-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qpvz0Xl86qic3EwKbWbcCp500lAHzV9RRqjJD0VCqzAEmLvL9mIL9zeXPezGNicg NmJqrhSrU7Q32rcB3JKMWg== 0000897069-01-000256.txt : 20010330 0000897069-01-000256.hdr.sgml : 20010330 ACCESSION NUMBER: 0000897069-01-000256 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL RESEARCH CORP CENTRAL INDEX KEY: 0000070487 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-TESTING LABORATORIES [8734] IRS NUMBER: 470634000 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-29466 FILM NUMBER: 1583584 BUSINESS ADDRESS: STREET 1: 1033 O ST CITY: LINCOLN STATE: NE ZIP: 68508 BUSINESS PHONE: 4024752525 MAIL ADDRESS: STREET 1: 1033 O ST CITY: LINCOLN STATE: NE ZIP: 68508 10-K405 1 0001.txt FORM 10-K 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, 2000 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission file number: 0-29466 NATIONAL RESEARCH CORPORATION (Exact name of registrant as specified in its charter) Wisconsin 47-0634000 --------------------------------- -------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1245 "Q" Street Lincoln, Nebraska 68508 --------------------------------------- --------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (402) 475-2525 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of Class -------------- Common Stock, $.001 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| Aggregate market value of the voting stock held by nonaffiliates of the registrant at March 1, 2001: $10,158,615. Number of shares of the registrant's common stock outstanding at March 1, 2001: 7,039,998 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 2001 Annual Meeting of Shareholders are incorporated by reference into Part III. 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 20 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 20 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. 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. Since 1997, 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. NRC's performance assessments offer the tangible measurement of health service quality currently demanded by consumers, employers, industry accreditation organizations and lawmakers. 2 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, dental, 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. During 2000, the Company piloted the new syndicated NRC DoctorGuide, a stand-alone individual report card on primary care physicians. The DoctorGuide allows health plans and consumers to review service quality measures of individual physicians. 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 industry method of mail and/or telephone based data collection, this assessment process monitors 3 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. Unlike most of its 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 the Company believes provides NRC's clients the fastest and easiest way to access measurement results. IDEAS, NRC's exclusive web-based electronic delivery system, provides 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 535 managed care plans and 2,800 hospitals nationwide and addresses more than 250 data items relevant to healthcare payers, providers and purchasers. Utilizing this proprietary database, the Company is able to produce reports which are customized to meet individual client's specific information needs. Similarly, the service's national name search feature allows a healthcare organization with a national or regional presence to simultaneously compare the performance of all its sites and pinpoint where strengths and weaknesses exist. The service's trending capacity details how the performance of a healthcare organization changes over time. Other data 4 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. The Company piloted its new renewable syndicated service, the NRC DoctorGuide, in 2000. The NRC DoctorGuide serves as a stand-alone report card on service quality of individual physicians. The first market was completed in the fall of 2000, with a second market expected to be completed by mid-2001. The report cards on the individual physicians can be sold to health plans, employees, physician management groups, with summary reports available to the general public via DoctorGuide.com. Clients The Company's ten largest clients accounted for 41%, 43% and 40% of the Company's total revenues in 2000, 1999 and 1998, respectively. The United States Department of Defense, through a primary contractor, United Healthcare Corporation, accounted for 14.6% of total revenues in 2000. 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. Sales associates now direct NRC's sales efforts from Nebraska, California, Tennessee, Pennsylvania, and Virginia. The Company is also in the process of searching for an additional sales associate. 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 was 10 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 108 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 120-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. 5 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 DoctorGuide, 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, 2000, the Company employed a total of 80 persons on a full-time basis. In addition, as of such date, the Company had 98 part-time associates primarily in its survey operations, representing approximately 54 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. 6 Executive Officers of the Registrant The following table sets forth certain information, as of March 1, 2001, regarding the executive officers of the Company: Name Age Positions ---- --- --------- Michael D. Hays 46 President, Chief Executive Officer and Director Jona S. Raasch 42 Vice President and Chief Operations Officer Patrick E. Beans 43 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 an owned 47,000 square foot office building 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. Item 3. Legal Proceedings ----------------- The Company filed a $2.8 million counter suit to a lawsuit filed in May 2000 in the United States District Court for the District of Nebraska by Cap Gemini America, Inc., the software developer of the Company's QualPro technology (a proprietary system that automates the creation and processing of surveys). Cap Gemini is suing the Company for approximately $1.1 million due under a consulting agreement between the two firms. The Company has withheld a portion of the consulting fee because of Cap Gemini's failure to fulfill the terms of the consulting agreement, creating a costly delay in the roll-out of QualPro and necessitating considerable expense on the part of the Company to make the software perform as required. The Company believes it has a strong case and that the outcome of the lawsuit will have little or no impact on the operations or financial condition of the Company. 7 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 2000 fiscal year. PART II ------- Item 5. Market for the Registrant's Common Equity and Related ----------------------------------------------------- Stockholder Matters ------------------- 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, 1999 through December 31, 2000: High Low ---- --- 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 First quarter ended March 31, 2000............ 6 3/8 3 7/16 Second quarter ended June 30, 2000............ 8 1/8 4 1/2 Third quarter ended September 30, 2000........ 63/4 4 5/8 Fourth quarter ended December 31, 2000........ 51/2 3 3/8 On March 1, 2001, there were approximately 18 shareholders of record and approximately 592 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. Item 6. Selected Financial Data ----------------------- The selected statement of income data for the years ended December 31, 2000, 1999 and 1998 and the balance sheet data at December 31, 2000 and 1999 are derived from, and are qualified by reference to, the audited financial statements of the Company included elsewhere in this Annual Report on Form 10-K. The selected statement of income data for the years ended December 31, 1997 and 1996 and the balance sheet data at December 31, 1998, 1997 and 1996 are derived from audited financial statements not included herein. 8
Year Ended December 31, --------------------------------------------------------------- 2000 1999 1998(1) 1997 1996 -------- -------- -------- -------- -------- (In thousands, except per share data) Statement of Income Data: Revenues.......................................... $ 18,316 $ 18,184 $ 17,665 $ 16,284 $ 12,600 Operating expenses: Direct expenses................................. 9,120 11,133 9,422 7,178 5,685 Selling, general and administrative............. 4,602 4,177 4,843 3,980 3,060 Depreciation and amortization................... 1,269 817 426 159 173 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................ 14,991 16,491 17,732 13,057 8,918 -------- -------- -------- -------- -------- Operating income (loss)........................... 3,325 1,693 (67) 3,227 3,682 Other income and expenses, net.................... 531 530 849 367 152 -------- -------- -------- -------- -------- Income before income taxes........................ 3,856 2,223 782 3,594 3,834 Provision for income taxes........................ 1,139 748 321 376 - Pro forma income taxes(2)......................... - - - 804 1,534 -------- -------- -------- -------- -------- Pro forma net income(2)........................... $ 2,717 $ 1,475 $ 461 $ 2,414 $ 2,300 ======== ======== ======== ======== ======== Pro forma net income per share - basic and diluted(2).................................... $ 0.39 $ 0.21 $ 0.06 $ 0.37 $ 0.37 ======== ======== ======== ======== ======== Weighted average shares outstanding - basic(3).... 7,019 7,054 7,283 6,440 6,185 Weighted average shares outstanding - diluted(3).. 7,025 7,057 7,301 6,440 6,185 December 31, --------------------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- (In thousands) Balance Sheet Data: Working capital................................... $ 8,342 $ 5,246 $ 8,954 $ 17,681 $ 2,018 Total assets...................................... 31,637 29,256 26,279 22,563 6,153 Total debt, including current portion............. 5,430 3,619 105 - - Total shareholders' equity........................ 21,382 18,566 17,435 18,121 2,079 - --------------------------- (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 year ended December 31, 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.
9 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. 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 10 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. The Company piloted its new renewable syndicated service, the NRC DoctorGuide, in 2000. The NRC DoctorGuide serves as a stand-alone report card on service quality of individual physicians. The first market was completed in the fall of 2000, with a second market expected to be completed by mid-2001. The report cards on the individual physicians can be sold to health plans, employees, physician management groups, with summary reports available to the general public via DoctorGuide.com. 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.
Percentage of Total Revenues Percentage Increase Year Ended December 31, (Decrease) ----------------------------- ----------------------- 2000 over 1999 over 2000 1999 1998 1999 1998 ----- ----- ----- ----- ----- Revenues 100.0% 100.0% 100.0% 0.7% 2.9% Operating expenses: Direct expenses............................. 49.8 61.2 53.3 (18.1) 18.2 Selling, general and administrative......... 25.1 23.0 27.4 10.2 (13.7) Depreciation and amortization............... 6.9 4.5 2.4 55.3 91.8 Acquired-in-process research and development cost....................... - - 15.5 - (100.0) Cost of closing duplicate facilities and severance charges...................... - 2.0 1.7 (100.0) 19.8 Special compensation charge................. - - - - - ----- ----- ----- Total operating expenses............ 81.8 90.7 100.3 (9.1) (7.0) ----- ----- ----- Operating income (loss)....................... 18.2% 9.3% (0.3)% N/A N/A ===== ===== =====
11 Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Total revenues. Total revenues increased 0.7% in 2000 to $18.3 million from $18.2 million in 1999 primarily due to the addition of new clients. Direct expenses. Direct expenses decreased 18.1% to $9.1 million in 2000 from $11.1 million in 1999. The decrease in direct expenses in 2000 was due primarily to a decrease in labor and payroll expenses of $853,000, software conversion costs of $356,000, printing and postage expenses of $216,000, contract service expenses of $216,000, fieldwork expenses of $112,000, and, to a lesser extent, decreases in travel expenses of $54,000, product development expenses of $48,000, and telephone costs of $47,000. Direct expenses decreased as a percentage of total revenues to 49.8% in 2000 from 61.2% during 1999 primarily due to the use of the new software for creating and processing surveys. Direct expenses as a percentage of total revenues are expected to remain at similar levels as 2000 in 2001. Selling, general and administrative expenses. Selling, general and administrative expenses increased 10.2% to $4.6 million in 2000 from $4.2 million in 1999. This increase was primarily due to an increase in salary and benefit expenses of $306,000, product development expenses of $231,000, marketing costs of $105,000, legal and accounting expenses of $68,000, bad debt expenses of $44,000, and human resources recruitment expenses of $20,000. These increases were partially offset by decreases in rent, utilities and repair costs of $218,000 and contract service expenses of $131,000. Selling, general and administrative expenses increased as a percentage of total revenues to 25.1% in 2000 from 23.0% in 1999 mainly due to product development charges. Selling, general and administrative expenses as a percentage of total revenues are expected to decrease slightly 2001. Depreciation and amortization. Depreciation and amortization expenses increased 55.3% to $1.3 million in 2000 from $817,000 in 1999. The increase is primarily due to the internal development of software and the completion of the new facilities. Depreciation and amortization expenses increased as a percentage of total revenues to 6.9% in 2000 from 4.5% in 1999. Depreciation and amortization expenses as a percent of total revenues are expected to decrease slightly in 2001. Provision for income taxes. The provision for income taxes totaled $1.1 million (29.5% effective tax rate) for 2000 compared to $748,000 (33.6% effective tax rate) for 1999. The effective tax rate was lower in 2000 due to certain federal income tax credits. The effective tax rate for 2001 is expected to increase to 34% due to the lack of federal tax credits. Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 Total revenues. Total revenues increased 2.9% in 1999 to $18.2 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 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 12 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. Liquidity and Capital Resources The Company's principal source of funds historically has been cash flow from its operations. The Company's cash flow has been sufficient to provide funds for working capital and capital expenditures. As of December 31, 2000, the Company had cash and cash equivalents of $3.2 million and working capital of $8.3 million. During 2000, the Company generated $2.0 million of net cash from operating activities as compared to $3.5 million of net cash generated during 1999. The decrease in cash flow was due, in part, to a decrease in billings in excess of revenues earned and an increase in unbilled revenues, both of which were partially offset by a decrease in trade accounts receivables. These changes were mainly due to the timing of the billing of certain customers in 2000, which timing the Company expects will reverse, in part, in 2001. The decrease in cash flows was also due to a decrease in accounts payable and accrued expenses, wages and profit sharing, largely due to timing. 13 Net cash used in investing activities was $1.9 million for 2000 and $7.8 million for 1999. The 2000 decrease in cash used was primarily due to the decrease in investments available-for-sale of $6.9 million, which was partially offset by an increase of $1.3 million for investment in the renovation of the Company's new building and the purchase of furniture, computer equipment and software. The 1999 use of cash was primarily a result of the purchase and renovation of an office building for $3.6 million and the purchase of securities available for sale for $2.9 million. These uses of cash were partially offset by a decrease in cash used for investment in furniture, computer equipment and software of $600,000. 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 $1.9 million for 2000, compared to $533,000 in 1999. The 2000 cash provided was primarily from the $1.8 million construction financing for the renovation of the Company's new office building and the $125,000 proceeds from issuance of common stock through the exercise of stock options. 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 Company has budgeted approximately $700,000 for expenditures in 2001 to be funded through cash generated from operations. The Company expects that capital expenditures during 2001 will be primarily for telecommunications equipment, computer hardware and software, production equipment and furniture. 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, 2000 and 1999, the Company had $1.8 million and $3.3 million of deferred revenues, respectively. In addition, when work is performed in advance of billing, the Company records this work as a cost in excess of billings or unbilled revenue. At December 31, 2000 and 1999, the Company had $1.2 million and $600,000 of unbilled revenues, respectively. Substantially all deferred and unbilled revenues will be earned and billed, respectively, within 12 months of the respective period ends. Stock Repurchase Program In October 1998, the Company announced plans to repurchase up to 245,000 shares of Common Stock in the open market or in privately negotiated transitions. The Company repurchased 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, 2000, 56,700 shares have been repurchased under the new authorization. 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- 14 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, 2000 and 1999, then the Company's interest income would have decreased, and pre-tax income would have decreased approximately $50,000 and $60,000, respectively. These amounts were determined by considering the impact of a hypothetical change in interest rates on the Company's interest income. Item 8. Financial Statements and Supplementary Data ------------------------------------------- Quarterly Financial Data (Unaudited) Selected unaudited quarterly financial information for the fiscal years ended December 31, 2000 and 1999 is as follows (in thousands, except per share data):
Quarter Ended ---------------------------------------------------------------------------------------- Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, 2000 2000 2000 2000 1999 1999 1999 1999 ---- ---- ---- ---- ---- ---- ---- ---- Revenues.............................. $4,206 $5,017 $4,638 $4,455 $4,618 $5,598 $4,305 $3,663 Direct expenses....................... 1,822 2,449 2,331 2,518 2,082 3,469 3,005 2,577 Selling, general and administrative... 1,068 1,212 1,222 1,100 1,165 1,061 1,046 905 Depreciation and amortization......... 316 342 347 264 266 203 179 169 Cost of closing of duplicate facilities and severance charges(1).. -- -- -- -- 364 -- -- -- ------ ------ ------ ------ ------ ------ ------ ------ Operating income (loss)............... 1,000 1,014 738 573 741 865 75 12 Other income and expenses, net........ 29 173 178 151 146 95 133 156 Provision for income taxes............ 287 356 266 230 262 334 85 67 --- --- --- --- --- --- -- -- Net income............................ $ 742 $ 831 $ 650 $ 494 $ 625 $ 626 $ 123 $ 101 ====== ====== ====== ====== ====== ====== ====== ====== Net income per share - basic and diluted........................ $ 0.11 $ 0.12 $ 0.09 $ 0.07 $ 0.09 $ 0.09 $ 0.02 $ 0.01 Weighted average shares outstanding- basic.............................. 7,032 7,025 7,013 7,006 7,036 7,050 7,056 7,077 Weighted average shares outstanding- diluted............................ 7,038 7,069 7,062 7,037 7,039 7,051 7,057 7,085 - ----------------------- (1) 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 Company's Financial Statements.
15 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, 2000 and 1999 and the related statements of income, shareholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of National Research Corporation as of December 31, 2000 and 1999 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Lincoln, Nebraska February 9, 2001 16 NATIONAL RESEARCH CORPORATION Balance Sheets December 31, 2000 and 1999
Assets 2000 1999 ------ ---- ---- Current assets: Cash and cash equivalents..................................................... $ 3,218,805 $ 1,149,587 Investments in marketable debt securities..................................... 6,577,112 10,876,608 Trade accounts receivable, less allowance for doubtful accounts of $77,276 and $63,098 in 2000 and 1999, respectively.............. 1,713,621 2,918,124 Unbilled revenues............................................................. 1,247,296 622,610 Prepaid expenses and other.................................................... 213,075 53,727 Income taxes recoverable...................................................... 62,833 -- Deferred income taxes......................................................... 217,205 215,018 ----------- ------------ Total current assets................................................... 13,249,947 15,835,674 Net property and equipment...................................................... 13,218,340 7,525,943 Deferred income taxes........................................................... 85,600 438,136 Goodwill and other intangible assets, net of accumulated amortization........... 5,057,761 5,440,252 Other........................................................................... 25,825 15,592 ----------- ------------ Total assets........................................................... $31,637,473 $ 29,255,597 =========== ============ Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Construction financing line of credit......................................... $ --- $ 3,544,000 Current portion of notes payable.............................................. 134,518 54,332 Accounts payable.............................................................. 1,771,498 1,680,385 Accrued wages, bonus and profit sharing....................................... 513,254 669,900 Accrued expenses.............................................................. 679,869 1,132,934 Income taxes payable.......................................................... --- 234,533 Billings in excess of revenues earned......................................... 1,809,090 3,273,577 ----------- ------------ Total current liabilities.............................................. 4,908,229 10,589,661 Notes payable, net of current portion........................................... 5,295,814 20,324 Bonuses, profit sharing accruals and other accrued expenses..................... 50,999 79,245 ----------- ------------ Total liabilities...................................................... 10,255,042 10,689,230 ----------- ------------ 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 7,332,413 in 2000 and 7,305,000 in 1999, outstanding 7,030,713 in 7,332 7,305 2000 and 7,006,300 in 1999.................................................. Additional paid-in capital.................................................... 16,964,720 16,839,839 Retained earnings............................................................. 5,927,019 3,210,292 Accumulated other comprehensive income........................................ (13,571) --- Treasury stock, at cost; 301,700 shares in 2000 and 298,700 shares in 1999..................................................................... (1,503,069) (1,491,069) ----------- ------------ Total shareholders' equity............................................. 21,382,431 18,566,367 ----------- ------------ Total liabilities and shareholders' equity............................. $31,637,473 $ 29,255,597 =========== ============ See accompanying notes to financial statements.
17 NATIONAL RESEARCH CORPORATION Statements of Income Three years ended December 31, 2000
2000 1999 1998 ---- ---- ---- Revenues............................................. $ 18,316,116 $ 18,184,007 $ 17,664,682 Operating expenses: Direct expenses.................................... 9,119,750 11,133,090 9,422,342 Selling, general and administrative................ 4,602,223 4,177,185 4,842,584 Depreciation and amortization...................... 1,269,535 816,740 425,876 Acquired-in-process research and development cost.. --- --- 2,737,542 Cost of closing duplicate facilities and severance charges......................................... --- 363,965 303,740 ------------ ------------ ------------ Total operating expenses.................... 14,991,508 16,490,980 17,732,084 ------------ ------------ ------------ Operating income (loss)..................... 3,324,608 1,693,027 (67,402) ------------ ------------ ------------ Other income (expense): Interest income.................................... 661,675 573,460 852,173 Interest expense................................... (91,709) (7,706) (7,360) Other, net......................................... (38,423) (35,778) 4,380 ------------ ------------ ------------ Total other income.......................... 531,543 529,976 849,193 ------------ ------------ ------------ Income before income taxes.................. 3,856,151 2,223,003 781,791 Provision for income taxes......................... 1,139,424 747,691 320,508 ------------ ------------ ------------ Net income.................................. $ 2,716,727 $ 1,475,312 $ 461,283 ============ ============ ============ Net income per share - basic and diluted............. $ 0.39 $ 0.21 $ 0.06 ============ ============ ============
See accompanying notes to financial statements. 18 NATIONAL RESEARCH CORPORATION Statements of Shareholders' Equity and Comprehensive Income Three years ended December 31, 2000
Accumulated Additional Other Preferred Common Paid-in Retained Comprehensive Treasury Stock Stock Capital Earnings Income (Loss) Stock Total ----- ----- ------- -------- ------------- ----- ----- Balances at December 31, 1997...... $ --- $7,305 $16,839,839 $ 1,273,697 $ --- $ --- $18,120,841 Comprehensive income............... Net income/total comprehensive 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 1,734,980 --- (1,147,594) 17,434,530 Comprehensive income............... Net income/total comprehensive 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 3,210,292 --- (1,491,069) 18,566,370 Issuance of 27,413 common shares from the exercise of stock options... --- 27 113,053 --- --- --- 113,080 Tax benefit from the exercise of --- --- 11,828 --- --- --- 11,828 options............................ Comprehensive income............... Other comprehensive loss, net of --- --- --- --- (13,571) --- (13,571) income taxes of $5,816......... Net income...................... --- --- --- 2,716,727 --- --- 2,716,727 ------ ------ ---------- ---------- ---------- ---------- ---------- Total comprehensive income......... --- --- --- 2,716,727 (13,571) --- 2,703,156 ------ ------ ---------- ---------- ---------- ---------- ---------- Purchase of 3,000 shares of treasury stock............... --- --- --- --- --- (12,000) (12,000) ------ ------ ---------- ---------- ---------- ---------- ---------- Balances at December 31, 2000...... $ --- $ 7,332 $16,964,720 $ 5,927,019 $ (13,571) $(1,503,069) $21,382,431 ====== ====== ========== ========== ========== ========== ==========
See accompanying notes to financial statements. 19 NATIONAL RESEARCH CORPORATION Statements of Cash Flows Three years ended December 31, 2000
2000 1999 1998 ---- ---- ---- Cash flows from operating activities: Net income............................................ $ 2,716,727 $ 1,475,312 $ 461,283 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization....................... 1,269,535 816,740 425,876 Impairment losses................................... --- 230,813 --- Acquired in-process research and development cost... --- --- 2,737,542 Deferred income taxes............................... 356,165 117,852 (3,600) Loss on sale of property and equipment.............. 25,682 22,106 (2,489) Loss on sale of other investments................... 43 788 --- Other non-cash charges.............................. 32,581 25,920 --- Change in assets and liabilities: Trade accounts receivable.......................... 1,204,504 22,232 1,278,132 Unbilled revenues.................................. (624,686) 407,741 (260,819) Prepaid expenses and other......................... (145,272) 122,300 27,665 Accounts payable................................... (464,158) 135,326 (698,495) Accrued expenses, wages and profit sharing......... (585,956) (101,491) (368,537) Income taxes payable/recoverable................... (297,366) 234,533 465,827 Billings in excess of revenues earned.............. (1,464,487) (9,885) (93,646) ---------- ---------- --------- Net cash provided by operating activities..... 2,023,312 3,500,287 3,968,739 ---------- ---------- --------- Cash flows from investing activities: Purchases of property and equipment................... (6,194,318) (4,904,156) (1,927,929) Acquisition, net of cash acquired..................... --- --- (5,899,588) Purchases of securities available-for-sale............ (13,218,641) (13,330,053) (11,611,973) Proceeds from the maturities of securities available-for-sale................................. 17,498,708 10,462,000 16,823,183 Proceeds from sale of property and equipment.......... 27,978 1,000 13,112 ---------- ---------- --------- Net cash used in investing activities......... (1,886,273) (7,771,209) (2,603,195) ---------- ---------- ---------- Cash flows from financing activities: Borrowings (payments) under line of credit............ (3,544,000) 3,544,000 --- Proceeds from issuance of debt........................ 5,440,000 --- --- Payments on notes payable............................. (76,729) (30,792) (18,590) Payment of purchase price payable..................... --- (2,636,936) --- Proceeds from issuance of common stock................ 124,908 --- --- Purchase of treasury stock............................ (12,000) (343,475) (1,147,594) ---------- ---------- ---------- Net cash provided by (used in) financing activities.................................. 1,932,179 532,797 (1,166,184) ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents............................ 2,069,218 (3,738,125) 199,360 Cash and cash equivalents at beginning of period........ 1,149,587 4,887,712 4,688,352 ---------- ---------- --------- Cash and cash equivalents at end of period.............. $ 3,218,805 $ 1,149,587 $4,887,712 ========== ========== ========= Supplementary information: Cash paid for: Interest, including capitalized interest of $325,963 and $54,617 in 2000 and 1999, respectively......... $ 417,567 $ 62,685 $ 7,360 ========== ========== ========= Income taxes.......................................... $ 1,068,798 $ 397,540 $ 928,246 ========== ========== ========= 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. Accounts payable included $555,270 in 2000 and $863,216 in 1999 for purchases of property and equipment.
See accompanying notes to financial statements. 20 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 41%, 43% and 40% of the Company's total revenues in 2000, 1999 and 1998, respectively. One client accounted for 14.6%, 15.7%, and 14.6% of total revenues in 2000, 1999 and 1998, respectively. A second client accounted for 12.9% and 10.2% of total revenues in 1999 and 1998, respectively. The Company operates in a single industry segment. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make 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 (if any) 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 21 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. For costs of software developed for internal use, 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 $596,000, $1,491,000 and $1,494,000 of costs incurred for the development of internal use software for the years ended December 31, 2000, 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. 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 both straight-line and accelerated methods of depreciation and amortization over estimated useful lives of five to ten years for furniture and fixtures, three to five years for computer equipment, three to four years for capitalized software and forty 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, ten to twenty 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, 2000 and 1999 were classified as available-for-sale and recorded at fair market value. Unrealized holding gains and losses (if any), net of the related tax effect, on available-for-sale securities are reported as other comprehensive income. Realized gains and losses from the sale of available-for-sale securities are determined on a specific-identification basis. Fair values are estimated based on quoted market prices. Income Taxes The Company uses the asset and liability method of accounting for income taxes. Under that method, deferred income tax assets and liabilities are recognized for the future tax consequences 22 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. Earnings Per Share Net income per share has been calculated and presented for "basic" and "diluted" data. Net income per share is computed by dividing net income by the weighted average number of common shares outstanding. Diluted income per share is computed by dividing net income by the weighted average number of common shares adjusted for the dilutive effects of options and common equivalent shares outstanding. The weighted average shares outstanding is calculated as follows:
2000 1999 1998 ---- ---- ---- Common stock........................................... 7,019,097 7,054,487 7,283,051 Dilutive effect of options............................. 5,918 2,987 18,315 --------- --------- --------- Weighted average shares used for dilutive per share........................................... 7,025,015 7,057,474 7,301,366 ========= ========= =========
There are no reconciling items between the Company's reported net income and net income used in the computation of basic and diluted income per share. 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 and 1998, the Company reported no other comprehensive income for the two years ended December 31, 1999. Reclassification Other income for the prior years has been reclassified to conform to the December 31, 2000 presentation. 23 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. During 2000, the Company negotiated a reduction in the incurred liabilities related to the management's plan to exit certain activities which reduced the Company's liabilities by $84,318. In October 1998, the amended acquisition agreement removed the contingencies associated with scheduled payments of additional purchase price in 1999 and the Company paid the scheduled payments of purchase price during 1999. 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 $8,900,000, 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................................. 5,417,771 20 years --------- 6,199,701 In-process research and development...... 2,737,542 0 years --------- $8,937,243 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. 24 3. Investments in Marketable Debt Securities ----------------------------------------- The amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value of securities by major security type and class of security at December 31, 2000, were as follows:
Gross Gross Amortized Unrealized Unrealized Cost Holding Gains Holding Losses Fair Value ---- ------------- -------------- ---------- Debt securities: Obligations of U.S. government agencies.... $ 6,595,541 --- $ (19,387) $ 6,576,154 Other...................................... 958 --- --- 958 ----------- ---------- --------- ----------- Total................................. $ 6,596,499 $ --- $ (19,387) $ 6,577,112 =========== ========== ========= ===========
There were no sales of marketable securities in advance of scheduled maturities of available-for-sale marketable debt securities during 2000, 1999 or 1998. The amortized cost of debt securities at December 31, 2000, 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. 2000 ---- Fair Amortized Value Cost ----- --------- Due after three months through one year $ 5,532,370 $ 5,544,542 Due after one year through five years 1,043,784 1,050,999 --------- --------- $ 6,576,154 $ 6,595,541 =========== =========== 4. Property and Equipment ---------------------- At December 31, 2000 and 1999 property and equipment consisted of the following: 2000 1999 ---- ---- Furniture and equipment................... $ 1,415,522 $ 416,214 Computer equipment and software........... 5,407,782 4,319,118 Building.................................. 7,862,117 3,613,003 Land...................................... 425,000 425,000 ------------ ---------- 15,110,421 8,773,335 Less accumulated depreciation and amortization........................ 1,892,081 1,247,392 ----------- ---------- Net property and equipment....... $ 13,218,340 $ 7,525,943 ============ ========== During 2000 the Company moved to its new headquarters and sold or otherwise disposed of certain old furniture and equipment used at the old headquarters, which had accumulated depreciation of approximately $350,000. 25 5. Goodwill and Other Intangible Assets ------------------------------------ Goodwill and other intangible assets consist of the following at December 31, 2000 and 1999: 2000 1999 ---- ---- Customer lists..................... $ 359,048 $ 359,048 Goodwill........................... 5,417,771 5,502,089 ----------- ----------- 5,776,819 5,861,137 Accumulated amortization........... (719,058) (420,885) ----------- ----------- $ 5,057,761 $ 5,440,252 =========== =========== 6. Income Taxes ------------ Income tax expense (benefit) consisted of the following components: Current Deferred Total ------- -------- ----- 2000: Federal............. $ 608,400 $ 310,500 $ 918,900 State............... 174,859 45,665 220,524 ------- ------ ------- Total.......... $ 783,259 $ 356,165 $ 1,139,424 ======= ======= ========= 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 ======= ======== ======= 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: 2000 1999 1998 ---- ---- ---- Expected federal income taxes...... $ 1,311,100 $ 755,800 $266,000 State income taxes, net of federal benefit................... 153,600 80,100 32,900 Tax credits and incentives......... (386,100) (66,000) --- Other.............................. 60,824 (22,209) 21,608 ----------- -------- ------- Total..................... $ 1,139,424 $ 747,691 $320,508 ========= ======= ======= 26 Deferred tax assets and liability at December 31, 2000 and 1999, were comprised of the following: 2000 1999 ---- ---- Deferred tax assets: Allowance for doubtful accounts......... $ 30,100 $ 24,600 Accrued expenses........................ 157,800 164,400 Bonus and profit sharing accruals....... 34,000 29,600 In process research and development..... 461,000 434,554 Investments available-for-sale.......... 5,816 --- --------- --------- Gross deferred tax assets.......... 688,716 653,154 Deferred tax liability: Basis in property and equipment 385,911 --- --------- --------- Net deferred tax assets............ $ 302,805 $ 653,154 =========== ========= 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 ------------- Notes payable consist of the following: 2000 1999 ---- ---- Note payable to US Bank, at 8.25%, payable in monthly installments of $46,690 including interest, with final payment of principal and interest due October 31, 2010, secured by land and building $5,410,050 $ --- 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 paid October 1, 2000 --- 39,988 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 20,282 34,668 ---------- -------- Total notes payable 5,430,332 74,656 Less current portion 134,518 54,332 ---------- -------- Notes payable, net of current portion $5,295,814 $ 20,324 ========== ======== The aggregate maturities of notes payable for each of the five years subsequent to December 31, 2000 are: 2001 - $134,518; 2002 - $132,848; 2003 - $139,639; 2004 - $151,605; and 2005 - $164,596. 27 8. Stock Option Plans ------------------ In August 1997, the Board of Directors adopted and the Company's shareholders approved the National Research Corporation 1997 Equity Incentive Plan (the "Equity Incentive Plan"). The Equity Incentive Plan provides for the granting of options to purchase up to an aggregate of 730,000 shares of the Company's common stock through the date of the Company's annual meeting of shareholders in the year 2001. Options granted may be either nonqualified or incentive stock options. Vesting terms vary with each grant, and option terms are five years. At December 31, 2000, the number of shares available for issuance pursuant to future grants under the Equity Incentive Plan was 380,895 shares. 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 2000 and 1999. At December 31, 2000, the number of shares available for issuance pursuant to future grants under the Director Plan was 24,000. Options to purchase shares of common stock have been granted in 2000 and 1999 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: 2000 1999 1998 ---- ---- ---- (in thousands, except per share amounts) Pro forma: Net income, as reported........................ $2,717 $1,475 $461 Net income, adjusted for the fair value method. 2,687 1,324 267 Income per share, as reported (1).............. $0.39 $0.21 $0.06 Income per share, adjusted for the fair value method(1)........................... 0.39 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 2000, 1999 and 1998 was $4.99, $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 2000, 1999 and 1998 was estimated at the date of grant using the Black-Scholes model with the following assumptions: 28
2000 1999 1998 ---- ---- ---- Expected dividend yield at date of grant.. 0 0 0 Expected stock price volatility........... 45.0% 45.0% 45.0% Risk-free interest rate................... 6.0% 6.0% 6.0% Expected life of options (in years)........ 3.75 to 5.00 3.75 to 5.00 3.75 to 5.00
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 ------- Balance at December 31, 1998.......... 402,630 6.33 Granted........................... 135,930 3.71 Canceled.......................... (89,341) 5.51 ------ Balance at December 31, 1999.......... 449,219 5.70 Granted........................... 38,218 4.99 Exercised......................... (27,413) 4.13 Canceled.......................... (118,332) 5.26 ------- Balance at December 31, 2000.......... 341,692 5.90 ======= Exercisable at December 31, 2000...... 269,198 6.26 ======= At December 31, 2000, 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 3.03 years, of which 260,524 shares are between $3.71 and $4.99. 9. Leases ------ The Company leased office space for a monthly base rental payment plus maintenance and utilities. Rental expense was $276,359, $401,105 and $385,735 during 2000, 1999 and 1998, respectively, and is included in selling, general and administrative expenses in the statements of income. During 2000 the Company moved out of the leased office space and into its own building. The Company also leases printing equipment and services. The future minimum lease payments under noncancelable operating leases are approximately $351,450 in 2001. 10. Employee Benefits ----------------- The Company sponsors a qualified defined contribution profit sharing plan covering substantially all employees with a minimum service of 1,000 hours and one year of service except for highly compensated employees covered by other nonqualified profit sharing plans. Employer contributions, which are discretionary, vest to participants at a rate of 20% per year. No contributions were made by the Company in 2000, 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 29 executive management incentive plan are paid over a five-year period. Expense recorded under these plans was $273,793, $162,458 and $84,013 in 2000, 1999 and 1998, respectively. 11. 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 included 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 were 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. No severance benefits were paid in 1999 and, therefore, accrued expenses include liabilities of $104,437 for unpaid severance benefits at December 31, 1999. These severance benefits were paid in full during 2000. o Impairment losses of $230,813 were recorded in 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. o Impairment losses of $17,428 were recognized in 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. Management terminated its remaining call center work force in Columbus, Ohio during 2000. The cost of terminating this remaining workforce was not significant. Item 9. Changes in and Disagreements with Accountants on Accounting and --------------------------------------------------------------- Financial Disclosure -------------------- None. 30 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 2001 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. 31 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, 2001. 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, 2001 - ------------------------ Officer and Director l Michael D. Hays (Principa Executive Officer) /s/ Patrick E. Beans Vice President, Treasurer, March 29, 2001 - ------------------------ Secretary, Chief Financial Patrick E. Beans Officer and Director (Principal Financial and Accounting Officer) /s/ John N. Nunnelly Director March 29, 2001 - ------------------------ John N. Nunnelly /s/ Paul C. Schorr, III Director March 29, 2001 - ------------------------ Paul C. Schorr, III 32 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE Page in this Form 10-K ----------------------- Independent Auditors' Report 16 Balance Sheets as of December 31, 2000 and 1999 17 Statements of Income for each of the years in 18 the three-year period ended December 31, 2000 Statements of Shareholders' Equity for each of 19 the years in the three-year period ended December 31, 2000 Statements of Cash Flows for each of the three years 20 in the period ended December 31, 2000 Notes to Financial Statements 21-30 Independent Auditors' Report on Financial Statement Schedule 34 Financial Statement Schedule: 35 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. 33 INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE The Board of Directors National Research Corporation: Under date of February 9, 2001, we reported on the balance sheets of National Research Corporation as of December 31, 2000 and 1999, and the related statements of income, shareholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2000, 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 9, 2001 34 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, 1998................. $ 62,808 40,000 40,917 61,891 Year Ended December 31, 1999................. $ 61,891 45,000 43,793 63,098 Year Ended December 31, 2000................. $ 63,098 89,000 74,822 77,276
See accompanying independent auditors' report. 35 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)] (23) Consent of KPMG LLP (99) Proxy Statement for the 2001 Annual Meeting of Shareholders [Except to the extent specifically incorporated by reference, the Proxy Statement for the 2001 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. 36 EX-23 2 0002.txt CONSENT Accountants' Consent The Board of Directors National Research Corporation: We consent to incorporation by reference in the registration statements (File No. 333-52135 and 333-52143) on Form S-8 of National Research Corporation of our report dated February 8, 2001, relating to the balance sheets of National Research Corporation as of December 31, 2000 and 1999, and the related statements of income, shareholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2000, and related schedule, which reports appear in the December 31, 2000, annual report on Form 10-K of National Research Corporation. /s/ KPMG LLP Lincoln, Nebraska March 29, 2001 -----END PRIVACY-ENHANCED MESSAGE-----