UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 0-29466
National Research Corporation
(Exact name of Registrant as specified in its charter)
Wisconsin 47-063400
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1033 "O" Street, Lincoln Nebraska 68508
(Address of principal executive offices) (Zip Code)
(402) 475-2525
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.001 par value, outstanding as of October 31, 1998: 7,283,000
shares
<PAGE>
NATIONAL RESEARCH CORPORATION
FORM 10-Q INDEX
For the Quarter Ended September 30, 1998
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets 3
Condensed Statements of Income 4
Condensed Statements of Cash Flows 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of 9-13
Financial Condition and Results of Operations
PART II.
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit Index 16
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<PAGE>
PART I - Financial Information
ITEM 1 Financial Statements
NATIONAL RESEARCH CORPORATION
CONDENSED BALANCE SHEETS
September 30, December 31,
1998 1997
----------------- ---------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 911,276 $ 4,688,352
Investments in marketable
debt securities 12,303,679 13,220,553
Trade accounts receivable
less allowance for doubtful
accounts of $77,808 in 1998
and $62,808 in 1997 2,958,318 3,094,772
Unbilled revenues 919,841 559,856
Prepaid expenses and other 177,715 184,156
Other receivables 402,878 -
Deferred income taxes 112,905 127,225
------------ ------------
Total current assets 17,786,612 21,874,914
------------ ------------
Property and equipment, net of
accumulated
depreciation and amortization 1,730,804 519,955
Deferred income taxes 1,297,964 155,775
Other 15,592 12,482
Goodwill and other intangibles,
net of accumulated amortization 3,349,495 -
------------ ------------
Total assets $ 24,180,467 $ 22,563,126
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Current portion - notes
payable $ 30,754 $ -
Accounts payable and accrued
expenses 1,301,314 615,930
Accrued wages, bonuses and
profit sharing 1,101,547 1,161,917
Income taxes payable 228,166 118,000
Billings in excess of revenues
earned 2,925,922 2,297,751
------------ ------------
Total current liabilities 5,587,703 4,193,598
Notes payable, net of current portion 82,358 -
Bonuses and profit sharing accruals 248,684 248,684
Other accrued expense 321,529 -
------------ ------------
Total long-term liabilities 652,571 248,684
------------ ------------
Total liabilities 6,240,274 4,442,282
------------ ------------
Shareholders' equity:
Common stock, $.001 par value;
authorized 20,000,000
shares, issued and outstanding
7,305,000 7,305 7,305
Preferred stock, $.01 par value;
authorized 2,000,000 shares,
no shares issued and outstanding - -
Additional paid-in capital 16,839,839 16,839,839
Retained earnings 1,093,049 1,273,700
------------ ------------
Total shareholders' equity 17,940,193 18,120,844
------------ ------------
Total liabilities and
shareholders' equity $ 24,180,467 $ 22,563,126
============ ============
See accompanying notes to condensed financial statements.
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<PAGE>
<TABLE>
NATIONAL RESEARCH CORPORATION
CONDENSED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------- ---------------------------
1998 1997 1998 1997
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Renewable performance tracking services
and custom research $ 4,608,110 $3,878,813 $11,572,821 $10,385,079
Renewable syndicated service 1,006,414 852,493 1,477,520 1,296,805
----------- ---------- ---------- ----------
Total revenues 5,614,524 4,731,306 13,050,341 11,681,884
----------- ---------- ---------- ----------
Operating expenses:
Direct expenses 3,390,400 2,326,750 6,915,322 5,337,475
Selling, general and administrative 1,238,991 995,258 3,670,390 2,832,679
Depreciation and amortization 126,417 43,032 244,773 122,600
Acquired in-process research and
development cost - - 2,974,324 -
Severance charge - - 303,740 -
----------- ---------- ---------- ----------
Total operating expenses 4,755,808 3,365,040 14,108,549 8,292,754
----------- ---------- ---------- ----------
Operating income (loss) 858,716 1,366,266 (1,058,208) 3,389,130
Other income:
Interest income 174,594 55,001 792,038 152,030
Interest expense (3,635) - (4,938) -
----------- ---------- ------------ ----------
Total other income 170,959 55,001 787,100 152,030
----------- ---------- ------------ ----------
Income (loss) before income taxes 1,029,675 1,421,267 (271,108) 3,541,160
Income tax provision (benefit) 403,454 - (90,457) -
----------- ---------- ------------ ----------
Net income (loss) 626,221 1,421,267 (180,651) 3,541,160
Pro forma income taxes - 568,507 - 1,416,465
----------- ---------- ------------ ----------
Pro forma net income (loss) $ 626,221 $ 852,760 (180,651) $2,124,695
=========== ========== ============ ==========
Pro forma net income per share--basic
and diluted $ 0.09 $ 0.14 (0.02) $ 0.34
=========== ========== ============ ==========
Weighted average shares and share equivalents
outstanding--basic and diluted 7,305,000 6,184,812 7,305,000 6,184,812
=========== ========== ============== ===========
See accompanying notes to condensed financial statements.
</TABLE>
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<TABLE>
NATIONAL RESEARCH CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine months ended
September 30,
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (180,651) $3,541,160
Adjustments to reconcile net income
to net cash
provided by operating activities:
Depreciation and amortization 244,773 122,600
Acquired in-process research and
development cost, net of tax 1,814,338 -
Changes in assets and liabilities,
net of acquisition:
Trade accounts receivable 1,260,172 (882,567)
Unbilled revenues (150.309) (174,045)
Prepaid expenses and other 25,977 (362,472)
Deferred income taxes 32,117 -
Accounts payable and accrued expenses 94,802 (247,212)
Accrued wages, bonuses and profit sharing (212,523) 630,926
Income taxes payable 110,166 -
Billings in excess of revenues earned (451,186) (13,638)
------------- -----------
Net cash provided by operating
activities 2,587,676 2,614,752
------------- -----------
Cash flows from investing activities:
Purchases of property and equipment (1,251,469) (286,414)
Acquisition, net of cash acquired (5,616,353) -
Accounts receivable - other (402,878) -
Purchases of securities available-for-sale (8,432,047) (334,019)
Proceeds from the maturities of securities
available-for-sale 9,348,921 1,760,057
----------- -----------
Net cash provided by (used in)
investing activities (6,353,826) 1,139,624
----------- -----------
Cash flows from financing activities:
Dividends paid - (2,146,093)
Payments on notes payable (10,926) -
----------- ------------
Net cash used in financing
activities (10,926) (2,146,093)
----------- -----------
Net increase (decrease) in
cash and cash equivalents (3,777,076) 1,608,283
Cash and cash equivalents at beginning of period 4,688,352 2,782,212
----------- -----------
Cash and cash equivalents at end of period $ 911,276 $4,390,495
=========== ==========
Supplemental disclosure of cash paid for:
Interest $ 4,938 $ -
============= =========
Taxes $ 931,447 $ -
============= =========
</TABLE>
See accompanying notes to condensed financial statements.
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<PAGE>
NATIONAL RESEARCH CORPORATION
Notes to Condensed Financial Statements
1. INTERIM FINANCIAL REPORTING
The condensed balance sheet of National Research Corporation (the "Company") at
December 31, 1997 was derived from the Company's audited balance sheet as of
that date. All other financial statements contained herein are unaudited and, in
the opinion of management, include all adjustments (consisting only of normal
recurring adjustments) the Company considers necessary for a fair presentation
of financial position, results of operations and cash flows in accordance with
generally accepted accounting principles.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed financial statements should be
read in conjunction with the financial statements and notes thereto that are
included in the Company's Form 10-K for the fiscal year ended December 31, 1997,
filed with the Securities and Exchange Commission in March 1998.
On January 1, 1998, the Company adopted the American Institute of Certified
Public Accountants Statement of Position No. 98-1 (SOP 98-1), Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use. Under that
accounting standard, the Company expenses as incurred computer software costs
incurred in the preliminary project stage, which involved the conceptual
formulation, evaluation and selection of technology alternatives. Costs incurred
related to the design, coding installation and testing of software during the
application project stage are capitalized. Costs incurred for training and
application maintenance are expensed as incurred. The Company has capitalized
approximately $890,000 of costs incurred for the development of internal use
software for the nine months ended September 30, 1998, with such costs
classified as property and equipment. Prior to January 1, 1998, the Company's
accounting policy was to expense as incurred all costs of software developed for
internal use. Costs incurred prior to January 1, 1998, for the development of
internal use software have not been adjusted or capitalized as a result of the
Company's adoption of SOP 98-1.
Statement of Financial Accounting Standard ("SFAS") 130, Reporting Comprehensive
Income establishes standards for the reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
The standard also requires disclosure of the total of comprehensive income in
interim financial statements. Other than its net income, the Company's only
other source of comprehensive income is unrealized gains or losses on marketable
debt securities. However, other comprehensive income from marketable debt
securities is not significant for the three month and nine month periods ended
September 30, 1998 and 1997, respectively.
2. S CORPORATION STATUS
From August 1, 1994, through October 13, 1997 (three days prior to the Company's
initial public offering), the Company was an S Corporation and, accordingly, was
not subject to Federal and state income taxes for the nine months ended
September 30, 1997. Pro forma net income reflects a pro forma tax provision at a
combined Federal and state rate of 40% for the periods the Company was an S
Corporation as if it had been a C Corporation. Since October 14, 1997, the
Company has been C Corporation.
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<PAGE>
3. ACQUISITION
Effective June 1, 1998, the Company acquired the business of Healthcare Research
Systems, Ltd. ("HRS") through an acquisition of assets. Consideration paid by
the Company at closing included a fixed payment of $5,100,000 plus an estimated
payment of $350,000 for the net working capital surplus assumed. The Company
also incurred liabilities of $625,362 related to management's plans to exit
certain activities of HRS and has paid or accrued $170,000 of direct acquisition
costs. Management's exit plans include costs for the relocation of certain of
HRS's employees and an accrual for minimum operating lease commitments for
duplicative space which will be abandoned or sublet. Management's exit plans
have not been finalized, however, and adjustments to the allocation of purchase
price may result from the finalization of the these plans. The acquisition
agreement was subsequently amended to return to the Company the entire $350,000
estimated payment for the net working capital surplus paid at closing and to
provide for the Company's assumption of additional pre-acquisition liabilities
of HRS of $629,588. The amendment to the acquisition agreement was recorded in
the third quarter as an adjustment to the purchase price, increasing goodwill by
$629,588.
The acquisition of HRS has been accounted for as a purchase and, accordingly,
the operating results of HRS have been included in the Company's financial
statements since the date of acquisition. The excess of the aggregate purchase
price over the fair value of net assets acquired of approximately $6,524,950 has
been allocated to the following assets based upon management's preliminary
estimates of the fair values of identifiable assets of HRS at the date of
acquisition. Intangible assets, including in-process research and development,
acquired are as follows:
Estimated
Fair Value Life
Property and equipment $150,000 5-7 years
Workforce in place 272,882 10 years
Customer lists 359,048 15 years
Goodwill 2,768,696 20 years
---------
3,550,626
In-process research and development 2,974,324 0 years
---------
$6,524,950
==========
In October 1998, the amended acquisition agreement removed the contingencies
associated with scheduled payments of additional purchase price in 1999. The
amendment also reduced the amount of the first of those scheduled payments to
approximately $1.2 million in March 1999. The liability for the purchase price
payment commitments was recorded in the fourth quarter of 1998, with the
additional purchase price allocated to goodwill of HRS. The additional goodwill
will be amortized over its remaining estimated useful life of 20 years.
The following unaudited pro forma data summarizes the results of operations for
the periods indicated as if the acquisition of HRS had been completed on January
1, 1997. The pro forma data gives effect to the actual operating results prior
to the acquisition, amortization of acquisition-related intangibles and income
taxes. The pro forma amounts do not purport to be
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<PAGE>
indicative of the results that would have actually been obtained if the
acquisition had occurred on January 1, 1997, or that may be obtained in the
future.
Nine months ended September 30,
-------------------------------
1998 1997
---- ----
(dollars in thousands, except per share amounts)
Revenues $16,219 $16,483
Net income (loss) $1,347 $(204)
Net income (loss) per share -
basic and diluted $0.18 $(0.05)
-8-
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth, for the periods indicated, selected financial
information derived from the Company's condensed financial statements, expressed
as a percentage of total revenues. The trends illustrated in the following table
may not necessarily be indicative of future results. The discussion that follows
the table should be read in conjunction with the condensed financial statements.
<TABLE>
<CAPTION>
Percentage of Total Revenues
-------------------------------------------
Three months ended Nine months ended
September 30, September 30,
-------------------- ------------------
1998 1997 1998 1997
-------------------- ------------------
<S> <C> <C> <C> <C>
Revenues:
Renewable performance tracking services
and custom research 82.1% 82.0% 88.7% 88.9%
Renewable syndicated service 17.9 18.0 11.3 11.1
--------- --------- -------- --------
Total revenues 100.0 100.0 100.0 100.0
--------- --------- -------- --------
Operating expenses:
Direct expenses 60.4 49.2 53.0 45.7
Selling, general and administrative 22.1 21.0 28.1 24.3
Depreciation and amortization 2.3 1.0 1.9 1.0
Acquired in-process research and development cost -- -- 22.8 --
Severance charge -- -- 2.3 --
--------- --------- -------- --------
Total operating expenses: 84.8 71.2 108.1 71.0
--------- --------- -------- --------
Operating income (loss) 15.2% 28.8% (8.1%) 29.0%
========= ========= ======== ========
</TABLE>
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997
Total revenues. Total revenues increased 18.7% in the three-month period ended
September 30, 1998, to $5.6 million from $4.7 million in the three-month period
ended September 30, 1997. Revenues from the Company's renewable performance
tracking services and custom research increased 18.8% to $4.6 million in the
three month period ended September 30, 1998 from $3.9 million in the same period
during 1997 primarily due to the addition of new clients, the acquisition of HRS
in June 1998 and, to a lesser extent, an increase in the scope of existing
tracking projects. Revenues for the Company's renewable syndicated service
increased 18.1% to $1.0 million in the three month period ended September 30,
1998 compared to $852,000 in the same three month period in 1997. Such an
increase reflects increased sales of the 1997 annual edition of the NRC
Healthcare Market Guide following its release in the prior year.
Direct expenses. Direct expenses increased 45.7% to $3.4 million in the
three-month period ended September 30, 1998 from $2.3 million in the same period
during 1997. The increase in direct expenses in the 1998 period was due to
increases in postage and printing expenses of $72,000,
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<PAGE>
telephone expense of $101,000, outside field services of $172,000 and labor and
payroll expenses of $651,000, which were due partially to increased costs
associated with the addition of a telephone call center and to increased
revenues. Direct expenses increased as a percentage of total revenues to 60.4%
in the three-month period ended September 30, 1998, from 49.2% during the same
period of 1997.
Selling, general and administrative expenses. Selling general and administrative
expenses increased 24.5% to $1.2 million for the three-month period ended
September 30, 1998 from $995,000 for the same period in 1997. This increase was
primarily due to an increase of $186,000 associated with the increase in the
Company's rent expense and other costs associated with the Company's new
location in Columbus, Ohio since June 1998 and $15,000 associated with being a
public company. Sales, general and administrative expenses increased as a
percentage of total revenues to 22.1% for the three-month period ended September
30, 1998, from 30.9% for the same period in 1997.
Depreciation and amortization. Depreciation and amortization expenses increased
193.8% to $126,000 in the three-month period ended September 30, 1998 from
$43,000 in the same period of 1997 partially due to the acquisition of HRS.
Depreciation and amortization expenses as a percentage of total revenues
increased to 2.3% in the three-month period ended September 30, 1998, from 1.0%
in the same period of 1997.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997
Total revenues. Total revenues increased 11.7% in the first nine months of 1998
to $13.1 million from $11.7 million in the first nine months of 1997. Revenues
from the Company's renewable performance tracking services and custom research
increased 11.4% to $11.6 million in the first nine months of 1998 from $10.4
million in the same period of 1997 primarily due to the addition of new clients,
the acquisition of HRS in June 1998, and, to a lesser extent, an increase in the
scope of existing tracking projects. Revenues from the Company's renewable
syndicated service increased 13.9% to $1.5 million in the first nine months of
1998 from $1.3 million in the same period of 1997. Such increase reflects the
addition of new syndicated service clients.
Direct expenses. Direct expenses increased 29.6% to $6.9 million in the first
nine months of 1998 from $5.3 million in the first nine months of 1997. The
increase in direct expenses in the 1998 period was due to increases in outside
field services of $201,000, telephone expenses of $71,000, rent and office
expenses of $34,000 and labor and payroll expenses of $1.1 million due partially
to increased costs associated with the addition of a telephone call center and
to increased revenues. Direct expenses increased as a percentage of total
revenues to 53.0% in the first nine months of 1998 from 45.7% during the first
nine months of 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 29.6% to $3.7 million for the first nine
months of 1998 from $2.8 million for the first nine months of 1997. This
increase was primarily due to an increase of $488,000 associated with the
expansion of the Company's sales and marketing workforce, an increase of
$261,000 associated with the increase in the Company's rent expenses and other
costs associated with the Company's new location in Columbus, Ohio since June
1998 and an increase of $206,000 associated with being a public company, which
were offset by a decrease of $123,000 in expenses related to enhancements to the
Company's software. Selling, general and administrative expenses
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<PAGE>
increased as a percentage of total revenues to 28.1% for the first nine months
of 1998 from 24.3% for the first nine months of 1997.
Acquired In-Process Research and Development Cost and Severance Charge. In
connection with the acquisition of HRS in June 1998, the Company incurred a
one-time, non-recurring charge of $3.0 million for costs assigned to in-process
research and development activities of the acquired company and operating
expenses for severance costs of $304,000 for duplicative employees of the
Company as a result of the acquisition. The aggregate charges to income net of
taxes associated with the acquisition were approximately $2.0 million, or $0.27
per share.
Depreciation and amortization. Depreciation and amortization expenses increased
99.7% to $245,000 in the first nine months of 1998 from $123,000 in the first
nine months of 1997 partially due to the acquisition of HRS. Depreciation and
amortization expenses increased as a percentage of total revenues to 1.9% in the
first nine months of 1998 from 1.0% in the first nine months of 1997.
Liquidity and Capital Resources
The Company's principal source of funds historically has been cash flow from its
operations. The Company's cash flow has been sufficient to provide funds for
working capital and capital expenditures.
As of September 30, 1998, the Company had cash and cash equivalents of $911,000
and working capital of $12.2 million.
During the nine months ended September 30, 1998, the Company generated $2.6
million of net cash from operating activities, the same amount as, during the
same period in the prior year.
For the nine months ended September 30, 1998, net cash used in investing
activities was $6.4 million as compared to net cash provided of $1.1 million
during the same period in the prior year. The 1998 increase in cash used was
primarily due to the acquisition of HRS in June 1998 for approximately $5.6
million, the accounts receivable-other related to the acquisition of $403,000
and investment of $1.3 million in furniture, computer equipment, software and
production equipment to meet the expansion of the Company's business, which was
partially offset by the maturing of investments in debt securities
available-for-sale. The 1997 net cash provided was primarily the maturing of
investments available for sale which was partially offset by an investment of
$286,000 in furniture, computer equipment and production equipment. The
Company's investments available-for-sale consist principally of United States
government securities with maturities of twelve months or less.
Net cash used in financing activities was $11,000 and $2.1 million for the nine
months ended September 1998 and 1997, respectively. Net cash used in financing
activities for 1998 was for the payments of notes payable and for 1997 was the
result of S Corporation distributions to shareholders.
The Company typically bills clients for projects before they have been
completed. Billed amounts are recorded as billings in excess of costs or
deferred revenue on the Company's financial statements and are recognized as
income when earned. As of September 30, 1998 and as of December 31, 1997, the
Company had $2.9 million and $2.3 million of deferred revenues, respectively. In
addition, when work is performed in advance of billing, the Company records this
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<PAGE>
work as a cost in excess of billings or unbilled revenue. At September 30, 1998
and December 31, 1997, the Company had $920,000 and $560,000 of unbilled
revenues, respectively. Substantially all deferred and unbilled revenues will be
earned and billed, respectively, within 12 months of the respective period ends.
In October 1998, the Company announced plans to repurchase up to 245,000 shares
of common stock in the open market or in privately negotiated transitions. The
Company repurchased 22,000 shares during October 1998.
Year 2000
The Year 2000 ("Y2K") issue is the result of computer systems using two digits,
as opposed to four digits, to indicate the year. Such computer systems will be
unable to interpret dates beyond the year 1999, which could cause a system
failure or other computer errors, leading to a disruption in operations. The
Company uses software and related technologies throughout its business that
could be affected by the date change in Y2K.
At the end of 1997, an independent third party conducted an assessment of the
Company's computer systems and, based on such assessment, the Company developed
plans to address issues related to the impact of Y2K on its information systems.
The Company has completed the assessment phase for all of its information
technology systems and developed a plan of repair or replacement for those
systems that were not Y2K compliant.
Many of the external software programs used by the Company were already Y2K
compliant. The remaining software is currently being upgraded to new vendor
versions, which, in addition to providing increased functionality, address the
Y2K issue.
The Company's internal software systems presented no Y2K compatibility issues.
Most of the Company's internal hardware systems presented no Y2K compatibility
issues. The Company has been upgrading its computer hardware that is not Y2K
compliant on an ongoing basis and all mission-critical hardware will be Y2K
compliant before the end of 1999. The software used by the Company to deliver
information to its clients contains no date related data or code other than that
related to licensing issues, and therefore, is not affected by the Y2K issue.
Many of the services sold by the Company originate from data provided by the
Company's clients. The Company generally does not use live data provided by its
clients, instead the clients transmit member or patient information on a weekly
or monthly basis. As a result, the Company's ability to provide services to
these clients is dependent on whether such clients' systems for transmitting
data to the Company are Y2K compliant. If a client cannot transmit member or
patient information to the Company, then the Company cannot provide its services
to the client. Therefore, there can be no assurance that the failure of clients
of the Company to be Y2K compliant will not have a material adverse effect on
the Company. To be prepared to address unexpected occurrences, the Company
expects to develop contingency plans during 1999 to assess alternative methods
to obtain data from its clients.
The current estimate of total Y2K compliance cost is $126,000. A majority of
these costs have been included in the ongoing upgrading and standardization of
the Company's systems. Approximately $26,000 of such costs have been incurred to
date. Based upon progress to date, the Company does not believe that future
costs of Y2K compliance will materially affect the Company's operating results
or financial condition.
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<PAGE>
The estimated costs of, and timetable for, becoming Y2K compliant constitute
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Shareholders, potential investors and other readers are
cautioned that such estimates are based on numerous assumptions by management,
including assumptions regarding the accuracy of representations made by third
parties concerning their compliance with Y2K issues and other factors.
PART II - Other Information
ITEM 2 Changes in Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) The Company's Registration Statement on Form S-1 (Registration No.
333-33273) (the "Registration Statement") relating to the offer and sale (the
"Offering") of an aggregate of 2,415,000 shares of Common Stock was declared
effective by the Securities and Exchange Commission on October 9, 1997. Of the
2,415,000 shares of Common Stock registered under the Registration Statement,
1,250,000 shares were sold by the Company and 1,165,000 shares (including
315,000 shares sold pursuant to the exercise of an over-allotment option granted
to the underwriters) were sold by a certain shareholder of the Company, Michael
D. Hays (the "Selling Shareholder").
During the fourth quarter of 1997, all of the shares of Common Stock
registered were sold in the Offering at a price of $15.00 per share, for an
aggregate price of $18,750,000 and $17,475,000 for the shares of Common Stock
sold by the Company and the Selling Shareholder, respectively. After deducting
the underwriting discount of $1.05 per share, the Selling Shareholder received
net proceeds equal to $16,251,750 and the Company received net proceeds equal to
$17,437,500 less expenses of $596,411 incurred in connection with the Offering.
The net proceeds to the Company were reasonably estimated to be applied as
follows:
1. Temporary investments of United States government
securities with maturities of two years or less $11,224,736
2. Acquisition of HRS and related acquisition costs 5,616,353
------------
Total proceeds to the Company $16,841,089
===========
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<PAGE>
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibit Number Description
(2) Addendum to Asset Purchase Agreement, dated October
23, 1998, among National Research Corporation,
Healthcare Research Systems, Ltd. and the members of
Healthcare Research System, Ltd.
(27) Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K
--------------------
On August 13, 1998, the Company filed an amendment on Form 8-K/A to
the Company's Current Report on Form 8-K dated June 11, 1998. The report, as
amended, included (under Item 7 of Form 8-K) the following financial statements:
for HRS - audited Balance Sheet as of December 31, 1997, audited Statement of
Operations and Statement of Cash Flows for the year ended December 31, 1997,
audited Statement of Members' Equity for the year ended December 31, 1997,
unaudited Condensed Balance Sheets as of March 31, 1998 and December 31, 1997
and unaudited Condensed Statements of Operations and Statements of Cash Flows
for the three months ended March 31, 1998 and 1997; and for the Company -
unaudited Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1998
and unaudited Pro Forma Condensed Consolidated Statements of Operations for the
year ended December 31, 1997 and for the three months ended March 31, 1998.
-14-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL RESEARCH CORPORATION
-----------------------------
Date: November 12, 1998 By:/s/ Michael D. Hays
-----------------------------------------
Michael D. Hays
President and Chief Executive Officer
Date: November 12, 1998 By:/s/ Patrick E. Beans
-----------------------------------------
Patrick E. Beans
Vice President, Treasurer, Secretary and
Chief Financial Officer (Principal
Financial and Accounting Officer)
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<PAGE>
NATIONAL RESEARCH CORPORATION
EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the Quarterly Period ended September 30,
1998
Exhibit
-------
(2) Addendum to Asset Purchase Agreement, dated October 23,
1998, among National Research Corporation, Healthcare Research
Systems, Ltd. and the members of Healthcare Research Systems,
Ltd.
(27) Financial Data Schedule (EDGAR version only)
-16-
Exhibit (2)
ADDENDUM TO ASSET PURCHASE AGREEMENT
AMONG
NATIONAL RESEARCH CORPORATION,
HEALTHCARE RESEARCH SYSTEMS, LTD.
AND
THE MEMBERS OF HEALTHCARE RESEARCH SYSTEMS, LTD.
THIS ADDENDUM ("Addendum") is made and entered into as of this 23rd
day of October, 1998, by and among National Research Corporation, a Wisconsin
corporation ("Buyer"), Healthcare Research Systems, Ltd., an Ohio limited
liability company ("Company"), and all of the members of Company (individually,
"Member" and collectively, "Members").
WHEREAS, Buyer, Company and Members have entered into that certain
Asset Purchase Agreement, dated as of June 11, 1998 (the "Purchase Agreement");
WHEREAS, Buyer, Company and Members desire to supplement and amend the
Purchase Agreement in accordance with the terms set forth herein; and
WHEREAS, Section 12.6 of the Purchase Agreement provides that the
Purchase Agreement may be amended by the written agreement of Buyer, Company and
Members.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein and other good and valuable consideration the
receipt and sufficiency of which is hereby acknowledged, the parties hereto,
intending to be legally bound, hereby agree to supplement and amend the Purchase
Agreement as follows:
1. Notwithstanding anything contained in Sections 2.1 or 2.2 of the
Purchase Agreement (or in any Schedules identified in such Sections 2.1 or 2.2
of the Purchase Agreement) to the contrary, the parties hereto agree that Buyer
or Company, as the case may be, will be responsible for and pay the Company's
accounts payable set forth under their respective names on Schedule A attached
hereto.
2. In settlement of all amounts payable under Sections 3.2.(c), 3.3
and 3.4 of the Purchase Agreement, Company is hereby delivering to Buyer a check
payable to the order of Buyer in the amount of $350,000.
3. Section 3.6.(a) of the Purchase Agreement shall be deleted in its
entirety.
4. Section 3.6.(b) of the Purchase Agreement shall be deleted in its
entirety and the following, which shall be reordered to become Section 3.6.(a),
shall be substituted therefor:
<PAGE>
3.6.(a) Revenues Payment. On March 31, 1999, Buyer
shall deliver to Company an aggregate sum equal to $1,500,000
less the Company Revenues Difference (as hereinafter defined
in Section 3.6.(b)) and less the dollar amount, if any, of all
accounts receivable of Company as reflected on the Closing
Balance Sheet (net of the reserve shown on the Closing Balance
Sheet for doubtful accounts) that have not been collected by
Buyer pursuant to the provisions of Section 6.9 on or prior to
December 31, 1998, without interest (the "Revenues Payment").
Such amount, if any, shall be paid by delivery to Company of a
certified or bank cashier's check payable to the order of
Company or, at Company's option, by wire transfer of
immediately available funds to an account designated by
Company not less than 48 hours prior to the time for payment
specified herein.
5. Section 3.6.(c) of the Purchase Agreement shall be amended by
reordering such section to become Section 3.6.(b) and by adding the following
sentence after the current last sentence thereof:
Notwithstanding anything to the contrary in this Section 3.6,
the parties hereto agree that the Company Revenues Difference
shall be $350,000.
6. Section 3.6.(d) of the Purchase Agreement shall be deleted in its
entirety.
7. Section 3.6.(e) of the Purchase Agreement shall be deleted in its
entirety and the following, which shall be reordered to become Section 3.6.(c),
shall be substituted therefor:
3.6.(c) Anniversary Payment. On the first anniversary
of the Closing Date, Buyer shall deliver to Company the sum
equal to $1,500,000, without interest (the "Anniversary
Payment").
8. All references in the Purchase Agreement to Sections 3.6.(a) and
3.6.(d) shall hereafter be deleted and all references in the Purchase Agreement
to Sections 3.6.(b), 3.6.(c) and 3.6.(e) shall hereafter be to Sections 3.6.(a),
3.6.(b) and 3.6.(c), respectively.
9. Section 6.9 of the Purchase Agreement shall be amended by deleting
therefrom all references to "costs in excess of billings," "and costs in excess
of billings" and "and/or costs in excess of billings."
10. In settlement of the amounts due Buyer under the introductory
paragraph of Article 10 of the Purchase Agreement (i.e., to effectuate the
Closing as of the close of business on May 31, 1998), Company is hereby
delivering to Buyer a check payable to the order of Buyer in the amount of
$49,878.36.
11. New Section 12.12 of the Purchase Agreement shall be added to read
as follows:
-2-
<PAGE>
12.12. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings set forth below:
"Buyer's Accountants" shall mean KPMG Peat Marwick LLP.
12. The references to the "Agreement," "hereof," "hereunder" or words
of like import in the Purchase Agreement shall be deemed, from and after the
date of this Addendum, to encompass the Purchase Agreement as amended and
supplemented by this Addendum.
13. Defined terms used and not defined in this Addendum shall have the
same meaning assigned to them in the Purchase Agreement.
14. Except as expressly supplemented and amended pursuant to this
Addendum, all of the terms, conditions and provisions of the Purchase Agreement
shall remain in full force and effect.
15. This Addendum may be executed in counterparts, each of which will
be deemed an original, but all of which together will constitute one and the
same instrument.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Addendum as
of the date and year first above written.
NATIONAL RESEARCH CORPORATION
("Buyer")
By: /s/ Michael Hays
Name: Michael Hays
Title: President and CEO
HEALTHCARE RESEARCH SYSTEMS, LTD.
("Company")
By: Stephen Strasser
Name: Stephen Strasser
Title: President
MEMBERS:
/s/ Stephen Strasser
Stephen Strasser
/s/ Donald Strasser
Donald Strasser
/s/ Peter Strasser
Peter Strasser
/s/ Charles L. Fabrikant
Charles L. Fabrikant
/s/ Fred C. Farkouh
Fred C. Farkouh
/s/ Charles Fabrikant
Charles Fabrikant, as trustee of the
Scott Strasser 1995 Trust, established
under an agreement dated August 21, 1995
-4-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONDENSED FINANCIAL STATEMENTS OF NATIONAL RESEARCH
CORPORATION AS OF AND FOR THE 9 MONTHS ENDED SEPTEMBER 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 911
<SECURITIES> 12,304
<RECEIVABLES> 3,036
<ALLOWANCES> 78
<INVENTORY> 0
<CURRENT-ASSETS> 17,787
<PP&E> 2,469
<DEPRECIATION> 738
<TOTAL-ASSETS> 24,180
<CURRENT-LIABILITIES> 5,588
<BONDS> 113
0
0
<COMMON> 7
<OTHER-SE> 17,933
<TOTAL-LIABILITY-AND-EQUITY> 24,180
<SALES> 0
<TOTAL-REVENUES> 13,050
<CGS> 0
<TOTAL-COSTS> 6,915
<OTHER-EXPENSES> 7,193
<LOSS-PROVISION> 15
<INTEREST-EXPENSE> 5
<INCOME-PRETAX> (1,058)
<INCOME-TAX> (90)
<INCOME-CONTINUING> (1,058)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (181)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
