board and Reasons for the Merger

     Dynamic’s board of directors has determined that the merger is advisable and fair to and in the best interests of Dynamic and its shareholders and has approved and adopted the merger agreement and the transactions contemplated thereby, including the merger. Accordingly, the Dynamic board recommends that shareholders vote “FOR” approval and adoption of the merger agreement and the transactions contemplated thereby, including the merger.

     In reaching its determination that the merger is fair to and in the best interests of Dynamic and its shareholders, the Dynamic board consulted with its management, its financial and legal advisors, and considered a number of factors, which included (but did not consist exclusively of) the following:

    The financial terms of the merger, including the value of the merger consideration offered, the premium to be paid as it relates to both the book value of Dynamic and the recent historical market prices for the Dynamic common shares, the prices paid in comparable transactions, the relative earnings per share and the relative shareholders’ equity of Cerner and Dynamic. The Dynamic board also considered Dynamic’s ability to continue to meet Nasdaq NMS listing requirements, the greater liquidity and more active trading market for the Cerner common stock, and the ability to terminate the transaction if the market price of the Cerner common stock falls below a floor price for a prolonged period prior to closing the merger.
 
    Dynamic’s limited capital resources, as evidenced by its negative working capital, and the difficulty of raising additional capital on satisfactory terms under current market conditions.

-24-


Table of Contents

    The future prospects of Dynamic and possible alternatives available to the proposed merger, including the prospects of continuing as an independent stand alone company. The Dynamic board considered its prior and recent experiences in attempting to identify a strategic partner or a potential business combination, the timing of the offer, the prospects for receiving a better financial offer from another acquiror, and the risks associated with all such alternatives, including those which could affect the ability of Dynamic to achieve its projected results of operations if it should remain independent. With respect to the prospect of remaining independent, based on its analysis the Dynamic board concluded that the values to be received upon the sale of Dynamic to Cerner would be higher in the long term and less susceptible to the risks of remaining independent.
 
    The opinion of SG Cowen Securities Corporation to the Dynamic board of directors that, as of the date of the opinion, the exchange ratio established under the terms of the merger agreement was fair from a financial point of view to the Dynamic common shareholders. The opinion of SG Cowen Securities Corporation is set forth in Appendix B to this proxy statement/prospectus.
 
    Information with respect to the financial condition, results of operations, business, and prospects of Dynamic and the current industry, economic, and market conditions, as well as the risks associated with achieving these prospects.
 
    The business and financial condition and earning prospects of Cerner, the potential growth of Cerner’s business operations, and the competence, integrity, and experience of Cerner and its management. In this regard, the Dynamic board considered the long term prospects for appreciation in the Cerner common stock.
 
    The non-financial terms and structure of the proposed merger, and in particular, the fact that the merger is intended to qualify as a tax free exchange to Dynamic common shareholders. In addition, the Dynamic board considered the “fiduciary out” and termination provisions of the merger agreement which would not prevent the Dynamic board from accepting a superior acquisition proposal, subject to paying Cerner a termination fee.
 
    The size of the termination fee and the conditions under which it is payable, and the determination that such provisions are reasonable in light of the benefits of the merger and the process that was conducted.
 
    The social and economic effect on Dynamic and its employees, customers, suppliers, and other constituencies of the communities in which Dynamic is located. In this regard, the Dynamic board considered the terms of the employee benefits to be received, the complementary nature of the products offered by Cerner, the access that the Dynamic products will have to additional distribution channels, and the increased level of services that can be provided to existing customers of Dynamic.

     The Dynamic board also considered:

    The risks that the benefits sought in the transaction would not be obtained.
 
    The risk that the transaction would not be consummated.
 
    The risk that the value of the Cerner common stock will decline.
 
    The effect of a public announcement of the merger on Dynamic’s sales, customer and supplier relationships, operating results and the ability to retain employees, and on the trading price of the Dynamic common shares.
 
    The substantial time and effort of management that will be required to consummate the merger and integrate the operations of the two companies.
 
    The impact of the transaction on Dynamic employees.
 
    The possibility that the provisions of the merger agreement and the stock option agreement might have the effect of discouraging other persons potentially interested in a business combination with Dynamic from pursuing such an opportunity.

-25-


Table of Contents

     The board also recognized that members of Dynamic’s board and executive officers have interests in the merger that are different from Dynamic’s other shareholders. See “— Interests of Certain Persons in the Merger.”

     In the judgment of the Dynamic board, the potential benefits of the transaction outweigh the potential negative elements of the above-described considerations.

     The foregoing discussion of the information and factors discussed by the Dynamic board is not meant to be exhaustive but includes all material factors considered by the board. In view of the complexity and wide variety of information and factors considered, both positive and negative, the Dynamic board did not find it practical to quantify, rank or otherwise attach any relative weight to the various factors. In addition, the Dynamic board did not reach any specific conclusion with respect to each of the factors considered, or any aspect of any particular factor, but conducted an overall analysis of these factors, including thorough discussions with Dynamic’s management and legal and financial advisors. However, the Dynamic board did place a special emphasis on the consideration payable in connection with the proposed merger and the receipt of a fairness opinion from SG Cowen Securities Corporation as set forth in Appendix B of this proxy statement/prospectus. See “— Opinion of SG Cowen Securities Corporation” below. As a result of its consideration of the foregoing, the Dynamic board determined that the merger agreement and the transactions contemplated thereby, including the merger, are fair to and in the best interests of Dynamic and its shareholders and approved and adopted, the merger agreement and the transactions contemplated thereby, including the merger.

Cerner’s Reasons for the Merger

     Cerner’s board of directors has unanimously determined that the merger is advisable and in the best interests of Cerner and its shareholders and has approved and adopted the merger, the merger agreement and the transactions contemplated thereby. In reaching the determination that the merger is advisable and in the best interests of Cerner and its shareholders, the Cerner board considered a number of factors, which included (but did not consist exclusively of) the following:

       • The acquisition of Dynamic is complementary to Cerner’s existing pathology, laboratory and radiology client bases that primarily consists of larger hospitals, health systems and independent laboratories and will allow Cerner to broaden its market presence in the healthcare industry, furthering Cerner’s mission to improve healthcare efficiencies, patient safety and appropriate clinical decision-making.
 
       • Dynamic clients will be provided an opportunity to expand their automation of clinical processes throughout the entire healthcare organization through Cerner’s HNA Millennium suite of products and through Cerner’s application and data services business. This represents additional market opportunities for Cerner.
 
       • Cerner should be able to reduce operating costs of the Dynamic business by reducing Dynamic’s cost structure, for example eliminating Dynamic’s cost of being a stand-alone public company (e.g., costs of complying with the periodic reporting requirements of the Securities and Exchange Commission, auditing costs and duplicative administrative resources).
 
       • Cerner’s existing knowledge of the pathology, laboratory and radiology businesses should allow Cerner to absorb Dynamic in an efficient manner.

     The foregoing discussion of the information and factors discussed by the Cerner board is not meant to be exhaustive but includes all material factors considered by the Cerner board. The Cerner board did not find it practical to quantify, rank or otherwise attach any relative weight to the various factors. In addition, the Cerner board did not reach any specific conclusion with respect to each of the factors considered, or any aspect of any particular factor, but conducted an overall analysis of these factors, including discussions with Cerner’s management and legal and financial advisors. As a result of its consideration of the foregoing, the Cerner board determined that the merger, the merger agreement and the transactions contemplated thereby are advisable and fair to and in the best interests of Cerner and its shareholders and approved and adopted the merger, the merger agreement and the transactions contemplated thereby.

Opinion of SG Cowen Securities Corporation

     Pursuant to an engagement letter dated August 29, 2001, Dynamic retained SG Cowen Securities Corporation to render an opinion to the board of directors of Dynamic as to the fairness, from a financial point of view, to the holders of Dynamic common shares of the exchange ratio pursuant to the terms of the merger agreement.

-26-


Table of Contents

     On September 5, 2001, SG Cowen delivered certain of its written analyses and its oral opinion to the Dynamic board, subsequently confirmed in writing as of the same date, to the effect that, and subject to the various assumptions set forth therein, as of September 5, 2001, the exchange ratio was fair, from a financial point of view, to the holders of common stock of Dynamic. The full text of the written opinion of SG Cowen, dated September 5, 2001, is attached as Appendix B and is incorporated by reference. Holders of Dynamic common stock are urged to read the opinion in its entirety for the assumptions made, procedures followed, other matters considered and limits of the review by SG Cowen. The summary of the written opinion of SG Cowen set forth herein is qualified in its entirety by reference to the full text of such opinion. SG Cowen’s analyses and opinion were prepared for and addressed to the Dynamic board and are directed only to the fairness, from a financial point of view, of the exchange ratio to the holders of Dynamic common shares, and do not constitute an opinion as to the merits of the merger or a recommendation to any shareholders as to how to vote on the proposed merger. The exchange ratio was determined through negotiations between Dynamic and Cerner and not pursuant to recommendations of SG Cowen.

     In arriving at its opinion, SG Cowen reviewed and considered such financial and other matters as it deemed relevant, including, among other things:

    a draft of the merger agreement dated August 31, 2001;
 
    certain publicly available information for Dynamic and certain other relevant financial and operating data furnished to SG Cowen by Dynamic management;
 
    certain publicly available information for Cerner;
 
    certain internal financial analyses, financial forecasts, reports and other information concerning Dynamic prepared by its management;
 
    the amounts and timing of the cost savings and related expenses expected to result from the merger furnished to SG Cowen by the management of Dynamic;
 
    First Call estimates and financial projections in Wall Street analyst reports for Cerner;
 
    discussions with certain members of the management of both Dynamic and Cerner concerning the historical and current business operations, financial conditions and prospects of Dynamic and Cerner and such other matters SG Cowen deemed relevant;
 
    certain operating results, the reported price and trading histories of the shares of the common stock of Cerner and the common shares of Dynamic as compared to the operating results, the reported price and trading histories of selected publicly traded companies SG Cowen deemed relevant;
 
    certain financial terms of the merger as compared to the financial terms of selected business combinations SG Cowen deemed relevant;
 
    based on the financial forecasts furnished to SG Cowen by Dynamic management, the cash flows generated by Dynamic on a stand-alone basis to determine the present value of the discounted cash flows;
 
    certain pro forma financial effects of the merger on an accretion/dilution basis; and
 
    such other information, financial studies, analyses and investigations and such other factors that SG Cowen deemed relevant for the purposes of this opinion.

     In conducting its review and arriving at its opinion, SG Cowen, with Dynamic’s consent, assumed and relied, without independent investigation, upon the accuracy and completeness of all financial and other information provided to it by Dynamic and Cerner, respectively, or which was publicly available. SG Cowen did not undertake any responsibility for the accuracy, completeness or reasonableness of, or independently to verify, this information. In addition, SG Cowen did not conduct any physical inspection of the properties or facilities of Dynamic or Cerner. SG Cowen further relied upon the assurance of management of Dynamic that they were unaware of any facts that would make the information provided to

-27-


Table of Contents

SG Cowen incomplete or misleading in any respect. SG Cowen, with Dynamic’s consent, assumed that the financial forecasts and synergies provided to SG Cowen were reasonably prepared by the management of Dynamic, and reflected the best available estimates and good faith judgments of such management as to the future performance of Dynamic and the expected synergies. Management of Dynamic confirmed to SG Cowen, and SG Cowen assumed, with Dynamic’s consent, that the financial forecasts and the expected synergies provided by Dynamic management, and the First Call estimates and the analyst projections with respect to Cerner provided a reasonable basis for SG Cowen’s opinion.

     SG Cowen did not make or obtain any independent evaluations, valuations or appraisals of the assets or liabilities of Dynamic or Cerner, nor was SG Cowen furnished with these materials. With respect to all legal matters relating to Dynamic and Cerner, SG Cowen relied on the advice of legal counsel to Dynamic. SG Cowen expresses no opinion with respect to any legal matter. SG Cowen’s services to Dynamic in connection with the merger were comprised solely of rendering an opinion from a financial point of view of the exchange ratio. SG Cowen’s opinion was necessarily based upon economic and market conditions and other circumstances as they existed and could be evaluated by SG Cowen on the date of its opinion. It should be understood that although subsequent developments may affect its opinion, SG Cowen does not have any obligation to update, revise or reaffirm its opinion and SG Cowen expressly disclaims any responsibility to do so.

     In rendering its opinion, SG Cowen assumed, in all respects material to its analysis, that the representations and warranties of each party contained in the merger agreement are true and correct, that each party will perform all of the covenants and agreements required to be performed by it under the merger agreement and that all conditions to the consummation of the merger will be satisfied without waiver thereof. SG Cowen assumed that the final form of the merger agreement would be substantially similar to the last draft received by SG Cowen prior to rendering its opinion. SG Cowen also assumed that all governmental, regulatory and other consents and approvals contemplated by the merger agreement would be obtained and that, in the course of obtaining any of those consents, no restrictions will be imposed or waivers made that would have an adverse effect on the contemplated benefits of the merger. SG Cowen also assumed that, immediately prior to or concurrent with the merger, all outstanding shares of preferred stock of Dynamic will be redeemed for an aggregate consideration of $2.0 million plus accrued but unpaid dividends. SG Cowen expressed no opinion as to the fairness of the terms of the redemption. Dynamic informed SG Cowen, and SG Cowen assumed, that the merger will be treated as a tax-free reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended.

     SG Cowen’s opinion does not constitute a recommendation to any shareholder as to how such shareholder should vote on the proposed merger. SG Cowen’s opinion does not imply any conclusion as to the likely trading range for Dynamic’s or Cerner’s common stock following consummation of the merger or otherwise, which may vary depending on numerous factors that generally influence the price of securities. SG Cowen’s opinion is limited to the fairness, from a financial point of view, to the holders of Dynamic’s common shares of the exchange ratio. SG Cowen expresses no opinion as to the underlying business reasons that may support the decision of Dynamic’s board to approve, or Dynamic’s decision to consummate, the merger.

     The following is a summary of the principal financial analyses performed by SG Cowen to arrive at its opinion. Some of the summaries of financial analyses include information presented in tabular format. In order to fully understand the financial analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data set forth in the tables without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of the financial analyses. SG Cowen performed certain procedures, including each of the financial analyses described below, and reviewed with the management of Dynamic and Cerner the assumptions on which such analyses were based and other factors, and reviewed with the management of Dynamic the historical and projected financial results of Dynamic.

     Analysis of Premiums Paid in Selected Transactions. SG Cowen reviewed the premium of the offer price over the trading prices one trading day and four weeks prior to the announcement date of ten acquisition transactions in the healthcare information technology industry announced since May 1996. These transactions were (listed as acquiror/target):

  Xcare.net/Healthcare.com
 
  InfoCure Corp./InfoSoft, LLC (DENTSPLY-Intl., Inc.)
 
  Cerner Corp./ADAC Healthcare Information Systems, Inc.
 
  Perot Systems Corp./Health Systems Design Corp.
 
  Cerner Corp./Citation Computer Systems, Inc.

-28-


Table of Contents

  InfoCure Corp./Reynolds & Reynolds Co.
 
  HBO & Company/US Servis, Inc.
 
  QuadraMed Corp./Medicus Systems, Inc.
 
  National Data Corp./Health EDI Services (Equifax, Inc.)
 
  Physician Computer Network, Inc./Wismer Martin, Inc.

     The following table presents the median and mean premium of the offer prices over the trading prices one day and four weeks prior to the announcement date for the selected transactions and the premiums implied for Dynamic, based on the exchange ratio pursuant to the merger agreement. The information in the table is based on the closing prices of Dynamic’s common shares and Cerner’s common stock on September 4, 2001, the date immediately preceding the date of the opinion.

                                         
    Premium Paid for                  
   
                 
    Selected Transactions     Selected Transactions     Premium Implied  
    Since May 1996     Since May 2000     By Exchange Ratio  
   
   
   
 
Premiums Paid to Stock Price:   Median     Mean     Median     Mean          
One day prior to
                                       
Announcement
    34.8 %     44.7 %     33.3 %     38.4 %     30.2 %
 
Four weeks prior to
                                       
Announcement
    70.0 %     72.7 %     48.8 %     66.7 %     1.8 %

     Analysis of Selected Transactions. SG Cowen also reviewed the financial terms, to the extent publicly available, of the selected healthcare information technology transactions. SG Cowen reviewed the enterprise value (defined as the market capitalization of common stock plus total debt less cash and equivalents) paid in the selected transactions as a multiple of latest reported 12 month (referred to as LTM) revenues, earnings before interest expense, income taxes, depreciation and amortization (referred to as EBITDA) and earnings before interest expense and income taxes (referred to as EBIT), and also examined the multiples of equity value paid in the selected transactions to book value and LTM earnings.

-29-


Table of Contents

     The following tables present, for the periods indicated, the low, mean, median and high multiples implied by the ratio of enterprise value to LTM revenues, EBIT and EBITDA, and the ratio of equity value to book value and LTM earnings for the selected transactions and the corresponding multiples for Dynamic implied by the exchange ratio. The information in the tables is based on the closing price of Dynamic’s common shares and Cerner’s common stock on September 4, 2001.

                                           
      Multiples for Selected Transactions     Multiple  
              Since May 2000             Implied by  
     
    Exchange  
      Low     Mean     Median     High     Ratio  
     
   
   
   
   
 
Enterprise Value as a ratio of:
                                       
 
LTM Revenue
    0.30x       0.88x       0.81x       1.62x       0.77x  
 
LTM EBITDA
    10.5x       16.9x       16.9x       23.4x     NM
 
LTM EBIT
    19.7x       34.4x       34.4x       49.1x     NM
Equity Value as a ratio of:
                                       
 
Book Value
    1.2x       2.3x       2.2x       3.4x       4.2x  
 
LTM Earnings
  NM   NM   NM   NM   NM
                                           
      Multiples for Selected Transactions     Multiple  
              Since May 1996             Implied by  
     
    Exchange  
      Low     Mean     Median     High     Ratio  
     
   
   
   
   
 
Enterprise Value as a ratio of:
                                       
 
LTM Revenue
    0.30x       1.46x       1.39x       2.80x       0.77x  
 
LTM EBITDA
    3.2x       12.7x       10.5x       23.4x     NM
 
LTM EBIT
    4.2x       24.2x       19.7x       49.1x     NM
Equity Value as a ratio of:
                                       
 
Book Value
    1.2x       3.0x       2.8x       4.7x       4.2x  
 
LTM Earnings
    5.2x       19.6x       11.5x       44.6x     NM

     Although the selected transactions were used for comparison purposes, none of those transactions is directly comparable to the merger, and none of the companies in those transactions is directly comparable to Dynamic or Cerner. Accordingly, an analysis of the results of such a comparison is not purely mathematical, but instead involves complex considerations and judgments concerning differences in historical and projected financial and operating characteristics of the companies involved and other factors that could affect the acquisition value of such companies or Dynamic to which they are being compared.

     Analysis of Selected Publicly Traded Companies. To provide contextual data and comparative market information, SG Cowen compared selected historical operating and financial data and ratios for Dynamic to the corresponding financial data and ratios of six other companies in the healthcare information technology industry whose securities are publicly traded and which SG Cowen believes have operating, market valuation and trading valuations similar to what might be expected of Dynamic. These companies were:

    First Consulting Group, Inc.
    Mediware Information Systems, Inc.
    QuadraMed, Inc.
    Quality Systems, Inc.
    Superior Consultant Holdings Corp.
    VitalWorks, Inc.

     The data and ratios included the enterprise value of the selected companies as multiples of LTM revenues, EBITDA and EBIT, of estimated 2001 calendar year revenues, EBITDA and EBIT and of estimated 2002 calendar year revenues, EBITDA and EBIT. SG Cowen also examined the ratios of the current share prices of the selected companies to

-30-


Table of Contents

the LTM earnings per share (referred to as EPS), estimated 2001 calendar year EPS and estimated 2002 calendar year EPS (in each case, as available from research analyst reports or, if not so available, First Call).

     The following table presents, for the periods indicated, the low, mean, median and high multiples implied for the selected companies by the ratio of enterprise value to LTM revenues, LTM EBITDA, and estimated 2001 and 2002 calendar year revenues, and the ratio of equity value to 2002 calendar year earnings. SG Cowen noted that the LTM and estimated 2001 and 2002 EBIT and EBITDA and LTM and estimated 2001 earnings for all but one of the selected companies were either negative or not available, and did not derive low, mean, median or high multiples with respect to these ratios. The information in the table is based on the closing price of Dynamic’s common shares and Cerner’s common stock on September 4, 2001.

                                             
                                        Dynamic  
        Selected Company Multiples     Multiple  
       
    Implied by  
        Low     Mean     Median     High     Exchange Ratio  
       
   
   
   
   
 
Enterprise Value as a ratio of:
                                       
   
LTM Revenue
    0.46x       1.06x       1.10x       1.48x       0.77x  
   
LTM EBITDA
    6.2x       32.2x       31.2x       59.1x       NM
   
2001 Revenue
    0.42x       0.85x       0.68x       1.44x       0.75x  
   
2002 Revenue
    0.35x       0.74x       0.58x       1.27x       0.69x  
Equity Value as a ratio of:
                                       
 
2002 Earnings
    19.4x       21.7x       20.5x       25.4x       8.7x  

     Although the selected companies were used for comparison purposes, none of those companies is directly comparable to Dynamic. Accordingly, an analysis of the results of such a comparison is not purely mathematical, but instead involves complex considerations and judgments concerning differences in historical and projected financial and operating characteristics of the selected companies and other factors that could affect the public trading value of the selected companies or Dynamic to which they are being compared.

     Historical Exchange Ratio Analysis. SG Cowen analyzed the ratios of the closing prices of Dynamic’s common shares to those of Cerner’s common stock over various periods ending September 4, 2001. The table below illustrates the ratios for those periods.

         
Historical Exchange   Exchange Ratio  

 
 
Latest 12 months average
    0.0465
Latest six months average
    0.0446  
Latest three months average
    0.0443  
Latest one month average
    0.0498  
High (latest 12 months)
    0.0991  
Low (latest 12 months)
    0.0259  
Current
    0.0424  
Implied exchange ratio for Dynamic
    0.0552  

     Stock Trading History. To provide contextual data and comparative market data, SG Cowen reviewed the historical market prices of Dynamic’s common shares from September 5, 2000 to September 4, 2001. SG Cowen noted that over the twelve-month period indicated, the high and low prices for shares of Dynamic were $3.94 and $1.17, respectively. The closing price on September 4, 2001 was $2.08.

     SG Cowen also reviewed the historical market prices of Cerner’s common stock from September 5, 2000 to September 4, 2001. SG Cowen noted that over the twelve-month period indicated, the high and low prices for shares of Cerner were $61.94 and $29.50, respectively. The closing price on September 4, 2001 was $49.07.

     Contribution Analysis. SG Cowen analyzed the respective contributions of LTM and estimated fiscal years 2001 and 2002 revenues, EBITDA, EBIT and net income to the combined company, based upon the historical financial

-31-


Table of Contents

results of Dynamic and Cerner the financial forecasts prepared by the management of Dynamic and analyst projections for Cerner. The following table shows Dynamic’s and Cerner’s respective contributions to the combined company during each of these periods.

                     
        % of Combined Company  
       
 
        Dynamic     Cerner  
        Contribution     Contribution  
       
   
 
Operating Results
               
 
LTM:
               
   
Revenues
    5.0 %     95.0 %
   
EBITDA
    0.1 %     99.9 %
   
EBIT
    (6.2 )%     106.2 %
   
Net Income
    (12.8 )%     112.8 %
 
FY 2001:
               
   
Revenues
    4.8 %     95.2 %
   
EBITDA
    2.2 %     97.8 %
   
EBIT
    (0.3 )%     100.3 %
   
Net Income
    (0.8 )%     100.8 %
 
FY 2002:
               
   
Revenues
    4.5 %     95.5 %
   
EBITDA
    3.2 %     96.8 %
   
EBIT
    2.4 %     97.6 %
   
Net Income
    4.1 %     95.9 %

     Pro Forma Ownership Analysis. SG Cowen analyzed the pro forma ownership in the combined company by the holders of Dynamic and noted that holders of Dynamic common shares would own approximately 0.9% of the combined company, based on the Dynamic closing share price on September 4, 2001.

     Discounted Cash Flow Analysis. SG Cowen estimated a range of values for Dynamic common shares based upon the discounted present value of the projected after-tax cash flows of Dynamic described in the financial forecasts provided by management of Dynamic for the four and one-quarter fiscal years from August 31, 2001, through December 31, 2005, and of the terminal value of Dynamic at December 31, 2005, based upon multiples of revenue. After-tax cash flow was calculated by taking projected EBIT and subtracting from this amount projected taxes, capital expenditures, changes in working capital and changes in other assets and liabilities and adding back projected depreciation and amortization. This analysis was based upon certain assumptions described by, projections supplied by and discussions held with the management of Dynamic. In performing this analysis, SG Cowen utilized discount rates ranging from 15.0% to 20.0%. SG Cowen utilized terminal multiples of revenue ranging from 0.50 times to 0.80 times, these multiples representing the general range of multiples of revenues for the selected healthcare information technology companies and the selected healthcare information technology transactions.

     Utilizing this methodology, the per share equity value of Dynamic ranged from $2.35 through $3.49 per share based upon the Dynamic financial forecasts.

     The summary set forth above does not purport to be a complete description of all the analyses performed by SG Cowen. The preparation of a fairness opinion involves various determinations as to the most appropriate and relevant methods of financial analyses and the application of these methods to the particular circumstances and, therefore, such an opinion is not readily susceptible to partial analysis or summary description. SG Cowen did not attribute any particular weight to any analysis or factor considered by it, but rather made qualitative judgments as to the significance and relevance of each analysis and factor. Accordingly, notwithstanding the separate factors summarized above, SG Cowen believes, and has advised the Dynamic board, that its analyses must be considered as a whole and that selecting portions of its analyses and the factors considered by it, without considering all analyses and factors, could create an incomplete view of the process underlying its opinion. In performing its analyses, SG Cowen made numerous assumptions with respect to industry performance, business and economic conditions and other matters, many of which are beyond the control of Dynamic and Cerner. These analyses performed by SG Cowen are not necessarily indicative of actual values or future results, which may

-32-


Table of Contents

be significantly more or less favorable than suggested by such analyses. In addition, analyses relating to the value of businesses do not purport to be appraisals or to reflect the prices at which businesses or securities may actually be sold. Accordingly, such analyses and estimates are inherently subject to uncertainty, being based upon numerous factors or events beyond the control of the parties or their respective advisors. None of Dynamic, Cerner, SG Cowen or any other person assumes responsibility if future results are materially different from those projected. The analyses supplied by SG Cowen and its opinion were among several factors taken into consideration by the Dynamic board in making its decision to enter into the merger agreement and should not be considered as determinative of such decision.

     SG Cowen was selected by the Dynamic board to render an opinion to the Dynamic board because SG Cowen is a nationally recognized investment banking firm and because, as part of its investment banking business, SG Cowen is continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. SG Cowen is providing financial services for Dynamic for which it will receive customary fees. In addition, in the ordinary course of its business, SG Cowen and its affiliates may trade the equity securities of Dynamic and Cerner for their own account and for the accounts of their customers, and, accordingly, may at any time hold a long or short position in such securities.

     Pursuant to the SG Cowen engagement letter, SG Cowen is entitled to receive a fee of $500,000 for rendering its opinion. Additionally, SG Cowen will also receive a fee of $250,000 contingent upon the consummation of the merger in consideration of certain financial advisory services provided to Dynamic by SG Cowen unrelated to the merger. See “— Background of the Merger.” Additionally, Dynamic has agreed to reimburse SG Cowen for its out-of-pocket expenses, including attorneys’ fees, and has agreed to indemnify SG Cowen against certain liabilities, including liabilities under the federal securities laws. The terms of the fee arrangement with SG Cowen, which are customary in transactions of this nature, were negotiated at arm’s length between Dynamic and SG Cowen, and the Dynamic board was aware of the arrangement, including the fact that a portion of the fee payable to SG Cowen is contingent upon the completion of the merger.

Federal Securities Laws Consequences and Restrictions on Resales by Affiliates

     Shares of Cerner common stock to be issued to Dynamic shareholders in the merger have been registered under the Securities Act of 1933, as amended, and may be traded freely and without restriction by those shareholders not deemed to be affiliates (as that term is defined under the Securities Act) of Dynamic. Any subsequent transfer of shares, however, by any person who is an affiliate of Dynamic at the time the merger is submitted for a vote of the Dynamic shareholders will, under existing law, require either:

    the further registration under the Securities Act of the Cerner common stock to be transferred,
 
    compliance with Rule 145 promulgated under the Securities Act, which permits limited sales under certain circumstances, or
 
    the availability of another exemption from registration.

     An “affiliate” of Dynamic is a person who directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, Dynamic. These restrictions are expected to apply to the directors and executive officers of Dynamic and the holders of ten percent or more of the outstanding Dynamic common shares. The same restrictions apply to the spouses and certain relatives of those persons and any trusts, estates, corporations or other entities in which those persons have a ten percent or greater beneficial or equity interest. Cerner will give stop transfer instructions to the transfer agent with respect to the shares of Cerner common stock to be received by persons subject to these restrictions, and the certificates for their shares will be appropriately legended.

     Dynamic has agreed in the merger agreement to use its reasonable best efforts to cause each person who is an affiliate of Dynamic, for purposes of Rule 145 under the Securities Act, to deliver to Cerner a written agreement intended to ensure compliance with the Securities Act.

Shareholders Agreement

     Contemporaneously with the execution of the merger agreement, two holders of Dynamic preferred shares entered into a shareholders agreement with Cerner. The shareholders agreement requires such preferred shareholders to vote all

-33-


Table of Contents

Dynamic preferred shares held by them in favor of the approval of the merger agreement and the transactions contemplated thereby. In addition, such shareholders also granted to Cerner an irrevocable proxy to vote their preferred shares in favor of the approval of the merger agreement and the transactions contemplated thereby. The shareholders that are subject to the shareholders agreement hold a total of 930,000 Dynamic preferred shares, which constitutes approximately 93% of the outstanding Dynamic preferred shares. In order to complete the merger, a majority of the preferred shares, voting as a separate class, must be voted in favor of the merger agreement and the transactions contemplated thereby. This agreement to vote the Dynamic preferred shares does not affect the vote by the holders of Dynamic common shares. The complete text of the shareholder agreement is attached hereto as Appendix C.

Stock Option Agreement

     General. As a condition to entering into the merger agreement, Cerner required that Dynamic enter into a stock option agreement, which allows Cerner, under certain circumstances, to purchase up to 985,476 Dynamic common shares (representing approximately 15% of Dynamic’s issued and outstanding common shares), subject to adjustments so that in no event may Cerner acquire Dynamic common shares representing more than 15% of the issued and outstanding Dynamic common shares, at an exercise price of $3.00 per share (subject to adjustment). The option may only be exercised upon the occurrence of certain events which are described below.

     The stock option agreement will terminate upon the earliest to occur of: (a) the completion of the merger; or (b) the close of business on the earlier of: (1) the date one year following a triggering event (as described below) or (2) the date on which it is no longer possible for a triggering event to occur.

     In addition, the stock option agreement provides Cerner with certain rights to require Dynamic to register the Dynamic common shares acquired by or issuable upon the exercise of the stock option agreement under the Securities Act of 1933 and provides Cerner the right, under certain circumstances, to require Dynamic to repurchase the option following a triggering event.

     Effect of Stock Option Agreement. Cerner and Dynamic entered into the stock option agreement to increase the likelihood that the merger will be completed in accordance with its terms. The stock option agreement may have the effect of discouraging persons who might be interested in acquiring all of or a significant interest in Dynamic, even if such person were prepared to pay a higher price per Dynamic common share than the value per share contemplated by the merger agreement. The acquisition by a third party of Dynamic or a significant interest in Dynamic or a significant portion of its consolidated assets, or an agreement to do so, could cause the option to be exercisable and significantly increase the cost of the acquisition to a potential acquiror. Such increased costs might discourage a potential acquiror from considering or proposing an acquisition or might result in a potential acquiror proposing to pay a lower per share price to acquire Dynamic than it might otherwise have proposed to pay.

     Terms of Stock Option Agreement. The following is a brief summary of certain provisions of the stock option agreement, which is attached hereto as Appendix D. The summary is not intended to be complete and is qualified by reference to the complete text of the agreement.

     Cerner may exercise the option, in whole but not in part, at any time during the one year period following the occurrence of a “triggering event” as defined below. A “triggering event” means any of the following events:

    Dynamic’s withdrawal, modification, or material qualification in any manner adverse to Cerner of its recommendation that Dynamic shareholders approve the merger, or taking any action or making any statement in connection with the Dynamic shareholder meeting materially inconsistent with such recommendation;
 
    The solicitation, initiation or the knowing facilitation or encouragement of a submission of any “acquisition proposal” (as defined below) for Dynamic;
 
    Dynamic’s participation in any discussions or negotiations regarding, or furnishing to any person any information with respect to, or taking any other action knowingly to facilitate any inquiries or the making of any proposal that constitutes an acquisition proposal for Dynamic;

-34-


Table of Contents

    The approval, endorsement or recommendation of, or the execution of or entering into, any letter of intent, agreement in principal, or a definitive agreement by Dynamic’s Board of Directors relating to any acquisition proposal;
 
    Dynamic’s failure to recommend that its security holders reject any tender or exchange offer relating to securities of Dynamic;
 
    Dynamic’s grant of a waiver or a release under any standstill or any similar agreement with respect to any class of Dynamic equity securities; or
 
    Dynamic entering into any agreement with respect to any acquisition proposal for Dynamic.

     An Acquisition Proposal. For these purposes “acquisition proposal” means any offer or proposal for a merger, consolidation, share exchange, business combination, reorganization, recapitalization, issuance of securities, liquidation, dissolution, tender offer or exchange offer or other similar transaction or series of transactions involving, or any purchase of 10% or more of the assets, or directly or indirectly acquires beneficial ownership of securities representing or exchangeable for or convertible into, more than 10% of the outstanding securities of any class of voting securities of Dynamic or in which Dynamic issues securities representing 10% of the outstanding securities of any class of voting securities of Dynamic, other than the transactions contemplated by the merger agreement.

Fees and Expenses of the Merger

     Each party is responsible for its own expenses in connection with the merger.

Accounting Treatment

     The merger will be accounted for as a “purchase,” as such term is used under accounting principles generally accepted in the United States of America, for accounting and financial reporting purposes. Dynamic will be treated as the acquired corporation for such purposes. Dynamic’s assets, liabilities and other items will be adjusted to their estimated fair value on the closing date of the merger and will be recorded in Cerner’s consolidated financial statements. The difference between the estimated fair value of the assets, liabilities and other items (adjusted as discussed above) and the purchase price, if any, will be recorded as goodwill. In accordance with the recently issued Statement of Financial Accounting Standards No. 141, “Business Combinations,” goodwill will not be amortized, but will be subject to periodic tests for impairment. Cerner’s consolidated financial statements will include the operations of the surviving company after the effective time of the merger.

Federal Income Tax Consequences

     The following is a discussion of the material federal income tax consequences of the merger. The discussion is based on the Internal Revenue Code (the “Code”), Treasury regulations, rulings of the Internal Revenue Service (the “IRS”) and court decisions as of the date of this proxy statement/prospectus. Those authorities may change, possibly retroactively, which could alter the tax consequences described below.

     This discussion assumes that the Dynamic common and preferred shares are held as a capital asset. In addition, this discussion does not address all of the tax consequences that may be relevant to you in light of your particular circumstances or to Dynamic shareholders subject to special rules, such as foreign persons, financial institutions, tax-exempt organizations, dealers in securities or foreign currencies, insurance companies or mutual funds. In addition, this discussion does not discuss the consequences to shareholders who are subject to the alternative minimum tax provisions, acquired their shares in stock option or stock purchase plans or in other compensatory transactions, hold their shares as part of a hedging, straddle, conversion or other risk reduction transaction or hold the Dynamic stock as “qualified small business stock.”

     It is a condition to the obligation of Cerner and Dynamic to complete the merger that the parties receive the opinion of Cerner’s counsel, dated as of the completion of the merger, that the merger will be treated as a reorganization within the meaning of section 368(a) of the Code. The opinions will be based upon the facts existing at the completion of the merger. In rendering its opinion, Cerner’s counsel will require and rely upon representations contained in certificates of

-35-


Table of Contents

officers of Dynamic, Cerner and others. The tax opinion will not bind the IRS nor stop the IRS from taking a contrary position.

     In the opinion of Stinson, Mag & Fizzell, P.C., assuming that the merger is consummated in accordance with the terms of the merger agreement and as described in this prospectus/proxy statement and that the representations described in the preceding paragraph are true and complete as of the effective time of the merger, the merger will be treated as a “reorganization” within the meaning of Section 368(a) of the Code. Based on the merger being treated as a reorganization for federal income tax purposes, the merger will have the following U.S. federal income tax consequences:

    An exchanging Dynamic common shareholder will not recognize gain or loss (not including any gain or loss attributable to fractional shares) on the exchange of his or her Dynamic common shares in the merger for shares of Cerner common stock.
 
    The aggregate tax basis of the shares of Cerner common stock received by Dynamic shareholders will equal the aggregate tax basis of the Dynamic common shares surrendered in exchange for such Cerner common stock (not including any basis attributable to fractional shares).
 
    The holding period of a share of Cerner common stock received in the merger will include the holder’s holding period in the Dynamic common shares surrendered in the exchange for the Cerner common stock.
 
    A Dynamic common shareholder receiving cash for a fractional share will recognize gain or loss in an amount equal to the difference between the cash received for the fractional share and the basis allocable to such portion of the Dynamic common shares attributable to the fractional share and such gain or loss likely will be capital gain or loss.
 
    A Dynamic preferred shareholder receiving cash for preferred shares will recognize income or gain (or possibly loss, if the Dynamic preferred shareholder does not own any Dynamic common shares) in an amount equal to the difference between the cash received for the preferred shares and the tax basis of the Dynamic preferred shares exchanged.
 
    Neither Cerner nor Dynamic will recognize any gain or loss as a result of the merger.

     If the IRS successfully challenges the merger’s status as a reorganization, Dynamic’s common shareholders will have to recognize taxable gain or loss on the difference between the (1) fair market value of the Cerner common stock and (2) the tax basis of the Dynamic common shares exchanged. This gain or loss would be treated as capital gain or loss. In that event, a shareholder’s basis in the Cerner common stock received would equal its fair market value, and the shareholder would begin a new holding period.

     The determination of the amount and character of income or gain with respect to the redemption of preferred shares for cash is dependent on whether the redemption constitutes a sale or exchange or a dividend for federal income tax purposes. A sale or exchange and, consequently, capital gain or loss, results if (1) the redemption is not essentially equivalent to a dividend under section 302(b)(1) of the Code, (2) the redemption is substantially disproportionate under section 302(b)(2) of the Code, (3) the redemption is in complete termination of the shareholder’s interest under section 302(b)(3) of the Code or (4) the redemption is a partial liquidation under section 302(b)(4) of the Code. In making such determination, certain stock attribution rules are taken into account. In addition, if any portion of the cash received by holders of Dynamic preferred shares is attributable to accrued dividends on the Dynamic preferred shares which have been declared but not yet paid, such amounts will be treated as dividend income.

     Dynamic common and preferred shareholders, other than certain exempt recipients, may be subject to backup withholding at a rate of 31% with respect to cash received pursuant to the merger, unless the Dynamic shareholder either (1) furnishes a correct taxpayer identification number and certifies that he or she is not subject to backup withholding by completing the substitute Form W-9 that will be included as part of the transmittal letter or (2) otherwise proves that the shareholder is exempt from backup withholding.

     Dynamic common and preferred shareholders will also be required to file certain information with their federal income tax returns and to retain certain records with regard to the merger.

-36-


Table of Contents

     Tax matters are very complicated, and the tax consequences of the merger to each Dynamic shareholder will depend on the facts of each shareholder’s situation. Dynamic shareholders are encouraged to consult their own tax advisors regarding the specific tax consequences of the merger, including the applicability and effect of any federal, state, local and foreign income and other tax laws.

Interests of Certain Persons in the Merger

     When you consider Dynamic’s board of directors’ recommendation to vote for the merger, the merger agreement and the transactions contemplated thereby, you should be aware of interests which some of Dynamic’s directors and executive officers have in the merger that are different from your interests as Dynamic shareholders. Dynamic’s board was aware of these and other interests and specifically considered them before approving and adopting the merger, the merger agreement and the transactions contemplated thereby.

     Severance and Change of Control Arrangements. Dynamic has entered into employment agreements with three of its officers, T. Christopher Assif, its Chief Executive Officer, John P. Fingado, its President and Chief Operations Officer, and Brian Greco, its Vice President of Finance. Pursuant to the terms of their respective employment agreements, each of these officers is entitled, under certain circumstances, to receive severance payments in the event of a “Change of Control.” Under each of the employment agreements, these officers generally are entitled to receive a lump severance payment based on their then-current annual base compensation at the time of the Change of Control and the acceleration of the vesting periods of all outstanding stock options, warrants, and stock appreciation rights with respect to Dynamic common shares held by them. The options, however, cannot be exercised until 12 months after the original date of grant. In the event that they are entitled to a severance payment upon a Change of Control, Messrs. Fingado and Greco would receive an amount equal to one year of their respective annual base compensation and Mr. Assif would receive an amount equal to one and one-half times his annual base compensation. In addition, in such an event, 70% of the principal and interest due on a note issued by Mr. Assif in favor of Dynamic (“Assif Note”) shall be forgiven. The merger would constitute a Change of Control under the employment agreement of each of Messrs. Assif, Fingado and Greco.

     It is expected that Messrs. Assif and Greco will be temporarily employed by Cerner during a transition period after the merger. As a result of this arrangement, the Dynamic stock options granted to Mr. Assif during the last 12 months would become exercisable. Mr. Greco also is expected to enter into an agreement with Cerner whereby his Dynamic stock options would be purchased by Cerner for $17,000. It also is expected that Mr. Fingado will enter into an employment agreement with Cerner that will provide that Mr. Fingado will be employed by Cerner at his current base salary of $175,000 with substantially the same incentive compensation. Under these arrangements, he will receive a grant of 5,000 Cerner stock options and he will have the right to receive a severance payment equal to his annual base salary if during 2002 he is terminated (other than for cause as will be defined in the employment agreement), or resigns due to certain changes or reductions in his responsibilities.

     Annual base salaries for Messrs. Assif and Greco are $200,000 and $110,000, respectively. The Assif Note was issued by Mr. Assif in favor of Dynamic in the principal amount of $242,720. Upon consummation of the merger, it is expected that the total Change of Control payments payable under the employment agreements with Messrs. Assif and Greco will be $591,571, which includes the forgiveness of $181,571 in principal amount plus accrued interest with respect to the Assif Note as of September 30, 2001.

     Under terms of his employment and subsequent termination agreements with Dynamic, Mitchel Laskey, a former CEO and current director of Dynamic, is entitled to receive a payment of $100,000 in the event that the closing of the merger takes place prior to December 31, 2001. In addition, upon a change of control, Jerry L. Carson, a director and current employee of Dynamic, is entitled to receive a payment of $18,000.

     Stock Options and Warrants. Dynamic maintains employee stock option plans that provide for the grant of incentive and non-qualified options as the administrative committee of the Dynamic board shall determine. Certain stock options held by Dynamic directors, officers and employees contain provisions that cause the options to become fully vested in the event of a change of control, such as in the proposed merger. The options, however, cannot be exercised until 12 months after the original date of grant. Accordingly, such warrants and options that have been outstanding for at least 12 months will be immediately exercisable for shares of Cerner common stock following the closing of the merger. Current executive officers hold options to purchase up to 223,504 Dynamic common shares (assuming full vesting under applicable change of control provisions). However, only 123,335 options are exercisable at a price equal to or less than proposed merger consideration as determined on September 5, 2001.

     In connection with their service as directors of Dynamic and in partial compensation therefor, Dynamic has granted warrants to its directors from time to time. All such warrants are fully exercisable at the time of grant. Directors and former directors as a group hold warrants to purchase up to 68,671 Dynamic common shares. Only 6,668 of these warrants are exercisable at a price equal to or less than proposed merger consideration.

     The merger agreement provides that upon completion of the merger, each outstanding option and warrant of Dynamic, whether or not vested, will be converted into and become rights with respect to Cerner common stock. Cerner

-37-


Table of Contents

will assume each option and warrant to acquire Dynamic common shares in accordance with the terms of the stock option plan and the stock option agreement under which it was granted, in the case of a stock option, or the warrant agreement, in the case of a warrant except that:

    Each Dynamic stock option or warrant assumed by Cerner may be exercised solely for Cerner common stock; and
 
    The number of shares of Cerner common stock subject to post-merger stock options or warrants, as well as their respective exercise prices, will be adjusted to account for the exchange ratio used in the merger.

     In addition, all shares issued upon exercise of employee options will be registered by Cerner under the Securities Act.

     Ownership of Preferred Stock. Several directors and former directors and executive officers of Dynamic are holders or beneficial owners of the Dynamic preferred shares. Pursuant to the terms of the merger agreement, each Dynamic preferred share will be redeemed at a price per share equal to $2.00 in cash, plus all unpaid accrued dividends to which shareholders of such preferred shares are entitled to receive. Bret R. Maxwell and Daniel Raynor, current directors of Dynamic, beneficially own 930,000 Dynamic preferred shares, which constitutes approximately 93% of the outstanding Dynamic preferred shares, through their relationship with certain investors of Dynamic. The general partner of Argentum Capital Partners, L.P., an investment partnership which owns 290,000 Dynamic preferred shares, is BR Associates, Inc., a corporation to which Mr. Raynor serves as chairman of the board. Mr. Maxwell is the ultimate general partner of Riverside Partnership, an investment partnership which owns 640,000 preferred shares. In addition, Mr. Raynor, as a controlling person of a beneficiary partnership of Riverside Partnership, is an indirect beneficial owner of 50% of the preferred shares held by Riverside Partnership.

     Directors’ and Officers’ Indemnification and Insurance. The merger agreement provides that, for a period of five years following the effective time of the merger the directors and officers of Dynamic will continue to be indemnified to the full extent permitted by applicable law and to the same extent as provided for under the Dynamic Articles of Incorporation and Bylaws as in effect on the date of the merger agreement. In addition, Cerner has agreed to cause the surviving corporation in the merger to continue to provide these individuals with directors’ and officers’ liability and fiduciary liability insurance coverage for a period of five years following the effective time of the merger to the extent that premiums for such coverage do not exceed 150% of the last annual premium paid by Dynamic for such coverage.

Conditions to the Merger

     Completion of the merger is subject to various conditions. While it is anticipated that all such conditions will be satisfied, there can be no assurance as to whether or when all of such conditions will be satisfied or, where permissible, waived. The respective obligations of Cerner and Dynamic to complete the merger are subject to certain conditions set forth in the merger agreement, including the following:

    Approval of the merger agreement by the holders of at least a majority of all the outstanding Dynamic common shares and of a majority of the Dynamic preferred shares, each voting as a separate class;
 
    The effectiveness of the registration statement for the shares of Cerner common stock to be issued in the merger;
 
    The receipt of all state securities or blue sky authorizations necessary to complete the merger;
 
    The approval by the Nasdaq National Market of the listing of the shares of Cerner common stock to be issued in the merger, subject to official notice of issuance;
 
    The receipt of all required regulatory approvals and expiration of all related statutory waiting periods;
 
    The absence of any order, decree or injunction of a court or agency of competent jurisdiction which prohibits the completion of the merger;

-38-


Table of Contents

    The absence of any statute, rule or regulation that prohibits, restricts or makes illegal completion of the merger;
 
    The accuracy of the other party’s representations and warranties contained in the merger agreement as of the date specified therein, except, in the case of most of such representations and warranties, where a failure to be so accurate would not be reasonably likely to have a material adverse affect on the party making such representations and warranties, and the performance by the other party of its obligations contained in the merger agreement in all material respects;
 
    The receipt by each party of an opinion substantially to the effect that the merger will be treated for federal income tax purposes as a reorganization within the meaning of Section 368(b) of the Internal Revenue Code;
 
    The receipt by each party of an opinion of the other’s counsel as to certain corporate matters regarding Cerner and Dynamic;
 
    The absence of any material adverse change in respect of Cerner or Dynamic from execution of the merger agreement through the closing date;
 
    The receipt by Cerner of affiliate agreements from each affiliate of Dynamic;
 
    The average price per share of Cerner common stock during the 15 trading days preceding the closing date not being less than $43.00 per share; and
 
    The consideration in respect of the merger having been delivered to the exchange agent pursuant to the terms of the merger agreement.

Regulatory Approval

     There are no material regulatory approvals required to consummate the merger or the transactions contemplated by the merger agreement.

Conduct of Business Pending the Merger

     Until either the merger is completed or the merger agreement is terminated, Dynamic has agreed to carry on its business in the ordinary course in substantially the same manner as it was conducted prior to the execution of the merger agreement. Dynamic has agreed to certain limitations on its ability to engage in material transactions without the prior consent of Cerner. Such consent shall not be unreasonably withheld. Among those limitations, Dynamic, subject to certain exceptions, will not, without the prior consent of Cerner:

    amend its articles of incorporation or bylaws;
 
    split, combine or reclassify any shares of capital stock of Dynamic or declare, set aside or pay any dividend;
 
    (1) issue, deliver or sell, or authorize the issuance, delivery or sale of, any shares of Dynamic capital stock of any class or any securities convertible into or exercisable for, or any rights, warrants or options to acquire, any such capital stock or any such convertible securities, other than certain shares issuable pursuant to the Dynamic employee plans or existing stock rights, stock options or warrants, or (2) amend in any respect any term of any outstanding security of Dynamic;
 
    other than in the ordinary course of business,
 
    incur any capital expenditures or obligations or liabilities except as contemplated by the capital expenditure budgets for Dynamic or as disclosed in Dynamic SEC documents prior to the execution of the merger agreement,
 
    acquire in one transaction or a series of related transactions (1) any assets having a fair market value in excess of $50,000, or (2) all or substantially all of the equity interests of any person or any business or division of any person having a fair market value in excess of $50,000, or

-39-


Table of Contents

    make, incur or assume any expenditures, commitments, obligations or liabilities under the foregoing in excess of $100,000 in the aggregate;

    sell, lease, license, perform services, encumber or otherwise dispose of any assets, other than (1) sales or licenses of finished goods or the performance of services in the ordinary course of business consistent with past practice, (2) equipment and property no longer used in the operation of Dynamic’s business, and (3) assets related to discontinued operations of Dynamic;
 
    except as disclosed in schedules to the merger agreement, (1) incur any indebtedness for borrowed money or guarantee any such indebtedness, (2) issue or sell any debt securities or warrants or rights to acquire any debt securities of Dynamic, (3) make any loans, advances or capital contributions to or investments in, any other person, or (4) guarantee any debt securities or indebtedness of others, except, in each case, in the ordinary course of business consistent with past practice;
 
    (1) enter into any agreement or arrangement that limits or otherwise restricts Dynamic or any successor thereto or that would, after the effective time of the merger, limit or restrict Dynamic or the combined company, or any of their respective affiliates, from engaging or competing in any line of business or in any location, or (2) enter into, amend, modify or terminate any material contract, agreement or arrangement of Dynamic or otherwise waive, release or assign any material rights, claims or benefits of Dynamic thereunder; provided, however, Dynamic may enter into material contracts with customers, suppliers or distributors, so long as such contracts are entered into in the ordinary course and consistent with Dynamic’s prior practice;
 
    (1) except as required by law or a pre-existing written agreement, or as consistent with past practice and routine, grant raises on anniversary dates, increase the amount of compensation of any director or executive officer or make any increase in or commitment to increase any employee benefits, or (2) except as required by law, a preexisting written agreement or a Dynamic severance policy existing as of execution of the merger agreement, grant any severance or termination pay to any director, officer or employee of Dynamic, or (3) adopt any additional employee benefit plan or, except in the ordinary course of business consistent with past practice and containing only normal and customary terms, make any contribution to any such existing plan, or (4) except as may be required by law or a preexisting written agreement or employee benefit plan, or as contemplated by the merger agreement, enter into, amend in any respect or accelerate the vesting under any Dynamic employee plan, employment agreement, option, license agreement or retirement agreements, or (5) hire any employee with an annual base salary in excess of $75,000;
 
    change (1) Dynamic’s methods of accounting in effect at December 31, 2000 except as required by changes in accounting principles generally accepted in the United States of America, as concurred with by its independent public accountants, or (2) Dynamic’s fiscal year;
 
    (1) settle, propose to settle or commence, any litigation, investigation, arbitration, proceeding or other claim that is material to the business of Dynamic, other than the payment, discharge or satisfaction, in the ordinary course of business consistent with past practice of liabilities (a) recognized or disclosed in the Dynamic financial statements (or the notes thereto) or (b) incurred since the date of such financial statements in the ordinary course of business consistent with past practice, or (2) make any material tax election or enter into any settlement or compromise of any tax liability other than in the ordinary course of business consistent with past practices and containing only normal and customary terms;
 
    enter into any new material line of business not previously disclosed or mentioned in any Dynamic SEC document filed prior to execution of the merger agreement; or
 
    agree, resolve or commit to do any of the foregoing.

No Solicitation

     Dynamic has agreed that it will not nor shall it authorize or knowingly permit its officers, directors, employees, investment bankers, attorneys, accountants, agents or other advisors or representatives to (a) solicit, initiate or knowingly facilitate or encourage the submission of any “acquisition proposal for Dynamic,” (b) participate in any discussions or negotiations regarding, or furnish to any person any information with respect to, or take any other action knowingly to

-40-


Table of Contents

facilitate any inquiries or the making of any acquisition proposal for Dynamic, (c) grant any waiver or release under any standstill or similar agreement with respect to any class of Dynamic capital stock or (d) enter into any agreement with respect to any acquisition proposal for Dynamic. “Acquisition proposal for Dynamic” means any offer or proposal for a merger, consolidation, share exchange, business combination, reorganization, recapitalization, issuance of securities, liquidation, dissolution, tender offer or exchange offer or other similar transaction or series of transactions involving, or any purchase of ten percent or more of the assets, or directly or indirectly acquiring beneficial ownership of securities representing, or exchangeable for or convertible into, more than ten percent of the outstanding securities of any class of voting securities of Dynamic or in which Dynamic issues securities representing ten percent of the outstanding securities of any class of voting securities of Dynamic, other than the transaction contemplated by the merger agreement.

     However, under the merger agreement, Dynamic is permitted to furnish information to, and enter into negotiations with, a third party making a takeover proposal if:

    Dynamic receives from such third party an unsolicited “superior proposal” of the type described below prior to the approval of the merger agreement by Dynamic shareholders;
 
    The Dynamic board of directors concludes in good faith, after receiving advice from outside counsel and independent financial advisor, that Dynamic must do so in order to comply with its fiduciary duties under applicable law; and
 
    Prior to doing so, Dynamic enters into reasonably customary confidentiality and standstill agreements with such third party.

     Dynamic is required to notify Cerner immediately if any such negotiations are sought to be initiated or continued in respect of any such takeover proposal, together with all of the relevant details of the negotiations. Dynamic also generally will be required to pay the termination fee specified in the merger agreement if its board of directors elects to (a) withdraw or modify its approval or recommendation of the Cerner merger, (b) approve or recommend any Superior Proposal, or (c) terminate the merger agreement with Cerner. Dynamic also may communicate information about any takeover proposal to its shareholders if its board of directors determines, based on advice of outside counsel and financial advisor, that such communication is required under applicable law.

     “Superior proposal” for these purposes means any bona fide written takeover proposal for all outstanding Dynamic common shares or all or substantially all of the assets of Dynamic on terms which the board of directors of Dynamic determines in its good faith judgment (based on a written opinion of Dynamic’s financial advisor) to be materially more favorable to Dynamic and its shareholders than the merger (taking into account any changes to the financial and other contractual terms of the merger agreement proposed by Cerner in response to such proposal, the person making the proposal, any legal or regulatory considerations and all other relevant financial and strategic considerations, including the timing of the consummation of such transactions) and for which financing, to the extent required, is then committed or which, in the good faith judgment of the board of directors of Dynamic, is reasonably capable of being obtained by such third party.

Waiver and Amendment

     Prior to or at the effective time of the merger, any provision of the merger agreement, including, without limitation, the conditions to consummation of the merger (except any condition which, if not satisfied, would result in the violation of any law or governmental regulation, which violation would have a material adverse effect on Cerner or Dynamic), may be (a) waived, to the extent permitted under law, in writing by the party which is entitled to the benefits thereof; or (b) amended at any time by written agreement of the parties, whether before or after approval of the merger agreement by the shareholders of Dynamic. However, no such amendment or modification may be made after the Dynamic shareholder approval without the further approval of such shareholders if required under any applicable law, rule or regulation.

Termination of the Merger Agreement

     The merger agreement and the merger may be terminated at any time prior to the completion of the merger:

    By mutual written consent of Cerner and Dynamic;

-41-


Table of Contents

    By Cerner or Dynamic, if the merger has not been consummated by February 28, 2002, provided that the right to terminate shall not be available to any party whose breach of any provision of the merger agreement has resulted in the failure of the merger to occur on or before such date;
 
    By Cerner or Dynamic, if there shall be any law that makes consummation of the merger illegal or otherwise prohibited or any judgment, injunction, order or decree of any governmental entity having competent jurisdiction enjoining Cerner, Dynamic or Cerner Holdings, Inc. from consummating the merger is entered and such judgment, injunction, or order shall have become final and nonappealable;
 
    By Cerner or Dynamic, if the Dynamic shareholders do not approve the merger agreement on or before February 28, 2002;
 
    By Cerner or Dynamic, if there has been a material breach of any of the representations, warranties, covenants or agreements of the other party in the merger agreement which shall constitute a failure of a condition to the completion of the merger which condition shall be incapable of being satisfied before February 28, 2002;
 
    By Cerner, if there shall have occurred an adverse change in the Dynamic board of directors’ recommendation that its shareholders approve the merger;
 
    By Cerner, if there shall have occurred a breach by Dynamic or any of its officers, directors, employees, advisors or agents of Dynamic’s covenant not to solicit, participate in or negotiate an acquisition proposal;
 
    By Cerner, if Dynamic fails to include the recommendation of its board in favor of the adoption and approval of the merger agreement and the approval of the merger in this proxy statement/prospectus;
 
    By Cerner, if the board of directors of Dynamic shall have approved, endorsed or recommended any competing or alternative acquisition proposal of Dynamic;
 
    By Cerner, if a tender offer or exchange offer relating to the securities of Dynamic shall have been commenced and Dynamic shall not have sent to its shareholders, within ten business days after the commencement of such tender or exchange offer, a statement disclosing that Dynamic recommends rejection of such tender or exchange offer;
 
    By Dynamic, if it receives a bona fide superior proposal as discussed above under “No Solicitation” on page 40;
 
    By Dynamic, if all conditions to the merger, other than the condition relating to Cerner’s average common stock price, have been satisfied for at least 15 consecutive business days; or
 
    Automatically, if the merger is enjoined by a court of competent jurisdiction for a period extending beyond 90 days.

Effect of Termination

     If the merger agreement is terminated, it will thereafter become void and there will be no liability on the part of Cerner or Dynamic or their respective officers or directors, except that:

    Any such termination will be without prejudice to the rights of any party arising out of the willful breach by the other party of any provision of the merger agreement;
 
    Certain provisions of the merger agreement, including those relating to confidential treatment of information will survive the termination; and
 
    Except as specifically set forth in the merger agreement, Cerner and Dynamic each will bear its own expenses in connection with the merger agreement and the transactions contemplated thereby, except as otherwise provided therein.

-42-


Table of Contents

     Dynamic has agreed to pay to Cerner upon demand $2,000,000 (a) as a termination fee if Dynamic breaches certain covenants or conditions of the merger agreement and such breach would entitle Cerner to terminate the merger agreement including, but not limited to, Dynamic’s board of directors withdrawing or modifying its recommendation to approve the merger agreement in a manner adverse to Cerner or approving an “acquisition proposal” as described under “Stock Option Agreement – An Acquisition Proposal” or (b) as liquidated damages, in the event that all conditions under certain sections of the agreement to Dynamic’s obligations to consummate the merger have been satisfied, and Dynamic does not perform such obligations.

     Cerner has agreed to pay to Dynamic upon demand liquidated damages of $2,000,000 in the event that all conditions under certain sections of the agreement to Cerner’s obligations to consummate the merger have been satisfied, and Cerner does not perform such obligations.

Nasdaq National Market Listing

     The Cerner common stock is traded on the Nasdaq National Market. Cerner has agreed to use its reasonable best efforts to cause the shares of Cerner common stock to be issued in the merger to be listed on the Nasdaq National Market. It is a condition to completion of the merger that those shares be listed on the Nasdaq National Market, subject to official notice of issuance.

Effective Time

     It is presently anticipated that the effective time of the merger will occur sometime during the fourth quarter of 2001. However, completion of the merger could be delayed if there is a delay in satisfying any conditions to the merger. There can be no assurances as to whether, or when, Cerner and Dynamic will complete the merger. If the merger is not completed on or before February 28, 2002, either Cerner or Dynamic may terminate the merger agreement, unless the failure to complete the merger by that date is due to the failure of the party seeking to terminate the merger agreement to perform its covenants under the merger agreement.

INFORMATION REGARDING DYNAMIC

Business

     Dynamic is a provider of NT, UNIX and AS/400 based diagnostic workflow solutions for pathology, laboratory and radiology departments in approximately 640 customer sites, most located in the United States. Dynamic has designed, developed and deployed advanced Internet and image, voice and Web-enabled information systems for its customers that address a broad range of requirements. Dynamic’s information systems contribute to higher quality and more cost-effective delivery of care and make it possible to have access to information across the entire continuum of care. Dynamic provides support for all of its systems and also offers integration and other consulting services to its customers.

     Dynamic’s systems automate ordering, scheduling, specimen and procedure tracking, data/image acquisition from diagnostic equipment, store and archive results. For years, Dynamic has provided the processing for clinical information within the clinical departments of pathology, radiology and laboratory, and has provided electronic integration with diagnostic images and voice dictation.

The Company

     Dynamic was originally incorporated in California in 1977, reincorporated in Nebraska in 1982 and subsequently reincorporated in Florida in 1996. Dynamic’s executive offices are located at 615 Crescent Executive Court, Fifth Floor, Lake Mary, Florida, 32746. In addition, Dynamic’s clinical solutions center is located in Waltham, Massachusetts. The telephone number at the executive offices of Dynamic is (407) 333-5300 and its World Wide Web address is http://www.dht.com.

Industry Background

     The healthcare industry continues to undergo rapid and significant change. Cost containment pressures, industry consolidation, the increasing impact of managed care, rising standards of healthcare quality, the shift from inpatient to outpatient care settings, competition amongst healthcare providers, increasing involvement of patients in their healthcare

- 43 -


Table of Contents

delivery process, and the demand for instant access to information on the part of physicians, patients and payers represent fundamental trends in today’s healthcare operating environment. Although healthcare has been slower than other industries to recognize the value of information technology, healthcare providers recognize that the key to effective cost control and quality management lies in the collection, availability and analysis of medical record information to assess treatment patterns, resource utilization and outcomes.

Products and Services

     Dynamic uses the power of technology to improve diagnostic workflow for pathology, laboratory and radiology services. Dynamic’s solutions enable health professionals to have access to the clinical information they need to make decisions and more effectively manage patient care. Although Dynamic has various products and services, it does not maintain discrete financial information by product line. Management does not review operating results by product line to make decisions about allocating resources and assessing operating performance by product line. In addition, Dynamic’s product line is marketed through a common distribution network and to a common customer base almost exclusively in North America. Accordingly, management has determined that it operates in a single reporting segment.

Pathology

     Dynamic’s anatomic pathology systems are scalable, client/server solutions which are enabled with advanced voice, imaging and Web capabilities. Dynamic CoPathPlus is a client/server anatomic pathology system that automates specimen accessioning and case dictation, produces patient and management reports, and provides SNOMED and natural language retrieval of diagnoses. CoPathPlus also provides healthcare facilities with a flexible tool set that allows users to modify specimen data entry windows and report formats. CoPathPlus is image-enabled by capturing high-resolution digital images and permanently storing those images electronically with related patient and diagnostic data. CoPathPlus is also voice-enabled with a speech recognition solution, which expedites the pathology dictation process and results in shorter turnaround time in delivering patient reports to clinicians.

     Currently, the pathology product line has a dedicated sales force consisting of four sales representatives. Pricing for Dynamic’s pathology systems ranges from approximately $100,000 to over $1,000,000 for larger hospital systems. These prices include licensed software, equipment and implementation services. Annual support services are not included in the systems price and typically equal approximately 18% of the software license fee.

Laboratory

     The Premier Series laboratory information system (“LIS”) provides functionality for specimen collection, testing and result reporting. The Premier Series LIS supports bar coding, instrument interfaces, paperless microbiology, multi-facility management and optical storage. Other features include quality assurance workload recording and management reporting. The Premier Series LIS integrates with highly specialized blood bank information systems, providing both transfusion and donor service software as well as regulatory products. The Premier Series LIS also complies with federal regulations and assists laboratories in deciding upon the appropriate and medically necessary course of action in diagnosing and treating patients.

     Currently, the laboratory product line has a dedicated sales force consisting of two sales representatives. Pricing for Dynamic’s laboratory systems ranges from approximately $150,000 to over $250,000 for larger hospital systems. These prices include licensed software, equipment and implementation services. Annual support services are not included in the systems price and typically equal approximately 18% of the software license fee.

Radiology

     Dynamic’s radiology solution combines advanced client/server architecture with Web technology. Dynamic’s competitive position is enhanced by the close relationship between its Radiology Information System (“RIS”), and its Picture Archiving and Communication System (“PACS”). Information collected by Dynamic’s RIS is available to the PACS, and images captured by the PACS are available to the RIS. The result is an “image-enabled” RIS combined with an “information-enabled” PACS.  Primary markets for Dynamic’s radiology solutions include hospitals, clinics and independent diagnostic imaging centers.

     Dynamic RadPlus is an image-enabled, client/server radiology information system that includes scheduling, patient tracking, film tracking, remote transcription, reporting and management of all radiology functions. Using RadPlus,

- 44 -


Table of Contents

facilities can adapt to change with tools, which allow users to make screen modifications without the expense and delays of reprogramming by the vendor. RadPlus also is voice-enabled with its continuous speech recognition solution. In addition, remote transcriptionists have the ability to access RadPlus over the Internet to transcribe, approve and disseminate radiology reports to referring physicians. This Web-based connectivity feature improves efficiency by reducing turnaround time in the patient report completion process.

     As an integral part of RadPlus, Dynamic offers a PACS, which integrates information from the RIS with images and provides access to this information. CoMed for Results, a vital component of the PACS system, is a Web-based teleradiology system that provides radiologists and physicians with extensive access to radiology images and reports.

     The radiology product line has a dedicated sales force consisting of four sales representatives. Pricing for Dynamic’s radiology systems ranges from approximately $250,000 to over $1,000,000 for larger hospital systems. These prices include licensed software, equipment and implementation services. Annual support services are not included in the systems price and typically equal approximately 18% of the software license fee.

CoMed

     In July 2000, Dynamic launched its CoMed Internet strategy. CoMed is Dynamic’s solution for the industry’s challenges in the capture and dissemination of pertinent clinical and diagnostic information in any form. CoMed, short for Collaborative Medicine, allows physicians, nurses and other caregivers throughout the care delivery system to access and share information.

     Dynamic has developed its suite of CoMed Internet solutions to:

    Enable clients to deliver clinical transactions and information to their physician populations quickly and cost-effectively via a client branded, secure Web site; and
 
    Allow clients with limited capital and resources to purchase Dynamic’s workflow solutions via a subscription based Application Service Provider (“ASP”) model.

     Dynamic is developing and commercializing its Internet and software-based medical information system products using the names CoMed for Results and CoMed for Workflow Management. These products are designed to provide, through Dynamic’s ASP facility, the ability for diagnostic clinical departments to implement end-to-end clinical information systems and results distribution using a secure Web environment. These products are intended to leverage Dynamic’s expertise in providing traditional clinical information system solutions for pathology, laboratory and radiology and expand their reach through the use of current Internet technologies.

Consulting, Systems Integration and other Services

     Dynamic provides a full range of professional consulting services including project management, implementation, planning, training and education. Dynamic’s technical services include network design, implementation and support, custom software development, interfaces, and modifications and systems integration. Dynamic provides support services including 24-hour telephone support and software maintenance and enhancements.

Research and Development

     Dynamic’s research and development program is designed to extend the capabilities of existing products and develop new healthcare application solutions. As of September 30, 2001, there were 28 employees engaged in research and development activities. During the years ended December 31, 1998, 1999 and 2000, Dynamic spent approximately, $8,064,000, $6,806,000 and $6,881,000, respectively, on research and development. The majority of Dynamic’s research and development expenditures have been directed toward Dynamic RadPlus ™, CoPathPlus ™, Premier Series LIS and CoMed product lines.

Major Clients

     Dynamic does not have a dependence on any single customer, the loss of which would have a material adverse effect on continuing operations. Dynamic does generate revenue almost exclusively through sales to the healthcare industry located in the United States. Due to this concentration, substantially all receivables of Dynamic are from healthcare

- 45 -


Table of Contents

institutions which may be similarly affected by changes in economic, regulatory or other industry related conditions. Dynamic currently has approximately 640 customers. The majority of these customers are located within the United States.

Backlog

     As of June 30, 2001, Dynamic has a combined backlog of approximately $23.5 million. Dynamic had contracts for the delivery of systems and services totaling approximately $9.9 million on June 30, 2001, compared to $9.2 million on June 30, 2000. In addition, as of June 30, 2001, Dynamic had contracts for the delivery of software support services billable at an annual rate of $13.6 million, compared to $12.1 million as of June 30, 2000.

Sales and Marketing

     As of September 30, 2001, Dynamic had 16 full time employees in sales and marketing related functions. Dynamic had 11 sales employees and 5 marketing employees. The compensation of the sales employees is substantially dependent on the achievement of individual sales targets. Marketing personnel perform telemarketing, proposal development, demonstration coordination, develop business plans and product marketing programs, competitive analyses, sales collateral, audio and video products, coordinate trade shows, advertising, public relations, investor relations activities, and administrative support.

     Dynamic’s sales cycle is typically six to eighteen months and includes several steps:

  (i)   initial contact and qualification;
 
  (ii)   development of proposal in response to request for a proposal or direct sales lead;
 
  (iii)   business problem requirements definition;
 
  (iv)   product demonstrations;
 
  (v)   site visits; and
 
  (vi)   contract preparation and negotiations.

Members of Dynamic’s professional services, product management and sales support departments, and members of executive management assist the sales force in completing the proposal, conducting demonstrations and analyzing the requirements. In support of the sales efforts, Dynamic advertises in trade journals, participates in trade shows, publishes articles and provides speakers for industry shows and conferences.

Customers

     Dynamic currently serves more than 640 customers, most located in the United States. Key customers include Memorial Sloan-Kettering Cancer Center, The Mayo Foundation, The University of North Carolina Hospitals, LabCorp, Valley Health System, St. Mary’s Health System, Parkland Memorial Hospital, Columbia Presbyterian Medical Center, New York Hospital and Northwest Radiology Network.

Competition

     The market for information technology in the healthcare industry is intensely competitive. Many of Dynamic’s competitors have significantly greater financial, research and development technical and marketing resources than Dynamic. Competitors vary in size and in the scope and breadth of the products and services they offer. Dynamic’s systems compete both with other technologies and with similar systems developed by other companies. Other major information management companies, including the companies with whom Dynamic has strategic relationships, may enter the markets in which Dynamic competes. In addition, in the professional and technical consulting segment, Dynamic competes with the consulting divisions of national accounting firms as well as national and regional healthcare specialty consulting firms.

- 46 -


Table of Contents

Government Regulation

     The United States Food and Drug Administration (the FDA) has issued a guidance document addressing the regulation of certain computer products as medical devices under the Federal Food, Drug and Cosmetic Act (the FFDCA). To the extent that computer software is classified as a medical device under applicable regulations, the manufacturers of such products are required, depending upon the product, to: register and list their products with the FDA (Class I), notify the FDA and demonstrate substantial equivalence to other products on the market before marketing such products (Class II) or, obtain FDA clearance by filing a Pre Market Application (PMA) that establishes the safety and effectiveness of the product (Class III). As a result of the characterization of certain of Dynamic’s products as medical devices, Dynamic’s manufacturing facilities are registered with the FDA and its manufacturing operations regarding devices are required to be in compliance with the FDA’s Quality System Regulations (QSR). Dynamic currently has one product classified as a Class I Medical Device, Premier Series LIS, and one product currently classified as a Class II Medical Device, PACSPlus. A second product that was also classified as a Class II Medical Device, Transfusion Service Manager (“TSM”), was retired effective June 30, 2000. Both PACSPlus and TSM products were deemed substantially equivalent and had 510(k) clearance letters issued by the FDA. The most recent FDA on-site inspection of Dynamic’s Corporate Headquarters in Lake Mary, FL, occurred in August 1999, and concluded without incident. There can be no assurance that Dynamic ultimately will be able to obtain or maintain required FDA approvals to market its products.

     The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), has a direct impact on the ASP portion of Dynamic’s business and an indirect effect on Dynamic as a Business Associate of its customers, the healthcare providers. Dynamic has monitored HIPAA progress throughout its implementation and has proactively taken steps to ensure Dynamic responded appropriately. All of Dynamic’s existing products have been assessed against the proposed and finalized HIPAA regulations and the ASP business unit was developed with HIPAA security in the forefront. We are confident we will be able to provide software that will assist our customers in achieving their HIPAA compliance.

Intellectual Property

     Dynamic relies upon trade secrets, copyright laws and confidentiality agreements with employees and customers to protect its rights in its software technology. Dynamic does not hold any patents nor has it filed copyrights with respect to any of its software technology. Due to the rapid pace of innovation within the software industry, Dynamic believes that patent, trade secret and copyright protection are less significant than Dynamic’s ability to further develop, enhance and modify its current products and other clinical information systems through the technology and creative skills of its personnel. To minimize the possibility of third parties imitating Dynamic’s systems, Dynamic licenses object codes only and does not license or otherwise distribute source codes.

     Dynamic’s employees are required to enter into confidentiality agreements which prohibit the disclosure of confidential information and which require employees to report and assign to Dynamic all concepts, developments, discoveries and inventions conceived during their employment.

     Dynamic has obtained federal trademark protection for DynamicVision®, CoPath®, Maxifile®, Optima®, Dynamic CoPath Plus®, Dynamic RadPlus®, and Dynamic PACSPlus®. There can be no assurance that the legal protections and precautions taken by Dynamic will be adequate to prevent misappropriation of Dynamic’s technology. In addition, these protections do not prevent independent third-party development of functionally equivalent or superior technologies or services. Dynamic does not believe its operations or products infringe on the intellectual property rights of others. There can be no assurance that others will not assert infringement or trade secret claims against Dynamic with respect to its current or future products or that Dynamic will be successful in defending any such claim.

Employees

     As of September 30, 2001, Dynamic had 138 full time employees, of which 28 were employed in research and development, 78 in client services, 16 in general and administrative and 16 in sales and marketing. None of Dynamic’s employees is represented by a labor union or subject to a collective bargaining agreement. Dynamic has never experienced a work stoppage and believes that its employee relations are good.

Properties

     Dynamic’s corporate headquarters are located at 615 Crescent Executive Court, Suite 600, Lake Mary, Florida 32746. The Lake Mary location consists of approximately 53,800 square feet of office space under a lease that expires

- 47 -


Table of Contents

March 1, 2005. In addition, Dynamic also maintains an office at Two University Office Park, 51 Sawyer Road, Waltham, Massachusetts 02154 as Dynamic’s clinical solutions center. The Waltham location consists of approximately 30,000 square feet under lease that expires November 30, 2004. Dynamic believes that its current facilities are sufficient to meet its near-term requirements.

Legal Proceedings

     Dynamic periodically will be a party to or otherwise involved in legal proceedings arising in the normal course of business. Management does not believe that there is any proceeding threatened or pending against Dynamic which, if determined adversely, would have a material effect on the business or financial position of Dynamic on a consolidated basis.

DYNAMIC’S MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

     Dynamic is a provider of mission-critical healthcare information systems for clinical services departments and facilities throughout North America. Dynamic’s product line includes a suite of image-, voice-, and web-enabled systems for anatomic pathology, radiology, and laboratory information management systems. Dynamic’s services include implementation and training, product management and client software development.

     Revenues from professional services and maintenance and support services typically increase as the number of installed systems increases. Computer system equipment sales revenues are generally recognized when hardware is shipped. Computer system equipment sales and support revenues include hardware support contracts for a specific period from which revenue is recognized ratably over the corresponding contract period. Application software license revenues are recognized when application software is delivered to the client. Installation and training service revenues, included with application software licenses, are recognized as the services are performed. Software support revenues principally include contracts for remote dial-up problem diagnosis, maintenance and corrective support services, each of which covers a specified period for which revenue is recognized ratably over the corresponding contract period. Services and other revenues include custom programming services, post-contract support obligations and other services, which are provided under separate contract and are recognized as services are performed.

     Cost of products sold includes the cost of hardware sold, costs of third party software licenses and hardware support subcontracts. Client service expense includes the direct and indirect costs associated with implementation and support personnel. Software development costs include the direct and indirect salaries and wages of software research and development personnel, direct research and development expenses, reduced by capitalized software development costs. Software development costs are expensed until such time as technological feasibility is established and then are capitalized in compliance with Statement of Financial Accounting Standards No. 86 “Accounting for Costs of Computer Software to be Sold, Leased or Otherwise Marketed.” Software amortization is separately stated. Sales and marketing costs include direct and indirect salaries, commissions, joint marketing costs, advertising, trade show costs, user group cost and travel and entertainment expenses related to the sale and marketing of Dynamic’s products and services. General and administrative expenses include salaries and expenses for corporate administration, financial, legal and human resources.

     The sales cycle for Dynamic’s systems is typically six to eighteen months from initial contact to contract signing. The product delivery cycle is variable. Based on the client’s implementation plan, product delivery may take two or more years, particularly with enterprise-wide electronic healthcare record solutions involving significant and continuing client service requirements. Accordingly, the product delivery cycle depends upon the combination of products purchased and the implementation plan defined by the client in the master sales agreement. Each client contract is separately negotiated. The installation schedules for clinical information systems, or departmental electronic healthcare record implementations, typically require six to twelve months. Under its standard master sales agreement, Dynamic generally receives a partial payment upon execution of the agreement, a hardware installment payment upon delivery of hardware, installation progress payments upon the completion of defined milestones and final payment, which may vary with each contract.

     This Management’s Discussion and Analysis of Financial Condition and Results of Operations presents a review of the operating results and financial condition of Dynamic for the fiscal years ended December 31, 2000, 1999 and 1998 and for the six month periods ended June 30, 2001 and 2000. This discussion and analysis is intended to assist in

- 48 -


Table of Contents

understanding the financial condition and results of operations of Dynamic. Accordingly, this section should be read in conjunction with the financial statements and the related notes contained herein.

Results of Operations

     The following table sets forth, for each of the periods indicated, certain selected statement of operations data expressed as a percentage of total operating revenues:

                                             
        Fiscal Years Ended     Six Month Period  
        December 31,     Ended June 30,  
       
   
 
        2000     1999     1998     2001     2000  
       
   
   
   
   
 
Operating revenues:
                                       

 

 
Computer system equipment sales and support
    4.0 %     12.3 %     10.2 %     4.3 %     4.4 %
 
Application software licenses
    27.7 %     27.7 %     20.9 %     25.9 %     26.9 %
 
Software support
    45.9 %     33.3 %     45.4 %     46.0 %     44.6 %
 
Services and other
    22.4 %     26.7 %     23.5 %     23.8 %     24.1 %
 
 
   
   
   
   
 
   
Total revenues
    100.0 %     100.0 %     100.0 %     100.0 %     100.0 %
 
 
   
   
   
   
 

 

Operating expenses:
                                       

 

 
Cost of products sold
    9.0 %     17.8 %     12.6 %     8.2 %     7.5 %
 
Software amortization
    7.3 %     5.9 %     6.8 %     5.1 %     8.8 %
 
Client services expense
    38.4 %     28.1 %     42.4 %     37.6 %     39.4 %
 
Software development costs
    20.2 %     13.4 %     18.9 %     17.3 %     18.0 %
 
Sales and marketing
    17.6 %     18.7 %     36.5 %     21.4 %     17.1 %
 
General and administrative
    18.1 %     11.6 %     17.8 %     17.9 %     15.0 %
 
Realignment costs
    22.3 %     1.5 %     %     3.7 %     %
 
 
   
   
   
   
 
   
Total operating expenses
    132.9 %     97.0 %     135.0 %     111.2 %     105.8 %
 
 
   
   
   
   
 

 

Operating income (loss)
    (32.9 )%     3.0 %     (35.0 )%     (11.2 )%     (5.8 )%
Other income (expense)
    (0.7 )%     (0.5 )%     0.1 %     (0.5 )%     (0.5 )%
 
 
   
   
   
   
 

 

Net earnings (loss)
    (33.6 )%     2.5 %     (34.9 )%     (11.7 )%     (6.3 )%
 
 
   
   
   
   
 

Comparison of the Six Months Ended June 30, 2001 and 2000

     Revenues. During the six months ended June 30, 2001 Dynamic reported revenues of $12,552,000 a decrease of $496,000 or 3.8% from revenues of $13,048,000 for the same period in 2000. Revenues from new system implementations declined slightly principally due to a general market slowdown caused by reduced capital procurement by healthcare providers. Combined revenues from computer system equipment sales, application software licenses, and services and other revenues declined by $449,000, reflecting this decrease in new system implementations, while software support revenues decreased modestly by $47,000.

     Computer system equipment sales and support revenues decreased by $37,000 to 4.3% of total revenues for the six month period ended 2001, compared to 4.4% for the six months ended 2000. Management attributes the slight decrease to the clients’ procurement of needed hardware directly from the manufacturer.

     Application software license revenue during the six months ended June 30, 2001 decreased by $259,000 over the same period one year ago, from $3,506,000 to $3,247,000, and similarly service and other revenues decreased by $154,000 to $2,989,000 from $3,143,000. These decreases principally result from the decreased implementation of new systems.

     Software support revenues modestly decreased by $46,000 to $5,780,000 for the six months ended June 30, 2001, compared to $5,826,000 for the same period one year ago. During 2000 Dynamic discontinued support for customers operating our offering of MUMPS radiology products, this decrease is due primarily to customers not converting to our

- 49 -


Table of Contents

client server offering. Management expects support revenues to continue to grow with the implementation of new systems. As of June 30, 2001, the recurring annualized billable support base was $12.4 million, and an additional $1.2 million of annualized software support revenue is anticipated to be generated from delivery of Dynamic’s existing new systems backlog.

     Cost of Products Sold. Cost of products sold as a percentage of total revenues for the six months ended June 30, 2001 increased to 8.2% from 7.5% for the same period in 2000. Hardware and application software license revenues during the first six months of 2001 similarly decreased to 30.2% from 31.3% of total revenues for the first six months of 2000, due to the decrease in new system implementations.

     Client Services Expense. Client services expense for the six months ended June 30, 2001 decreased $424,000 to $4,723,000 from $5,147,000 for the six months ended June 30, 2000, decreasing as a percentage of total revenues from 39.5% to 37.6%. Dynamic previously reported a decrease in duplicative staffing and a reallocation of various resources in connection with the realignment plan completed in 2001. Product installation, delivery and support services were standardized along all product lines as Dynamic focuses on revenue generating functions.

     Software Development Costs. Software development costs for the six months ended June 30, 2001 decreased to 17.4% of total revenues from 18.0% incurred during the six months ended June 30, 2000. The $183,000 decrease in software development expense reported for the six months ended June 30, 2001 of $2,168,000, compared to $2,351,000 reported for the six months ended June 30, 2000, reflects a $1,054,000 reduction in capitalized software development costs offset by other reductions in total software departmental costs of $871,000 through the reduction and reallocation of personnel to various departments. Although development efforts continue as part of Dynamic’s overall strategy, the focus has been less on enhancements to existing product lines and more towards completion of Dynamic’s e-Business initiatives. Cost incurred in connection with Dynamic’s e-Business initiatives were not capitalized since the development of the products have not yet reached technological feasibility.

     Sales and Marketing. Sales and marketing costs for the six months ended June 30, 2001 as a percentage of total revenues, increased to 21.4% from 17.1% for the same period of 2000. This increase of $460,000 from $2,227,000 to $2,687,000 in sales and marketing expenses results principally from the increase of $317,000 in sales commissions paid as a result of an increase in the relative sales bookings. The remaining $143,000 increase is primarily due to increased marketing activity to promote Dynamic’s new CoMeD product and market awareness of existing products.

     General and Administrative. General and administrative expenses for the six months ended June 30, 2001 increased $297,000 to $2,255,000 from $1,958,000 for the six months ended June 30, 2000, and increased as a percentage of total revenues to 17.9% from 15.0%. The increase in expense is associated with direct increases in travel and entertainment, bad debt, legal, supplies, and Dynamic’s business activities specifically relating to compliance with NASDAQ.

     Realignment Cost. During the second quarter 2001, Dynamic adopted a formal plan to reallocate and eliminate selected mid-level management and duplicate staff positions in Dynamic. In connection with the plan, a total of thirty-six employees were terminated and Dynamic incurred a non-recurring charge in the amount of $465,204 related to termination and severance benefits. At June 30, 2001, $363,754 was paid and $101,450 of the remaining accrued severance and termination benefits will be paid by December 31, 2001.

     Other Income (expense). Dynamic incurred $64,000 of net other expense for the six months ended June 30, 2001 compared to $62,000 of net other expense reported for the six months ended June 30, 2000. The net increase of $2,000 in other expense is principally due to the $32,000 increase in other income and expense and a reduction of $30,000 for loss on disposal of fixed assets that occurred during the six months ended June 30, 2000.

Comparison of the Fiscal Years Ended December 31, 2000 and 1999

     Revenues. During the year ended December 31, 2000 Dynamic reported revenues of $25,659,000 a decrease of $9,484,000 from revenues of $35,143,000 for 1999. Revenues from new system implementations declined significantly principally due to general market slowdown caused by reduced capital procurement by healthcare providers. Combined revenues from computer system equipment sales, application software licenses, and services and other revenues declined by $9,535,000, reflecting this decrease in new system implementations, while software support revenues increased modestly by $51,000. Dynamic’s radiology revenues decreased by $3,947,000, from $9,479,000 recognized during 1999 to $5,532,000 recognized during 2000. Pathology revenues for 2000 decreased by $2,724,000 to $12,011,000 from

- 50 -


Table of Contents

$14,735,000 during 1999. Similarly, laboratory revenues for 2000 also decreased by $1,200,000 to $7,045,000 from $8,245,000 during 1999. In addition, Records Plus product line revenues decreased by $1,455,000 from $2,526,000 reported for 1999 to $1,071,000 for 2000.

     Computer system equipment sales and support revenues decreased by $3,274,000 to 4.0% of total revenues for 2000, compared to 12.3% for 1999. Management attributes the decrease to the decreased implementation of new systems by customers focused on year 2000 remediation and system validation efforts.

     Application software license revenue during 2000 decreased by $2,624,000 as compared to 1999, from $9,745,000 to $7,121,000, and service and other revenues decreased by $3,637,000 to $5,749,000 from $9,386,000, principally resulting from the decreased implementation of new systems during 2000.

     Software support revenues increased by $51,000 to $11,767,000 for 2000, compared to $11,716,000 for the same period one year ago. During 1999, Dynamic discontinued support for a limited offering of legacy laboratory and financial products in connection with Year 2000 remediation efforts. Management expects support revenues to grow with the implementation of new systems. As of December 31, 2000, the recurring annualized billable support base was $12.3 million.

     Cost of Products Sold. Cost of products sold as a percentage of total revenues for 2000 decreased to 9.0% from 17.8% for 1999. Computer system equipment sales and support revenues during 2000 similarly decreased to 4.0% from 12.3% of total revenues for 1999, due to the significant decrease in new system implementations.

     Software Amortization. Software amortization for 2000 decreased by approximately $198,000 from $2,078,000 during 1999 to $1,880,000. During 2000 Dynamic abandoned marketing of DynamicVision and PACSPlus for strategic reasons, which lowered the recurring amortization.

     Client Services Expense. Client services expense for 2000 decreased $24,000 to $9,856,000 from $9,880,000 for 1999, increasing as a percentage of total revenues from 28.1% to 38.4%. Dynamic previously reported decreased staffing in connection with the re-engineering and cost reduction plan completed in 1998. Product installation, delivery and support services were standardized along all product lines as Dynamic centralized these functions. However, during late 1999 and continuing through the first quarter of 2000 Dynamic transitioned various development personnel to support and new system implementation roles, consistent with the maturing of the recent new product releases, which offset these decreases.

     Software Development Costs. Software development costs for 2000 increased to 20.2% of total revenues from 13.4% incurred during 1999. The $466,000 increase in software development expense reported for 2000 of $5,176,000, compared to $4,710,000 reported for 1999, results principally from resources committed to the development of Dynamic’s e-Business initiatives, which have not been capitalized. In addition, development efforts continue as part of Dynamic’s overall growth strategy, including enhancements to existing product lines.

     Sales and Marketing. Sales and marketing costs for 2000 as a percentage of total revenues, decreased to 17.6% from 18.7% for the same period of 1999. This decrease of $2,081,000 from $6,589,000 to $4,508,000 in sales and marketing expenses results principally from cost reductions attributed to the sales realignment programs completed in 1999 and a decrease in sales commissions as a result of reduced new system bookings during 2000.

     General and Administrative. General and administrative costs increased by $562,000 to $4,631,000 for 2000 compared to $4,069,000 for 1999, and increased as a percentage of total revenues to 18.1% from 11.6%. Costs related to the management of Dynamic’s e-Business initiatives is being charged to general and administrative costs, and the restructured organization allocates a higher percentage of overhead burdens to the general administrative department as result of the department constituting a higher percentage of Company-wide salaries and wages. In addition, bad debt charges for 2000 increased by $135,000, principally as a result of the discontinued product offerings during 2000, and a $300,000 severance charge was taken in connection with the transition of Dynamic’s former CEO to Senior Advisor in the fourth quarter of 2000.

     Restructuring Costs. During the third quarter 2000, Dynamic adopted a formal plan to stop marketing and further development of specific products, and, as a result, recorded restructuring charges of $5,725,007. In connection with Dynamic’s strategic decision to focus marketing efforts on Dynamic’s clinical suite of products (CoPathPlus, RadPlus and e-Premier) and its e-Business initiatives (CoMed Internet), Dynamic decided to no longer actively market SurgiPlus,

- 51 -


Table of Contents

DynamicVision and PACSPlus. Historical revenues from the discontinued products were approximately $1,071,000 and $2,526,000 for the years ended December 31, 2000 and 1999, respectively. The affected product charges consist of the write-off of net capitalized software costs of $4,998,234 and a write-off of prepaid licenses of $130,624. In addition, employee severance and termination costs, associated with positions eliminated as a result of the abandoned product offerings, in the amount of $399,735 and a reserve for contract losses of $196,414 were accrued and expensed during the third quarter of 2000. A total of 32 employees were terminated in connection with the abandoned product offerings.

Comparison of the Fiscal Years Ended December 31, 1999 and 1998

     Revenues. During the year ended December 31, 1999 Dynamic reported revenues of $35,143,000, an increase of $9,314,000 or 36% from revenues of $25,829,000 for 1998. Dynamic’s radiology system revenues increased by $4,416,000, from $5,063,000 recognized during the 1998 to $9,479,000 recognized during 1999. Pathology revenue for 1999 increased by $3,909,000 to $14,735,000 from $10,826,000 during 1998. Similarly, laboratory information system revenues for 1999 also increased by $643,000 to $8,245,000 from $7,603,000 during 1998. Revenues from the Records Plus product line increased by $592,000 from $1,934,000 to $2,526,000 comparing 1998 to 1999, respectively. During 1997 Dynamic introduced new technology product releases in virtually every market segment in which Dynamic competes. Lengthy initial sales cycles significantly impacted 1998 performance, while record fourth quarter 1998 sales bookings, and the resulting record high new systems backlog as of December 31, 1998, resulted in increased system implementations during 1999.

     Computer system equipment sales and support revenues increased by $1,659,000 to 12.3% of total revenues for 1999 compared to 10.2% for 1998. Management attributed the increase to the increased implementation of new system sales.

     Application software license revenue during 1999 increased by $4,349,000 over 1998, from $5,396,000 to $9,745,000, and similarly, service and other revenue increased by $3,313,000 to $9,386,000 from $6,073,000. These increases principally result from the increased implementation of new system sales.

     Software support revenues modestly decreased by $7,000 to $11,716,000 for 1999, compared to $11,723,000 for 1998. During 1998 Dynamic announced the discontinuance of support for a limited offering of legacy laboratory and financial products in connection with Year 2000 remediation efforts. As of December 31, 1999, the recurring annualized billable support base was $12.3 million, and an additional $2.3 million of annualized software support revenue was anticipated to be generated from delivery of Dynamic’s existing new systems backlog.

     Cost of Products Sold. Cost of products sold as a percentage of total revenues for 1999 increased to 17.8% from 12.6% for 1998. Hardware and application software license revenues during 1999 similarly increased to 40.0% from 31.1% of total revenues for 1998, due to the significant increase in new system implementations.

     Client Services Expense. Client services expense for 1999 decreased $1,078,000 to $9,880,000 from $10,958,000 for 1998, decreasing as a percentage of total revenues from 42.4% to 28.1%. Dynamic previously reported decreased staffing in connection with the re-engineering and cost reduction plan completed in 1998. Product installation, delivery and support services were standardized along all product lines as Dynamic centralized these functions.

     Software Development Costs. Software development costs for 1999 decreased to 13.4% of total revenues from 18.9% incurred during 1998. This $180,000 net decrease in software development expense resulted despite a $1,078,000 reduction in capitalized software development costs from $3,174,000 capitalized during 1998 to $2,096,000 capitalized during 1999, which increased the expense. In effect, a real reduction in total software development departmental costs of $1,258,000 occurred in 1999, as compared to 1998.

     Sales and Marketing. Sales and marketing costs for 1999 as a percentage of total revenues, decreased to 18.7% from 36.5% for the same period of 1998. This decrease of $2,840,000 from $9,430,000 to $6,590,000 in sales and marketing expenses was despite an increase in sales commissions incurred for 1999 of $462,000 from $1,063,000 incurred during 1998 to $1,525,000 incurred during 1999, resulting from increased sales closings. This translates to a base sales and marketing cost reduction of approximately $3,302,000 attributed to the sales realignment program undertaken in 1998, in connection with Dynamic’s cost reduction plan.

     General and Administrative Expenses. General and administrative expenses for 1999 decreased by $536,000 and decreased to 11.6% of total revenues from 17.8% incurred during 1998. This decrease was despite an

- 52 -


Table of Contents

increase of $382,000 in amounts accrued under Dynamic’s Management Incentive Compensation Plan (“MIC Plan”). Dynamic did not pay any MIC Plan compensation for 1998. General and administrative costs for 1999 compared to the same period in 1998, include reductions in salaries and professional services of $544,000, office rent expense of $164,000 telephone expenses of $269,000, supplies of $72,000 and mail delivery costs of $49,000, principally attributed to the office consolidation and realignment efforts.

     Restructuring Costs. During the third quarter of 1999 Dynamic announced a restructuring plan. This restructuring was designed to provide a single focus to the development, marketing, sales and support of Dynamic’s information systems. It also established specific cost reductions, revenue improvement and customer satisfaction objectives and anticipated future cost efficiencies. In connection with the plan, a total of 17 employees were terminated and Dynamic incurred $524,000 of termination charges.

     Other Income (Expense). Dynamic incurred $202,000 of net other expense for 1999 compared to $41,000 of net other income reported for 1998. Net interest income was $180,000 during 1998 as compared to net interest expense during 1999 of $176,000 due to the cash used by operating and investing activities during 1998, and increased borrowings on the line of credit during 1999. In addition, Dynamic incurred approximately $139,000 in losses on sale of fixed assets in connection with the office consolidation in 1998 and $26,000 in 1999.

Liquidity and Capital Resources

     Dynamic has historically financed its operations primarily through cash flow from operations, public and private equity offerings of its securities, and bank financing, including the financing facility discussed below. Dynamic has experienced positive cash flow from operations for 11 consecutive quarters. As of June 30, 2001 Dynamic had cash and cash equivalents of $893,094, availability under the line of credit of $1,500,000, and a working capital deficit of $792,000, as compared to cash and cash equivalents of $3,198,000, availability under the line of credit of $2,875,000, and a working capital deficit of $314,000 at December 31, 2000. The decrease in cash and cash equivalents was primarily as a result of $2,875,000 in payment against the line of credit borrowings and additional severance paid in connection with the realignment plan implemented in April 2001. The increase in working capital deficit occurred primarily due to additional accrued liabilities associated with the realignment plan in April 2001.

     Our cash flows are impacted positively to the extent our accounts receivable are greater than our accounts payable and negatively, to the extent our accounts receivable are less than our accounts payable. Accounts receivable as of June 30, 2001 decreased by $1,542,000 from the balance on December 31, 2000, principally as a result of the increased collection activities for support renewals and decreases in new system installations. Unbilled receivables increased by $1,118,000 due principally to the timing of billable milestones on implementations and the increase of contract work in progress.

     Accounts payable and accrued expenses decreased $328,000 to $2,734,000 as of June 30, 2001 from $3,061,000 as of December 31, 2000. The lower level of system implementations resulted in a lower level of accrued third party product costs.

     Advanced billings as of June 30, 2001 increased by $796,000 to $1,993,000 from the 2000 year end balance of $1,197,000. The increase in sales bookings for the first quarter of 2001 resulted in a higher level of client contract deposits received and therefore, an increase in our liquidity.

     Dynamic’s line of credit with Silicon Valley Bank was renegotiated on July 25, 2001 and expires on July 24, 2002. The new line of credit is intended to provide for up to $2,500,000 of borrowings based on a maximum advanced ratio equal to 80% of qualified accounts receivable. Borrowings as of September 30, 2001 were $0. Future borrowing capacity is contingent on Dynamic’s compliance with a minimum quick asset ratio (as defined) of 1.00 to 1.00. Due to the cyclical nature of Dynamic’s operations or as the result a significant increase in expenses due to extraordinary events or otherwise (including the costs of the proposed merger with Cerner), Dynamic faces the risk of non-compliance with the quick asset ratio requirement, which could result in the reduction or removal of Dynamic’s available line of credit. In addition to the line of credit, Cerner has agreed to loan up to $500,000 to Dynamic, if necessary, to finance the additional costs associated with the pending merger transaction.

     Management believes that existing cash and funds available under its existing line of credit, together with funds expected to be generated by operations will be sufficient to meet operating requirements. However, Dynamic’s ability to meet its future working capital requirements is dependent on Dynamic’s ability to continue to generate positive cash flow from operations and to have availability under its existing line of credit or to obtain suitable additional financing.

- 53 -


Table of Contents

     As a result of the realignment plan adopted by Dynamic in April 2001 to eliminate and reallocate resources, a total of 36 employees were terminated and Dynamic incurred a non-recurring charge in the amount of $465,204 related to termination and severance benefits. At September 30, 2001, $414,479 was paid and $50,725 of the remaining accrued severance and termination benefits will be paid by December 31, 2001.

Quantitative and Qualitative Disclosures About Market Risk

     Dynamic is exposed to interest rate changes primarily as a result of its variable rate line of credit used to finance Dynamic’s short-term working capital needs and general corporate purposes. Dynamic’s interest rate risk management objective is to limit the impact of interest rate changes on earning and cash flows and to lower its overall borrowing costs.

     Dynamic’s market risks associated with its line of credit borrowings outstanding is that the interest rate under the line of credit agreement is based on the prime rate plus (3.0%) (8.50% as of September 30, 2001). The line of credit agreement expires on July 24, 2002. Fair value of the line of credit as of September 30, 2001 was equal to its carrying value of $0.

Inflation and Changing Prices

     Dynamic believes that the general state of the economy and inflationary trends have only a limited effect on its business. Historically, inflation has not had a material effect on Dynamic. Changing prices of computer hardware could have a material effect on the cost of the materials sold and the related selling price of software and hardware sales. Dynamic anticipates that the recent terrorist actions occurring in the United States on September 11, 2001 will result in increased costs relating to its sales activities, which are highly dependent on air travel. It is expected that air travel costs will increase and that travel delays may be experienced from time to time.

Recent Accounting Pronouncements

     In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, Business Combinations (SFAS 141), and No 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that Dynamic recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142 that Dynamic reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141.

     SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that Dynamic identify reporting units for the purposes of assessing potential future impairments of goodwill and reassess the useful lives of other existing recognized intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning when those assets were initially recognized. SFAS 142 requires Dynamic to complete a transitional goodwill impairment test six months from the date of adoption. Dynamic is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142.

     Dynamic’s previous business combinations were accounted for using the purchase method. As of September 30, 2001, the net carrying amount of goodwill is $558,392. Amortization expense during the six-month period ended September 30, 2001 was $290,544. Currently, Dynamic is assessing but has not yet determined how the adoption of SFAS 141 and SFAS 142 will impact its financial position and results of operations.

INFORMATION REGARDING CERNER

     Cerner is a Delaware corporation incorporated in 1980. The Company’s principal offices are located at 2800 Rockcreek Parkway, North Kansas City, Missouri 64117, and its telephone number is (816) 221-1024.

     Cerner designs, develops, markets, installs, hosts and supports software information technology and content solutions for healthcare organizations and consumers. Cerner implements these solutions as individual, combined or enterprise-wide systems. Cerner’s integrated suite of solutions enable healthcare providers to improve operating

- 54 -


Table of Contents

effectiveness, reduce costs, reduce medical errors, reduce variances and improve the quality of care as measured by clinical outcomes. Cerner solutions are designed to provide the appropriate health information and knowledge to caregivers, clinicians and consumers and the appropriate management information to healthcare administration on a real-time basis. Cerner solutions allow secure access to data by clinical, administrative and financial users in organized settings of care and by consumers from their home. These solutions can be implemented as a part of an enterprise-wide solution or individually, leveraging the client’s existing investment in information technology. Cerner solutions are available as integrated applications managed by its clients or as a service option under the hosted solutions model. Hosted solutions are applications that are provided to clients from Cerner’s solutions center in Lee’s Summit, Missouri. Cerner solutions are designed and developed using the Health Network Architecture (Registered) (“HNA”), a single information architecture. HNA (Registered) is a unified technology infrastructure for combining clinical and management information applications. HNA allows each participating healthcare organization to access an individual’s clinical record at the point of care, to organize it for the specific needs of the physician, nurse, laboratory technician or other care provider on a real-time basis, and to use the information in management decisions to improve the efficiency and productivity of the entire enterprise. Cerner has developed and is licensing and installing its newest generation of HNA solutions known as “Cerner Millennium™.”

     Cerner’s business and products are organized around a central vision of how it believes healthcare can and should operate. This vision is founded on four steps: (1) automate the core processes of healthcare by eliminating the paper medical record; (2) connect the person by creating the personal health system; (3) structure the knowledge by positioning every clinical decision as a learning event; and (4) close the loop by implementing evidence-based medicine.

     For more information about Cerner, reference is made to its periodic filings with the Securities and Exchange Commission, which are incorporated herein by reference into this proxy statement/prospectus. Dynamic shareholders desiring copies of these documents may contact Cerner at its address or telephone number indicated under “Where You Can Find More Information.”

COMPARATIVE RIGHTS OF SHAREHOLDERS

     The rights of Dynamic shareholders are currently governed by Florida law and Dynamic’s articles of incorporation and bylaws. As a result of the merger, the shareholders of Dynamic will become shareholders of Cerner, whose rights are governed by the Delaware General Corporation Law and Cerner’s certificate of incorporation and bylaws. The following discussion is intended only to highlight certain differences between the rights of corporate shareholders under Florida law and Delaware law generally and specifically with respect to the shareholders of Dynamic and Cerner. The discussion is not intended as a complete statement of all such differences, and Dynamic shareholders are referred to those laws and governing documents for a definitive treatment of the subject matter.

Certain Differences Between Florida and Delaware Corporation Statutes

     Shareholder Approval of Certain Corporate Transactions. The Delaware law requires that a merger, consolidation, disposition of all or substantially all the assets or voluntary dissolution of a corporation be approved by the affirmative vote of holders of a majority of the outstanding shares entitled to vote thereon (except as indicated below). The Delaware law also requires that mergers and dispositions of all or substantially all of the corporation’s assets be approved by the board of directors. Under the Delaware law, shareholder approval is not required for mergers in which (a) the certificate of incorporation of the surviving corporation is not amended, (b) shares of the surviving corporation outstanding before the merger are unchanged, and (c) new shares to be issued in the merger do not exceed 20 percent of the shares outstanding before the merger.

     Under Florida law, a merger, share exchange, and a sale, lease, exchange, or other disposition of all or substantially all of the assets of a corporation must be approved by the board of directors and approved by the affirming vote of holders of a majority of the outstanding shares of each class entitled to vote thereon, unless the articles of incorporation or the board of directors require a greater vote. The board of directors must recommend the action unless it makes no recommendation due to special circumstances that it communicates to the shareholders. Shareholder approval is not necessary for a merger between a parent corporation and subsidiary of which the parent corporation controls at least 80% of all the outstanding classes of equity and there will be no change to the articles of incorporation which would otherwise require shareholder approval. In addition, shareholder approval is not necessary, and dissenters’ rights are not available, for mergers by corporations reorganizing themselves as a holding company if such corporation’s shares are traded on a national exchange or on the interdealer quotation system by the NASD, or such shares are held of record by at least 2,000 shareholders.

- 55 -


Table of Contents

     Amendment of Charter. The Delaware law requires that an amendment to a Delaware corporation’s certificate of incorporation first be adopted by the board of directors before the amendment is submitted to the shareholders for approval by the affirmative vote of holders of a majority of the outstanding shares entitled to vote thereon.

     Florida law also generally requires an amendment to the articles of incorporation of a Florida corporation to be adopted by the board of directors before the amendment is recommended and submitted to the shareholders of the corporation for approval. Unless the articles of incorporation provide for a greater shareholder vote, Florida law generally requires that the votes cast in favor of such an amendment must exceed the votes cast against such an amendment at a meeting that at least a quorum is present; provided, however, that a majority of the outstanding votes entitled to be cast on the amendment is required with respect to an amendment that would create dissenters’ rights under Florida law. Further, under Florida law shareholder approval is not required for certain non-material amendments.

     Dissenters’ Appraisal Rights. The Delaware law grants appraisal rights only in connection with mergers and consolidations, and grants no appraisal rights with respect to mergers in which:

    dissenting shares are
     
(a)   listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc., or

 

(b)   held of record by more than 2,000 shareholders, or

    the corporation is the surviving corporation in the merger and no vote of its shareholders is required under the Delaware law, with certain exceptions.

     Under Florida law, dissenters’ appraisal rights are available in connection with corporate actions involving certain mergers, share exchanges, consolidations, sales or other dispositions of all or substantially all of the property of the corporation (other than in the ordinary course of business), the approval of certain control-share acquisitions, and amendments of the articles of incorporation where such amendment would adversely affect the shareholder by:

    altering or abolishing any preemptive rights attached to such shareholder’s shares;
 
    altering or abolishing the voting rights pertaining to such shareholder’s shares, except as such rights may be affected by the voting rights of new shares then being authorized of any existing or new class or series of shares;
 
    effecting an exchange, cancellation, or reclassification of any of such shareholder’s shares, when such amendment would alter or abolish the shareholder’s voting rights or alter his or her percentage of equity in the corporation, or effecting a reduction or cancellation of accrued dividends or other arrearages;
 
    reducing the stated redemption price of any of the shareholder’s redeemable shares, altering or abolishing any provision relating to any sinking fund for the redemption or purchase of any of his or her shares, or making any of the shareholder’s shares subject to redemption when they are not otherwise redeemable;
 
    making non-cumulative, in whole or in part, dividends on any of his or her preferred shares which had theretofore been cumulative;
 
    reducing the dividend preference of any of his or her preferred shares; or
 
    reducing any stated preferential amount payable on the shareholder’s preferred shares upon voluntary or involuntary liquidation.

     No dissenters’ rights are granted under Florida law in the case of a merger or share exchange or a proposed sale or exchange of property when the Florida corporation’s shares are listed on a national securities exchange or the Nasdaq National Market or held of record by at least 2,000 persons.

- 56 -


Table of Contents

     Anti-takeover Statutes. The Delaware law contains a business combination “moratorium” statute that generally prohibits a Delaware corporation from engaging in mergers or other business combinations with any person who is an “interested shareholder” for a period of three years after the person becomes an “interested shareholder,” unless certain conditions are satisfied.

     Florida law contains two statutes that addresses control share acquisitions and affiliated transactions.

     Control Share Acquisitions. This statute applies to Florida corporations with at least 100 or more shareholders and has a substantial nexus with the state as specified in the statute. Florida law substantially restricts the voting rights of certain shares of a Florida corporation’s stock when those shares are acquired by a party who, by such acquisition, would control at least one-fifth of all voting rights of the corporation’s issued and outstanding stock (and other thresholds thereafter). Florida law provides that the acquired shares (the “control shares”) will, upon such acquisition, cease to have any voting rights unless approved generally by a majority of all the votes entitled to be cast on the matter, excluding an “interested shares.” “Interested shares” are shares that are owned by the acquiring person, each officer of the corporation, and each employee of the corporation who also is a director of the corporation. If such a resolution is approved, and the voting rights re-assigned to the control shares represent a majority of all voting rights of the corporation’s outstanding voting stock, then, unless the corporation’s articles of incorporation or bylaws provide otherwise, all shareholders of the corporation shall be able to exercise dissenters’ rights in accordance with Florida law. A corporation may, by amendment to its articles of incorporation or bylaws, provide that, if the party acquiring the control shares does not submit an acquiring person’s statement in accordance with the statute, the corporation may redeem the control shares at any time during the period ending 60 days after the acquisition of control shares. If the acquiring party files an acquiring person’s statement, the control shares are not subject to redemption by the corporation unless the shareholders, acting on the acquiring party’s request, deny full voting rights to the control shares.

     Florida law does not alter the voting rights of any stock of the corporation acquired in any of the following manners: (a) pursuant to the laws of the intestate succession or pursuant to a give or testamentary transfer; (b) pursuant to the satisfaction of a pledge or other security interest created in good faith and not for the purpose of circumventing the statute; (c) pursuant to either a merger or share exchange if the corporation is a party to the agreement or plan of merger or share exchange; (d) pursuant to any savings, employee stock ownership or other benefit plan of the corporation; or (e) pursuant to an acquisition of shares that have specifically approved by the board of directors of the corporation prior to the acquisition. A Florida corporation may provide in its articles of incorporation or bylaws prior to any such acquisition that this statute shall not apply to it.

     Affiliated Transactions. In general, Florida law prevents an “Interested Shareholder” (defined generally as a person with 10% or more of a corporation’s outstanding voting stock) from engaging in an “Affiliated Transaction” with a corporation for three years following the date such person became and Interested Shareholder. The term an “Affiliated Transaction” includes mergers or consolidation with an Interested Shareholder and certain other transactions with an Interested Shareholder, including, without limitation: (1) any sale, lease, exchange, mortgage, pledge, transfer or other disposition to or with the Interested Shareholder of assets (except proportionately as a stockholder of the corporation) having an aggregate market value equal to 5% or more of the aggregate market value of all assets of the corporation determined on a consolidated basis or the aggregate market value of all the outstanding stock of the corporation; (2) any transaction which results in the issuance or transfer by the corporation or by certain subsidiaries thereof of any shares of the corporation or such subsidiary which have an aggregate market value of 5% percent or more of the aggregate market value of all the outstanding shares of the corporation to the Interested Shareholder, except pursuant to a transaction which, in general, effects a pro rata distribution to all shareholders of the corporation; (3) any transaction involving the corporation or certain subsidiaries thereof which has the effect, directly or indirectly, of increasing the proportionate share of the shares of any class or series, or securities convertible into shares of the corporation or any subsidiary which is owned directly or indirectly by the Interested Shareholder (except as a result of immaterial changes due to fractional share adjustments or as a result of any purchase or redemption of any shares not caused by the Interested Shareholder); (4) the adoption of any plan or proposal for the liquidation or dissolution of the corporation proposed by, or pursuant to any agreement, arrangement or understanding with the Interested Shareholder or any affiliate or associate of the Interested Shareholder; or (5) any receipt by the Interested Shareholder of the benefit (except proportionately as a stockholder of such corporation) of any loans, advances, guarantees, pledges, or other financial benefits provided by or through the corporation or certain subsidiaries.

     The three-year moratorium may be avoided if: (1) the Affiliated Transaction has been approved by a majority of the disinterested directors; (2) the corporation has not had more than 300 shareholders of record at any time during the 3 years preceding the announcement date; (3) the Interested Shareholder has been the beneficial owner of at least 80 percent of the corporation’s outstanding voting shares for at least 5 years preceding the announcement date; (4) the Interested Shareholder

- 57 -


Table of Contents

is the beneficial owner of at least 90 percent of the outstanding voting shares of the corporation, exclusive of shares acquired directly from the corporation in a transaction not approved by a majority of the disinterested directors; (5) the corporation is an investment company registered under the Investment Company Act of 1940; (6) certain consideration is paid to the shareholders of the corporation; or (7) the transaction is approved by the affirmative vote of the holders of two thirds of the voting shares other than the shares beneficially owned by the Interested Shareholder.

     The Affiliated Transaction restrictions described above do not apply if, among other things: (1) the corporation’s original articles of incorporation contain a provision expressly electing not to be governed by the statute; (2) the holders of a majority of the voting stock of the corporation approve an amendment to its certificate of incorporation or bylaws expressly electing not to be governed by the statute (effective 18 months after the amendment’s adoption), which amendment shall not be applicable to any Affiliated Transaction with a person who was an Interested Shareholder at or prior to the time of the amendment; or (3) the corporation adopts and amendment to its articles of incorporation prior to January 1, 1989, expressly electing not to be governed by this section provide that such amendment does not apply to any Affiliated Transaction of the corporation with an Interested Shareholder whose determination date is on or prior to the effective date of such amendment.

     Other Constituency Statute. Under Florida law, in discharging their duties, the directors of a Florida corporation are entitled to consider such factors as they deem relevant, including, the social, economic, legal, or other effects of any action on its employees, suppliers, customers of the corporation, the communities and society in which the corporation operates, and the economy of the state and nation. The Delaware law does not contain a similar provision.

     Shareholder Action by Written Consent. The Delaware law permits shareholders to act without a meeting, without prior notice and without a vote, if consents in writing setting forth the action so taken are signed by the holders of outstanding stock having the minimum number of votes that would be necessary to authorize such action at a meeting at which all shares entitled to vote with respect to the subject matter thereof were present and voted.

     Unless the articles of incorporation of a Florida corporation provide otherwise, Florida law authorizes shareholders of the corporation to act without a meeting, without prior notice, and without a vote, if written consents describing the action taken are executed, dated, and delivered to the corporate secretary of the corporation by the holders of the corporation’s outstanding stock entitled to vote on the matter having not less than the minimum number of votes that would be necessary to approve such action at a meeting at which all shares entitled to vote on the matter were present and voted.

     Neither Cerner nor Dynamic shareholders may act by written consent.

     Amendment of Bylaws. Under the Delaware law, the shareholders have the power to adopt, amend or repeal bylaws, provided that the corporation may in its certificate of incorporation confer such authority on the directors as well. Under the Delaware law, the fact that such power has been conferred on the directors does not limit the power of the shareholders to adopt, amend or repeal bylaws.

     Under Florida law, a Florida corporation’s bylaws may be amended or repealed by the board of directors or shareholders; provided, however, that the board may not amend or repeal the corporation’s bylaws if the articles of incorporation reserve such power to the shareholders, or the shareholders, in amending or repealing the bylaws, expressly provide that the board of directors may not amend or repeal the bylaws or a particular bylaw provision.

     Inspection of Books and Records. The Delaware law allows any stockowner to inspect the stockowners’ list and books of the corporation for a purpose reasonably related to such person’s interest as a shareholder.

     Under Florida law, a shareholder of a corporation is entitled to inspect and copy:

    the corporation’s articles of incorporation, as amended, and bylaws, as amended;
 
    resolutions of the board of directors creating different classes or series of stock;
 
    the minutes of all shareholders’ meetings and actions taken by written consent of the shareholders for the past 3 years;
 
    written communications to all shareholders generally, including financial statements, for the past 3 years;

- 58 -


Table of Contents

    a list containing the names and business street addresses of the corporation’s current officers and directors; and
 
    the corporation’s most recent annual report delivered to the Florida Department of State.

     In addition, if a shareholder makes a demand in good faith and for a proper purpose, the shareholder is entitled to inspect and copy the following records so long as the records are directly connected with the shareholder’s purpose:

    all minutes of the board of directors, all minutes of the shareholders, all actions taken by written consent of the board of directors and the shareholders, records of any committee of the board of directors acting on behalf of the corporation;
 
    accounting records of the corporation;
 
    the record of shareholders;
 
    and any other books and records.

     Payment of Dividends. Under the Delaware law, a corporation generally may pay dividends out of the corporation’s surplus or, if the corporation has no available surplus, out of net profits for the fiscal year in which the dividend is declared or the preceding fiscal year.

     Subject to any restrictions in a corporation’s articles of incorporation, Florida law generally provides that a corporation may make distributions to its shareholders unless after giving effect thereto (1) the corporation would not be able to pay its debts as they become due in the usual course of business, or (2) the corporation’s total assets would be less than the sum of its total liabilities plus the amount that would be needed upon the dissolution of the corporation to satisfy the preferential rights of shareholders having superior preferential rights to those shareholders receiving the distribution.

Certain Differences Between Dynamic’s and Cerner’s Charter and Bylaws

     Removal of Directors. Under the Cerner certificate of incorporation and bylaws, any director or the entire board of directors of Cerner may be removed from office only for cause and only by the affirmative vote of the holders of at least 80 percent of the then outstanding shares entitled to vote.

     Dynamic’s bylaws provide that any director or the entire board of directors may be removed from office with or without cause by the affirmative vote of the holders of a majority of the shares entitled to vote.

     Amendments to Charter. Cerner’s certificate of incorporation requires the affirmative vote of the holders of at least 80 percent of the then outstanding shares entitled to vote, voting together as a single class, to amend or repeal the provisions of Cerner’s certificate of incorporation regarding: (1) the number of shares that Cerner is authorized to issue (unless such amendment is approved by a majority of the disinterested directors, as defined in the certificate of incorporation); (2) the number of directors and the classification of the Cerner board, and the filling of vacancies on the Cerner board, the removal of directors and the process for nominating a candidate for the Cerner board, and voting power and term of office for directors; (3) the amendment of Cerner’s bylaws; (4) the required vote to approve any business combination; (5) the amendment of Cerner’s certificate of incorporation; and (6) the prohibition of shareholder action by written consent or the calling of special meetings of shareholders.

     Dynamic’s articles of incorporation are silent with respect to amendment of its articles of incorporation, therefore Florida law governs. See above “Certain Differences Between Florida and Delaware Corporation Statutes – Shareholder Approval of Certain Corporation Transactions – Amendment of Charter.”

     Amendments to Bylaws. The Cerner certificate of incorporation provides that the Cerner board of directors is empowered to make, adopt, alter, amend or repeal the bylaws and the shareholders may make, adopt, alter, amend or repeal the bylaws upon the affirmative vote of the holders of at least 80 percent of the shares entitled to vote, voting together as a single class.

     Pursuant to the provisions of Dynamic’s bylaws, its bylaws may be repealed or amended by the affirmative vote of a majority of Dynamic’s full board of directors or by the affirmative vote of a majority of the holders of the corporation’s

- 59 -


Table of Contents

outstanding stock entitled to vote. However, Dynamic’s board of directors may not amend or repeal any bylaw provision adopted by the shareholders if the shareholders specifically provide that the bylaw provision may not be amended or repealed by Dynamic’s board of directors.

     Special Meetings of Shareholders. Special meetings of Cerner’s shareholders may be called only by the chairman of the Cerner board of directors, the president of Cerner or the board of directors pursuant to a resolution approved by a majority of the entire board of directors.

     Special meetings of Dynamic’s shareholders may be called by Dynamic’s president or Dynamic’s board of directors or when requested in writing by the holder or holders of not less than ten (10) percent of all of the shares entitled to vote at the meeting.

     Notice of Shareholder Proposals and Director Nominations. Cerner’s bylaws permit shareholders entitled to vote to nominate candidates for election to Cerner’s board of directors and introduce other business that is a proper matter for shareholder action in connection with any annual or special meeting of shareholders with respect to the nomination of a director and in connection with any annual meeting of shareholders with respect to any other proposed matter. In either case, the shareholder must provide timely notice to the secretary of Cerner, and the notice must contain specific information as further delineated in Cerner’s bylaws. To be timely, notice must be delivered to and received by Cerner not less than 120 days prior to the date of the meeting at which directors are to be elected or the proposed business is to be conducted or, with respect to an election to be held at a special meeting of shareholders, such notice must be delivered not later than the close of business on the seventh day following the day on which notice of such meeting is first given to shareholders.

     Dynamic’s corporate governance documents have no similar provisions.

     Personal Liability of Directors. The Cerner certificate of incorporation limits the personal liability of directors of Cerner for monetary damages resulting from a breach of fiduciary duty as a director to the fullest extent permitted under Delaware law.

     Dynamic’s articles of incorporation and bylaws do not contain any provisions regarding limitation of personal liability of directors for monetary damages for actions taken as a director. Florida law, however, does provide that a director of a Florida corporation is not liable for monetary damages for any statement, vote, decision, or failure to act, regarding corporate management or policy, unless the director breached or failed to perform his duties as a director and the director’s breach of, or failure to perform, those duties constitutes a violation of criminal law, self dealing, willful misconduct, or recklessness.

     Business Combination Restrictions. Cerner has opted out of the interested stockholder provisions of Delaware law which prohibit a corporation from engaging in any business combination with an interested stockholder (defined as a 15 percent stockholder) for a period of three years after the date that stockholder became an interested stockholder unless certain conditions are met. Under the Cerner certificate of incorporation, any business combination with an interested stockholder (as defined in the Cerner certificate of incorporation) or an affiliate thereof, must be approved by an affirmative vote of the holders of at least 80 percent of the total outstanding shares of voting stock, treated as one class, except that such business combination shall require only the affirmative vote as is required by law if the business combination has been approved by a majority of the disinterested directors of Cerner.

     Neither Dynamic’s articles of incorporation nor its bylaws contains any provisions governing transactions with interested stockholders. Florida law contains a number of provisions which require super majority shareholder approval for certain affiliate transactions. Under the Florida law, any merger, consolidation, disposition of all or a substantial part of the assets of a Florida corporation or a subsidiary of the corporation, or exchange of securities requiring shareholder approval (a “business combination”), to which any person who together with his affiliates and associates beneficially owns 5% or more of any voting stock of the corporation (an “interested stockholder”) is a party, shall be approved by the affirmative vote of the holders of two-thirds of the voting shares of the corporation other than the shares beneficially owned by the interested stockholder; provided, that such approval is not required if:

    such transaction has been approved by a majority of the disinterested directors;
 
    the corporation has not had more than 300 shareholders of record at any time during the three years preceding the announcement date;

- 60 -


Table of Contents

    the interested stockholder has been the beneficial owner of at least 80% of the corporation’s outstanding voting shares for at least five years preceding the announcement date;
 
    the interested stockholder is the beneficial owner of at least 90% of the outstanding voting shares of the corporation, exclusive of the shares acquired directly from the corporation in a transaction not approved by a majority of the disinterested directors;
 
    the corporation is an investment company registered under the Investment Company Act of 1940; or
 
    the consideration to be received by holders of the stock of the corporation meets certain minimum levels (generally, the highest price paid by the interested stockholder for any shares which she or he has acquired).

     Shareholder Rights Plan. Dynamic does not have a shareholder rights plan. Cerner does maintain a shareholder rights plan which is designed to (a) protect shareholders from attempts to acquire control of Cerner without the approval of Cerner’s board and (b) prevent abusive tactics from potential acquirors that do not treat all shareholders fairly. The rights issued under the plan are not currently exercisable or transferable, and no separate certificates evidencing such rights will be distributed, unless certain events occur. The Cerner rights agreement was not intended to prevent a takeover of Cerner. However, it may cause substantial dilution to certain persons or groups that beneficially acquire ten percent or more of Cerner common stock unless the rights issuable under the plan are first redeemed by the Cerner board of directors. Accordingly, the rights agreement may result in Cerner being less attractive to a potential acquiror and, in the event that the existence of the rights issuable under the plan did deter certain potential acquirors, the plan could result in holders of Cerner common stock receiving less in the event of a takeover.

EXPERTS

     The financial statements and the related financial statement schedule included in the Cerner Annual Report on Form 10-K for the fiscal year ended December 30, 2000, that are incorporated herein by reference, have been audited by KPMG LLP, independent certified public accountants, as stated in their reports included in the Form 10-K, and have been incorporated by reference herein in reliance upon such reports given and upon the authority of that firm as experts in accounting and auditing.

     The financial statements and schedule of Dynamic Healthcare Technologies, Inc. included herein and /or incorporated by reference in this Prospectus and Registration Statement have been audited by BDO Seidman, LLP, independent certified accountants, to the extent and for the periods set forth in their reports appearing elsewhere herein and incorporated by reference, and are included and incorporated by reference herein in reliance upon such reports given upon the authority of said firm as experts in auditing and accounting.

     The consolidated statement of operations, shareholders’ equity and cash flows for the year ended December 31, 1998 of Dynamic have been included herein and incorporated by reference herein and in the registration statement in reliance upon the report of KPMG LLP, independent certified public accountants, appearing elsewhere herein and incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing.

LEGAL MATTERS

     The validity of the Cerner common stock to be issued in connection with the merger will be passed upon for Cerner by Stinson, Mag & Fizzell, P.C. In addition, certain federal income tax matters relating to the merger will be passed upon for Cerner and Dynamic by Stinson, Mag & Fizzell, P.C.

FUTURE SHAREHOLDER PROPOSALS

     Dynamic will hold its 2002 annual meeting of shareholders only if the merger is not consummated. In the event that the annual meeting is held, Dynamic shareholders may submit proposals to be considered for shareholder action at Dynamic’s 2002 annual meeting of shareholders if they do so in accordance with applicable regulations of the SEC and applicable provisions of Dynamic’s by-laws. The Secretary of Dynamic must receive any proposals by January 16, 2002 in order to be considered for inclusion in Dynamic’s 2002 annual meeting proxy materials.

WHERE YOU CAN FIND MORE INFORMATION

     Cerner has filed with the SEC a registration statement on Form S-4 with respect to the Cerner common stock to be issued to holders of Dynamic common stock in connection with the merger. This document is part of the registration statement and constitutes a prospectus of Cerner in addition to being a proxy statement of Dynamic for its special meeting of shareholders. This document does not contain all of the information contained in the registration statement or the

- 61 -


Table of Contents

exhibits to the registration statement as allowed by the rules and regulations of the SEC. Copies of the registration statement including exhibits, may be inspected, without charge, at the offices of the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies may be obtained from the SEC at prescribed rates.

     In addition, Cerner and Dynamic file annual, quarterly and special reports, proxy statements and other information with the SEC in accordance with the informational requirements of the Securities and Exchange Act of 1934. You may read and copy any reports, statements or other information Cerner or Dynamic file at the following locations of the SEC:

     
Public Reference Room
450 Fifth Street N.W.
Room 1024
Washington, D.C. 20549
  Regional Office
500 West Madison Street
Suite 1400
Chicago, Illinois 60661

     Copies of these materials may also be obtained from the SEC at prescribed rates by writing to the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the public reference rooms. The SEC also maintains an Internet world wide web site that contains reports, proxy statements and other information regarding issuers like Cerner and Dynamic who file electronically with the SEC at http\\www.sec.gov.

     You can also inspect reports, proxy statements and other information of Cerner and Dynamic at the offices of the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.

     The SEC permits Cerner and Dynamic to incorporate by reference information that is not contained in this document. This means that Cerner and Dynamic can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is deemed to be part of this document, except for any information superseded by information in this document. This document incorporates by reference the documents listed below that Cerner and Dynamic have previously filed with the SEC. They contain important information about our companies and their financial condition.

     
Cerner SEC Filings   Period

 
Annual Report on Form 10-K   Year ended December 30, 2000, as filed on March 30, 2001

 

Quarterly Report on Form 10-Q   Quarter ended March 31, 2001, as filed on May 15, 2001

 

Quarterly Report on Form 10-Q   Quarter ended June 30, 2001, as filed on August 14, 2001

 

The description of Cerner common stock set forth in Cerner’s registration statements filed by Cerner pursuant to Section 12 of the Securities Exchange Act of 1934 including any amendment or report filed for purposes of updating any such description.

 

The portions of Cerner’s proxy statement for the annual meeting of stockholders held on May 25, 2001 that have been incorporated by reference in the 2000 Cerner Form 10-K.

 

Current Report on Form 8-K   Filed on September 12, 2001
     
Dynamic SEC Filings   Period

 
Annual Report on Form 10-K   Year ended December 31, 2000, as filed on April 2, 2001

 

Current Report on Form 8-K   Filed on May 2, 2001

 

Quarterly Report on Form 10-Q   Quarter ended March 31, 2001, as filed on May 16, 2001

 

Current Report on Form 8-K   Filed on June 15, 2001

 

Current Report on Form 8-K   Filed on June 28, 2001

 

Current Report on Form 8-K   Filed on August 2, 2001

 

Quarterly Report on Form 10-Q   Quarter ended June 30, 2001, as filed on August 14, 2001

- 62 -


Table of Contents

     
Dynamic SEC Filings   Period

 
Current Report on Form 8-K   Filed on September 12, 2001

     All documents and reports filed by Cerner with the SEC between the date of this proxy statement/prospectus and the date of the special meeting of Dynamic shareholders are incorporated by reference into this document. These documents include periodic reports, such as annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as proxy statements.

     Cerner has supplied all information contained or incorporated in this document relating to Cerner. Dynamic has supplied all such information relating to Dynamic.

     You can obtain any of the documents incorporated by reference in this document through Cerner or from the SEC through the SEC’s Internet world wide web site at the address described above. Documents incorporated by reference are available from the companies without charge, excluding any exhibits to those documents, unless the exhibit is specifically incorporated by reference as an exhibit in this proxy statement/prospectus. You can obtain documents incorporated by reference in this proxy statement/prospectus by requesting them in writing or by telephone from the appropriate company at the following addresses:

Cerner Corporation, Inc.
2800 Rockcreek Parkway
North Kansas City, Missouri 64117
Telephone Number: (816) 221-1024
Attention: Randy D. Sims

Dynamic Healthcare Technologies, Inc.
615 Crescent Executive Court
Fifth Floor
Lake Mary, Florida 32746
(407) 333-5300
Attention: Brian Greco

     If you would like to request documents from us, please do so by December 5, 2001 in order to receive them before the Dynamic shareholder meeting. Documents will be sent first class mail within one day upon receipt of a request.

     We have not authorized anyone to give any information or make any representation about the merger of our companies that is different from, or in addition to, that information contained in this proxy statement/prospectus or in any of the materials that Cerner and/or Dynamic have incorporated by reference into this proxy statement/prospectus. Therefore, if anyone does give you information of this sort, you should not rely on it. If you are in a jurisdiction where offers to exchange or sell, or solicitations of offers to exchange or purchase, the securities offered by this document or the solicitation of proxies is unlawful, or if you are a person to whom it is unlawful to direct these types of activities, then the offer presented in this document does not extend to you.

     This document is dated November 8, 2001. You should not assume that the information contained in this document is accurate as of any date other than such date, and neither the mailing of this document to shareholders of Dynamic nor the issuance of Cerner common stock in the merger shall create any implication to the contrary.

- 63 -


Table of Contents

INDEX TO FINANCIAL STATEMENTS OF
DYNAMIC HEALTHCARE TECHNOLOGIES, INC.

     
    Page 
   
Independent Auditors’ Report   F-2

 

Independent Auditors’ Report   F-3

 

Balance Sheets as of December 31, 1999 and 2000   F-4

 

Statements of Operations for the years ended December 31, 1998, 1999 and 2000   F-5

 

Statements of Shareholders’ Equity for the years ended December 31, 1998, 1999 and 2000   F-6

 

Statements of Cash Flows for the years ended December 31, 1998, 1999 and 2000   F-7

 

Notes to Financial Statements   F-8

 

Balance Sheets as of December 31, 2000 and June 30, 2001 (unaudited)   F-22

 

Statements of Operations (unaudited) for the three and six months ended June 30, 2000 and 2001   F-23

 

Statements of Cash Flows (unaudited) for the six months ended June 30, 2000 and 2001   F-24

 

Notes to Financial Statements (unaudited)   F-25

F-1


Table of Contents

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors
Dynamic Healthcare Technologies, Inc.

We have audited the accompanying balance sheets of Dynamic Healthcare Technologies, Inc. as of December 31, 2000 and 1999 and the related statements of operations, shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 financial statements referred to above present fairly, in all material respects, the financial position of Dynamic Healthcare Technologies, Inc. at December 31, 2000 and 1999, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

   
/S/ BDO SEIDMAN, LLP
BDO SEIDMAN, LLP

New York, New York
March 8, 2001, except for
Note F as to which the date is March 15, 2001,
Note M (i) as to which the date is March 30, 2001 and
Note M (ii) as to which the date is June 28, 2001.

F-2


Table of Contents

INDEPENDENT AUDITORS’ REPORT

Board of Directors
Dynamic Healthcare Technologies, Inc.:

We have audited the accompanying consolidated statements of operations, shareholders’ equity and cash flows of Dynamic Healthcare Technologies, Inc. for the year ended December 31, 1998. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Dynamic Healthcare Technologies, Inc. for the year ended December 31, 1998, in conformity with accounting principles generally accepted in the United States of America.

   
/S/KPMG LLP
KPMG LLP

Orlando, Florida
February 19, 1999

F-3


Table of Contents

DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
BALANCE SHEETS
DECEMBER 31, 1999 AND 2000

*See Note M for Reverse Stock Split Subsequent Event

                       
          1999     2000  
         
   
 
ASSETS
               
Current assets:
               
   
Cash and cash equivalents
  $ 1,818,209     $ 3,197,743  
   
Accounts receivable, net
    8,590,441       5,309,700  
   
Unbilled receivables
    2,989,547       3,633,931  
   
Contracts receivable – current
    155,344       329,255  
   
Other current assets
    717,578       848,652  
   
 
 
   
 
     
Total current assets
    14,271,119       13,319,281  

 

Property and equipment, net
    4,107,481       3,507,870  
Capitalized software development costs, net
    9,266,284       4,093,560  
Goodwill, net
    1,255,483       847,934  
Contracts receivable – non-current
    741,444       713,052  
Other assets
    18,114       22,872  
   
 
 
   
 
 
  $ 29,659,925     $ 22,504,569  
   
 
 
   
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current liabilities:
               
   
Accounts payable and accrued expenses
  $ 3,041,799     $ 3,061,461  
   
Deferred revenue
    6,577,199       5,929,122  
   
Advance billings
    1,387,119       1,197,266  
   
Line of credit
    700,000       2,875,000  
   
Deferred lease incentives – current
    190,231       190,230  
   
Other current liabilities
    297,143       380,335  
   
 
 
   
 
     
Total current liabilities
    12,193,491       13,633,414  
Deferred lease incentives – non-current
    792,632       602,403  
Other non-current liabilities
    752,538       639,740  
   
 
 
   
 
     
Total liabilities
    13,738,661       14,875,557  
   
 
 
   
 
Shareholders’ equity:
               
   
Series C redeemable convertible preferred stock ($.01 par value; issued and outstanding 1,000,000 shares with an aggregate liquidation preference of $2,000,000, as of December 31, 2000 and a $.16 per share annual dividend)
    1,811,327       1,811,327  
   
Common stock ($.01 par value; authorized 40,000,000 shares; issued and outstanding 6,271,629 and 6,449,389 shares in 1999 and 2000, respectively)
    62,716       64,494  
 
Warrants
    3,000       3,000  
 
Additional paid-in capital
    45,260,542       45,830,110  
 
Deficit
    (31,216,321 )     (39,837,199 )
   
 
 
   
 
     
Subtotal
    15,921,264       7,871,732  
 
Less: note receivable from officer
          (242,720 )
   
 
 
   
 
     
Total shareholders’ equity
    15,921,264       7,629,012  
   
 
 
   
 
 
  $ 29,659,925     $ 22,504,569  
   
 
 
   
 

See notes to financial statements.

F-4


Table of Contents

DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000

*See Note M for Reverse Stock Split Subsequent Event

                             
        1998     1999     2000  
       
   
   
 
Operating revenues:
                       
 
Computer system equipment sales and support
  $ 2,637,601     $ 4,296,500     $ 1,022,331  
 
Application software licenses
    5,396,122       9,745,107       7,121,050  
 
Software support
    11,722,897       11,715,631       11,766,650  
 
Services and other
    6,072,679       9,386,162       5,748,620  
 
 
 
   
   
 
   
Total operating revenues
    25,829,299       35,143,400       25,658,651  
 
 
 
   
   
 
Costs and expenses:
                       
 
Cost of products sold
    3,242,556       6,237,188       2,312,494  
 
Software amortization
    1,756,798       2,077,643       1,879,760  
 
Client services expense
    10,958,132       9,880,115       9,856,409  
 
Software development costs
    4,889,673       4,709,784       5,175,867  
 
Sales and marketing
    9,430,307       6,589,688       4,508,283  
 
General and administrative
    4,605,237       4,068,990       4,630,737  
 
Restructuring costs
          523,569       5,725,007  
 
 
 
   
   
 
   
Total costs and expenses
    34,882,703       34,086,977       34,088,557  
 
 
 
   
   
 
   
Operating income (loss)
    (9,053,404 )     1,056,423       (8,429,906 )
 
 
 
   
   
 
Other income (expense):
                       
 
Interest expense and financing costs
    (94,049 )     (277,075 )     (273,837 )
 
Gain (loss) on disposal of property and equipment
    (139,063 )     (25,940 )     (92,057 )
 
Interest income
    273,826       100,960       174,922  
 
 
 
   
   
 
   
Total other income (expense)
    40,714       (202,055 )     (190,972 )
 
 
 
   
   
 
Earnings (loss) before income taxes
    (9,012,690 )     854,368       (8,620,878 )
Income taxes
                 
 
 
 
   
   
 
Net earnings (loss)
  $ (9,012,690 )   $ 854,368     $ (8,620,878 )
 
 
 
   
   
 
Net earnings (loss) available for common shareholders
  $ (9,080,245 )   $ 694,368     $ (8,780,878 )
 
 
 
   
   
 
Earnings (loss) per common share Basic and diluted
  $ (1.50 )   $ 0.11     $ (1.38 )
 
 
 
   
   
 

See notes to financial statements.

F-5


Table of Contents

DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
STATEMENTS OF SHAREHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000

*See Note M for Reverse Stock Split Subsequent Event

                                                     
                                Additional                  
        Series C             Common     Paid-In     Note          
        Preferred     Warrants     Stock     Capital     Receivable     Deficit  
       
   
   
   
   
   
 
Balance, December 31, 1997
  $     $     $ 60,027     $ 44,420,762     $     $ (23,057,999 )
 
Issuance of Series C Preferred Stock and
                                                      
   
Warrants in Private Placement
                                           
   
Transaction
    1,811,327       3,000                          
 
Exercise of Stock Options
                90       54,348              
 
Employee Stock Purchase Plan
                170       80,863              
 
Employee 401(k) Plan Match
                617       332,807              
 
Preferred Stock Dividends
                      (67,555 )            
 
Net loss
                                  (9,012,690 )
 
 
   
   
   
   
   
 
Balance, December 31, 1998
    1,811,327       3,000       60,904       44,821,225             (32,070,689 )

 

 
Exercise of Stock Options
                692       212,683              
 
Employee Stock Purchase Plan
                427       83,104              
 
Employee 401(k) Plan Match
                693       303,530              
 
Preferred Stock Dividends
                      (160,000 )            
 
Net income
                                  854,368  
 
 
   
   
   
   
   
 
Balance, December 31, 1999
    1,811,327       3,000       62,716       45,260,542             (31,216,321 )

 

 
Exercise of Stock Options and Warrants
                223       67,940              
 
Employee Stock Purchase Plan
                238       86,373              
 
Employee 401(k) Plan Match
                823       333,029              
 
Preferred Stock Dividends
                      (160,000 )            
 
Exercise of Stock Option by an Officer
                494       242,226       (242,720 )      
 
Net loss
                                  (8,620,878 )
 
 
   
   
   
   
   
 
Balance, December 31, 2000
  $ 1,811,327     $ 3,000     $ 64,494     $ 45,830,110     $ (242,720 )   $ (39,837,199 )
 
 
   
   
   
   
   
 

See notes to financial statements.

F-6


Table of Contents

DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000

                             
        1998     1999     2000  
       
   
   
 
CASH FLOWS FROM OPERATING ACTIVITIES:
                       
Net earnings (loss)
  $ (9,012,690 )   $ 854,368     $ (8,620,878 )
Adjustments to reconcile net earnings (loss) to net cash Provided (used) by operating activities:
                       
 
Depreciation and amortization
    3,323,374       3,571,501       3,365,201  
 
Write off of software development costs
                4,998,234  
 
Loss on disposed property and equipment
    139,063       25,940       92,057  
 
Employer 401(k) contributions not requiring cash
    333,424       304,224       333,852  
 
Provision for doubtful accounts receivable
    206,805       242,993       378,131  
Changes in assets and liabilities:
                       
 
Accounts receivable
    (987,998 )     (1,985,936 )     2,902,610  
 
Unbilled receivables
    322,624       (411,469 )     (644,384 )
 
Contracts receivable
    1,325,952       869,611       (145,519 )
 
Other assets and liabilities
    (194,955 )     805,018       (137,836 )
 
Accounts payable and accrued expenses
    1,208,181       (1,189,741 )     19,662  
 
Deferred revenue
    273,316       (152,237 )     (648,077 )
 
Advance billings
    568,475       (441,232 )     (189,853 )
 
 
   
   
 
   
Net cash provided (used) by operating activities
    (2,494,429 )     2,493,040       1,703,200  
 
 
   
   
 
CASH FLOWS FROM INVESTING ACTIVITIES:
                       
 
Capitalized software development costs
    (3,174,028 )     (2,096,349 )     (1,704,572 )
 
Purchases of property and equipment
    (1,142,941 )     (280,828 )     (529,332 )
 
Proceeds from disposal of property and equipment
    42,765       40,309       1,000  
 
 
   
   
 
   
Net cash used by investing activities
    (4,274,204 )     (2,336,868 )     (2,232,904 )
 
 
   
   
 
CASH FLOWS FROM FINANCING ACTIVITIES:
                       
 
Borrowings (repayments) under line of credit, net
    856,000       (156,000 )     2,175,000  
 
Borrowings (repayments) under notes payable
                (78,095 )
 
Proceeds from issuance of common stock
    135,471       296,905       154,773  
 
Proceeds from issuance of Series C Preferred Stock and Warrants
    1,814,327              
 
Payment of preferred stock dividends
    (67,555 )     (160,000 )     (160,000 )
 
Borrowings (repayments) capital lease obligations and other debt
    (472,869 )     (281,294 )     (182,440 )
 
 
   
   
 
   
Net cash provided (used) by financing activities
    2,265,374       (300,389 )     1,909,238  
 
 
   
   
 
Net increase (decrease) in cash and cash equivalents
    (4,503,259 )     (144,217 )     1,379,534  
Cash and cash equivalents, beginning of year
    6,465,685       1,962,426       1,818,209  
 
 
   
   
 
Cash and cash equivalents, end of year
  $ 1,962,426     $ 1,818,209       3,197,743  
 
 
   
   
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
                       
 
Interest paid
  $ 94,049     $ 271,951     $ 173,051  
 
 
   
   
 
SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITY:
                       
 
Computer and communications equipment acquired under capital lease obligations
  $ 492,495     $     $ 243,687  
 
 
   
   
 
 
Common stock issued in exchange for note receivable from an officer
  $     $     $ 242,720  
 
 
   
   
 
 
Leasehold incentives received
  $ 1 ,236,503     $     $  
 
 
   
   
 

See notes to financial statements.

F-7


Table of Contents

DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1999, AND 2000

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business — Dynamic Healthcare Technologies, Inc. (“Dynamic” or the “Company”) is a provider of mission-critical healthcare information systems for clinical services departments and facilities. The Company’s product line, includes a suite of image-, voice-, and web-enabled systems for anatomic pathology, radiology, and laboratory information management systems. Dynamic is headquartered in the greater Orlando area and has a key operations and development center near Boston. The Company provides support for all of its systems and offers integration and other consulting services.

Accounts Receivable — Accounts receivable is stated at net book value less an allowance for doubtful accounts of $360,000, $460,000, and $449,000 for the years ended December 31, 1998, 1999, and 2000, respectively. Bad debt expense for each of the years ended December 31, 1998, 1999, and 2000 was $206,805, $242,993, and $378,131 respectively.

Unbilled Receivables / Advance Billings — The timing of revenue recognition and contractual billing terms under certain multiple element arrangements may not precisely coincide resulting in the recording of unbilled receivables or advance billings. Customer payments are due under these arrangements in varying amounts upon the achievement of certain contractual milestones throughout the implementation period. Implementation periods generally range from three to twelve months.

Property and Equipment — Property and equipment is stated at cost less accumulated depreciation and amortization. The cost of property and equipment is depreciated and amortized over the estimated useful lives of the related assets, ranging from five to ten years, using the straight-line method.

Software Development Costs — Costs incurred to establish the technological feasibility of computer software products are research and development costs and are charged to expense as incurred. Costs of producing product masters subsequent to establishing technological feasibility, including coding and testing, are capitalized. Capitalization of computer software costs ceases when the product is available for general release to customers. Amortization of capitalized software development costs for the years ended December 31, 1998, 1999 and 2000 were $1,756,798, $2,077,643, and $1,879,760 respectively. During 2000, the Company wrote off $4,998,234 of capitalized software costs as a result of a restructuring (See Note I). Accumulated amortization of capitalized software development costs was $6,586,069, $8,663,712, and $10,543,472 at December 31, 1998, 1999, and 2000, respectively. Capitalized software development costs are amortized using either the straight-line method over the estimated economic life of the products (initially five years) or the ratio of current revenues to current and anticipated revenues for the product, whichever results in the greater amount of amortization. Unamortized capitalized costs of a computer software product in excess of its estimated net realizable value are expensed.

Goodwill — Goodwill is stated at cost less accumulated amortization. Goodwill is amortized using the straight-line method over a period of seven years. Amortization of goodwill for each of the years ended December 31, 1998, 1999, and 2000 was $407,549. Accumulated goodwill amortization as of December 31, 1998, 1999, and 2000 was $1,189,805, $1,597,354, and $2,004,903 respectively. The Company assesses the recoverability of goodwill based upon projected operations over a period which represents the approximate remaining life of goodwill. The Company evaluates the recoverability of goodwill based on this forecast of future cash from operations and income, and using an undiscounted rate that reflects the Company’s average cost of funds. No impairment has been recorded for the years ended December 31, 1998, 1999 and 2000.

Revenues — Revenues are derived from the sale of computer hardware, licensing and sub-licensing of software, professional and technical consulting services, and maintenance and support services. Each customer contract is negotiated separately. Application software licenses, other than software customizations, and computer system equipment revenues are recorded when they are delivered. Installation and training revenues, which are included with services and other revenues in the statements of operations, and customized software revenues are recognized

F-8


Table of Contents

when the services are performed. Software support revenues principally include contracts for continuing support services which cover a specific period, and from which revenue is recognized ratably over the period of the contract. Other service revenues include custom service revenues and post contract support obligations, which are typically rendered under separate contract and are recognized as the services are performed.

Deferred Revenue — Principally results from payments received in advance for software support contracts.

Employee Benefit Plan — The Company has a 401(k) defined contribution savings plan covering all full-time employees. Eligible employees may elect to defer up to 20% of their compensation, but limited to the maximum allowed by the Internal Revenue Code. Company contributions are made at the discretion of the Board of Directors and amounted to $349,454, $304,998, and $335,898 in 1998, 1999 and 2000, respectively. The employer match contribution for 1998, 1999, and 2000 were made through the issuance of 69,608, 64,904, and 89,705 shares of the Company’s common stock, respectively.

Stock-Based Employee Compensation Plans — The Company accounts for its stock option plans in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation”, permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock compensation as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosures of SFAS No. 123 for options issued to employees.

Income Taxes — Deferred income taxes are provided for temporary differences in the recognition of income and expense for financial reporting and income tax purposes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets, liabilities and tax carry forwards that will result in taxable or deductible amounts in future periods based upon enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Deferred tax liabilities are recognized when incurred; deferred tax assets, when necessary, are reduced by a valuation allowance when it is more likely than not that the asset will not be realized.

Earnings Per Share — Basic earnings per share is computed on the basis of the weighted average number of shares outstanding. Diluted earnings per share is computed on the basis of the weighted average number of shares outstanding plus potential common stock which would arise from the exercise of stock options and warrants and conversion of the Series C Preferred Stock, if dilutive.

The following is a reconciliation of basic and diluted net earnings (loss) per share for the years ended December 31, 1998, 1999 and 2000 (see Note M for Reverse Stock Split Subsequent Event):

                         
    1998     1999     2000  
   
   
   
 
Net earnings (loss)
  $ (9,012,690 )   $ 854,368     $ (8,620,878 )
Preferred stock dividends
    (67,555 )     (160,000 )     (160,000 )
 
 
   
   
 
Earnings (loss) available for common shareholders
  $ (9,080,245 )   $ 694,368     $ (8,780,878 )
 
 
   
   
 

 

Weighted average shares outstanding — basic
    6,042,547       6,192,858       6,353,676  
Dilutive effect of options and warrants
          98,376        
 
 
   
   
 
Weighted average shares outstanding — diluted
    6,042,547       6,291,234       6,353,676  
 
 
   
   
 
Earnings (loss) per share — basic and diluted
  $ (1.50 )   $ 0.11     $ (1.38 )
 
 
   
   
 

F-9


Table of Contents

Loss per common share is based upon the weighted average number of common shares outstanding during each period. Potential common shares for 1998 and 2000 have not been included since their effect would be anti-dilutive. Potential common shares not included in diluted earnings (loss) per share for the years ended December 31, 1998, 1999, and 2000 are summarized as follows (see Note M for Reverse Stock Split Subsequent Event):

                         
    1998     1999     2000  
   
   
   
 
Incentive Stock Options
    346,109       170,667       440,792  
Director and Management Options
    101,778       72,167       91,667  
Warrants
    211,363       148,833       178,333  
Employment Options
    232,167       108,333       182,167  
Reserved for Series C Conversion
    333,333       333,333       333,333  
 
 
   
   
 
 
    1,224,750       833,333       1,226,292  
 
 
   
   
 

Cash Equivalents — For purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Use of Estimates — The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates relate to the allowance for doubtful accounts, the recoverability of software development costs and goodwill. Actual results could differ from those estimates.

Concentration of Credit Risk — The Company generates revenue primarily through sales to entities operating within the healthcare industry located throughout the United States. Due to this concentration, substantially all receivables at December 31, 1999 and 2000, are from healthcare institutions which may be similarly affected by changes in economic, regulatory or other conditions. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses and such losses have been within management’s expectations.

The Company invests its excess cash in deposits with major financial institutions, in U.S. government agency securities and in commercial paper of companies with strong credit ratings. Generally, the investments mature within 90 days and, therefore, are subject to little risk. The Company has not experienced losses related to these investments.

Fair Value of Financial Instruments — The following methods and assumptions were used to estimate the fair value of the Company’s financial instruments: The fair value of cash and cash equivalents, trade receivables and trade accounts payable approximate their carrying amounts because of the short maturity of those instruments. The fair value of contract receivables approximates its carrying value, and is estimated by discounting the guaranteed minimum payments and unguaranteed contract residuals at the imputed incremental borrowing rates of the related customers (see also Note C herein). The fair value of the bank note payable and line of credit are estimated based on the current rates available to the Company for debt of the same remaining maturities and approximates its carrying amount.

Segment Information — The Company has determined that it operates in a single reporting segment.

Reclassifications — Certain prior year balances have been reclassified to conform to the 2000 presentation.

Recent Accounting Pronouncements — In June 1998, the FASB issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”). FAS 133 requires companies to recognize all derivative contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may specifically be designated as a hedge, the objective of which is to match the timing of gain or loss recognition of: (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk; or (ii) the earnings effect of the hedged transaction. For a derivative not designated as a hedging

F-10


Table of Contents

instrument, the gain or loss is recognized as income in the period of change. FAS 133, as amended by FAS 137 and 138, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Historically, the Company has not entered into any derivative contracts either to hedge existing risks or for speculative purposes. Accordingly, the Company does not expect the new standard to affect its financial statements.

In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44 (“FIN 44”), Accounting for Certain Transactions Involving Stock Compensation, and Interpretation of APB Opinion No. 25. FIN 44 clarifies the application of Opinion No. 25 for (a) the definition of employee for purposes of applying Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequences of various modifications to the previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 was effective July 2, 2000, but certain conclusions cover specific events that occur after either December 15, 1998 or January 12, 2000. The adoption of FIN 44 has not had a material effect on the Company’s financial position or results of operations.

In December 1999, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 101 (“SAB No. 101”), “Revenue Recognition in Financial Statements”. SAB No. 101 summarizes certain of the SEC’s views in applying generally accepted accounting principles to revenue recognition in financial statements. In October 2000, the SEC issued additional written guidelines to further supplement SAB No. 101. The adoption of this bulletin in the fourth quarter 2000 did not significantly impact the Company’s financial statements.

B. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

                 
                December 31,           
   
 
    1999     2000  
   
   
 
                 
Furniture and fixtures
  $ 1,224,039     $ 1,133,734  
Equipment
    6,954,570       7,552,913  
Leasehold improvements
    1,558,386       1,558,386  
 
 
   
 
 
    9,736,995       10,245,033  
Less accumulated depreciation and amortization
    5,629,514       6,737,163  
 
 
   
 
 
  $ 4,107,481     $ 3,507,870  
 
 
   
 

C. CONTRACTS RECEIVABLE:

Contracts receivable amounts represent receivables from customers in monthly installments of principal and interest with initial terms ranging from one to five years. The future minimum principal payments to be received under contract receivables as of December 31, 2000 are summarized as follows:

           
Year Ended December 31,        

       
           
 
2001
    329,255  
 
2002
    282,513  
 
2003
    180,623  
 
2004
    142,799  
 
2005
    107,117  
 
 
 
 
 
Total
  $ 1,042,307  
 
 
 
 

F-11


Table of Contents

D. LEASE OBLIGATIONS

Capital Leases

The Company leases furniture and fixtures under a capital lease obligation. The capital lease obligation requires 36 non-cancelable monthly installments of $15,837 which began in October 1998, bears an interest rate of 9.8% and provides for a $100 purchase option to the Company at lease expiration in October 2001.

During the third quarter 2000, the Company entered into a lease agreement for the purchase of $243,687 of computer and communications equipment. The capital lease requires 36 monthly installments of $7,753 which began September 2000 and provides for a $1.00 purchase option to the Company at lease expiration in September 2003. Future minimum lease payments under capital lease obligations as of December 31, 2000 are summarized as follows:

                 
Year Ended December 31,                

               
                 
2001
          $ 235,575  
2002
            93,042  
2003
            54,275  
           
 
Total future minimum lease payments
            382,892  
Less: Amount representing interest
            (35,435 )
           
 
Present value of minimum lease payments
            347,457  
Less: Current portion
            (211,934 )
           
 
Long term capital lease obligation
          $ 135,523  
           
 

Included in property and equipment are the following:

                 
    1999     2000  
   
   
 
                 
Property under capital leases
  $ 523,049     $ 766,736  
Less: Accumulated amortization
    (102,388 )     (268,190 )
 
 
   
 
 
  $ 420,661     $ 498,546  
 
 
   
 

The capital lease obligation balances are included with other current and non-current liabilities on the balance sheet.

Operating Leases

The Company leases office space under non-cancelable operating leases. The leases call for monthly payments over terms of 60 to 78 months and include renewal options. Total rent expense on all operating leases was $1,609,000, $1,445,000, and $1,812,000 for the years ended December 31, 1998, 1999 and 2000, respectively.

The future minimum rental payments under operating leases as of December 31, 2000 are as follows:

         
  Year Ended December 31,      
 
     
         
 
2001
    2,022,726
 
2002
    2,040,914
 
2003
    2,059,640
 
2004
    1,994,816
 
2005
       183,684
 
 
 
 
Total
  $ 8,301,780
 
 
 

F-12


Table of Contents

Deferred Lease Incentives

In connection with the lease of the Lake Mary office space the Company was provided $1,236,494 of lease incentives, which are being amortized on a straight line basis over the 78 month lease term beginning September 1, 1998, as a reduction in office rent expense. During 1998, 1999, and 2000, the Company recognized $63,401, $190,230, and $190,230 of deferred lease incentive against office rent expense.

E. NOTE PAYABLE

Included in other current and non-current liabilities is a note payable (the “Note”). The Note is payable in fixed monthly installments of $7,228, bears fixed interest at a rate of 8.74%, and matures on February 1, 2003. On December 31, 2000 current and long-term portions of the Note were $74,772 and $95,876, respectively.

The Note was issued subject to the terms of the sale of the Company’s right to receive minimum payments under a radiology system contract (the “Contract”). The Note plus any accrued interest becomes immediately due should any of the following occur: 1) The Company fails to make a scheduled installment payment. 2) Any default in the agreement governing the sale of the minimum payments occurs. 3) The customer defaults on the terms of the Contract. The Note is secured by all the hardware and software included in the Contract plus any payments due to the Company under the Contract other than the minimum payments sold.

As of December 31, 2000, future maturities pursuant to the Note are as follows:

       
Year Ended December 31,

       
2001
  $ 74,772
2002
    81,575
2003
    14,301
 
 
Total
  $ 170,648
 
 

F. LINE OF CREDIT

On March 15, 2001 the Company amended its existing Line of Credit with Silicon Valley Bank (the “Bank”) which expires in March, 2002. The amended Line of Credit is intended to provide for up to $3,000,000 of borrowings based on a maximum advance ratio equal to 75% of qualified receivables. However, the maximum credit limit is currently $1,500,000 until such time the company is in compliance with the operating budget provided to the Bank, at which time the maximum credit limit will increase in increments of $500,000 (up to a maximum of $3,000,000) but will not exceed the Company’s tangible net worth. Interest is to accrue at the Bank’s prime rate plus two and one half percent, which as of March 15, 2001 was eleven percent (11%), and is due monthly in arrears. The required tangible net worth covenant was reduced to $1,500,000. The Company’s tangible net worth as of December 31, 2000 was $2,687,518. The agreement contains a lock-box requirement and a subjective acceleration clause, and, therefore, the entire balance is classified as a current liability.

G. SERIES C REDEEMABLE CONVERTIBLE PREFERRED STOCK

On July 29, 1998 the Company issued 1,000,000 shares of Series C Redeemable Convertible Preferred Stock (“Series C Preferred Stock”) together with detachable Warrants to purchase an aggregate of 100,000 Common Shares of the Company in a private placement transaction, which resulted in net proceeds to the Company of $1,814,000. The Series C Preferred Stock is convertible on a share for share basis to Common Stock, is non-voting, carries a $.16 per share cumulative annual dividend payable calendar quarterly in arrears, has a liquidation preference of $2.00 per share, may be automatically converted upon the Company’s Common Stock sustaining sufficient trading at or above $12.00, and is redeemable by the Company on or after July 29, 2000 at a price of $2.00 per share. The Warrants are exercisable at $6.75 per Common Share at any time on or before July 29, 2003. On September 29, 1998 common stock underlying the Series C Preferred Stock and Warrants (“Securities”) was registered under the Securities Act of 1933, as amended. During the years ended December 31, 1998, 1999 and

F-13


Table of Contents

2000 all of the then accrued Series C Preferred Stock dividends aggregating $67,555, $160,000, and $160,000 respectively, were declared and paid.

H. CAPITAL STOCK, WARRANTS AND OPTIONS

The Articles of Incorporation authorize the issuance of 40,000,000 shares of $.01 par value common stock and 10,000,000 shares of $.01 par value preferred stock, in such series and variations in the relative rights and preferences, including voting rights, if any, between series as the Board of Directors shall determine.

During 1993, the shareholders approved and the Company adopted a stock warrant and option plan for directors and management employees (the “D&M Plan”), whereby 83,334 shares of common stock were reserved for issuance. During 1997, the shareholders approved increasing shares reserved for issuance pursuant to the D&M Plan to 216,667. Under the D&M Plan directors’ and management employee warrants are five year warrants which vest under varying terms and are issued at an exercise price equal to the market price of the Company’s common stock on the date of grant. During 1995, the shareholders approved an amendment to the D&M Plan to conform the terms of vesting to 40% upon grant plus 20% per year for each of three years thereafter, and to provide for early vesting upon death or employment termination without cause for all future options granted under the D&M Plan. Outside directors receive a five-year warrant for 8,500 shares of the Company’s common stock issued the date of their first election to the Board of Directors. Additionally, annual warrants are issued to certain outside directors at the beginning of that director’s fourth consecutive term in office. Other grants under the D&M Plan are made under the direction of the Company’s Compensation Committee. Each annual warrant is for 1,667 shares of the Company’s Common Stock, has a five year term, has an exercise price equal to the average of the closing bid and ask prices of the Company’s Common Stock on the date of issuance, and is fully vested upon issuance. At December 31, 2000 the Company had stock warrants and options outstanding to purchase shares of its common stock under the D&M Plan as follows (see Note M for Reverse Stock Split Subsequent Event):

                                         
    Number     Presently     Price     Year     Expiration  
    of Shares     Exercisable     Per Share     Granted         Date  
   
   
   
   
   
 
                                         
Directors’ Warrants:
    1,667       1,667     $ 5.91       1996     Mar. 2001
 
    25,500       25,500     $ 18.18       1996     May 2001
 
    3,333       3,333     $ 17.64       1997     June 2002
 
    2,667       2,134     $ 4.32       1998     June 2003
 
    6,667       4,000     $ 6.39       1999     June 2004
 
    8,333       3,333     $ 3.51       2000     June 2005
 
    8,500       3,400     $ 2.73       2000     Nov. 2005
Management Employee’s Options:
    2,500       2,500     $ 14.25       1996     Dec. 2001
 
    32,500       26,000     $ 9.84       1998     Jan. 2003
 
 
   
             
 
    91,667       71,867                          
 
 
   
             

F-14


Table of Contents

D&M Plan options activity is summarized as follows (see Note M for Reverse Stock Split Subsequent Event):

           
      Shares  
     
 
Options outstanding at December 31, 1997
    98,000  
 
Exercised
    (8,500 )
 
Granted
    44,333  
 
Canceled
    (32,055 )
 
 
 
Options outstanding at December 31, 1998
    101,778  
 
Exercised
    (5,667 )
 
Granted
    6,667
 
Canceled
    (26,278 )
 
 
 
Options outstanding at December 31, 1999
    76,500  
 
Exercised
    (1,667 )
 
Granted
    16,834  
 
Canceled
     
 
 
 
Options outstanding at December 31, 2000
    91,667  
 
 
 

The Company adopted an incentive stock option plan in 1983 for key employees whereby 133,333 shares of common stock were reserved for issuance under the Plan. Options granted vest 40%, 30% and 30% on the first, second and third anniversaries of their issuance, respectively and expire ten years after the date of grant. At December 31, 2000, the Company had granted options of 118,347 shares, of which options for 39,913 shares had been exercised, and 78,433 expired unexercised. The 1983 Plan terminated in 2000.

During 1993, the shareholders approved and the Company adopted a new ten year incentive stock option plan for employees whereby 33,333 shares of common stock were reserved for issuance under the Plan. The terms of this 1993 ISO Plan are similar to the 1983 Plan. During 1995 and 1997, the shareholders approved increasing shares reserved for issuance pursuant to the 1993 ISO Plan to 200,000 then 500,000, respectively. During 2000, the shareholders approved amending the terms of the 1993 ISO Plan, merging it into and creating a new 2000 Incentive Stock Option Plan, increasing the shares issuable pursuant to the new Plan to 833,333 shares. At December 31, 2000, the Company had granted options for 992,802 shares, of which 48,683 options had been exercised, 503,327 options were terminated and options to purchase 161,754 shares were exercisable. Under both the 1993 and 2000 Plans, the exercise price for stock options may not be less than the market price of the Company’s common stock at date of grant. As of December 31, 2000 options under the 2000 plan are summarized as follows (see Note M for Reverse Stock Split Subsequent Event):

                             
                Weighted Average     Weighted Average  
Range of Exercise Price   Outstanding     Exercise Price     Remaining Contractual Life  

 
   
   
 
   
$2.70-$3.60
    103,952     $ 3.06     5.9 Years
   
$4.08-$6.00
    268,257       5.25     3.9 Years
   
$6.18-$9.18
    7,667       7.17     1.8 Years
   
$9.84-$13.14
    16,833       11.88     6.7 Years
   
$14.25-$15.75
    44,084       15.12     5.9 Years
 
 
   
   
 
 
    440,793     $ 6.00     4.6 Years
 
 
   
   
 
                             
                Weighted Average     Weighted Average  
Range of Exercise Price   Exercisable     Exercise Price     Remaining Contractual Life  

 
   
   
 
   
$2.70-$3.60
    20,931     $ 3.00     7.0 Years
   
$4.08-$6.00
    79,923       5.43     7.2 Years
   
$6.18-$9.18
    1,883       8.01     5.4 Years
   
$9.84-$13.14
    14,933       12.15     6.7 Years
   
$14.25-$15.75
    44,084       15.12     5.9 Years
 
 
   
   
 
 
    161,754     $ 8.40     6.8 Years
 
 
   
   
 

F-15


Table of Contents

As of January 1, 2000 and December 31, 2000, the weighted average exercise prices of options outstanding under the ISO Plans were $7.17 and $6.00, respectively. Additionally, during 2000 the weighted average exercise prices of options exercised, granted and canceled under the ISO Plans were $3.33, $4.59 and $6.81, respectively (see Note M for Reverse Stock Split Subsequent Event).

Incentive stock option activity under the 1983, 1993, and 2000 Plans and price information follows:

                   
              Stock Option  
      Shares     Price Range  
     
   
 
Options outstanding at December 31, 1997
    287,082     $ 3.00-$16.14  
 
Exercised
    (550 )   $ 3.00-$5.91  
 
Granted
    252,583     $ 2.91-$9.84  
 
Canceled
    (193,006 )   $ 3.00-$16.14  
 
 
         
Options outstanding at December 31, 1998
    346,109     $ 2.91-$15.75  
 
Exercised
    (20,216 )   $ 3.00-$3.00  
 
Granted
    174,067     $ 3.00-$6.60  
 
Canceled
    (161,418 )   $ 3.00-$15.75  
 
 
         
Options outstanding at December 31, 1999
    338,542     $ 2.91-$15.75  
 
Exercised
    (3,966 )   $ 3.00-$5.16  
 
Granted
    221,833     $ 2.70-$7.02  
 
Canceled
    (115,616 )   $ 2.91-$15.00  
 
 
         
Options outstanding at December 31, 2000
    440,793     $ 2.70-$15.75  
 
 
         

During 1993 the shareholders approved and the Company adopted an Employee Stock Purchase Plan effective for a five year period beginning January 1, 1994. The Company reserved 66,667 shares of common stock for issuance under the Plan. During 1997, the shareholders approved increasing shares reserved for issuance to 200,000 shares, and during 1998 shareholders approved extending the Plan through December 31, 2003. The Plan operates in one or more phases of six months each and is open for enrollment by employees working at least 20 hours per week and who have completed at least five months of service. A summary of plan activity is as follows (see Note M for Reverse Stock Split Subsequent Event):

                           
Phase #   Phase Ending Date     Shares Issued     Price  

 
 
   
 
 
1
  June 30, 1994     1,758     $ 4.95  
 
2
  December 31, 1994     845     $ 2.94  
 
3
  June 30, 1995     2,085     $ 2.79  
 
4
  December 31, 1995     7,525     $ 2.79  
 
5
  June 30, 1996     4,675     $ 6.135  
 
6
  December 31, 1996     5,774     $ 12.606  
 
7
  June 30, 1997     7,942     $ 12.60  
 
8
  December 31, 1997     13,372     $ 9.03  
 
9
  June 30, 1998     16,988     $ 4.77  
 
10
  December 31, 1998     19,324     $ 2.04  
 
11
  June 30, 1999     23,338     $ 1.89  
 
12
  December 31, 1999     8,181     $ 4.29  
 
13
  June 30, 2000     15,610     $ 3.30  
 
14
  December 31, 2000     15,776     $ 1.35  

Phase ten (10), twelve (12), and fourteen (14) shares were issued in January 1999, 2000, and 2001 respectively.

F-16


Table of Contents

The Company’s Board of Directors, in connection with employment agreements, has granted employment options. Employment options are exercisable for five years from the date of grant in accordance with a vesting schedule of 40% upon grant plus 20% per year for each of three years thereafter at an exercise price equal to the fair market value on the date of the grant. On August 23, 1994, the Company’s Board of Directors, in connection with an employment agreement, granted options to Mitchel J. Laskey, the Company’s President and then COO, (now Senior Advisor), for 83,333 shares of common stock under similar terms at an exercise price equal to the fair market value on the date of the grant of $5.0625. On September 13, 1995, the Company’s Board of Directors reduced the exercise price on Mr. Laskey’s employment options to $3.00 per share. On December 17, 1996 the Company’s Board of Directors, in connection with various other employment agreements, granted options covering 32,000 shares of common stock under similar terms at an exercise price equal to fair market value on the date of the grant of $15.00. On January 1, 1997 the Company’s Board of Directors granted additional employment options to Mitchel J. Laskey for 16,667 shares of common stock under similar terms at an exercise price of $13.89 which represents the fair market value on the date of grant. During 1998, 15,833 of Mitchel J. Laskey’s January 1, 1997 options expired. On January 1, 1998 the Company’s Board of Directors approved additional options to Mitchel J. Laskey for 133,333 shares of common stock, 33,333 shares at an exercise price of $18.00, $22.50, $27.00 and $31.50 each. All of these employment option agreements provide for early vesting upon death or employment termination without cause and were issued at exercise prices no less than the fair market value of the shares on the date of grant. As such, in accordance with APB 25 no corresponding compensation expense was recognized.

On July 31, 1995 the Company completed a Private Placement Offering issuing $775,000 of Subordinated Convertible Notes, bearing simple interest at 9% per annum, together with detachable warrants to purchase 51,666 shares of the Company’s common stock, (“debt warrants”). The warrants were exercisable at $3.00 per common share, and are exercisable for five years from the date of issuance (23,333 in June 1995 and 28,333 in July 1995). During the years ended December 31, 1999 and 2000, 10,000 and 16,667 of the debt warrants were exercised, respectively, and 25,000 expired in 2000.

In connection with the Private Placement of the shares of Series B Preferred Stock, the Board of Directors of the Company authorized the issuance on December 8, 1995 of warrants to purchase 70,000 shares of the Company’s common stock for $3.00 per share to a financial consultant (“Series B warrants”) for $25,000. These warrants are exercisable for seven years from the date of issuance. As of December 31, 2000, none of the Series B warrants were exercised.

During 1998 the employer match contribution of $349,454 to the Company’s 401(k) defined contribution savings plan was made through the issuance of 69,608 shares of the Company’s common stock at an average price of $5.01 per share. During 1999 the employer match contribution of $304,998 to the Company’s 401(k) defined contribution savings plan was made through the issuance of 64,904 shares of the Company’s common stock at an average price of $4.71 per share. During 2000 the employer match contribution of $335,898 to the Company’s 401(k) defined contribution savings plan was made through the issuance of 89,705 shares of the Company’s common stock at an average price of $3.75 per share.

On August 8, 2000 the Company issued 49,334 shares of common stock pursuant to an employment agreement with Mr. Christopher Assif, the Company’s CEO, for $4.92 per share through the issuance of a promissory note in the amount of $242,720, payable to the Company on or before August 8, 2003. Interest on the recourse note is payable annually in arrears and accrues at the rate of nine percent (9%) per annum. This note may be prepaid in whole or part at any time without penalty. Accrued interest receivable of $8,617 is included in other assets as of December 31, 2000.

F-17


Table of Contents

I.     RESTRUCTURING COSTS

During the third quarter of 1999 the Company announced a realignment plan. This realignment was designed to provide a single focus to the development, marketing, sales and support of the Company’s information systems. It also established specific cost reductions, revenue improvement and customer satisfaction objectives and anticipated future cost efficiencies. In connection with the plan, a total of seventeen employees were terminated. Termination benefits for the year ended December 31, 1999 are summarized as follows:

                 
    No. of     Total Severance  
    Terminated     and Termination  
Department   Employees     Benefits Paid  

 
   
 
 
Client Services
    6     $ 28,368  
Software Development
    6       55,114  
Sales and Marketing
    4       192,043  
General and Administrative
    1       248,044  
 
 
   
 
 
    17     $ 523,569  
 
 
   
 

During the third quarter of 2000, the Company adopted a formal plan to stop marketing specific products, and, as a result, recorded restructuring charges of $5,725,007. In connection with the Company’s strategic decision to focus marketing efforts on the Company’s clinical suite of products (CoPathPlus, RadPlus and e-Premier) and its e-Business initiatives (CoMed Internet). SurgiPlus and DynamicVision for Imaging will no longer be actively marketed by the Company. Historical revenues from the discontinued products were approximately $1,070,857, $2,525,682, and $1,913,858 for the years ended December 31, 2000, 1999, and 1998 respectively. The abandoned product charges consist of the write-off of net capitalized software costs of $4,998,234 and a write-off of prepaid licenses of $130,624. In addition, employee severance and termination costs, associated with positions eliminated as a result of the abandoned product offerings, in the amount of $399,735 and a reserve for contract losses of $196,414 were accrued and expensed during the third quarter of 2000. A total of 32 employees were terminated in connection with the abandoned product offerings. Termination benefits paid for the year ended December 31, 2000 are summarized as follows:

                 
    No. of     Total Severance  
    Terminated     and Termination  
Department   Employees     Benefits Paid  

 
   
 
 
Client Services
    13     $ 90,271  
Software Development
    16       209,643  
Sales and Marketing
    3       99,821  
 
 
   
 
 
    32     $ 399,735  
 
 
   
 

F-18


Table of Contents

J.     INCOME TAXES

The components of income tax expense (benefit) are as follows:

                         
    Year Ended December 31,  
   
 
    1998     1999     2000  
   
   
   
 
Current:
                       
Federal
  $     $ 299,000     $  
State
          43,000        
 
 
   
   
 
 
          342,000        
 
 
   
   
 
Deferred:
                       
Federal
            (299,000 )        
State
          (43,000 )      
 
 
   
   
 
 
          (342,000 )      
 
 
   
   
 
Total
  $     $     $  
 
 
   
   
 

Deferred income taxes reflect the net tax effects of operating loss and tax credit carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant items comprising the Company’s net deferred tax as of December 31, 1999 and 2000, are as follows:

                   
      1999     2000  
     
   
 
Deferred tax asset:
               
 
Net operating loss carryforwards
  $ 7,753,000     $ 8,247,000  
 
Tax credit carryforwards
    551,000       551,000  
 
Other
    528,000       528,000  
 
 
   
 
 
    8,832,000       9,326,000  
Deferred tax liabilities:
               
 
Capitalized software development costs
    (3,128,000 )     (1,058,000 )
 
Other
    (235,000 )     (99,000 )
 
 
   
 
Net deferred tax asset
    5,469,000       8,169,000  
Valuation allowance
    (5,469,000 )     (8,169,000 )
 
 
   
 
Net deferred tax
  $     $  
 
 
   
 

The net deferred tax asset is reduced by a valuation allowance due to the uncertainty associated with the realization of the net deferred tax asset. The valuation allowance increased $2,700,000 from the allowance of $5,469,000 at December 31, 1999.

The provisions for Federal income taxes differs from the amount computed by applying the statutory rate to net earnings (loss) before income taxes for each of the three years in the period ended December 31, 2000 as follows:

                         
    Amount of Tax          
   
         
    1998     1999     2000  
   
   
   
 
 
Computed expected tax expense (benefit)
  $ (3,154,000 )   $ 299,000     $ (3,017,000 )
State taxes expenses (benefit), net of federal benefit
    (450,000 )     43,000       (431,000 )
Permanent differences
                119,000  
Other
                15,000  
Expiration of net operating loss carry forward
                614,000  
Non-recognition (recognition) of the benefits of operating loss carryforward and the related valuation allowance change
    3,604,000       (342,000 )     2,700,000  
 
 
   
   
 
 
  $     $     $  
 
 
   
   
 

F-19


Table of Contents

At December 31, 2000, the Company had unused net operating loss carryforwards for tax and alternative minimum tax purposes of approximately $20,617,000 and $19,983,000, respectively, and unused tax credits of approximately $551,000. These operating loss carryforwards and tax credits expire in varying amounts during 2007 through 2020.

K.     RELATED PARTY TRANSACTIONS

The Company expensed $63,000 and $46,500 during 1998 and 1999, respectively, for consulting and advisory fees paid to MMRI, Inc. which is majority owned by the Company’s former Chairman of the Board, David Pomerance.

The private placement transaction closing on July 29, 1998, more fully discussed in Note G, was solely subscribed to by executive officers and directors of the Company on terms negotiated by non-participating directors and executive officers with the Company’s investment banker.

L.     LITIGATION

On February 27, 2001 the Company signed an Amended Strategic Value Added Reseller Agreement with Sunquest Information Systems, Inc. Sunquest paid the Company for maintenance services through December 31, 2003 and advance license fees, and Sunquest will continue to distribute, implement and support the Company’s CoPath Plus product. This resolves all previous disputes between the two companies.

As of the date hereof, in the opinion of management, there are no material legal proceedings pending against the Company which will have a material effect on the Company’s consolidated financial statements.

M.     SUBSEQUENT EVENTS

(i)  Amendment of Articles of Incorporation:

During 2001, management was notified of a dispute involving the effect on the conversion price of the Series C Preferred Stock (see also Notes G and K) as a result of the issuance of certain stock options by the Company. The dispute involved whether or not the terms of the Series C Preferred Stock were originally intended to exclude from adjustments to the conversion price of the Series C Preferred Stock, issuances or grants of dilutive securities pursuant to its employee benefit plans or employment contacts. The Company and its Series C Preferred Stockholders agreed to resolve this dispute and stipulate that the exclusion language should have been included in the Amended Articles of Incorporation from inception and therefore that no adjustment in conversion price was due to them in exchange for certain other revisions to the terms of the Series C Preferred Stock. On March 30, 2001, the Company and the holders of the Series C Preferred Stockholders agreed to amend the Company’s Articles of Incorporation relating to the adjustment of the conversion price of the Series C Preferred Stock to specifically exempt dilutive securities issued in connection with employee benefit plans or employment contracts after the issuance of the Series C Preferred Stock, in exchange for creating a Contingent Dividend provision for the Series C Preferred Stock shareholders. The Contingent Dividend will be payable only upon conversion or a change of control, as defined, in an amount equal to the greater of $125,000 or an accumulated amount calculated beginning January 1, 2001 at the rate of $0.08 per annum per share of Series C Preferred Stock.

(ii)  Reverse Stock Split:

On June 28, 2001, the Company completed a one for three (1:3) reverse stock split with respect to its common stock. All common share and earnings per share information, included in the accompanying financial statements, has been retroactively adjusted to give effect to the reverse stock split.

N.     STOCK BASED COMPENSATION PRO FORMA INFORMATION

F-20


Table of Contents

Options granted to the Company’s directors and employees under the 1983, 1993 and 2000 Incentive Stock Option Plans, various employment agreements, and the D&M Stock Option Plan (hereafter, the “Plans”), are accounted for under APB Opinion 25, Accounting for Stock Issued to Employees, and related interpretations. The exercise price of each option granted under these Plans is at least equal to the market price of the Company’s stock on the date of grant. Accordingly, no compensation has been recognized for directors and employees under these Plans. Had compensation cost for the Plans been determined based on the fair value of the options at the grant dates consistent with the method of Statement of Financial Accounting Standards 123, Accounting for Stock-Based Compensation (SFAS 123), the Company’s net earnings (loss) and net earnings (loss) per share would have reflected the pro forma amounts indicated below (see Note M for Reverse Stock Split Subsequent Event).

                                   
              1998     1999     2000  
             
   
   
 
 
Net earnings (loss)
  As reported   $ (9,012,690 )   $ 854,368     $ (8,620,878 )
 
  Pro forma   $ (9,448,792 )   $ 442,200     $ (9,039,489 )
 
Net earnings (loss) available
  As reported   $ (9,080,245 )   $ 694,368     $ (8,780,878 )
 
to common shareholders
  Pro forma   $ (9,516,348 )   $ 282,200     $ (9,199,489 )
 
Basic and diluted earnings
  As reported   $ (1.50 )   $ 0.11     $ (1.38 )
 
(loss) per share
  Pro forma   $ (1.56 )   $ 0.03     $ (1.44 )

The fair value of each option grant under SFAS 123 is estimated on the date of grant using the Black-Scholes option-pricing model assuming no future common stock dividend declarations. Volatility was computed based on the daily common stock high, low and close information provided by NASDAQ for the twenty days prior to the close of trading on the date of each option grant, and range from 59% – 234% for options granted during 1998, 116% – 331% for options granted during 1999, and 87% – 262% for options granted during 2000. Risk free rates of 5.0% for options granted with a ten year exercise period and for options granted with a three to five year exercise period were used for all options granted during 1998 and 1999. For all options granted during 2000, the risk free rate used was 4%. The initial forfeiture rate under the 1993 and 2000 ISO Plans for 1998 was 70%, for 1999 was 44%, and for 2000 was 70%. Under the D&M Plan, the initial forfeiture rate for 1998 was 70%, and ranged between 0% and 70% for options granted in connection with continuing employment agreements. The initial forfeiture rate under the D&M Plan for 1999 and 2000 was 35% and for options granted in connection with employment agreements was 100%. The weighted average grant date fair value of options granted during 1998, 1999, and 2000 were $1.23, $2.13, and $4.59, respectively.

O.     UNAUDITED QUARTERLY INFORMATION

Quarterly operating results are summarized as follows (in thousands, except per share data):

*See Note M for Reverse Stock Split Subsequent Event:

                                 
            Three Months Ended (Unaudited)          
   
         
1999   March 31     June 30     September 30     December 31  

 
   
   
   
 
 
Total Operating Revenues
  $ 9,843     $ 9,925     $ 7,502     $ 7,873  
Operating Income (Loss)
    479       609       (201 )     169  
Net Earnings (Loss)
    438       549       (266 )     134  
Net Earnings (Loss) Per Share
    .06       .08       (0.06 )     .03  
Shareholders’ Equity
    15,150       15,765       15,763       15,921  
 
    Three Months Ended (Unaudited)          
   
         
2000   March 31     June 30     September 30     December 31  

 
   
   
   
 
 
Total Operating Revenues
  $ 6,582     $ 6,466     $ 6,180     $ 6,431  
Operating Income (Loss)
    (335 )     (432 )     (6,480 )     (1,183 )
Net Earnings (Loss)
    (350 )     (479 )     (6,503 )     (1,289 )
Net Earnings (Loss) Per Share
    (0.06 )     (0.09 )     (1.02 )     (0.21 )

F-21


Table of Contents

                                 
Shareholders’ Equity
    15,652       15,239       8,882       7,629  

F-22


Table of Contents

DYNAMIC HEALTHCARE TECHNOLOGIES, INC.
Balance Sheets

                         
            December 31,     June 30,  
            2000     2001  
           
   
 
ASSETS
        (Unaudited)
Current assets:
               
   
Cash and cash equivalents
  $ 3,197,743     $ 893,094  
   
Accounts receivable, net
    5,309,700       3,767,561  
   
Unbilled receivables
    3,633,931       4,751,559  
   
Contracts receivable — current
    329,255       286,795  
   
Other current assets
    848,652       724,974  
 
 
   
 
       
Total current assets
    13,319,281       10,423,983  
 
Property and equipment, net
    3,507,870       3,149,277  
Capitalized software development costs, net
    4,093,560       3,509,540  
Goodwill, net
    847,934       644,159  
Contracts receivable — non-current
    713,052       597,763  
Other assets
    22,872       17,479  
 
 
   
 
 
  $ 22,504,569     $ 18,342,201  
 
 
   
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
               
   
Accounts payable and accrued expenses
  $ 3,061,461     $ 2,733,558  
   
Deferred revenue
    5,929,122       5,992,778  
   
Advance billings
    1,197,266       1,993,429  
   
Line of credit
    2,875,000        
   
Deferred lease incentives — current
    190,230       190,230  
   
Other
    380,335       306,483  
 
 
   
 
       
Total current liabilities
    13,633,414       11,216,478  
Deferred lease incentives — non-current
    602,403       507,288  
Other non-current liabilities
    639,740       504,983  
 
 
   
 
       
Total liabilities
    14,875,557       12,228,749  
 
 
   
 
Shareholders’ equity:
               
 
Series C redeemable convertible preferred stock ($.01 par value;
Issued and outstanding 1,000,000 shares with an aggregate Liquidation preference of $2,000,000, as of December 31, 2000 and June 30, 2001; $.16 per share annual dividend)
    1,811,327       1,811,327  
 
Common stock ($.01 par value; authorized 40,000,000 shares; i