UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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 47-0634000
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1033 "O" Street
Lincoln, Nebraska 68508
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (402) 475-2525
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock, $.001 par value
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Aggregate market value of the voting stock held by nonaffiliates of the
registrant at March 1, 1999: $8,873,469.
Number of shares of the registrant's common stock outstanding at March 1, 1999:
7,077,000 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1999 Annual Meeting of Shareholders are
incorporated by reference into Part III
<PAGE>
PART I
Item 1. Business
General
National Research Corporation ("NRC" or the "Company") believes it is a
leading provider of ongoing survey-based performance measurement, analysis and
tracking services to the healthcare industry. The Company believes it has
achieved this leadership position based on its over 18 years of industry
experience and its relationships with many of the industry's largest payers and
providers. The Company addresses the growing need of healthcare providers and
payers to measure the care outcomes, specifically satisfaction and health
status, of their patients and/or members. NRC has been at the forefront of the
industry in developing tools that enable healthcare organizations to obtain
service quality information necessary to comply with industry and regulatory
standards and to improve their business practices so that they can maximize new
member and/or patient attraction, member retention and profitability.
Since its founding 18 years ago as a Nebraska corporation (the Company
reincorporated in Wisconsin in September 1997), NRC has focused on the
information needs of the healthcare industry. The Company offers two primary
types of information services: (i) renewable performance tracking services and
custom research and (ii) a renewable syndicated service. During 1998, NRC
provided services to more than 260 healthcare organizations, including health
maintenance organizations ("HMOs"), integrated healthcare systems, medical
groups and industry regulatory bodies. The Company gathered and analyzed over
1,415,000 completed surveys for these clients in 1998.
One of the Company's growth strategies has been to expand its client base
by adding new sales associates and by pursuing strategic opportunities to
acquire other healthcare performance information providers. During 1998, the
Company followed this strategy by hiring new sales associates. In June 1998, the
Company also acquired Healthcare Research Systems, Ltd. ("HRS"), an Ohio-based
provider of survey-based performance measurement, analysis and tracking services
to the healthcare industry.
While performance data has always been of interest to healthcare
providers and payers, such information has become increasingly important to
these entities as a result of regulatory, industry and competitive requirements.
In recent years, the healthcare industry has been under significant pressure
from consumers, employers and the government to reduce costs. Through the
implementation of managed care, which currently covers approximately 75.6% of
all Americans, the rate of growth in healthcare costs has been substantially
reduced. However, the same parties that demanded cost reductions are now
concerned that healthcare service quality is being compromised under managed
care. This concern has created a demand for consistent, objective performance
information by which healthcare providers and payers can be measured and
compared and on which physicians' compensation can, in part, be based.
The NRC Solution
The Company addresses healthcare organizations' growing need to track
their performance at the enterprise-wide, departmental and physician/caregiver
levels. The Company has been at the forefront of the industry in developing
tools that enable its clients to collect, in an unobtrusive manner, a
substantial amount of comparative service quality information in order to
analyze and improve their practices to maximize new member and/or patient
attraction, member retention and profitability.
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NRC's performance assessments offer the tangible measurement of health service
quality currently demanded by consumers, employers, industry accreditation
organizations and lawmakers.
The Company's innovative solutions respond to managed care's redefined
relationships among consumers, employers, payers and providers. While many
vendors exclusively use static, mass produced questionnaires, NRC also utilizes
its dynamic data collection process to create a personalized questionnaire that
evaluates service issues specific to each respondent's specific healthcare
experience. The flexibility of the Company's data collection process allows
healthcare organizations to add timely, market driven questions relevant to
matters such as industry performance mandates, employer performance guarantees
and internal quality improvement initiatives. In addition, the Company assesses
core service factors relevant to all healthcare respondent groups (patients,
members, employers, employees, physicians, etc.) and to all service points of a
healthcare system (inpatient, emergency room, outpatient, home health,
rehabilitation, long-term care, hospice, etc.).
NRC offers two primary types of information services: (i) renewable
performance tracking services and custom research and (ii) a renewable
syndicated service. The NRC Listening System (the "Listening System") is a
renewable performance tracking tool for gathering and analyzing data from survey
respondents. The Company has the capacity to measure performance beyond the
enterprise-wide level and has the ability and experience to determine key
performance indicators at the department and individual physician/caregiver
measurement levels, where the Company's services can best guide the efforts of
its clients to improve quality and enhance their market position. The Company's
custom research enables NRC's clients to conduct specific studies in order to
identify areas of improvement and measure market issues and opportunities. The
syndicated NRC Healthcare Market Guide (the "Market Guide"), a stand-alone
market information and competitive intelligence source as well as a comparative
performance database, allows the Company's clients to assess their performance
relative to the industry, to access best practice examples and to utilize
competitive information for marketing purposes. Recognizing the increasing
applications for self-reported healthcare assessments, NRC works with its
clients to integrate satisfaction measurement into various areas of their
businesses, including physician compensation. As the Company partners with its
clients, it seeks to enhance relationships throughout the healthcare
organization and thereby both broaden and deepen the scope of its projects.
With the acquisition of HRS in June 1998, NRC added HRS' unique service
offerings, including functional disease-specific and health status measurement
tools. These additional services for the healthcare industry enhance existing
services and products available to the Company's clients.
Growth Strategy
The Company believes that it can continue to grow through: (i) expanding
the depth and breadth of its current clients' performance tracking programs,
since healthcare organizations are increasingly interested in gathering
performance information at deeper levels of their organizations and from more of
their constituencies, (ii) increasing the cross-selling of its complementary
services, (iii) adding new clients through penetrating the sizeable portion of
the healthcare industry that is not yet conducting performance assessments
beyond the enterprise-wide level or is not yet outsourcing this function and
(iv) pursuing acquisitions of, or investments in, firms providing products,
services or technologies that complement those of the Company.
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<PAGE>
Services
The Company's primary types of information services are as follows:
Renewable Performance Tracking Services and Custom Research. The
Listening System and custom research represented 89%, 89% and 90% of the
Company's total revenues in 1998, 1997 and 1996, respectively. The Listening
System is NRC's state-of-the-art data collection process which provides ongoing,
renewable performance tracking. This performance tracking program efficiently
coordinates and centralizes an organization's satisfaction monitoring, thereby
establishing a uniform methodology and survey instrument needed to obtain valid
performance information and improve quality. Using the industry method of mail
and/or telephone based data collection, this assessment process monitors
satisfaction across healthcare respondent groups (patients, members, employers,
employees, physicians, etc.) and service settings (inpatient, emergency room,
outpatient, etc.). Rather than be limited to only static, mass produced
questionnaires that provide limited flexibility and performance insights, NRC's
proprietary software generates individualized questionnaires, which include
personalization such as patient name, treating caregiver name, encounter date
and, in some cases, the services received. This personalization enhances the
response rates and the relevance of performance data. Flexible and responsive to
healthcare organizations changing information needs, NRC creates personalized
questionnaires that evaluate service issues specific to each respondent's
specific healthcare experience and include questions that address core service
factors throughout a healthcare organization.
As differentiated from other competitors, the Company gathers data
through one efficient questionnaire, the contents of which are selected from the
Company's library of questions after a client's needs are determined, as opposed
to multiple questionnaires that often bombard the same respondents. As a result,
the Company's renewable performance tracking programs and data collection
process (i) realize higher response rates, obtain data more efficiently, and
thereby provide healthcare organizations with more feedback, (ii) eliminate
oversurveying (where one respondent receives multiple surveys) and (iii) allow
healthcare organizations to adapt questionnaire content to address management
objectives and to assess quality improvement programs or other timely
marketplace issues. Recognizing that performance programs must do more than just
measure satisfaction, NRC has developed a one-page reporting format called the
NRC Action Plan that provides a basis on which to make improvements. NRC Action
Plans show healthcare organizations which service factors their customer groups
value, which have the greatest impact on satisfaction levels and how their
performance in relationship to these key indicators changes over time.
In order to be a sole source provider to its clients, the Company also
conducts custom research that measures and monitors market characteristics or
issues specific to individual healthcare organizations. NRC's custom research
includes consumer recall of promotional and branding campaigns, consumer
response to new service offerings and provider perception of health plans and
healthcare organizations. The Company generally utilizes phone interviews to
collect relevant data for these custom studies.
Renewable Syndicated Service. The Company's renewable nationally
syndicated service, the NRC Healthcare Market Guide, serves as a stand-alone
market information and competitive intelligence source as well as a comparative
performance database. This service accounted for 11%, 11% and 10% of the
Company's total revenues in 1998, 1997 and 1996, respectively. Published by NRC
bi-annually from 1988 to 1996 and annually since 1996, this survey, which is the
largest of its kind, asks consumers via a pre-recruited third-party panel,
members of which are sent Market Guide
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<PAGE>
questionnaires to complete, to evaluate their health plans, health systems,
physicians/caregivers and personal health status. Representing the views of one
in every 650 households across every county in the continental United States,
the Market Guide provides name specific performance data on 600 managed care
plans and 2,500 hospitals nationwide and addresses more than 100 data items
relevant to healthcare payers, providers and purchasers. Utilizing this
proprietary database, the Company is able to produce reports which are
customized to meet individual client's specific information needs. Similarly,
the service's national name search feature allows a healthcare organization with
a national or regional presence to simultaneously compare the performance of all
its sites and pinpoint where strengths and weaknesses exist. The service's
trending capacity details how the performance of a healthcare organization
changes over time. Other data collected in the Market Guide profile health plan
market share, consumers' health plan decision making factors,
physician/caregiver accessibility, hospital/healthcare system quality and
chronic patient populations. The Company gives clients easy access to the
customized version of the Market Guide they purchase via its CD-ROM-based
desktop delivery system C the Report Card System. This delivery system allows
healthcare professionals to generate reports in numerous formats to support
their decision making.
Clients
The Company's ten largest clients accounted for 40%, 64% and 64% of the
Company's total revenues in 1998, 1997 and 1996, respectively. The United States
Department of Defense, through a primary contractor, United Healthcare
Corporation, accounted for 14.6% of total revenues in 1998. HealthSouth
Corporation accounted for 10.2% of total revenues in 1998. Overall, the Company
served more than 260 healthcare organizations in 1998.
Sales and Marketing
The Company has generated the majority of its revenues from client
renewals, supplemented by its internal marketing efforts and a direct sales
force. To increase geographic penetration, NRC increased its five person sales
force to six persons in 1998. New sales associates now direct NRC's sales
efforts from Boston, Massachusetts and Ann Arbor, Michigan. The Company is also
in the process of searching for additional sales associates. As compared to the
typical industry practice of compensating salespeople with relatively high base
pay and a relatively small sales commission, NRC compensates its sales
associates with relatively low base pay and a relatively high, per sale
commission. The Company believes this compensation structure provides incentives
to its sales associates to surpass sales goals and increases the Company's
ability to attract top quality sales associates. The average healthcare/market
research industry experience of the Company's sales associates is over 11 years.
Numerous marketing efforts support the direct sales force's new business
generation and project renewal initiatives. NRC conducts an annual direct
marketing campaign around scheduled trade shows, including leading industry
conferences. NRC uses this lead generation mechanism to track the effectiveness
of marketing efforts and add generated leads to its database of current and
potential client contacts. Finally, the Company's public relations program
includes (i) an ongoing presence in leading industry trade press and in the
mainstream press; (ii) public speaking at strategic industry conferences; (iii)
monthly "Perspectives on Performance" articles (which are in-depth discussions
of performance tracking applications, trends and policies) sent to current
clients and top prospects; (iv) fostering relationships with key industry
constituencies; and (v) an annual Quality Leaders award program recognizing
top-ranking health systems in approximately 100 markets.
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<PAGE>
The Company's integrated marketing activities facilitate its ongoing
receipt of project requests-for-proposals as well as direct sales force
initiated prospect contact. The sales process typically spans a 90-day period
encompassing the identification of a healthcare organization's information
needs, the education of prospects on NRC solutions (via proposals and in-person
sales presentations) and the closing of the sale. The Company's sales cycle
varies depending on the particular service being marketed and the size of the
potential project.
Competition
The healthcare information and market research industry is highly
competitive. The Company has traditionally competed both with healthcare
organizations' internal marketing, market research and/or quality improvement
departments which create their own performance measurement tools and with
relatively small specialty research firms which provide survey-based healthcare
market research and/or performance assessment. The Company, to a certain degree,
currently competes with, and anticipates that in the future it may increasingly
compete with (i) traditional market research firms which are significant
providers of survey-based, general market research and (ii) firms which provide
services or products that complement healthcare performance assessments, such as
healthcare software or information systems. Although only a few of these
competitors have to date offered survey-based, healthcare market research that
competes directly with the Company's services, many of these competitors have
substantially greater financial, information gathering and marketing resources
than the Company and could decide to increase their resource commitments to the
Company's market. There are relatively few barriers to entry into the Company's
market, and the Company expects increased competition in its market, which could
adversely affect the Company's operating results through pricing pressure,
increased marketing expenditures and market share losses, among other factors.
There can be no assurance that the Company will continue to compete successfully
against existing or new competitors.
The Company believes the primary competitive factors within its market
include quality of service, timeliness of delivery, service uniqueness,
credibility of provider, industry experience and price. NRC believes that its
industry leadership position, exclusive focus on the healthcare industry,
dynamic questionnaire, syndicated Market Guide and comparative performance
database, and its relationships with leading healthcare payers and providers
position the Company to compete in this market.
Intellectual Property and Other Proprietary Rights
The Company's success is in part dependent upon its data collection
process, research methods, data analysis techniques and internal systems and
procedures that it has developed specifically to serve clients in the healthcare
industry. The Company has no patents; consequently, it relies on a combination
of copyright, trademark and trade secret laws and employee nondisclosure
agreements to protect its systems and procedures. There can be no assurance that
the steps taken by the Company to protect its rights will be adequate to prevent
misappropriation of such rights or that third parties will not independently
develop functionally equivalent or superior systems or procedures. The Company
believes that its systems and procedures and other proprietary rights do not
infringe upon the proprietary rights of third parties. There can be no
assurance, however, that third parties will not assert infringement claims
against the Company in the future or that any such claims will not result in
protracted and costly litigation, regardless of the merits of such claims.
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<PAGE>
Employees
As of December 31, 1998, the Company employed a total of 104 persons on a
full-time basis. In addition, as of such date, the Company had 246 part-time
associates primarily in its survey operations, representing approximately 123
full-time equivalent employees. None of the Company's employees are represented
by a collective bargaining agreement. The Company considers its relationship
with its employees to be excellent.
Executive Officers of the Registrant
The following table sets forth certain information, as of March 15, 1999,
regarding the executive officers of the Company:
Name Age Positions
Michael D. Hays 44 President, Chief Executive Officer and Director
Jona S. Raasch 40 Vice President and Chief Operations Officer
Patrick E. Beans 41 Vice President, Treasurer, Chief Financial
Officer, Secretary and Director
Michael D. Hays has served as President and Chief Executive Officer and
as a director since he founded the Company in 1981. Prior thereto, Mr. Hays
served for seven years as a Vice President and a director of SRI Research
Center, Inc. (n/k/a the Gallup Organization).
Jona S. Raasch has served as Vice President and Chief Operations Officer
since September 1988. Prior to joining the Company, Ms. Raasch held various
positions with A.C. Nielsen.
Patrick E. Beans has served as Vice President, Treasurer and Chief
Financial Officer since August 1997, as Secretary since September 1997, as a
director since October 1997 and as the principal financial officer since he
joined the Company in August 1994. From June 1993 until joining the Company, Mr.
Beans was the finance director for the Central Interstate Low-Level Radioactive
Waste Commission, a five-state compact developing a low-level radioactive waste
disposal plan. From 1979 to 1988 and from June 1992 to June 1993, he practiced
as a certified public accountant.
Executive officers of the Company are elected by, and serve at the
discretion of, the Company's Board of Directors. There are no family
relationships between any directors or executive officers of NRC.
Item 2. Properties
The Company's headquarters is located in approximately 25,000 square feet
of leased office space in Lincoln, Nebraska. This facility houses all the
capabilities necessary for NRC's survey programming, printing and distribution;
telephone interviewing; data processing, analysis and report generation;
marketing; and corporate administration. The lease on this facility expires on
December 31, 1999.
The Company leases approximately 18,000 square feet of office space in
Columbus, Ohio. This facility houses certain client service and marketing
activities. The Company is currently
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<PAGE>
marketing approximately 8,000 square feet at this facility for sublease. The
lease on this facility expires on October 7, 2000. The Company also leases
approximately 6,000 square feet of office space in Columbus, Ohio, which houses
a telephone call center. The lease on this facility expires on January 31, 2003.
On January 4, 1999, the Company purchased a building in downtown Lincoln,
Nebraska, which the Company will renovate during 1999. The Company intends to
move its headquarters to the new facility in December 1999 and to occupy
approximately 30,000 square feet at the new facility.
Item 3. Legal Proceedings
The Company is not subject to any material pending litigation.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of the Company's 1998 fiscal year.
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<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
(a) The Company's Common Stock, $.001 par value ("Common Stock"), is
traded on the Nasdaq National Market under the symbol "NRCI." The
following table sets forth the range of high and low closing sales prices
for the Common Stock for the period from October 10, 1997, the date of
the initial public offering of the Common Stock, through December 31,
1998:
High Low
Fourth quarter ended December 31, 1997.......... 23 4 7/8
First quarter ended March 31, 1998.............. 9 11/16 5 7/8
Second quarter ended June 30, 1998.............. 10 1/2 8 1/4
Third quarter ended September 30, 1998.......... 9 1/4 3
Fourth quarter ended December 31, 1998.......... 6 15/16 3 1/2
On March 1, 1999, there were approximately 15 shareholders of
record and approximately 1,040 beneficial owners for the Common Stock.
The Company does not intend to pay any cash dividends on its
Common Stock in the foreseeable future. The Company intends to retain all
of its future earnings for use in the expansion and operation of its
business. Any future determination to pay cash dividends will be at the
discretion of the Company's Board of Directors and will depend upon,
among other things, the Company's results of operations, financial
condition, contractual restrictions and such other factors deemed
relevant by the Board of Directors.
Since its S Corporation election in 1994, the Company has made
cash distributions to its shareholders in amounts necessary to allow the
shareholders to at least pay the Federal and state income taxes on their
proportionate shares of the Company's net income. In connection with the
termination of the Company's S Corporation status (which was done
concurrently with the Company's initial public offering of the Common
Stock), the Company made distributions of $2,230,730 to its existing
shareholders. The Company will not make any additional distributions of
this kind in the future.
(b) 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. As of December 31,
1998, the net proceeds to the Company are reasonably estimated to be
applied as follows:
1. Temporary investments of U.S. government securities
of two years or less $10,941,501
2. Acquisition of HRS and related acquisition costs 5,899,588
----------
Total proceeds to the Company $16,841,089
==========
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Item 6. Selected Financial Data
The selected statement of income data for the years ended December 31,
1998, 1997 and 1996 and the balance sheet data at December 31, 1998 and 1997 are
derived from, and are qualified by reference to, the audited financial
statements of the Company included elsewhere in this Annual Report on Form 10-K.
The selected statement of income data for the years ended December 31, 1995 and
1994 and the balance sheet data at December 31, 1996 and 1995 are derived from
audited financial statements not included herein. The balance sheet data at
December 31, 1994 is derived from unaudited financial statements not included
herein.
<TABLE>
<CAPTION>
Year Ended December 31,
------------ ------------ ------------ ------------ ------------
1998(1) 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(In thousands, except per share data)
Statement of Income Data:
Revenues:
<S> <C> <C> <C> <C> <C>
Performance tracking services and customer
research......................................... $ 15,743 $ 14,526 $ 11,324 $ 8,424 $ 6,103
Renewable syndicated service......................... 1,922 1,758 1,276 493 652
------- ------- ------- ------- -------
Total revenues........................... 17,665 16,284 12,600 8,917 6,755
Operating expenses:
Direct expenses.................................... 9,422 7,178 5,685 3,495 2,967
Selling, general and administrative................ 4,843 3,980 3,060 2,364 2,044
Depreciation and amortization...................... 426 159 173 119 86
Acquired-in-process research and development
cost............................................. 2,737 - - - -
Special compensation and severance charge.......... 304 1,740 - - -
------- ------- ------- ------- -------
Total operating expenses................. 17,732 13,057 8,918 5,978 5,097
------- ------- ------- ------- -------
Operating income (loss).............................. (67) 3,227 3,682 2,939 1,658
Other income and expenses, net....................... 849 367 152 108 46
------- ------- ------- ------- -------
Income before income taxes........................... 782 3,594 3,834 3,047 1,704
Provision for income taxes........................... 321 376 - - 114
Pro forma income taxes(2)............................ - 804 1,534 1,219 583
------- ------- ------- ------- -------
Pro forma net income(2).............................. $ 461 $ 2,414 $ 2,300 $ 1,828 $ 1,007
======== ======== ======== ======== ========
Pro forma net income per share - basic and
diluted(2)....................................... $ 0.06 $ 0.37 $ 0.37
======== ======== ========
Weighted average shares outstanding - basic(3)....... 7,283 6,440 6,185
Weighted average shares outstanding - diluted(3)..... 7,301 6,440 6,185
<CAPTION>
December 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital...................................... $ 8,954 $ 17,681 $ 2,018 $ 1,534 $ 1,358
Total assets......................................... 26,279 22,563 6,153 4,996 3,539
Total debt........................................... 105 - - - 9
Total shareholders' equity........................... 17,435 18,121 2,079 1,830 1,623
- ---------------------------
(1) On January 1, 1998, the Company adopted the American Institute of Certified
Public Accountants Statement of Position No. 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use.
(2) From 1984 through July 31, 1994, the Company was a C Corporation. From
August 1, 1994 through October 13, 1997, the Company was an S Corporation
and, accordingly, was not subject to Federal and state income taxes for the
five months ended December 31, 1994, for the years ended December 31, 1995
and 1996 or from January 1, 1997 to October 13, 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.
(3) Includes 129,812 shares of Common Stock in 1997 and 1996, which, had they
been issued (at $13.95 per share, the initial public offering price less
the underwriting discount), would have generated cash sufficient to fund
the portion of the estimated S Corporation distributions and special (cash)
compensation expense that are in excess of the Company's 1996 net income.
See Note 1 to the Company's Financial Statements.
</TABLE>
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Special Note Regarding Forward-Looking Statements
Certain matters discussed below in this Annual Report on Form 10-K are
"forward-looking statements" intended to qualify for the safe harbors from
liability established by the Private Securities Litigation Reform Act of 1995.
These forward-looking statements can generally be identified as such because the
context of the statement includes phrases such as the Company "believes,"
"expects" or other words of similar import. Similarly, statements that describe
the Company's future plans, objectives or goals, as well as the estimated costs
and timetable for Year 2000 compliance, are also forwarding-looking statements.
Such forward-looking statements are subject to certain risks and uncertainties
which could cause actual results or outcomes to differ materially from those
currently anticipated. Factors that could affect actual results or outcomes
include, without limitation, the Company's reliance on a limited number of key
clients for a substantial portion of its revenues, the Company's dependence on
performance tracking contract renewals, fluctuations in the Company's operating
results related to the Market Guide, increased competition, changes in
conditions affecting the healthcare industry, the Company's ability to manage
its growth and to successfully integrate any possible future acquisitions, the
Company's ability to provide timely and accurate performance tracking and market
research to its clients and the success of third parties regarding compliance
with Year 2000 issues. Shareholders, potential investors and other readers are
urged to consider these factors in evaluating the forward-looking statements and
are cautioned not to place undue reliance on such forward-looking statements.
The forward-looking statements included are only made as of the date of this
Annual Report on Form 10-K and the Company undertakes no obligation to publicly
update such forward-looking statements to reflect subsequent events or
circumstances.
Overview
The Company believes it is a leading provider of ongoing survey-based
performance measurement, analysis and tracking services to the healthcare
industry. The Company offers two primary types of information services: (i)
renewable performance tracking services and custom research and (ii) a renewable
syndicated service.
The Company's renewable performance tracking service, the Listening
System, is a performance tracking tool for gathering and analyzing data from
survey respondents. Such services are provided pursuant to contracts which are
generally renewable annually and that provide for a customer specific study
which is conducted via a series of surveys and delivered via a series of updates
or reports, the timing and frequency of which vary by contract (such as monthly
or weekly). These contracts are generally cancelable on short or no notice
without penalty and, since progress on these contracts can be tracked and
regular updates and reports are made, clients are entitled to any
work-in-process but are obligated to pay for all services performed through
cancellation. Typically, these contracts are fixed fee arrangements and a
portion of the project fee is billed in advance, and the remainder is billed
periodically over the duration of the project. The Company conducts custom
research which measures and monitors market issues specific to individual
healthcare organizations. The majority of the Company's custom research is
performed under contracts which provide for advance billing of 65% of the total
project fee with the remainder due upon delivery. Revenues and direct expenses
for the Company's renewable performance tracking services and custom research
are recognized on a percentage of completion basis.
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<PAGE>
The Company's renewable nationally syndicated service, the Market Guide,
serves as a stand-alone market information and competitive intelligence source
as well as a comparative performance database. Published by NRC bi-annually from
1988 to 1996 and annually since 1996, this survey is a comprehensive
consumer-based healthcare assessment. Market Guide services are generally
provided pursuant to contracts which have durations of four to six months and
that provide for the receipt of survey results that are customized to meet an
individual client's specific information needs. Typically, these contracts are
not cancelable by clients, clients receive no rights in the comprehensive
healthcare database which results from this survey, other than the right to use
the customized reports purchased pursuant thereto, and amounts due for the
Market Guide are billed prior to or at delivery. The Company recognizes revenue
when the Market Guides are delivered to the customers pursuant to their
contracts, typically in the third quarter of the year. Substantially all of the
related costs are deferred and subsequently charged to direct expenses
contemporaneously with the recognition of the revenue. The Company generally has
some incidental sales of the Market Guide subsequent to completion of each
edition. Revenues and marginal expenses related to such incidental sales are
recognized upon delivery. The profit margin earned on such revenues is generally
higher than that earned on revenues realized from customers under contract at
the time of delivery. As a result, the Company's margins vary throughout the
year.
Results of Operations
The following table sets forth, for the periods indicated, selected
financial information derived from the Company's financial statements, expressed
as a percentage of total revenues and the percentage change in such items versus
the prior comparable period. 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 Company's financial statements.
<TABLE>
<CAPTION>
Percentage of Total Revenues Percentage Increase
Year Ended December 31, (Decrease)
1998 over 1997 over
1998 1997 1996 1997 1996
---- ---- ---- ---- ----
Revenues:
<S> <C> <C> <C> <C> <C>
Performance tracking services
and custom research....................... 89.1% 89.2% 89.9% 8.4% 28.3%
Renewable syndicated service................. 10.9 10.8 10.1 9.3 37.7
---- ----- -----
Total revenues...................... 100.0 100.0 100.0 8.5 29.2
===== ===== =====
Operating expenses:
Direct expenses.............................. 53.3 44.1 45.1 31.3 26.3
Selling, general and administrative.......... 27.4 24.4 24.3 21.7 30.1
Depreciation and amortization................ 2.4 1.0 1.4 167.8 (8.2)
Acquired-in-process research and
development cost.......................... 15.5 - - 100.0 -
Special compensation and severance
charge................................... 1.7 10.7 - (82.5) 100.0
----- ----- -----
Total operating expenses............ 100.3 80.2 70.8 35.8 46.4
----- ----- -----
Operating income (loss)........................ (0.3)% 19.8% 29.2% (102.1)% (12.4)%
==== ===== =====
</TABLE>
-12-
<PAGE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Total revenues. Total revenues increased 8.5% in 1998 to $17.7 million
from $16.3 million in 1997. Revenues from the Company's renewable performance
tracking services and custom research increased 8.4% to $15.7 million in 1998
from $14.5 million in 1997 primarily due to the addition of new clients and 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 9.3% to $1.9 million in 1998 from $1.8 million in
1997. Such increase reflects the addition of new syndicated service clients.
Direct expenses. Direct expenses increased 31.3% to $9.4 million in 1998
from $7.2 million in 1997. The increase in direct expenses in the 1998 was due
primarily to an increase in labor and payroll expenses of $1.5 million (which
was due partially to increased costs associated with the addition of a telephone
call center and with increased revenues) and, to a lesser extent, increases in
outside field services of $358,000, telephone expenses of $109,000, rent and
office expenses of $78,000 and software conversion costs of $120,000; which were
offset by a decrease in printing and postage of $146,000 (which was partially
due to the increase in the telephone methodology associated with projects
acquired from HRS). Direct expenses increased as a percentage of total revenues
to 53.3% in 1998 from 44.1% during 1997 due to an increase in telephone
methodology, which increases labor costs, as a percentage of total revenues.
Direct expenses as a percentage of total revenues are expected to remain at
similar levels in 1999.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 21.7% to $4.8 million in 1998 from $4.0
million in 1997. This increase was primarily due to an increase of $452,000
associated with the expansion of the Company's sales and marketing workforce, an
increase of $238,000 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 $196,000 associated with being a public
company, which were offset by a decrease of $132,000 in expenses related to
enhancements to the Company's software. Selling, general and administrative
expenses increased as a percentage of total revenues to 27.4% in 1998 from 24.4%
in 1997 due to excess rental space leased by the Company from June 1998 to
December 1998 and increased costs related to being a public company.
Depreciation and amortization. Depreciation and amortization expenses
increased 167.8% to $426,000 in 1998 from $159,000 in 1997 partially due to the
acquisition of HRS. The increase in amortization due to HRS acquisition
intangible assets in 1998 was $127,000. Depreciation and amortization expenses
increased as a percentage of total revenues to 2.4% in 1998 from 1.0% in 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 $2.7 million for costs assigned to in-process
research and development activities of HRS 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 $1.9 million, or $0.26 per share.
Provision for income taxes. The provision for income taxes totaled
$321,000 (40.9% effective tax rate) for 1998 compared to $376,000 for 1997, plus
pro forma taxes for 1997 of $803,000, for total income taxes for 1997 of
$1,179,000 (32.8% effective tax rate), which included a $258,000 nonrecurring
income tax benefit created by the termination of the Company's S Corporation
status in
-13-
<PAGE>
October 1997 in connection with the Company's initial public offering. Without
the nonrecurring income tax benefit, total income taxes for 1997 would have been
$1,437,000 (39.9% effective tax rate).
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Total revenues. Total revenues increased 29.2% in 1997 to $16.3 million
from $12.6 million in 1996. Revenues from the Company's renewable performance
tracking services and custom research increased 27.3% in 1997 to $14.5 million
from $11.3 million in 1996 due primarily to the addition of new clients and, to
a lesser extent, an increase in the scope of existing tracking projects.
Revenues from the Company's renewable syndicated service increased 37.7% to $1.8
million in 1997 from $1.3 million in 1996. Such increase reflects the addition
of new syndicated service clients.
Direct expenses. Direct expenses increased 26.3% to $7.2 million in 1997
from $5.7 million in 1996. The increase in direct expenses was due to increases
in postage expenses of $630,000, printing expenses of $161,000 and labor and
payroll expenses of $642,000. Direct expenses decreased as a percentage of total
revenues to 44.1% in 1997 from 45.1% in 1996. The decrease in direct expenses as
a percentage of total revenues was due primarily to incidental sales of the 1996
edition of the Market Guide during 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 30.1% to $4.0 million in 1997 from $3.1
million in 1996. This increase was primarily due to an increase of $443,000
associated with the expansion of the Company's sales and marketing work force,
an increase of $126,000 in expenses related to enhancements to the Company's
dynamic questionnaire production software and an increase of $68,000 in profit
sharing expense. Selling, general and administrative expenses increased as a
percentage of revenues to 24.4% in 1997 from 24.3% in 1996.
Depreciation and amortization. Depreciation and amortization expense
decreased 8.2% to $159,000 in 1997 from $173,000 in 1996 but remained relatively
constant as a percentage of revenues at 1.0% and 1.4% in 1997 and 1996,
respectively.
Provision for income taxes. The provision for income taxes totaled
$376,000 for 1997, plus pro forma income taxes for 1997 of $803,000, for total
income taxes for 1997 of $1,179,000 (32.8% effective tax rate), which included a
$258,000 nonrecurring income tax benefit created by the termination of the
Company's S Corporation status in October 1997 in connection with the Company's
initial public offering. Without the nonrecurring income tax benefit, total
income taxes for 1997 would have been $1,437,000 (39.9% effective tax rate),
which compared to a $1,534,000 pro forma income tax expense for 1996 (40.0%
effective tax rate).
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 December 31, 1998, the Company had cash and cash equivalents of
$4.9 million and working capital of $9.0 million.
-14-
<PAGE>
During 1998, the Company generated $4.0 million of net cash from
operating activities as compared to $1.5 million of net cash generated during
1997. The increase in cash flow was due, in part, to the timing of the
collection of account receivables and the timing of costs incurred in advance of
billings on certain projects, combined with the decrease in accounts receivable
and the growth in unbilled revenues and deferred revenues.
Net cash used in investing activities was $2.6 million for 1998 and $12.1
million for 1997. The 1998 use of cash was primarily a result of the acquisition
of HRS in June 1998 and the investment of $1.9 million in furniture, computer
equipment, computer software and production equipment. Part of this latter
investment was to meet the expansion of the Company's business and was for a
reengineering process for the Company's computer software and equipment, which
will be the platform for future expansion of the Company's business. These uses
of cash were partially offset by a decrease in investments available-for-sale of
$5.2 million. The 1997 increase in cash used by investing activities was
primarily due to the purchasing of investments available-for-sale, which was
offset by an investment of $341,000 in furniture, computer equipment and
production equipment to meet the expansion of the Company's business. The
Company's investments available-for-sale consist principally of United States
government securities with maturities of two years or less.
Net cash used in financing activities was $1.2 million for 1998, compared
to net cash provided of $12.5 million in 1997. The 1998 use of cash was
primarily a result of the Company's stock repurchase program announced in
October 1998. The Company repurchased 213,000 shares of Common Stock during the
fourth quarter of 1998 at a cost of $1.1 million. Net cash provided by financing
activities for 1997 was the result of the Company's receipt of approximately
$16.8 million of net proceeds from its initial public offering. The primary use
of cash for financing activities in 1997 was S Corporation distributions to
shareholders of $4.4 million.
The Company has budgeted approximately $1.5 million for expenditures in
1999, to be funded through cash generated from operations. The Company expects
that capital expenditures during 1999 will be primarily for telecommunications
equipment, computer hardware and software, product equipment and furniture. In
addition, the Company purchased a building on January 4, 1999 for $1.4 million
and plans to spend an additional $3.0 million during 1999 to renovate the
building. Following the renovation, the Company intends to move its headquarters
to such building in December 1999. The Company intends to secure long-term
financing on the building for approximately $3.8 million.
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 December 31, 1998 and 1997, the Company had $3.3
million and $2.3 million of deferred revenues, respectively. In addition, when
work is performed in advance of billing, the Company records this work as a cost
in excess of billings or unbilled revenue. At December 31, 1998 and 1997, the
Company had $1.0 million 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.
Stock Repurchase Program
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 213,000 shares during the fourth quarter of
1998 and an additional 27,000 shares through February 28, 1999.
-15-
<PAGE>
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 complaint.
Many of the external software programs used by the Company were already
Y2K complaint. 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 complaint on an ongoing basis and all mission-critical hardware will
be Y2K complaint 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, it 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 complaint 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 $95,000. A majority
of these costs have been included in the ongoing upgrading and standardization
of the Company's systems. Approximately $36,000 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.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"). SFAS 133 requires that all derivatives be
recognized as either assets or liabilities in the balance sheet and measured at
their fair value. If certain conditions are met, a derivative may be
specifically designated as (i) a hedge of the exposure to changes in the fair
value of a recognized asset
-16-
<PAGE>
or liability or an unrecognized firm commitment, (ii) a hedge of the exposure to
variable cash flows of a forecasted transaction or (iii) a hedge of the foreign
currency exposure of a net investment in a foreign operation, an unrecognized
firm commitment, an available-for-sale security or a foreign-currency
denominated forecasted transaction. SFAS 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company does not
expect the effect of SFAS 133 to be significant to its financial reporting.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
The impact of financial market risk exposure to the Company is not
significant. The Company's primary financial market risk exposure consists of
interest rate risk related to interest income from the Company's investments in
United States government securities with maturities of two years or less. The
Company has invested and expects to continue to invest a substantial portion of
its excess cash in such securities. See Note 3 to the Company's financial
statements. Generally, if the overall average return on such securities owned as
of December 31, 1998 decreased .25% in 1999 from the average return in 1998,
then the Company's interest income would decrease, and pre-tax income would
decrease approximately $28,000. This amount is determined by considering the
impact of a hypothetical change in interest rates on the Company's interest
income.
-17-
<PAGE>
Item 8. Financial Statements and Supplementary Data
Quarterly Financial Data (Unaudited)
Selected quarterly financial information for the fiscal years ended
December 31, 1998 and 1997 is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Quarter
Ended
----------------------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31,
1998 1998 1998(1) 1998(2) 1997 1997 1997 1997
Revenues:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Renewable performance tracking
services and custom research...... $ 4,171 $ 4,608 $ 3,860 $ 3,105 $ 4,141 $ 3,879 $ 3,407 $ 3,099
Renewable syndicated services...... 444 1,006 170 301 462 852 103 341
----- ----- ------ ------ ----- ----- ------ ------
Total revenues.............. 4,615 5,614 4,030 3,406 4,603 4,731 3,510 3,440
Direct expenses...................... 2,507 3,390 2,016 1,509 1,840 2,327 1,618 1,393
Selling, general and administrative.. 1,173 1,239 1,243 1,189 1,149 995 886 951
Depreciation and amortization........ 181 126 66 52 37 43 37 42
Acquired in-process research and
development cost.................. -- -- 2,737 -- -- -- -- --
Special compensation charge.......... -- -- 304 -- 1,740 -- -- --
----- ----- ------ ------ ----- ----- ------ ------
Operating income (loss).............. 754 859 (2,336) 656 (163) 1,366 969 1,054
Other income and expenses, net....... 162 171 254 262 215 55 52 45
Provision for income taxes........... 358 403 (797) 357 376 -- -- --
Pro forma income taxes (benefit)(3).. -- -- -- -- (613) 568 408 440
----- ----- ------ ------ ----- ----- ------ ------
Pro forma net income(3).............. $ 558 $ 627 $(1,285) $ 561 $ 289 $ 853 $ 613 $ 659
====== ====== ======= ======= ====== ====== ======= =======
Pro forma net income per share - basic
and diluted(3).................... $ 0.08 $ 0.09 $ (0.18) $ 0.08 $ 0.04 $ 0.14 $ 0.10 $ 0.11
Weighted average shares outstanding -
basic (4)......................... 7,218 7,305 7,305 7,305 7,195 6,185 6,185 6,185
Weighted average shares outstanding -
diluted (4)....................... 7,250 7,305 7,305 7,305 7,195 6,185 6,185 6,185
- -----------------------
(1) The financial information for the three months ended June 30, 1998 has been
restated to reflect a revised charge for acquired in-process research and
development cost and a correction in the accrual of interest income. The
Company previously reported (pro forma) a net loss of $1.4 million, or a
loss per share of $0.19, based upon the Company's initial valuation of
acquired in-process research and development cost and including previously
recognized interest income. The charge for acquired research and
development cost was revised to conform with recent guidance from the
Securities and Exchange Commission on such valuations.
(2) On January 1, 1998, the Company adopted the American Institute of Certified
Public Accountants Statement of Position No. 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use.
(3) From August 1, 1994 through October 13, 1997, the Company was an S
Corporation and, accordingly, was not subject to Federal and state income
taxes for any of the quarterly periods presented, except from October 14,
1997 to December 31, 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.
(4) Includes 129,812 shares of Common Stock in 1997, which, had they been
issued (at $13.95 per share, the initial public offering price less the
underwriting discount), would have generated cash sufficient to fund the
portion of the estimated S Corporation distributions and special (cash)
compensation expense that are in excess of the Company's 1996 net income.
See Note 1 to the Company's Financial Statements.
</TABLE>
-18-
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
National Research Corporation:
We have audited the accompanying balance sheets of National Research Corporation
as of December 31, 1998 and 1997 and the related statements of income,
shareholders= equity and cash flows for each of the years in the three-year
period ended December 31, 1998. 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 generally accepted auditing
standards. 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 National Research Corporation
as of December 31, 1998 and 1997 and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
On January 1, 1998, National Research Corporation 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.
KPMG Peat Marwick LLP
Lincoln, Nebraska
February 12, 1999
-19-
<PAGE>
<TABLE>
<CAPTION>
NATIONAL RESEARCH CORPORATION
Balance Sheets
December 31, 1998 and 1997
Assets 1998 1997
------ ---- ----
Current assets:
<S> <C> <C>
Cash and cash equivalents.............................................. $ 4,887,712 $ 4,688,352
Investments in marketable debt securities.............................. 8,009,343 13,220,553
Trade accounts receivable, less allowance for doubtful
accounts of $61,891 and $62,808 in 1998 and 1997,
respectively......................................................... 2,940,356 3,094,772
Unbilled revenues...................................................... 1,030,351 559,856
Prepaid expenses and other............................................. 165,037 184,156
Deferred income taxes.................................................. 222,500 127,225
------------- -------------
Total current assets............................................. 17,255,299 21,874,914
------------- -------------
Property and equipment:
Furniture and equipment................................................ 509,541 382,654
Computer equipment..................................................... 2,619,326 681,563
------------- -------------
3,128,867 1,064,217
Less accumulated depreciation and amortization......................... 840,284 544,262
------------- -------------
Net property and equipment....................................... 2,288,583 519,955
------------- -------------
Deferred income taxes.................................................... 548,506 155,775
Goodwill and other intangible assets, net of accumulated amortization.... 6,160,209 ---
Other.................................................................... 26,582 12,482
------------- -------------
Total assets..................................................... $ 26,279,179 $ 22,563,126
============== ==============
Liabilities and Shareholders' Equity
Current liabilities:
Purchase price payable................................................. $ 2,650,000 $ --
Current portion - notes payable........................................ 30,754 --
Accounts payable....................................................... 681,843 330,744
Accrued expenses....................................................... 747,885 285,186
Accrued wages, bonuses and profit sharing.............................. 907,743 1,161,917
Income taxes payable................................................... --- 118,000
Billings in excess of revenues earned.................................. 3,283,462 2,297,751
------------- -------------
Total current liabilities........................................ 8,301,687 4,193,598
Notes payable, net of current portion.................................... 74,694 ---
Bonuses and profit sharing accruals...................................... 157,472 248,684
Other accrued expenses................................................... 310,793 ---
------------- -------------
Total liabilities................................................ 8,844,646 4,442,282
------------- -------------
Shareholders' equity:
Preferred stock, $.01 par value; authorized 2,000,000 shares
no shares issued and outstanding..................................... --- ---
Common stock, $.001 par value; authorized 20,000,000 shares,
issued 7,305,000 in 1998 and in 1997................................. 7,305 7,305
Additional paid-in capital............................................. 16,839,839 16,839,839
Retained earnings...................................................... 1,734,983 1,273,700
Treasury stock, at cost; 213,000 shares in 1998; and 0 shares in 1997.. (1,147,594) ---
------------- -------------
Total shareholders' equity....................................... 17,434,533 18,120,844
------------- -------------
Commitments and contingencies
Total liabilities and shareholders' equity....................... $ 26,279,179 $ 22,563,126
============= ==============
See accompanying notes to financial statements.
</TABLE>
-20-
<PAGE>
<TABLE>
<CAPTION>
NATIONAL RESEARCH CORPORATION
Statements of Income
Three years ended December 31, 1998
1998 1997 1996
---- ---- ----
Revenues:
<S> <C> <C> <C>
Performance tracking services and custom research.. $ 15,743,024 $ 14,526,442 $ 11,323,810
Renewable syndicated service....................... 1,921,658 1,757,691 1,276,423
------------- ------------- -------------
Total revenues............................... 17,664,682 16,284,133 12,600,233
------------- ------------- -------------
Operating expenses:
Direct expenses.................................... 9,422,342 7,178,408 5,685,200
Selling, general and administrative................ 4,842,584 3,980,316 3,060,189
Depreciation and amortization...................... 425,876 159,013 173,148
Acquired-in-process research and development cost.. 2,737,542 --- ---
Special compensation and severance charge.......... 303,740 1,740,000 ---
------------- ------------- -------------
Total operating expenses..................... 17,732,084 13,057,737 8,918,537
------------- ------------- -------------
Operating income (loss)...................... (67,402) 3,226,396 3,681,696
------------- ------------- -------------
Other income:
Net interest income................................ 844,813 366,978 125,948
Other, net......................................... 4,380 55 26,484
------------- ------------- -------------
Total other income........................... 849,193 367,033 152,432
------------- ------------- -------------
Income before income taxes................... 781,791 3,593,429 3,834,128
Provision for income taxes......................... 320,508 376,000 ---
------------- ------------- -------------
Net income................................... $ 461,283 $ 3,217,429 $ 3,834,128
============= ============= =============
Pro forma information:
Net income......................................... $ 461,283 $ 3,217,429 $ 3,834,128
Pro forma income taxes............................. --- 803,463 1,533,651
------------- ------------- -------------
Pro forma net income......................... $ 461,283 $ 2,413,966 $ 2,300,477
============= ============= =============
Pro forma net income per share - basic and diluted... $ 0.06 $ 0.37 $ 0.37
============= ============= =============
See accompanying notes to financial statements.
</TABLE>
-21-
<PAGE>
<TABLE>
<CAPTION>
NATIONAL RESEARCH CORPORATION
Statements of Shareholders' Equity
Three years ended December 31, 1998
Additional
Preferred Common Paid-in Retained Treasury
Stock Stock Capital Earnings Stock Total
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995..... $ --- $ 6,055 $ --- $ 1,823,510 $ --- $ 1,829,565
Net income........................ --- --- --- 3,834,128 --- 3,834,128
Dividends declared, $.59 per share --- --- --- (3,584,286) --- (3,584,286)
------------ ------------ ------------ ------------ ------------- -----------
Balances at December 31, 1996..... --- 6,055 --- 2,073,352 --- 2,079,407
Issuance of 1,250,000 shares of
common stock, net of offering
expenses....................... --- 1,250 16,839,839 --- --- 16,841,089
Net income........................ --- --- --- 3,217,429 --- 3,217,429
Dividends declared, $.55 per share --- --- --- (4,017,081) --- (4,017,081)
------------ ------------ ------------ ------------ ------------ -----------
Balances at December 31, 1997..... --- 7,305 16,839,839 1,273,700 --- 18,120,844
Net income........................ --- --- --- 461,283 --- 461,283
Purchase of 213,000 shares
of treasury stock.............. --- --- --- --- (1,147,594) (1,147,594)
------------ ------------ ------------ ------------ ----------- -----------
Balances at December 31, 1998..... $ --- $ 7,305 $ 16,839,839 $ 1,734,983 $ (1,147,594) $ 17,434,533
============ ============ ============ ============ =========== ============
See accompanying notes to financial statements.
</TABLE>
-22-
<PAGE>
<TABLE>
<CAPTION>
NATIONAL RESEARCH CORPORATION
Statements of Cash Flows
Three years ended December 31, 1998
1998 1997 1996
---- ---- ----
Cash flows from operating activities
<S> <C> <C> <C>
Net income........................................... $ 461,283 $ 3,217,429 $ 3,834,128
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization...................... 425,876 159,013 173,148
Acquired in-process research and development cost.. 2,737,542 --- ---
Loss on sale of property and equipment............. (2,489) --- 32,837
Change in assets and liabilities:
Trade accounts receivable...................... 1,278,132 (1,877,960) 1,695,310
Unbilled revenues.............................. (260,819) (277,498) (185,024)
Prepaid expenses and other..................... 27,665 (139,959) (21,412)
Deferred tax asset............................. (3,600) (283,000) ---
Accounts payable............................... (698,495) (163,870) 134,626
Accrued expenses............................... 135,620 285,186 ---
Accrued wages, bonuses and profit sharing...... (504,157) 359,374 402,788
Billings in excess of revenues earned.......... (93,646) 129,725 279,872
Income taxes payable........................... 465,827 118,000 ---
--------------- ------------- -------------
Net cash provided by operating activities... 3,968,739 1,526,440 6,346,273
--------------- ------------- -------------
Cash flows from investing activities:
Purchases of property and equipment.................. (1,927,929) (341,339) (272,235)
Acquisition, net of cash acquired.................... (5,899,588) --- ---
Purchases of securities available-for-sale........... (11,611,973) (13,553,644) (4,154,720)
Proceeds from the maturities of securities
available-for-sale................................. 16,823,183 1,810,058 3,265,000
Proceeds from sale of property and equipment 13,112 -- --
--------------- --------------- ---------------
Net cash used in investing activities....... (2,603,195) (12,084,925) (1,161,955)
--------------- --------------- ---------------
Cash flows from financing activities:
Dividends paid....................................... --- (4,376,464) (3,336,906)
Payments on notes payable............................ (18,590) --- ---
Proceeds from issuance of common stock............... --- 16,841,089 ---
Payments to acquire common stock..................... (1,147,594) --- ---
--------------- --------------- ---------------
Net cash provided by (used in)
financing activities...................... (1,166,184) 12,464,625 (3,336,906)
--------------- --------------- ---------------
Net increase in cash and
cash equivalents.......................... 199,360 1,906,140 1,847,412
Cash and cash equivalents at beginning of period....... 4,688,352 2,782,212 934,800
--------------- --------------- ---------------
Cash and cash equivalents at end of period............. $ 4,887,712 $ 4,688,352 $ 2,782,212
=============== ============== ==============
Supplementary information Cash paid for:
Interest........................................... $ 7,360 $ --- $ ---
=============== =============== ===============
Taxes.............................................. $ 928,246 $ 541,000 $ ---
=============== =============== ===============
Noncash investing and financing activities:
In 1996, the Company assigned a life insurance policy to its majority
shareholder and recorded a dividend of $178,236 for the cash surrender
value of the life insurance policy.
In 1998, the Company assumed liabilities of $0.6 million and incurred
purchase price payable of $2.7 million in connection with the acquisition
of a business.
See accompanying notes to financial statements.
</TABLE>
-23-
<PAGE>
NATIONAL RESEARCH CORPORATION
Notes to Financial Statements
(1) Summary of Significant Accounting Policies
Description of Business and Basis of Presentation
National Research Corporation (the ACompany@) is a provider of ongoing
survey-based performance measurement, analysis and tracking services to the
healthcare industry. The Company provides market research services to hospitals
and insurance companies on an unsecured credit basis. One client accounted for
31.1% and 40.4% of total revenues in 1997 and 1996, respectively. This client
canceled its contract for performance measurement studies in December of 1997. A
second client accounted for 14.6%, 15.1% and 3.5% of total revenues in 1998,
1997 and 1996, respectively. A third client accounted for 10.2% and 6.2% of
total revenues in 1998 and 1997, respectively. The Company operates in a single
industry segment.
Basis of Presentation
Pro Forma Net Income and Net Income Per Share - Pro forma net income and
pro forma income per share has been computed assuming that the Company had been
taxed as a C Corporation for Federal and state income tax purposes for all
periods presented. Pro forma income per share has been calculated and presented
for Abasic" and Adiluted" data. Pro forma income per share is computed by
dividing net income by the weighted average number of common shares. Diluted
income per share is computed by dividing net income by the weighted average
number of common shares and common equivalent shares outstanding.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 98, weighted average shares outstanding for 1997 and 1996 include the pro
forma effect of shares that would have had to have been issued (at $13.95 per
share, the initial public offering price less the underwriting discount expense)
to generate sufficient cash to fund the portion of the approximately $5.6
million of S Corporation distributions and special (cash) compensation expense
that are in excess of the net income for the year ended December 31, 1996. The
weighted average shares outstanding is calculated as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Common stock................................... 7,283,051 6,309,728 6,055,000
Dilutive effect of assumed initial public
offering shares for distribution............. -- 129,812 129,812
---------- ---------- ----------
Weighted average common shares - Basic 7,283,051 6,439,540 6,184,812
Dilutive effect of options issued.............. 18,315 694 --
---------- ---------- ----------
Weighted average common shares and common
share equivalents - Diluted.................. 7,301,366 6,440,234 6,184,812
========== ========== ==========
</TABLE>
There are no reconciling items between the Company's reported (pro forma)
net income and (pro forma) net income used in the computation of basic and
diluted income per share.
-24-
<PAGE>
NATIONAL RESEARCH CORPORATION
Notes to Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
The Company derives a majority of its operating revenues from its
annually renewable services, which include the NRC Listening System
(APerformance Tracking Services") and the NRC Healthcare Market Guide
(ARenewable Syndicated Service"). Under the NRC Listening System, the Company
provides interim and annual performance tracking to its clients under annual
client service contracts, although such contracts are generally cancelable on
short or no notice without penalty. Through its syndicated NRC Healthcare Market
Guide, the Company publishes healthcare market information to its clients
generally on an annual or (prior to 1996) biannual basis. The Company also
derives revenues from custom and other research projects.
The Company recognizes revenues from its Performance Tracking Services
and its custom and other research projects using the percentage of completion
method of accounting. These services typically include a series of surveys and
deliverable reports in which the timing and frequency vary by contract. Progress
on a contract can be tracked reliably and customers are obligated to pay as
services are performed. The recognized revenue is the percent of estimated total
revenues that incurred costs to date bear to estimated total costs after giving
effect to estimates of costs to complete based upon most recent information.
Losses expected to be incurred on jobs in progress are charged to income as soon
as such losses are known. Revenues earned on contracts in progress in excess of
billings are classified as a current asset. Amounts billed in excess of revenues
earned are classified as a current liability. Client projects are generally
completed within a twelve-month period.
The Company recognizes revenue on a completed contract basis for its
Renewable Syndicated Service contracts with its principal customers.
Characteristics of these contracts include durations of four to six months,
progress to completion cannot be reasonably defined, and various intermediate
steps in the process overlap in stages of progress for different contracts. The
Company defers direct costs of preparing the survey data for the Renewable
Syndicated Service. The Company recognizes revenues and related direct costs for
its Renewable Syndicated Service upon delivery to its principal customers.
Customers have no obligation to pay for these services until the services are
delivered. The Company generates additional revenues from incidental customers
subsequent to the completion of each edition. Revenues and costs for these
services are recognized as the customization services are performed and
completed.
Property and Equipment
Property and equipment is stated at cost. Major expenditures to purchase
property or to substantially increase useful lives of property are capitalized.
Maintenance, repairs and minor renewals are expensed as incurred. When assets
are retired or otherwise disposed of, their costs and related accumulated
depreciation are removed from the accounts and resulting gains or losses are
included in income.
-25-
<PAGE>
NATIONAL RESEARCH CORPORATION
Notes to Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
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 involves 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 $1,494,000 of costs incurred for the development
of internal use software for the year ended December 31, 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.
The Company provides for depreciation and amortization of property and
equipment using annual rates which are sufficient to amortize the cost of
depreciable assets over their estimated useful lives. The Company uses
accelerated methods of depreciation and amortization over estimated useful lives
of five to seven years for furniture and fixtures and three to five years for
computer equipment.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets, which represent the excess of
purchase price over fair value of net assets acquired, are amortized on a
straight-line basis over the expected periods to be benefited, 10 to 20 years.
The Company assesses the recoverability of these intangible assets by
determining whether the amortization of the intangible asset balances over their
remaining life can be recovered through undiscounted future operating cash flows
of the acquired operation.
Marketable Securities
All marketable securities held by the Company at December 31, 1998 and
1997 were classified as available-for-sale and recorded at cost, which
approximates market value. Unrealized holding gains and losses (if any), net of
the related tax effect, on available-for-sale securities are excluded from
income and are reported as a separate component of shareholders= equity until
realized. Realized gains and losses from the sale of available-for-sale
securities are determined on a specific-identification basis. Fair values are
estimated based on quoted market prices.
Income Taxes
Effective August 1, 1994, the Company, with the consent of its
shareholders, elected under the Internal Revenue Code to be an S Corporation. In
lieu of corporation income taxes, the shareholders of an S Corporation are taxed
on their proportionate share of the Company's taxable income. The Company
terminated its S Corporation election on October 13, 1997. Therefore, no
provision or liability for federal income taxes has been included in these
financial statements for the period from January 1, 1997 through October 13,
1997 and for the year ended December 31, 1996. Income taxes have been provided
on the Company's taxable income from October 14, 1997 through December 31, 1997
and for the year ended December 31, 1998.
-26-
<PAGE>
NATIONAL RESEARCH CORPORATION
Notes to Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
Upon the termination of its S Corporation election, the Company adopted
the asset and liability method of accounting for income taxes of Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes.
Under that method, deferred income tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases using enacted tax rates. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. Valuation allowances, if any, are established
when necessary to reduce deferred tax assets to the amount that is more likely
than not to be realized.
Stock Option Plans
The Company recognizes stock-based compensation expense for its stock
option plans using the intrinsic value method. Under that method, no
compensation expense is recorded if the exercise price of the employee stock
options equals or exceeds the market price of the underlying stock on the date
of grant. For disclosure purposes, pro forma net income and income per share are
provided as if the fair value method had been applied.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less to be
cash equivalents.
Comprehensive Income
Other than unrealized holding gains on securities available-for-sale, the
Company has no sources of other comprehensive income. Because the cost of the
Company's available-for-sale securities approximated market value in 1998, 1997
and 1996, the Company had no other comprehensive income for the three years
ended December 31, 1998. Therefore, the Company's comprehensive income consists
solely of its net income. Accordingly, a statement of comprehensive income has
been omitted from the accompanying financial statements.
Reclassification
Certain amounts for the prior years have been reclassified to conform to
the December 31, 1998 presentation.
(2) 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 cash payment of $5,100,000 plus an
estimated payment of $350,000 for the net working capital acquired. The Company
also incurred liabilities of $625,362 related to management's plans to exit
certain activities of HRS and has paid $170,000 of direct acquisition costs.
Management's exit plans include costs for the relocation of certain of HRS'
employees and an accrual for minimum operating lease commitments for duplicate
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 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
-27-
<PAGE>
NATIONAL RESEARCH CORPORATION
Notes to Financial Statements, Continued
(2) Acquisition, Continued
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 purchase price of
approximately $9,174,950 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. 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 5,655,478 20 years
---------
6,437,408
In-process research and development 2,737,542 0 years
---------
$9,174,950
=========
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 purchase price payable for the
first of those scheduled payments to approximately $1,150,000 in March 1999. An
additional payment of approximately $1,500,000 for purchase price payable is due
in June 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.
In 1998, the Company also terminated the employment of certain of its
employees whose responsibilities were duplicative of those performed by
employees acquired in the HRS acquisition. The terminations resulted in a
severance charge of $303,740 in 1998. All severance payments related to this
charge were paid prior to December 31, 1998.
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
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.
Year ended December 31,
1998 1997
---- ----
(dollars in thousands, except per
share amounts)
Revenues................................. $20,834 $22,800
Net income (loss)........................ $ 1,840 $ (73)
Net income (loss) per share -
basic and diluted...................... $ 0.25 $ (0.01)
-28-
<PAGE>
NATIONAL RESEARCH CORPORATION
Notes to Financial Statements, Continued
(3) Investments in Marketable Debt Securities
The carrying value of available-for-sale securities by major security
type is shown below. Amortized cost approximates fair value.
<TABLE>
<CAPTION>
December 31,
Debt securities: 1998 1997
---- ----
<S> <C> <C>
Obligations of U.S. government agencies..... $ 8,008,180 $ 13,219,350
Other......................................... 1,163 1,203
-------------- --------------
Total.................................. $ 8,009,343 $ 13,220,553
============== ==============
</TABLE>
There were no sales of marketable securities in advance of scheduled
maturities of available-for-sale marketable debt securities during 1998, 1997 or
1996. The amortized cost of debt securities at December 31, 1998 and 1997, by
contractual maturity, are shown below. Expected maturities will differ from the
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
1998 1997
-------- ------
Amortized Amortized
cost cost
Due after three months through one year $ 6,958,046 $ 13,219,350
Due after one year through five years 1,050,134 --
---------- -----------
$ 8,008,180 $ 13,219,350
========== ===========
(4) Goodwill and Other Intangible Assets
Goodwill and other intangible assets consist of the following at December
31, 1998:
1998
----
Workforce in place $ 272,882
Customer lists 359,048
Goodwill 5,655,478
---------
6,287,408
Accumulated amortization (127,199)
---------
$ 6,160,209
=========
(5) Income Taxes and Pro Forma Income Taxes
Income tax expense (benefit) for 1998 and the period of October 14, 1997
through December 31, 1997 consisted of the following components:
Current Deferred Total
------- -------- -----
1998:
Federal........... $ 713,514 $(442,014) $ 271,500
State............. 195,000 (45,992) 49,800
-------- --------- ---------
Total........... $ 808,514 $(488,006) $ 320,508
======== ======== ========
1997:
Federal........... $ 553,000 $(237,000) $ 316,000
State............. 106,000 (46,000) 60,000
-------- --------- ---------
Total........... $ 659,000 $(283,000) $ 376,000
======== ======== ========
-29-
<PAGE>
NATIONAL RESEARCH CORPORATION
Notes to Financial Statements, Continued
(5) Income Taxes and Pro Forma Income Taxes, Continued
Income tax expense for the period of October 14, 1997 through December
31, 1997 is based on taxable income of approximately $1,592,500. The difference
between the Company's income tax expense as reported in the accompanying
financial statements for 1998 and 1997 and that which would be calculated
applying the U.S. Federal income tax rate of 34% on pretax income is as follows:
1998 1997
---- ----
Expected Federal income taxes......................... $ 266,000 $ 541,500
State income taxes, net of federal benefit............ 32,900 70,100
Deferred tax benefits recognized upon termination
of the Company's S Corporation election............. -- (258,000)
Other................................................. 21,608 22,400
-------- --------
Total.............................................. $ 320,508 $ 376,000
======== ========
Deferred tax assets at December 31, 1998 and 1997, were comprised of the
following:
1998 1997
---- ----
Deferred tax assets:
Allowance for doubtful accounts.............. $ 24,200 $ 24,500
Accrued expenses............................. 162,800 102,725
Bonus and profit sharing accruals............ 99,600 155,775
Intangible assets............................ 484,406 --
-------- --------
Total deferred tax assets................ $ 771,006 $ 283,000
======== ========
The Company did not record a valuation allowance for its deferred tax
assets because management believes that it is more likely than not that the
Company will generate sufficient taxable income to fully realize these deferred
tax benefits.
The accompanying statements of income reflect a provision for income
taxes on a pro forma basis, at a combined rate of 40% (Federal statutory rate of
34% plus estimated state rate, net of federal benefit of 6%) as if the Company
was liable for Federal and state income taxes as a taxable corporate entity
throughout the periods ending December 31, 1997 and 1996.
The components of the provision for pro forma income taxes are as
follows:
Years ended December 31,
------------------------
1997 1996
---- ----
Federal............................ $ 642,770 $1,226,921
State.............................. 160,693 306,730
-------- ---------
Pro forma income taxes............. $ 803,463 $1,533,651
======== =========
-30-
<PAGE>
NATIONAL RESEARCH CORPORATION
Notes to Financial Statements, Continued
(6) Notes Payable
Notes payable consist of the following at December 31, 1998:
<TABLE>
<CAPTION>
1998
----
<S> <C>
Note payable to Fifth Shore Partnership, at 9.0%, payable in monthly
installments of $1,808 including interest, with final payment of
principal and interest due December 1, 2001 $ 56,867
Note payable to National Computer Systems, at 8.50%, payable in monthly
installments of $1,430.00 including interest, with final payment of
principal and interest due March 1, 2002, secured by the assets of the
Company 48,581
--------
Total notes payable 105,448
Less current portion 30,754
--------
Notes payable, net of current portion $ 74,694
========
</TABLE>
The aggregate maturities of notes payable for each of the years
subsequent to December 31, 1998 are: 1999 - $30,754; 2000 - $33,653; 2001 -
$36,730; and 2002 - $4,311.
(7) Common Stock
During 1997, the Company reincorporated in Wisconsin and paid a stock
dividend of approximately 239.5-to-1, the effects of which were given
retroactive effect in the accompanying financial statements. In connection with
the reincorporation, the Company also increased its authorized common stock from
100,000 shares to 20,000,0000 shares and authorized up to 2,000,0000 shares of
undesignated preferred stock.
In August 1997, the Company decided to pay special cash bonuses
aggregating $1,740,000 to two executive officers prior to the termination of its
S Corporation status, with such bonuses intended to fund the purchase of Company
shares by such individuals in an initial public offering (AIPO@) of the
Company's common stock. The related special compensation expense of $1,740,000
was recognized by the Company in the fourth quarter of 1997, concurrent with the
completion of the IPO. The special compensation expense reduced the amount
otherwise available for distribution to the Company's shareholders prior to the
termination of its S Corporation status.
On October 9, 1997, the Company completed its IPO by issuing 1,250,000
shares of common stock at a price of $15 per share. Net proceeds of $16,841,089
were realized by the Company after deducting the underwriting discount and
offering expenses.
(8) Stock Option Plans
In August 1997, the Board of Directors adopted and the Company's
shareholders approved the National Research Corporation 1997 Equity Incentive
Plan (the "Equity Incentive Plan"). The Equity Incentive Plan provides for the
granting of options to purchase up to an aggregate of 730,000 shares of the
Company's common stock through the date of the Company's annual meeting of
shareholders in the year 2001. Options granted may be either nonqualified or
incentive stock options. Vesting terms vary with each grant, and option terms
are five years. At December 31, 1998, the number of shares available for
issuance pursuant to future grants under the Equity Incentive Plan was 329,370
shares.
-31-
<PAGE>
NATIONAL RESEARCH CORPORATION
Notes to Financial Statements, Continued
(8) Stock Option Plans, Continued
In October 1997, the Board of Directors adopted and the Company's
shareholders approved the National Research Corporation Director Stock Plan (the
"Director Plan"). As amended in December 1997, the Director Plan provides for
formula grants of nonqualified options to each director of the Company who is
not an employee of the Company. On the date of each annual meeting of
shareholders of the Company, each such director, if reelected or retained as a
director at such meeting, is granted an option to purchase 1,000 shares of the
Company's common stock. Option exercise prices equal the fair market value of
the Company's common stock on the date of grant. Options vest one year following
the date of grant and may be exercisable for a period of up to 10 years
following the date of grant. In 1998, options to purchase 2,000 shares of the
Company's common stock were granted. At December 31, 1998, the number of shares
available for issuance pursuant to future grants under the Director Plan was
28,000.
Options to purchase shares of common stock have been granted in 1998 and
1997 with exercise prices equal to the fair value of the common stock on the
date of grant. Accordingly, no compensation expense was recorded for these
grants. Had compensation cost for the stock option grants been determined using
the fair value method, the Company's net income and net income per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
---- ----
(in thousands, except
per share amounts)
Pro forma:
<S> <C> <C>
Net income, as reported...................................... $ 461 $ 2,414
Net income, adjusted for the fair value method............... 267 2,332
Income per share, as reported (1)............................ $ 0.06 $ 0.37
Income per share, adjusted for the fair value method (1)..... 0.04 0.36
(1) Amounts are the same for both basic and diluted income per share.
</TABLE>
The weighted average fair value of options granted in 1998 and 1997 was
$1.80 and $6.16, respectively. Pro forma net income reflects the allocation of
compensation cost for stock option grants using the fair value method.
Compensation cost is allocated between periods based upon the vesting period of
the options. Therefore, the full impact of calculating compensation cost using
the fair value method is not reflected in pro forma net income amounts presented
above because compensation cost is amortized to expense over the vesting period,
and additional options may be granted in future years. The fair value for these
options was estimated at the date of grant using the Black-Scholes model with
the following assumptions:
1998 1997
---- ----
Expected dividend yield at date of grant.. 0 0
Expected stock price volatility........... 45.0% 45.0%
Risk-free interest rate................... 6.0% 6.0%
Expected life of options.................. 3.75 to 5.00 years 3.75 years
-32-
<PAGE>
NATIONAL RESEARCH CORPORATION
Notes to Financial Statements, Continued
(8) Stock Option Plans, Continued
The following information relates to options to purchase common stock:
Number of Weighted Average
--------------------------
Shares Exercise Price Fair Value
----- -------------- ----------
Balance at December 31, 1996........ --
Granted......................... 168,843 $15.00 $6.16
Canceled........................ (1,713) 15.00 6.16
--------
Balance at December 31, 1997........ 167,130 15.00 6.16
Granted......................... 342,878 4.37 1.80
Canceled........................ (107,378) 13.58 5.58
--------
Balance at December 31, 1998........ 402,630 6.33 2.60
========
Exercisable at December 31, 1998.... 36,904 15.00 6.16
========
At December 31, 1998, the range of exercise prices for outstanding stock
options was $4.19 to $15.00 and the weighted average remaining contractual life
of outstanding stock options was 4.63 years.
(9) Leases
The Company leases office space for a monthly base rental payment plus
maintenance and utilities. Rental expense was $385,735, $253,034 and $183,118
during 1998, 1997 and 1996, respectively, and is included in selling, general
and administrative expenses in the statements of income. The future minimum
lease payments under noncancelable operating leases for each of the five years
subsequent to December 31, 1998 approximate $537,000, $256,000, $40,000, $42,000
and $4,000, respectively.
(10) Employee Benefits
The Company sponsors a qualified defined contribution profit sharing plan
covering substantially all employees with a minimum service of 1,000 hours and
one year of service except for highly compensated employees covered by other
nonqualified profit sharing plans. Employer contributions, which are
discretionary, vest to participants at a rate of 20% per year. Total profit
sharing expense was $0, $97,402 and $75,229 in 1998, 1997 and 1996,
respectively.
The Company also sponsors nonqualified profit sharing bonus and incentive
plans for employees and members of executive management of the Company. Certain
bonuses under the executive management incentive plan are paid over a five-year
period. Expense recorded under these plans was $84,013, $607,877 and $552,832 in
1998, 1997 and 1996, respectively.
(11) Subsequent Event
On January 4, 1999, the Company acquired a building in Lincoln, Nebraska.
The purchase price of the building was approximately $1.4 million. The Company
plans to renovate the building during 1999 and to move its headquarters to the
building in December 1999.
-33-
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item with respect to directors and
Section 16 compliance is included under the captions "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance", respectively, in the
Company's definitive Proxy Statement for its 1999 Annual Meeting of Shareholders
("Proxy Statement") and is hereby incorporated herein by reference. Information
with respect to the executive officers of the Company appears in Part I, page 7
of this Annual Report on Form 10-K.
Item 11. Executive Compensation
The information required by this Item is included under the captions
"Board of DirectorsCDirector Compensation" and "Executive Compensation" in the
Proxy Statement and is hereby incorporated herein by reference; provided,
however, that the subsection entitled "Executive CompensationCReport on
Executive Compensation" shall not be deemed to be incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is included under the caption
"Principal Shareholders" in the Proxy Statement and is hereby incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions
None.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial statements - The financial statements listed in the
accompanying index to financial statements and financial statement
schedules are filed as part of this Annual Report on Form 10-K.
2. Financial statement schedules - The financial statement schedules
listed in the accompanying index to financial statements and financial
statement schedules are filed as part of this Annual Report on Form
10-K.
3. Exhibits - The exhibits listed in the accompanying index to exhibits
are filed as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K
None.
-34-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this 19th day of
March, 1999.
NATIONAL RESEARCH CORPORATION
By /s/ Michael D. Hays
Michael D. Hays
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Michael D. Hays President, Chief Executive March 19, 1999
- --------------------------- Officer and Director
Michael D. Hays (Principal Executive Officer)
/s/ Patrick E. Beans Vice President, Treasurer, March 19, 1999
- --------------------------- Secretary, Chief Financial
Patrick E. Beans Officer and Director
(Principal Financial and
Accounting Officer)
/s/ John N. Nunnelly Director March 19, 1999
- ---------------------------
John N. Nunnelly
/s/ Paul C. Schorr, III Director March 19, 1999
- ---------------------------
Paul C. Schorr, III
-35-
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULE
Page in this Form 10-K
Independent Auditors' Report 19
Balance Sheets as of December 31, 1998 and 1997 20
Statements of Income for each of the years in 21
the three-year period ended December 31, 1998
Statements of Shareholders' Equity for each of 22
the years in the three-year period ended
December 31, 1998
Statements of Cash Flows for each of the three years 23
in the period ended December 31, 1998
Notes to Financial Statements 24-33
Independent Auditors' Report on Financial
Statement Schedule 37
Financial Statement Schedule: 38
II - Valuation and Qualifying Accounts
All other financial statement schedules are omitted since the required
information is not present or is not present in amounts sufficient to require
submission of the schedules, or because the information required is included in
the consolidated financial statements and notes thereto.
-36-
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors
National Research Corporation:
Under date of February 12, 1999, we reported on the balance sheets of National
Research Corporation as of December 31, 1998 and 1997, and the related
statements of income, shareholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 1998, which are included in the Form
10-K. In connection with our audits of the aforementioned financial statements,
we also audited the related financial statement schedule in the Form 10-K. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG Peat Marwick LLP
Lincoln, Nebraska
February 12, 1999
-37-
<PAGE>
<TABLE>
<CAPTION>
NATIONAL RESEARCH CORPORATION
Schedule II - Valuation and Qualifying Accounts
Balance at Write-offs, Balance
Beginning Bad Debt Net of at End
of Year Expense Recoveries of Year
Allowance for doubtful accounts:
<S> <C> <C> <C> <C>
Year Ended December 31, 1996........ $ 25,000 30,764 10,764 45,000
Year Ended December 31, 1997........ $ 45,000 35,000 17,192 62,808
Year Ended December 31, 1998........ $ 62,808 40,000 40,917 61,891
See accompanying independent auditors' report.
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Description
(3.1) Articles of Incorporation of National Research Corporation,
as amended to date [Incorporated by reference to Exhibit
(3.1) to National Research Corporation's Form S-1
Registration Statement (Registration No. 333-33273)]
(3.2) By-Laws of National Research Corporation, as amended to date
[Incorporated by reference to Exhibit (3.2) to National
Research Corporation's Form S-1 Registration Statement
(Registration No. 333-33273)]
(10.1)* National Research Corporation 1997 Equity Incentive Plan
[Incorporated by reference to Exhibit (10.2) to National
Research Corporation's Form S-1 Registration Statement
(Registration No. 333-33273)]
(10.2)* National Research Corporation Director Stock Plan, as
amended to date [Incorporated by reference to Exhibit (10.2)
to National Research Corporation's Form 10-K for the year
ended December 31, 1997 (File No. 0-29466)]
(10.3)* Employment Memorandum, dated as of July 15, 1994, from
National Research Corporation to Patrick E. Beans
[Incorporated by reference to Exhibit (10.5) to National
Research Corporation's Form S-1 Registration Statement
(Registration No. 333-33273)]
(10.4)* Separation of Employment Agreement, dated as of June 26,
1998, between National Research Corporation and Sharon
Flaherty
(10.5)+ Subcontract, dated as of May 9, 1997, as amended, between
National Research Corporation and United HealthCare
Corporation [Incorporated by reference to Exhibit (10.7) to
National Research Corporation's Form S-1 Registration
Statement (Registration No. 333-33273)]
(10.6)+ Letter of Agreement, dated as of June 15, 1998, between
National Research Corporation and HealthSouth Corporation.
(10.7) Lease, dated as of January 9, 1998, between National
Research Corporation and Gold's Limited Partnership
[Incorporated by reference to Exhibit (10.7) to National
Research Corporation's Form 10-K for the year ended December
31, 1997 (File No. 0-29466)]
(23) Consent of KPMG Peat Marwick LLP
(27) Financial Data Schedule (EDGAR version only)
(99) Proxy Statement for the 1999 Annual Meeting of Shareholders
[Except to the extent specifically incorporated by
reference, the Proxy Statement for the 1999 Annual Meeting
of Shareholders shall not be deemed to be filed with the
Securities and Exchange Commission as part of this Annual
Report on Form 10-K.]
- --------------------
* A management contract or compensatory plan or arrangement.
+ Portions of this exhibit have been redacted and are subject to a
confidential treatment request filed with the Secretary of the
Securities and Exchange Commission pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934, as amended. The redacted material was
filed separately with the Securities and Exchange Commission.
EXHIBIT (10.4)
SEPARATION OF EMPLOYMENT AGREEMENT
BETWEEN NATIONAL RESEARCH CORPORATION AND SHARON FLAHERTY
This Agreement is entered into between National Research Corporation,
1033 "O" Street, 4th Floor, Gold's Galleria, Lincoln, NE 68508 (the "Company")
and Sharon Flaherty, 6700 Old Dominion Road, Lincoln, NE 68516 ("Employee"),
effective as of June 11, 1998 (the "separation date"). Employee and the Company
mutually agree that the employment agreement entered into between Employee and
the Company dated as of the 1st day of December, 1996 ("Employment Agreement")
is terminated by the Company, effective June 11, 1998, in full accordance with
all of the terms of that Employment Agreement including without limitation its
Paragraph 10.
In consideration of this mutual Agreement Employee and the Company hereby
agree as follows:
1. Severance Compensation. In full settlement of the severance
compensation obligations of Paragraph 10 of the Employment Agreement the Company
shall pay Employee a single lump sum amount of Two Hundred Eighty Thousand Seven
Hundred Thirty-seven Dollars ($280,737) reduced for applicable payroll taxes and
withholding. Payment will be made within not more than five (5) working days of
Employee's execution of this Agreement provided the conditions of Paragraph 6
have been met. This lump sum payment is deemed to be severance pay and will not
be treated as compensation for purposes of any retirement program of the
Company.
2. Other Compensation Matters.
(a) The Company will pay for, or reimburse Employee for, amounts not
to exceed Three Thousand Five Hundred Dollars ($3,500) for the cost of
outplacement services incurred by Employee.
(b) The Company will pay Employee for sixty-five (65) accrued but
unused vacation hours.
(c) The Company has previously reimbursed Employee for all business
expenses incurred on the Company's behalf by Employee.
(d) No annual incentive compensation is payable to Employee for the
portion of 1998 for which Employee worked for the Company.
(e) No long term incentive compensation is payable to Employee for
Employee's period of employment with the Company. Employee is not vested in any
stock options issued to Employee by the Company and such options terminate
immediately upon Employee's separation from service with the Company.
<PAGE>
3. Medical and Group Life Insurance.
(a) Employee agrees to make a timely COBRA health insurance
continuation election to assure continuation of Employee's (and family members
currently covered) health insurance coverage for up to eighteen (18) months
after Employee's separation date. During the COBRA continuation coverage period,
up to a maximum of eighteen (18) months, the Company will subsidize Employee's
monthly COBRA continuation premium, which shall not be reported as income, so
that Employee's cost of continuation coverage will not exceed sixty-five percent
(65%) of the premium charged for similar coverage to an active employee of the
Company participating in the Company's pretax premium payment program. For
example, if an active employee's charge per pay period for similar coverage was
a pretax amount of One Hundred Twenty Dollars ($120.00), the charge to Employee
on an after tax basis would be sixty-five percent (65%) of that amount, or
Seventy-eight Dollars ($78.00) per pay period.
(b) The Company has made the 1998 premium payment on the term life
insurance policy described in Paragraph 7 of the Employment Agreement. No
further premium payments will be made by the Company on this policy and Employee
is not covered by any other component of the Company's group life insurance
program after Employee's separation date.
4. Nondisclosure and Noncompetition. Employee agrees that the covenants
regarding nondisclosure and noncompetition set forth in Paragraphs 13 and 14 of
the Employment Agreement remain fully effective and that the expiration date
under Paragraph 14 is November 30, 1999. In addition, in the event Employee or
anyone acting at Employee's direction at any time prior to December 1, 1999,
shall substantially denigrate the Company (including its business operations),
or its officers or directors, including without limitation by way of news media
or the expression to news media of personal views, opinions or judgments, the
Company shall be entitled to withhold and terminate any all payments and
benefits under this Agreement and/or the Company shall be entitled to pursue any
other available legal or equitable remedies. The Company, including its officers
and directors similarly agrees not to denigrate the Employee.
5. Tax Payments, Withholding and Reporting. Employee recognizes that
certain payments provided under this Agreement may result in taxable income to
Employee which the Company will report to the appropriate taxing authorities.
The Company has the right to deduct from any payment made under this Agreement
any federal, state, local or other income, employment or other taxes it
determines are required by law to be withheld with respect to such payments.
6. Severability. In the event any one or more of the terms of this
Agreement shall for any reason be held to be invalid, illegal or unenforceable,
the remaining terms of this Agreement shall be unimpaired, and the invalid,
illegal or unenforceable term shall be replaced by a term, which, being valid,
legal and enforceable, comes closest to the intention of the parties underlying
the invalid, illegal or unenforceable terms. However, in the event that any such
term of this Agreement is adjudged by a court of competent jurisdiction to
-2-
<PAGE>
be invalid, illegal or unenforceable, but that the other terms are adjudged to
be valid, legal and enforceable if such invalid, illegal or unenforceable term
were deleted or modified, then this Agreement shall apply with only such
deletions or modifications, or both, as the case may be, as are necessary to
permit the remaining separate terms to be valid, legal and enforceable.
7. Company Property. Employee affirms that Employee has previously
delivered to the Company the original and all copies of all documents, records,
electronic files, and property of any nature whatsoever which were in Employee's
possession or control and which are the property of the Company or which relate
to the business activities, facilities, or customers of the Company, its
subsidiaries, or its affiliates, including any records, documents or property
created by Employee and, where such records may be maintained on hard disk files
on computers owned by Employee, such files have been purged and eliminated.
8. Other Agreements. This Agreement does not limit or restrict in any way
Employee's rights under the Company's employee benefit plans. All the terms of
agreement relating to Employee's separation from employment with the Company are
embodied in this Agreement, which incorporates by reference Paragraphs 13 and 14
of the Employment Agreement. This Agreement fully supersedes any and all prior
agreements or understandings between Employee and the Company.
9. Governing Law, Dispute Resolution, Etc. This Agreement shall be
governed by the substantive laws of the State of Nebraska without regard to its
conflict of laws provisions. The parties agree that any proceeding to resolve
any dispute arising hereunder will be brought only in the courts of the State of
Nebraska or in the courts of the United States of America for the District of
Nebraska, and that each party irrevocably submits to such jurisdiction, and
hereby waives any and all objections as to venue, inconvenient forum and the
like. It is the intention of the parties hereto, however, that to the extent
practicable, the parties will endeavor to settle any dispute arising hereunder
first through the process of non-binding mediation to be conducted in Lincoln,
Nebraska. This agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective heirs, legal representatives, successors and
assigns.
10. Indemnification. The Company shall indemnify Employee if Employee is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative by reason of the fact that Employee is or was a director
(including advisory board member), officer, employee or agent of the Company or
Employee is or was serving at the request of the Company as a director
(including advisory board member), officer, employee or agent of another
corporation or other enterprise, against expenses (including attorney's fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by Employee in connection with such action, suit or proceeding if Employee acted
in good faith and in a manner Employee reasonably believed to be in or not
opposed to the best interests of the Company, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe Employee's conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that Employee did not act in good
faith and in a manner which Employee
-3-
<PAGE>
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had reasonable
cause to believe that Employee's conduct was unlawful. Expenses incurred by
Employee in defending a civil or criminal action, suit or proceeding shall be
paid by the Company in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of Employee to repay
such amount if it shall ultimately be determined that Employee is not entitled
to be indemnified by the Company as authorized in this paragraph. The
indemnification and advancement of expenses provided by this paragraph shall not
be deemed exclusive of any other rights to which those seeking indemnification
or advancement of expenses may be entitled under any section of the corporation
law of Nebraska as now in effect or as the same may hereafter be amended, or
under any agreement, vote of stockholders or directors, or otherwise both as to
action in Employee's official capacity and as to action in another capacity
while holding such office. The indemnification and advancement of expenses
provided by this paragraph shall, unless otherwise provided when authorized or
ratified, continue after Employee has ceased to be a director (including
advisory board member), officer, employee or agent and shall inure to the
benefit of Employee's heirs, executors and administrators.
11. Form 5 Representation. Employee, who served as Vice President-Sales,
Marketing and Client Services of the Company until the separation date, hereby
represents to the Company that she will not be required to file a Form 5 under
Section 16 of the Securities Exchange Act of 1934, as amended ("Section 16"),
for the Company's fiscal year ending December 31, 1998, because she (i) has
reported all transactions (if any) required to be reported under Section 16 that
occurred from December 31, 1997 through the separation date; and (ii) did not,
during the six months preceding the separation date, engage in a transaction in
Company securities that was not exempt under subparagraph (b) of Section 16.
Dated this 26th day of June, 1998.
NATIONAL RESEARCH CORPORATION
/s/ Michael Hays
Michael Hays, President
/s/ Sharon Flaherty
Sharon Flaherty, Employee
EXHIBIT (10.6)
[Logo] Letter of Agreement
This Agreement is made and entered into as of June 15, 1998, by and between
National Research Corporation (NRC), a Wisconsin corporation, and HEALTHSOUTH
Corporation ("Client"), for itself and on behalf of its affiliates and
subsidiaries.
National Research Corporation agrees to provide Client marketing research
services as specifically outlined below.
Project Specifications:
>Client is responsible for providing NRC patient discharge/visit data in a
magnetic readable format on a monthly basis (for all participating facilities).
>NRC is responsible for:
o Sample plan management for each facility.
o Use of personalized 8 by 14" questionnaire with integrated cover letter
(one logo in black ink).
o Translation of questionnaire into Spanish.
o Data collection using NRC's three-step mail methodology, with an estimated
response rate of 50 percent for inpatient and 40% for outpatient.
o Receiving of returned questionnaires, including return postage and printing
of the return envelopes.
o Mailing of comments on a monthly basis is included (faxing of urgent
comments on a daily basis).
o Scanning of returned questionnaires.
o Generation of Action Plan reports for the individual facilities, one
Corporate Summary report, divisional roll-up reports, and divisional
ranking reports on a quarterly basis.
o Conducting six on-site application workshops.
o Providing project booklets to all HEALTHSOUTH facilities upon joining the
satisfaction measurement system.
o Communication (reminder phone calls, memos, etc.) to facilities regarding
data tapes.
o Analysis and distribution of annual newsletter specific to each division.
o Development of a training video for facilities to use to review project
scope and research science.
o Ongoing communication, education, and coordination with facility staff.
o Ad hoc analyses typically upon request (if extensive time and materials are
requested, Client will be notified of additional fees prior to work
performed).
o Conducting a focus group with Client patients regarding the survey
instrument.
o Conducting a focus group with health care payors regarding important
satisfaction data used in making business decisions.
o Conducting a periodic users group meeting to share information and gather
input from key clients.
<PAGE>
o Working extensively with Client Information Systems for proper facility
identification or to provide conversion for facility numbers to match
HEALTHSOUTH master facility numbering scheme.
NRC agrees that during the term of this Agreement and at any and all times
thereafter, it will hold the data provided by Client in strict confidence. In no
event will NRC divulge a patient or Client's identity in any report, publication
or other form of communication containing data collected in the course of
conducting the patient satisfaction measurement. NRC will utilize such data in
conjunction with its Patient Satisfaction Measurement Database and NRC shall be
entitled to retain copy of such data after the termination of this Agreement,
but subject to the continuing confidentiality provisions of this paragraph.
NRC agrees to store original patient questionnaires for a period of six months
at which time they will be destroyed. Data from these questionnaires will be
archived and stored electronically, thereby preserving the information from the
questionnaires. Comments, which are attached as additional sheets of paper are
not stored by NRC, but are passed on to the client facilities in their original
form. The exception to this is urgent comments, which are faxed daily, and the
original attached sheets of paper are stored with the original questionnaires.
This Agreement shall be effective for a three year data collection period,
effective as of January 1, 1998. With 120 days written notice by either party,
this contract may be overruled by a subsequent contract incorporating new
specifications and integration of additional measures.
If the tape sources for Client patient encounters are consolidated to fewer than
10 or equal to 1 per module (i.e. Rehab Hospital Inpatients, Medical Centers,
Outpatient Centers, Diagnostic Centers, Surgery Centers) than the price per
returned survey is reduced by *.
In return for NRC's services, Client agrees to pay NRC in accordance with the
following pricing model, which includes discounts for volume thresholds:
*
Client shall pay NRC on a quarterly basis. Amount to be invoiced quarterly each
year on January 31, April 30, July 31, and October 31. Invoice amounts will be
based on actual facility participation.
- -----------------
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed
separately with the SEC pursuant to Rule 24b-2.
-2-
<PAGE>
Payment to NRC is due in US Dollars within thirty (30) days of each invoice.
Interest shall accrue on any past due amount at the rate of one and one-half
percent (1 1/2%) per month until paid. Postal rate increases will be passed on
if applicable.
IN WITNESS WHEREOF, the parties, by and through their authorized
representatives, have executed this Agreement on the dates indicated below.
NATIONAL RESEARCH CORPORATION HEALTHSOUTH Corporation
One HealthSouth Parkway
Birmingham, AL 35243
By: /s/ Antonette Benzing By: /s/
Antonette Benzing
Contract Administrator Title:
Date: June 15, 1998 Date: 2/1/98
Purchase Order #:
Please return one signed copy of Agreement to National Research Corporation
EXHIBIT (23)
Accountants' Consent
The Board of Directors
National Research Corporation:
We consent to incorporation by reference in the Registration Statements (Nos.
333-52143 and 333-52135) on Form S-8 of National Research Corporation of our
report dated February 12, 1999, relating to the balance sheets of National
Research Corporation as of December 31, 1998 and 1997, and the related
statements of income, shareholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1998 and all related schedules,
which report appears in the December 31, 1998 annual report on Form 10-K of
National Research Corporation. Our report refers to the Company's adoption of
the American Institute of Certified Public Accountants Statement of Position No.
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use on January 1, 1998.
/s/ KPMG Peat Marwick LLP
Lincoln, Nebraska
March 17, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF NATIONAL RESEARCH CORPORATION AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,888
<SECURITIES> 8,009
<RECEIVABLES> 3,002
<ALLOWANCES> 62
<INVENTORY> 0
<CURRENT-ASSETS> 17,255
<PP&E> 3,129
<DEPRECIATION> 840
<TOTAL-ASSETS> 26,279
<CURRENT-LIABILITIES> 8,302
<BONDS> 75
0
0
<COMMON> 7
<OTHER-SE> 17,428
<TOTAL-LIABILITY-AND-EQUITY> 26,279
<SALES> 0
<TOTAL-REVENUES> 17,665
<CGS> 0
<TOTAL-COSTS> 9,422
<OTHER-EXPENSES> 8,270
<LOSS-PROVISION> 40
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> 782
<INCOME-TAX> 321
<INCOME-CONTINUING> 782
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 461
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
