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, 1999
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
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(Exact name of registrant as specified in its charter)
Wisconsin 47-0634000
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1033 "O" Street
Lincoln, Nebraska 68508
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(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, 2000: $9,046,238.
Number of shares of the registrant's common stock outstanding at March 1, 2000:
7,006,300 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2000 Annual Meeting of Shareholders are
incorporated by reference into Part III
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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 19 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 19 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's primary types of
information services are renewable performance tracking services, custom
research and a renewable syndicated service. During 1999, NRC provided services
to more than 267 healthcare organizations, including health maintenance
organizations ("HMOs"), integrated healthcare systems, medical groups and
industry regulatory bodies. The Company gathered and analyzed over 1,407,000
completed surveys for these clients in 1999.
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 1999, 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 a majority 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 renewable performance tracking services, custom research
and 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. Additional offerings include functional disease-specific and health
status measurement tools. 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.
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.
Information Services
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
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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. NRC has
also developed on-line access to satisfaction performance results, which, in
2000, is anticipated to provide NRC's clients the fastest and easiest way to
access measurement results. IDEAS, NRC's exclusive web-based electronic delivery
system, will provide clients the ability to review results and reports on-line,
independently analyze data, query data sets, customize some reports and
distribute reports electronically.
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.
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.
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 questionnaires to
complete, to evaluate their health plans, health systems, physicians/caregivers
and personal health status. Representing the views of one in every 570
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
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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 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 43%, 40% and 64% of
the Company's total revenues in 1999, 1998 and 1997, respectively. The United
States Department of Defense, through a primary contractor, United Healthcare
Corporation, accounted for 15.7% of total revenues in 1999. HealthSouth
Corporation accounted for 12.9% of total revenues in 1999. Overall, the Company
served more than 267 healthcare organizations in 1999.
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 six person sales
force to nine persons in 1999. New sales associates now direct NRC's sales
efforts from two locations in California and one additional office in Tennessee.
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 at year-end.
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) fostering relationships with key industry constituencies; and (iv) an
annual Quality Leaders award program recognizing top-ranking health systems in
approximately 100 markets.
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.
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<PAGE>
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.
Employees
As of December 31, 1999, the Company employed a total of 79 persons on
a full-time basis. In addition, as of such date, the Company had 145 part-time
associates primarily in its survey operations, representing approximately 79
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 good.
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<PAGE>
Executive Officers of the Registrant
The following table sets forth certain information, as of March 1,
2000, regarding the executive officers of the Company:
Name Age Positions
---- --- ---------
Michael D. Hays 45 President, Chief Executive Officer and Director
Jona S. Raasch 41 Vice President and Chief Operations Officer
Patrick E. Beans 42 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
May 31, 2000.
On January 4, 1999, the Company purchased a building in downtown
Lincoln, Nebraska, which the Company started renovating during 1999. The Company
intends to move its headquarters to the new facility in May 2000 and to occupy
approximately 43,000 square feet at the new facility.
The Company leases approximately 18,000 square feet of office space in
Columbus, Ohio. This facility formerly housed certain client service and
marketing activities. The Company is currently marketing all of 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 current lease on this facility expires
on May 31, 2000. The Company expects to consolidate the telephone call center
into the new facility in Lincoln, Nebraska in May 2000.
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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 1999 fiscal year.
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 January 1, 1998 through December 31, 1999:
High Low
---- ---
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
First quarter ended March 31, 1999............... 5 1/2 3 1/2
Second quarter ended June 30, 1999............... 3 5/8 1 3/4
Third quarter ended September 30, 1999........... 3 3/8 2 1/8
Fourth quarter ended December 31, 1999........... 4 11/16 3 1/8
On March 1, 2000, there were approximately 16 shareholders of record
and approximately 700 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.
(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").
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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, 1999, 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 $ 2,761,429
2. Acquisition of HRS and related acquisition costs 8,549,588
3. The acquisition of a new headquarters building 4,039,003
4. Repurchases of Common Stock 1,491,069
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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,
1999, 1998 and 1997 and the balance sheet data at December 31, 1999 and 1998 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 year ended December 31, 1995 and
the balance sheet data at December 31, 1996 and 1995 are derived from audited
financial statements not included herein.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1999 1998(1) 1997 1996 1995
------- ------- ------- ------- ------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenues................................................ $18,184 $17,665 $16,284 $12,600 $8,917
------- ------- ------- ------- ------
Operating expenses:
Direct expenses....................................... 11,133 9,422 7,178 5,685 3,495
Selling, general and administrative................... 4,177 4,843 3,980 3,060 2,364
Depreciation and amortization......................... 817 426 159 173 119
Acquired-in-process research and development
cost................................................ - 2,737 - - -
Cost of closing duplicate facilities and severance
charges............................................. 364 304 - - -
Special compensation charge........................... - - 1,740 - -
------- ------- ------- ------- ------
Total operating expenses.................... 16,491 17,732 13,057 8,918 5,978
------- ------- ------- ------- ------
Operating income (loss)................................. 1,693 (67) 3,227 3,682 2,939
Other income and expenses, net.......................... 530 849 367 152 108
------- ------- ------- ------- ------
Income before income taxes.............................. 2,223 782 3,594 3,834 3,047
Provision for income taxes.............................. 748 321 376 - -
Pro forma income taxes(2)............................... - - 804 1,534 1,219
------- ------- ------- ------- ------
Pro forma net income(2)................................. $ 1,475 $ 461 $ 2,414 $ 2,300 $1,828
======= ======= ======= ======= ======
Pro forma net income per share - basic and
diluted(2).......................................... $ 0.21 $ 0.06 $ 0.37 $ 0.37
======= ======= ======= =======
Weighted average shares outstanding - basic(3).......... 7,054 7,283 6,440 6,185
Weighted average shares outstanding - diluted(3)........ 7,057 7,301 6,440 6,185
December 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- ------
(In thousands)
Balance Sheet Data:
Working capital......................................... $ 5,246 $ 8,954 $17,681 $ 2,018 $1,534
Total assets............................................ 29,256 26,279 22,563 6,153 4,996
Total debt.............................................. 3,619 105 - - -
Total shareholders' equity.............................. 18,566 17,435 18,121 2,079 1,830
</TABLE>
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(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 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 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.
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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 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 and the Company's ability to provide timely and accurate
performance tracking and market research to its clients. 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's primary types of information services are renewable
performance tracking services, custom research and 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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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)
------------------------------ -------------------
1999 1998
over over
1999 1998 1997 1998 1997
------ ------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 2.9% 8.5%
Operating expenses:
Direct expenses.............................. 61.2 53.3 44.1 18.2 31.3
Selling, general and administrative.......... 23.0 27.4 24.4 (13.7) 21.7
Depreciation and amortization................ 4.5 2.4 1.0 91.8 167.8
Acquired-in-process research and
development cost.......................... - 15.5 - (100.0) 100.0
Cost of closing duplicate facilities and
severance charges......................... 2.0 1.7 - 19.8 100.0
Special compensation charge.................. - - 10.7 - (100.0)
------ -------- ------
Total operating expenses............ 90.7 100.3 80.2 (7.0) 35.8
------ -------- ------
Operating income (loss)........................ 9.3% (0.3)% 19.8% N/A (102.1)%
====== ======== ======
</TABLE>
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Total revenues. Total revenues increased 2.9% in 1999 to $18.1 million
from $17.7 million in 1998 primarily due to the addition of new clients.
Direct expenses. Direct expenses increased 18.2% to $11.1 million in
1999 from $9.4 million in 1998. The increase in direct expenses in 1999 was due
primarily to an increase in software
-12-
<PAGE>
conversion costs of $617,000, labor and payroll expenses of $609,000, computer
support and equipment expenses of $204,000 and, to a lesser extent, increases in
printing and postage of $91,000, fieldwork expenses of $80,000 and occupancy
costs of $50,000; which were offset by a decrease in travel expenses of $24,000.
Direct expenses increased as a percentage of total revenues to 61.2% in 1999
from 53.3% during 1998 due to an increase in expenses associated with the
Company's planned conversion of internal software and, and to a lesser extent,
an increase in the use of telephone methodology, which increases labor costs.
Direct expenses as a percentage of total revenues are expected to decrease from
the 1999 levels in 2000 primarily due to the completion of the Company's
software conversion.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased 13.7% to $4.2 million in 1999 from $4.8
million in 1998. This decrease was primarily due to a decrease in marketing
costs of $226,000, salary and benefit expenses of $179,000, travel expenses of
$92,000, office supplies and postage of $76,000 and legal and accounting
expenses of $30,000. These decreases were partially offset by an increase in
recruiting and relocation costs of $40,000. Selling, general and administrative
expenses decreased as a percentage of total revenues to 23.0% in 1999 from 27.4%
in 1998 partially due to underutilized rental space leased by the Company from
June 1998 to December 1998. Selling, general and administrative expenses as a
percentage of total revenues are expected to increase from the 1999 levels in
2000 as a result of anticipated increases in sales and marketing activities.
Depreciation and amortization. Depreciation and amortization expenses
increased 91.8% to $817,000 in 1999 from $426,000 in 1998. The increase is
primarily due to the amortization of the intangible assets of HRS acquired in
June 1998 and the internal development of software. The increase in amortization
due to HRS acquisition intangible assets in 1999 was $336,000, as compared to
$127,000 in 1998, which included only seven months of amortization. Depreciation
and amortization expenses increased as a percentage of total revenues to 4.5% in
1999 from 2.4% in 1998.
Closing of duplicate facilities and severance charge. In December
1999, NRC closed its duplicate office in Columbus, Ohio. In connection with the
closing of this office, NRC incurred severance, write-down of an intangible
asset and other charges of approximately $364,000. The aggregate charges in 1999
to income net of taxes associated with the closing of duplicate office was
$235,000, or $0.03 per share.
Provision for income taxes. The provision for income taxes totaled
$748,000 (33.6% effective tax rate) for 1999 compared to $321,000 (41.0%
effective tax rate) for 1998. The effective tax rate was lower in 1999 due to
certain federal income tax credits. The effective tax rate for 2000 is expected
to remain at a similar level due to anticipated federal and state tax credits.
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.
-13-
<PAGE>
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.
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 (41.0% 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 (33.0% 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 (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.
-14-
<PAGE>
As of December 31, 1999, the Company had cash and cash equivalents of
$1.1 million and working capital of $5.2 million.
During 1999, the Company generated $3.5 million of net cash from
operating activities as compared to $4.0 million of net cash generated during
1998. The decrease 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 $7.8 million for 1999 and
$2.6 million for 1998. The 1999 increase in cash used was primarily due to the
purchase of an office building for $3.6 million and the purchase of securities
available for sale for $2.9 million. Cash used for investment in furniture,
computer equipment, software decreased $600,000. 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 Company's
investments available-for-sale consist principally of United States government
securities with maturities of two years or less.
Net cash provided by financing activities was $533,000 for 1999,
compared to net cash used of $1.2 million in 1998. The 1999 cash provided was
primarily from the $3.5 million construction financing for the renovation of the
Company's new office building and was partially offset by the Company's payment
of the $2,637,000 purchase price for such office building and the Company's
repurchase of 85,700 shares of stock during 1999 at a cost of $343,000. 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.
The Company has budgeted approximately $1.8 million for expenditures
in 2000, to be funded through cash generated from operations. The Company
expects that capital expenditures during 2000 will be primarily for
telecommunications equipment, computer hardware and software, product equipment
and furniture. In addition, the Company plans to spend an additional $2.7
million during 2000 to renovate the new office building. Following the
renovation, the Company intends to move its headquarters to such building in May
2000. The Company intends to secure long-term financing on the building for
approximately $5.5 million to replace the Company's line of credit that expires
on June 1, 2000.
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, 1999 and 1998, the Company had $3.3
million of deferred revenues. 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, 1999 and 1998, the Company had $600,000 and
$1.0 million of unbilled revenues, respectively. Substantially all deferred and
unbilled revenues will be earned and billed, respectively, within 12 months of
the respective period ends.
-15-
<PAGE>
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 245,000 shares between October 1998 and
March 1999. In April 1999, the Board of Directors of the Company authorized the
repurchase of an additional 150,000 shares. As of December 31, 1999, 53,700
shares have been repurchased under the new authorization.
Year 2000
The total estimated costs of the Company's Year 2000 compliance costs
were $57,000. As of the date of this Form 10-K, the Company has not experienced
any material business disruptions as a result of Year 2000 issues arising from
its information systems, nor is it aware of any material Year 2000 related
business disruptions impacting its clients or service providers. However, the
Company cannot be certain that it will not suffer business interruptions, either
due to its own Year 2000 issues that may develop or those of third parties.
Accordingly, there can be no assurance the Company or third parties will not
have ongoing Year 2000 issues that may have a material adverse effect on the
Company.
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 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, as amended by Statement of Financial Accounting Standards
No. 137, is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. 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
decreased .5% from the average return during the year ended December 31, 1999
and 1998, then the Company's interest income would have decreased, and pre-tax
income would have decreased approximately $60,000 and $56,000, respectively.
These amounts were determined by considering the impact of a hypothetical change
in interest rates on the Company's interest income.
-16-
<PAGE>
Item 8. Financial Statements and Supplementary Data
Quarterly Financial Data (Unaudited)
Selected unaudited quarterly financial information for the fiscal
years ended December 31, 1999 and 1998 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,
1999 1999 1999 1999 1998 1998 1998 1998(1)
-------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................... $4,618 $5,598 $4,305 $3,663 $4,615 $5,614 $ 4,030 $3,406
------ ------ ------ ------ ------ ------ ------- ------
Direct expenses........................ 2,082 3,469 3,005 2,577 2,507 3,390 2,016 1,509
Selling, general and administrative.... 1,165 1,061 1,046 905 1,173 1,239 1,243 1,189
Depreciation and amortization.......... 266 203 179 169 181 126 66 52
Acquired in-process research and
development cost.................... -- -- -- -- -- -- 2,737 --
Closing of duplicate facilities and
severance charges(2)................ 364 -- -- -- -- -- 304 --
------ ------ ------ ------ ------ ------ ------- ------
Operating income (loss)................ 741 865 75 12 754 859 (2,336) 656
Other income and expenses, net......... 146 95 133 156 162 171 254 262
Provision for income taxes............. 262 334 85 67 358 403 (797) 357
Income taxes (benefit)................. -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------- ------
Net income............................. $ 625 $ 626 $ 123 $ 101 $ 558 $ 627 $(1,285) $ 561
====== ====== ====== ====== ====== ====== ======= ======
Net income per share - basic
and diluted......................... $ 0.09 $ 0.09 $ 0.02 $ 0.01 $ 0.08 $ 0.09 $ (0.18) $ 0.08
Weighted average shares outstanding -
basic .............................. 7,036 7,050 7,056 7,077 7,218 7,305 7,305 7,305
Weighted average shares outstanding -
diluted ............................ 7,039 7,051 7,057 7,085 7,250 7,305 7,305 7,305
</TABLE>
- -----------------------
(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) In the quarter ended December 31, 1999, the Company recorded severance
costs, impairment losses on intangible assets and property and
equipment and other charges of approximately $364,000. The aggregate
affect of these charges on net income and earnings per share in such
quarter was $235,000 or $0.03 per share. See Note 12 to the Notes to
Financial Statements.
-17-
<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, 1999 and 1998 and the related statements of income,
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1999. 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, 1999 and 1998 and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1999, 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 LLP
Lincoln, Nebraska
February 8, 2000
-18-
<PAGE>
<TABLE>
NATIONAL RESEARCH CORPORATION
Balance Sheets
December 31, 1999 and 1998
<CAPTION>
Assets 1999 1998
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................... $ 1,149,587 $ 4,887,712
Investments in marketable debt securities............................... 10,876,608 8,009,343
Trade accounts receivable, less allowance for doubtful
accounts of $63,098 and $61,891 in 1999 and 1998, respectively........ 2,918,124 2,940,356
Unbilled revenues....................................................... 622,610 1,030,351
Prepaid expenses and other.............................................. 53,727 165,037
Deferred income taxes................................................... 215,018 222,500
----------- -----------
Total current assets............................................ 15,835,674 17,255,299
----------- -----------
Net property and equipment................................................ 7,525,943 2,288,583
----------- -----------
Deferred income taxes..................................................... 438,136 548,506
Goodwill and other intangible assets, net of accumulated amortization..... 5,440,252 6,160,209
Other..................................................................... 15,592 26,582
----------- -----------
Total assets.................................................... $29,255,597 $26,279,179
=========== ===========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Purchase price payable.................................................. $ --- $ 2,650,000
Construction financing line of credit................................... 3,544,000 ---
Current portion - notes payable......................................... 54,332 30,754
Accounts payable........................................................ 1,680,385 681,843
Accrued wages, bonus and profit sharing................................. 669,900 907,743
Accrued expenses........................................................ 1,132,934 747,885
Income taxes payable.................................................... 234,533 ---
Billings in excess of revenues earned................................... 3,273,577 3,283,462
----------- -----------
Total current liabilities....................................... 10,589,661 8,301,687
Notes payable, net of current portion..................................... 20,324 74,694
Bonuses, profit sharing accruals and other accrued expenses............... 79,245 468,265
----------- -----------
Total liabilities............................................... 10,689,230 8,844,646
----------- -----------
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 1999 and in 1998, outstanding 7,006,300 in
1999 and 7,092,000 in 1998............................................ 7,305 7,305
Additional paid-in capital.............................................. 16,839,839 16,839,839
Retained earnings....................................................... 3,210,292 1,734,983
Treasury stock, at cost; 298,700 shares in 1999 and 213,000 shares
in 1998............................................................... (1,491,069) 1,147,594)
----------- -----------
Total shareholders' equity...................................... 18,566,367 17,434,533
----------- -----------
Commitments and contingencies
Total liabilities and shareholders' equity...................... $29,255,597 $26,279,179
=========== ===========
See accompanying notes to financial statements.
</TABLE>
-19-
<PAGE>
<TABLE>
NATIONAL RESEARCH CORPORATION
Statements of Income
Three years ended December 31, 1999
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues..................................................... $18,184,007 $17,664,682 $16,284,133
----------- ----------- -----------
Operating expenses:
Direct expenses............................................ 11,133,090 9,422,342 7,178,408
Selling, general and administrative........................ 4,177,185 4,842,584 3,980,316
Depreciation and amortization.............................. 816,740 425,876 159,013
Acquired-in-process research and development cost.......... --- 2,737,542 ---
Cost of closing duplicate facilities and severance
charges.................................................. 363,965 303,740 ---
Special compensation charge................................ --- --- 1,740,000
----------- ----------- -----------
Total operating expenses........................... 16,490,980 17,732,084 13,057,737
----------- ----------- -----------
Operating income (loss)............................ 1,693,027 (67,402) 3,226,396
----------- ----------- -----------
Other income:
Net interest income........................................ 565,754 844,813 366,978
Other, net................................................. (35,778) 4,380 55
----------- ----------- -----------
Total other income................................. 529,976 849,193 367,033
----------- ----------- -----------
Income before income taxes......................... 2,223,003 781,791 3,593,429
Provision for income taxes................................. 747,691 320,508 376,000
----------- ----------- -----------
Net income......................................... $ 1,475,312 $ 461,283 $ 3,217,429
=========== =========== ===========
Pro forma information:
Net income................................................. $ 1,475,312 $ 461,283 $ 3,217,429
Pro forma income taxes..................................... --- --- 803,463
----------- ----------- -----------
Pro forma net income............................... $ 1,475,312 $ 461,283 $ 2,413,966
=========== =========== ===========
Pro forma net income per share - basic and diluted........... $ 0.21 $ 0.06 $ 0.37
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
-20-
<PAGE>
<TABLE>
NATIONAL RESEARCH CORPORATION
Statements of Shareholders' Equity
Three years ended December 31, 1999
<CAPTION>
Additional
Preferred Common Paid-in Retained Treasury
Stock Stock Capital Earnings Stock Total
--------- ------ ---------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
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
Net income........................... --- --- --- 1,475,312 --- 1,475,312
Purchase of 85,700 shares
of treasury stock................. --- --- --- --- (343,475) (343,475)
-------- ------ ----------- ----------- ----------- -----------
Balances at December 31, 1999........ $ --- $7,305 $16,839,839 $ 3,210,295 $(1,491,069) $18,566,370
======== ====== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
-21-
<PAGE>
<TABLE>
NATIONAL RESEARCH CORPORATION
Statements of Cash Flows
Three years ended December 31, 1999
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income.............................................. $ 1,475,312 $ 461,283 $ 3,217,429
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization....................... 816,740 425,876 159,013
Acquired in-process research and development cost... --- 2,737,542 ---
Loss on sale of property and equipment.............. 22,106 (2,489) ---
Loss on sale of other investments................... 788 --- ---
Other non-cash charges.............................. 25,920 --- ---
Change in assets and liabilities:
Trade accounts receivable......................... 22,232 1,278,132 (1,877,960)
Unbilled revenues................................. 407,741 (260,819) (277,498)
Prepaid expenses and other........................ 122,300 27,665 (139,959)
Deferred tax asset................................ 117,852 (3,600) (283,000)
Accounts payable.................................. 135,326 (698,495) (163,870)
Accrued expenses, wages, bonuses and profit sharing (101,491) (368,537) 644,560
Billings in excess of revenues earned............. (9,885) (93,646) 129,725
Income taxes payable.............................. 234,533 465,827 118,000
Impairment losses................................. 230,813 --- ---
------------ ------------ ------------
Net cash provided by operating activities...... 3,500,287 3,968,739 1,526,440
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment........................ (4,904,156) (1,927,929) (341,339)
Acquisition, net of cash acquired.......................... --- (5,899,588) ---
Purchases of securities available-for-sale................. (13,330,053) (11,611,973) (13,553,644)
Proceeds from the maturities of securities
available-for-sale....................................... 10,462,000 16,823,183 1,810,058
Proceeds from sale of property and equipment............... 1,000 13,112 --
------------ ------------ ------------
Net cash used in investing activities............. (7,771,209) (2,603,195) (12,084,925)
------------ ------------ ------------
Cash flows from financing activities:
Dividends paid............................................. --- --- (4,376,464)
Borrowings under line of credit............................ 3,544,000 --- ---
Payments on notes payable.................................. (30,792) (18,590) ---
Payment of purchase price payable.......................... (2,636,936) --- ---
Proceeds from issuance of common stock..................... --- --- 16,841,089
Purchase of treasury stock................................. (343,475) (1,147,594) ---
------------ ------------ ------------
Net cash provided by (used in)
financing activities............................ 532,797 (1,166,184) 12,464,625
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents................................ (3,738,125) 199,360 1,906,140
Cash and cash equivalents at beginning of period............. 4,887,712 4,688,352 2,782,212
------------ ------------ ------------
Cash and cash equivalents at end of period................... $ 1,149,587 $ 4,887,712 $ 4,688,352
============ ============ ============
Supplementary information
Cash paid for:
Interest, including capitalized interest of $54,617...... $ 62,685 $ 7,360 $ ---
============ ============ ============
Taxes.................................................... $ 397,540 $ 928,246 $ 541,000
============ ============ ============
Noncash investing and financing activities:
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.
In 1999, accounts payable included $863,216 for purchases of property and equipment.
See accompanying notes to financial statements.
</TABLE>
-22-
<PAGE>
NATIONAL RESEARCH CORPORATION
Notes to Financial Statements, Continued
(1) Summary of Significant Accounting Policies
Description of Business and Basis of Presentation
National Research Corporation (the "Company") 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. The Company's ten largest
clients accounted for 43%, 40% and 64% of the Company's total revenues in 1999,
1998 and 1997, respectively. One client accounted for 31.1% of total revenues in
1997. This client canceled its contract for performance measurement studies in
December of 1997. A second client accounted for 15.7%, 14.6%, and 15.1% of total
revenues in 1999, 1998 and 1997, respectively. A third client accounted for
12.9% and 10.2% of total revenues in 1999 and 1998, 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 "basic" and "diluted" 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 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:
1999 1998 1997
---- ---- ----
Common stock.................................. 7,054,487 7,283,051 6,309,728
Dilutive effect of assumed initial public
offering shares for distribution............ -- -- 129,812
--------- --------- ---------
Weighted average common shares - basic...... 7,054,487 7,283,051 6,439,540
Dilutive effect of options issued............. 2,987 18,315 694
--------- --------- ---------
Weighted average common shares and common
share equivalents - diluted................ 7,057,474 7,301,366 6,440,234
========= ========= =========
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.
-23-
<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 substantial majority of its operating revenues
from its annually renewable services, which include the NRC Listening System
("Performance Tracking Services") and the NRC Healthcare Market Guide
("Renewable 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 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.
-24-
<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 $1,491,000 and $1,494,000 of costs incurred for
the development of internal use software for the year ended December 31, 1999
and 1998, respectively, 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, three to five years for
computer equipment, five years for capitalized software and 39 years for the
Company's new office building.
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. Assets to be disposed of or abandoned are assessed
for recoverability by determining whether the carrying value of the asset is
less than estimated net realizable value.
Marketable Securities
All marketable securities held by the Company at December 31, 1999 and
1998 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.
-25-
<PAGE>
NATIONAL RESEARCH CORPORATION
Notes to Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
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. 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.
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 1999,
1998 and 1997, the Company had no other comprehensive income for the three years
ended December 31, 1999. Therefore, the Company's comprehensive income consists
solely of its net income.
Reclassification
Certain amounts for the prior years have been reclassified to conform
to the December 31, 1999 presentation.
-26-
<PAGE>
NATIONAL RESEARCH CORPORATION
Notes to Financial Statements, Continued
(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. The acquisition agreement was subsequently amended to
return to the Company the entire $350,000 estimated payment for the net working
capital surplus paid at closing and to provide for the Company's assumption of
additional pre-acquisition liabilities of HRS of $629,588. The amendment to the
acquisition agreement was recorded in the third quarter of 1998 as an adjustment
to the purchase price, increasing goodwill by $629,588. As the Company completed
its original exit plans in 1999, management determined that the ultimate costs
of certain exit activities were less than the liabilities accrued at the time of
the acquisition. As a result, the Company reduced its goodwill and accrued
liabilities by $153,390 for the excess of accrued liabilities over actual costs.
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.
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 $9,021,561, as adjusted for accrued liabilities, 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................................ 5,502,089 20 years
---------
6,284,019
In-process research and development..... 2,737,542 0 years
----------
$9,021,561
==========
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.
-27-
<PAGE>
NATIONAL RESEARCH CORPORATION
Notes to Financial Statements, Continued
(2) Acquisition, Continued
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)
(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.
December 31,
-------------------------
Debt securities: 1999 1998
---- ----
Obligations of U.S. government agencies.... $ 9,681,812 $8,008,180
Commercial paper........................... 1,193,712 --
Other...................................... 1,084 1,163
---------- ---------
Total................................. $10,876,608 $8,009,343
========== =========
There were no sales of marketable securities in advance of scheduled
maturities of available-for-sale marketable debt securities during 1999, 1998 or
1997. The amortized cost of debt securities at December 31, 1999 and 1998, 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.
1999 1998
---- ----
Amortized Amortized
cost cost
--------- ---------
Due after three months through one year $ 9,825,040 $6,958,046
Due after one year through five years 1,050,484 1,050,134
----------- ----------
$10,875,524 $8,008,180
=========== ==========
-28-
<PAGE>
NATIONAL RESEARCH CORPORATION
Notes to Financial Statements, Continued
(4) Property and Equipment
At December 31, 1999 and 1998 property and equipment consisted of the
following:
1999 1998
---- ----
Furniture and equipment................ $ 416,214 $ 509,541
Computer equipment and software........ 4,319,118 2,619,326
Building............................... 3,613,003 --
Land................................... 425,000 --
---------- ----------
8,773,335 3,128,867
Less accumulated depreciation
and amortization..................... 1,247,392 840,284
---------- ----------
Net property and equipment....... $7,525,943 $2,288,583
========== ==========
(5) Goodwill and Other Intangible Assets
Goodwill and other intangible assets consist of the following at
December 31, 1999 and 1998:
1999 1998
---- ----
Workforce in place..................... $ -- $ 272,882
Customer lists......................... 359,048 359,048
Goodwill............................... 5,502,089 5,655,478
---------- ----------
5,861,137 6,287,408
Accumulated amortization............... (420,885) (127,199)
---------- ----------
$5,440,252 $6,160,209
========== ==========
In connection with management's plans to exit certain operations of
the Company's Columbus, Ohio location, the Company recorded an impairment loss
of $230,813 for the abandonment of the intangible asset workforce in place in
the fourth quarter of 1999. The impairment loss is classified as a cost of
closing duplicate facilities and severance charges in the Statement of Income.
As discussed in Note 12, the Company's exit plans included the termination of
substantially all employees, other than those associated with call center
operations, acquired in connection with the HRS acquisition.
(6) Income Taxes
Income tax expense (benefit) for 1999, 1998 and 1997 consisted of the
following components:
Current Deferred Total
1999:
Federal................. $523,658 $ 102,767 $626,425
State................... 106,181 15,085 121,266
------- --------- --------
Total................. $629,839 $ 117,852 $747,691
======= ========= ========
1998:
Federal................. $713,514 $(442,014) $271,500
State................... 95,000 (45,992) 49,008
------ --------- --------
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
(6) Income Taxes, Continued
Income tax expense for the period of October 14, 1997 through December
31, 1997 is based on taxable income at approximately $1,592,500. The difference
between the Company's income tax expense as reported in the accompanying
financial statements and that which would be calculated applying the U.S.
Federal income tax rate of 34% on pretax income is as follows:
1999 1998 1997
---- ---- ----
Expected Federal income taxes................. 755,800 $266,000 $541,500
State income taxes, net of federal benefit.... 80,100 32,900 70,100
Rehabilitation tax credit..................... (66,000) -- --
Deferred tax benefits recognized upon
termination of the Company's S
Corporation election........................ -- -- (258,000)
Other......................................... (22,209) 21,608 22,400
-------- -------- --------
Total................................... $747,691 $320,508 $376,000
======== ======== ========
Deferred tax assets at December 31, 1999 and 1998, were comprised of
the following:
1999 1998
---- ----
Deferred tax assets:
Allowance for doubtful accounts...................... $ 24,600 $ 24,200
Accrued expenses..................................... 164,400 162,800
Bonus and profit sharing accruals.................... 29,600 99,600
Intangible assets.................................... 434,554 484,406
-------- --------
Total deferred tax assets........................ $653,154 $771,006
======== ========
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.
(7) Notes Payable and Line of Credit
Notes payable consist of the following:
1999 1998
---- ----
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 October 1, 2000 $39,988 $ 56,867
Note payable to National Computer Systems, at 8.50%,
payable in monthly installments of $1,430 including
interest, with final payment of principal and interest
due March 1, 2002, secured by the assets of the Company 34,668 48,581
------- --------
Total notes payable 74,656 105,448
Less current portion 54,332 30,754
------- --------
Notes payable, net of current portion $20,324 $ 74,694
======= ========
-30-
<PAGE>
NATIONAL RESEARCH CORPORATION
Notes to Financial Statements, Continued
(7) Notes Payable and Line of Credit, Continued
The aggregate maturities of notes payable for each of the years
subsequent to December 31, 1999 are: 2000 - $54,332; 2001 - $16,013; and 2002 -
$4,311.
At December 31, 1999, the Company has borrowings of $3,544,000 under a
secured construction financing line of credit with a local financial
institution. All borrowings under the line of credit are secured by the land and
building subject to renovation (net book value of $4,012,042 at December 31,
1999) and $5.5 million par value of marketable debt securities and bear interest
at the institution's reference rate (7.50% at December 31, 1999). Total maximum
borrowings under the line of credit are $5,700,000, of which $2,156,000 remains
available for further borrowings at December 31, 1999. The line of credit
expires on June 1, 2000. The Company intends to secure long-term financing on
the building for approximately $5,500,000 to replace the line of credit.
(8) 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 ("IPO") 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.
(9) 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, 1999, the number of shares available for
issuance pursuant to future grants under the Equity Incentive Plan was 445,377
shares.
-31-
<PAGE>
NATIONAL RESEARCH CORPORATION
Notes to Financial Statements, Continued
(9) 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. Options to purchase 2,000 shares of the Company's
common stock were granted in each of 1999 and 1998. At December 31, 1999, the
number of shares available for issuance pursuant to future grants under the
Director Plan was 26,000.
Options to purchase shares of common stock have been granted in 1999
and 1998 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:
1999 1998
---- ----
(in thousands, except
per share amounts)
Pro forma:
Net income, as reported............................... $1,475 $ 461
Net income, adjusted for the fair value method........ 1,324 267
Income per share, as reported (1)..................... $ 0.21 $0.06
Income per share, adjusted for the fair
value method (1).................................... 0.19 0.04
(1) Amounts are the same for both basic and diluted income per share.
The weighted average fair value of options granted in 1999 and 1998
was $5.51 and $1.80, 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 for 1999 and 1998 was estimated at the date of grant using the
Black-Scholes model with the following assumptions:
Expected dividend yield at date of grant..... 0
Expected stock price volatility.............. 45.0%
Risk-free interest rate...................... 6.0%
Expected life of options..................... 3.75 to 5.00 years
-32-
<PAGE>
NATIONAL RESEARCH CORPORATION
Notes to Financial Statements, Continued
(9) Stock Option Plans, Continued
The following information relates to options to purchase common stock:
Number of Weighted Average
Shares Exercise Price
--------- ----------------
Balance at December 31, 1997............... 167,130 $15.00
Granted................................ 342,878 4.37
Canceled............................... (107,378) 13.58
-------- 6.33
Balance at December 31, 1998............... 402,630 3.71
======== 5.51
Granted................................ 135,930 5.70
Canceled............................... (89,183) 7.87
--------
Balance at December 31, 1999............... 449,219
========
Exercisable at December 31, 1999........... 196,150
========
At December 31, 1999, the range of exercise prices for outstanding
stock options was $2.188 to $15.00 and the weighted average remaining
contractual life of outstanding stock options was 3.42 years.
(10) Leases
The Company leases office space for a monthly base rental payment plus
maintenance and utilities. Rental expense was $401,105, $385,735 and $253,034
during 1999, 1998 and 1997, respectively, and is included in selling, general
and administrative expenses in the statements of income. The future minimum
lease payments under noncancelable operating leases are approximately $401,000
in 2000.
(11) 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 $97,402 in 1997. No contributions were made by the Company
in 1999 and 1998.
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 $162,458,
$84,013 and $607,877 in 1999, 1998 and 1997, respectively.
-33-
<PAGE>
NATIONAL RESEARCH CORPORATION
Notes to Financial Statements, Continued
(12) Restructuring Expenses and Impairment of Assets
During the quarter ended December 31, 1999, the Company recorded
provisions related to restructuring expenses and impairments of long-lived
assets. The Company's restructuring activities include the elimination of
substantially all of the Company's Columbus, Ohio work force and the abandonment
of duplicative facilities. The Company's restructuring plan commitments, which
are expected to be fully completed in 2000, included the following:
o Severance costs of $104,437 were accrued related to the
termination of fourteen employees at the Company's Columbus, Ohio
location. These employees represent substantially all of the
Company's full-time work force in Columbus, Ohio. Following the
termination of these employees in December 1999, the only
remaining employees of the Company in Columbus, Ohio are those
employed in the Company's call center facility. No severance
benefits were paid in 1999 and, therefore, accrued expenses
include liabilities of $104,437 for unpaid severance benefits at
December 31, 1999.
o Management expects to terminate its remaining call center work
force in Columbus, Ohio by the end of the second quarter of 2000.
No provisions for employee terminations were made in the 1999
financial statements because the conditions for accrual of a
liability were not met. The anticipated cost of terminating this
remaining workforce is not expected to be significant.
o Impairment losses of $230,813 were recorded in the quarter ended
December 31, 1999 for the Company's intangible asset, workforce
in place, which was acquired in connection with the Company's
1998 acquisition of HRS. The abandonment of this intangible asset
occurred concurrent with management's plans to eliminate
substantially all of its full-time Columbus, Ohio workforce. See
also Note 5.
o Impairment losses of $17,428 were recognized in the quarter ended
December 31, 1999 in connection with duplicative property and
equipment abandoned with the Columbus, Ohio facilities.
o Lease costs of $11,287 were accrued for contractual commitments
on abandoned facilities in connection with management's exit
plans.
After income taxes, these actions reduced 1999 net income by approximately
$235,000, or $.03 per share.
-34-
<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 2000 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 Directors-Director Compensation" and "Executive Compensation" in the
Proxy Statement and is hereby incorporated herein by reference; provided,
however, that the subsection entitled "Executive Compensation-Report 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.
-35-
<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 29th day of
March, 2000.
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 29, 2000
- ------------------------- Officer and Director
Michael D. Hays (Principal Executive Officer)
/s/ Patrick E. Beans Vice President, Treasurer, March 29, 2000
- ------------------------- Secretary, Chief Financial
Patrick E. Beans Officer and Director (Principal
Financial and Accounting Officer)
/s/ John N. Nunnelly Director March 29, 2000
- -------------------------
John N. Nunnelly
/s/ Paul C. Schorr, III Director March 29, 2000
- -------------------------
Paul C. Schorr, III
-36-
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULE
Page in this Form 10-K
----------------------
Independent Auditors' Report 18
Balance Sheets as of December 31, 1999 and 1998 19
Statements of Income for each of the years in 20
the three-year period ended December 31, 1999
Statements of Shareholders' Equity for each of 21
the years in the three-year period ended
December 31, 1999
Statements of Cash Flows for each of the three 22
years in the period ended December 31, 1999
Notes to Financial Statements 23-34
Independent Auditors' Report on Financial
Statement Schedule 38
Financial Statement Schedule: 39
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.
-37-
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors
National Research Corporation:
Under date of February 8, 2000, we reported on the balance sheets of National
Research Corporation as of December 31, 1999 and 1998, and the related
statements of income, shareholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 1999, 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 LLP
Lincoln, Nebraska
February 8, 2000
-38-
<PAGE>
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:
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
Year Ended December 31, 1999.... $61,891 45,000 43,793 63,098
See accompanying independent auditors' report.
-39-
<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)+ 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)]
(10.4) 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 LLP
(27) Financial Data Schedule (EDGAR version only)
(99) Proxy Statement for the 2000 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.
-40-
Accountants' Consent
The Board of Directors
National Research Corporation:
We consent to incorporation by reference in the registration statements (Numbers
333-52135 and 333-52143) on Form S-8 of National Research Corporation of our
report dated February 8, 2000, relating to the balance sheets of National
Research Corporation as of December 31, 1999 and 1998, and the related
statements of income, shareholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 1999, and related schedule, which
reports appear in the December 31, 1999, annual report on Form 10-K of National
Research Corporation.
/s/ KPMG LLP
Lincoln, Nebraska
March 27, 2000
<TABLE> <S> <C>
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<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, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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