10-Q 1 sdc560.txt 10-Q QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 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 of (I.R.S. Employer incorporation or organization) Identification No.) 1245 "Q" Street, Lincoln Nebraska 68508 ------------------------------------------------------ (Address of principal executive offices) (Zip Code) (402) 475-2525 ------------------------------------------------------ (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.001 par value, outstanding as of November 7, 2003: 7,310,756 shares NATIONAL RESEARCH CORPORATION FORM 10-Q INDEX For the Quarter Ended September 30, 2003 Page No. ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Condensed Balance Sheets 3 Consolidated Condensed Statements of Income 4 Consolidated Condensed Statements of Cash Flows 5-6 Notes to Consolidated Condensed Financial Statements 7-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-14 Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 Item 4. Controls and Procedures 14-15 PART II. OTHER INFORMATION Item 5. Exhibits and Reports on Form 8-K 16 Signatures 17 Exhibit Index 18 2 PART I - Financial Information ITEM 1. Financial Statements -------------------- NATIONAL RESEARCH CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, December 31, 2003 2002 ------------- ------------ (unaudited) Assets Current assets: Cash and cash equivalents $ 3,946,721 $ 991,217 Investments in marketable debt securities 12,155,150 9,986,677 Trade accounts receivable, less allowance for doubtful accounts of $83,892 and $67,320 in 2003 and 2002, 2,552,054 4,579,439 respectively Unbilled revenues 1,731,565 1,933,415 Prepaid expenses and other 606,291 274,111 Deferred income taxes 220,835 183,575 ------------ ------------ Total current assets 21,212,616 17,948,434 ------------ ------------ Net property and equipment 12,250,285 12,345,896 ------------ ------------ Customer relationships, net of accumulated amortization 766,523 607,004 Goodwill, net of accumulated amortization 9,109,860 7,888,714 Other 36,111 41,923 ------------ ------------ Total assets $ 43,375,395 $ 38,831,971 ============ ============ Liabilities and Shareholders' Equity Current liabilities: Current portion of notes payable $ 139,181 $ 131,907 Accounts payable 658,538 565,540 Accrued wages, bonuses and profit sharing 803,794 632,837 Accrued expenses 460,089 366,943 Income taxes payable 510,814 55,558 Billings in excess of revenues earned 3,240,440 3,276,813 ------------ ------------ Total current liabilities 5,812,856 5,029,598 Notes payable, net of current portion 4,937,648 5,044,090 Deferred income taxes 957,612 740,008 Other long-term liabilities 443,460 -- ------------ ------------ Total liabilities 12,151,576 10,813,696 ------------ ------------ Shareholders' equity: Common stock, $.001 par value; authorized 20,000,000 shares, issued 7,624,917 in 2003 and 7,560,610 in 2002, outstanding 7,305,617 in 2003 and 7,245,110 in 2002 7,625 7,561 Additional paid-in capital 18,659,724 18,123,603 Retained earnings 14,576,250 11,447,443 Unearned compensation (387,809) -- Accumulated other comprehensive income, net of taxes 12,605 35,371 Treasury stock, at cost; 319,300 and 315,500 shares in 2003 and 2002, respectively (1,644,576) (1,595,703) ------------ ------------ Total shareholders' equity 31,223,819 28,018,275 ------------ ------------ Total liabilities and shareholders' equity $ 43,375,395 $ 38,831,971 ============ ============
See accompanying notes to consolidated condensed financial statements 3 NATIONAL RESEARCH CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
Three months ended Nine months ended September 30 September 30 ---------------------------- ---------------------------- 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Revenues $ 7,993,419 $ 7,317,037 $ 20,179,978 $ 16,165,316 ------------ ------------ ------------ ------------ Operating expenses: Direct expenses 3,797,360 3,388,030 9,280,730 6,962,252 Selling, general and administrative 1,563,760 1,200,381 4,380,916 3,562,212 Depreciation and amortization 535,904 400,884 1,463,842 1,223,240 ------------ ------------ ------------ ------------ Total operating expenses 5,897,024 4,989,295 15,125,488 11,747,704 ------------ ------------ ------------ ------------ Operating income 2,096,395 2,327,742 5,054,490 4,417,612 Other income (expense): Interest income 76,697 63,091 213,666 187,976 Interest expense (107,506) (109,313) (321,044) (340,689) Other, net 4,634 (696) 47,867 (72,250) ------------ ------------ ------------ ------------ Total other income (expense) (26,175) (46,918) (59,511) (224,963) ------------ ------------ ------------ ------------ Income before income taxes 2,070,220 2,280,824 4,994,979 4,192,649 Provision for income taxes 769,999 854,282 1,866,172 1,576,313 ------------ ------------ ------------ ------------ Net income $ 1,300,221 $ 1,426,542 $ 3,128,807 $ 2,616,336 ============ ============ ============ ============ Net income per share--basic and diluted $ .18 $ .20 $ .43 $ .37 ============ ============ ============ ============ Weighted average shares and share equivalents outstanding--basic 7,261,582 7,176,323 7,255,466 7,138,581 ============ ============ ============ ============ Weighted average shares and share equivalents outstanding--diluted 7,330,579 7,200,344 7,304,298 7,162,602 ============ ============ ============ ============
See accompanying notes to consolidated condensed financial statements. 4 NATIONAL RESEARCH CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Nine months ended September 30, --------------------------- 2003 2002 ------------ ------------ Cash flows from operating activities: Net income $ 3,128,807 $ 2,616,336 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,463,842 1,223,240 Deferred income taxes 192,918 209,164 Gain on sale of property and equipment (2,850) (1,420) Loss (gain) on sale of other investments 27 (18) Non-cash stock compensation expense 20,412 -- Net changes in assets and liabilities: Trade accounts receivable 2,174,027 (696,490) Unbilled revenues 250,372 (613,221) Prepaid expenses and other (300,356) 30,572 Accounts payable 42,683 (521,212) Accrued expenses, wages, bonuses and profit sharing 133,792 204,250 Income taxes recoverable and payable 442,038 936,093 Billings in excess of revenues earned (54,523) 335,593 ----------- ----------- Net cash provided by operating activities 7,491,189 3,722,887 ----------- ----------- Cash flows from investing activities: Purchases of property and equipment (1,296,442) (1,301,743) Proceeds from sale of property and equipment 2,850 1,420 Acquisition, net of cash acquired (996,888) (21,565) Purchases of securities available-for-sale (8,456,924) (7,536,519) Proceeds from the maturities of securities available-for-sale 6,257,182 5,284,811 ----------- ----------- Net cash used in investing activities (4,490,222) (3,573,596) ----------- ----------- Cash flows from financing activities: Payments on notes payable (99,168) (95,417) Proceeds from exercise of stock options 127,964 543,098 Purchase of treasury stock (48,873) (18,729) ----------- ----------- Net cash (used in) provided by financing activities (20,077) 428,952 ----------- ----------- Effect of exchange rate changes on cash: (25,386) -- Net increase in cash and cash equivalents 2,955,504 578,243 Cash and cash equivalents at beginning of period 991,217 1,080,053 ----------- ----------- Cash and cash equivalents at end of period $ 3,946,721 $ 1,658,296 =========== =========== Supplemental disclosure of cash paid for: Interest expense $ 321,044 $ 340,689 =========== =========== Income taxes $ 1,216,112 $ 429,660 =========== =========== Supplemental disclosures of non-cash activities: In connection with the Company's acquisition of a business in March 2003, the Company acquired current assets of $171,635 and assumed current liabilities of $164,294. See accompanying notes to consolidated condensed financial statements.
5 NATIONAL RESEARCH CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1. INTERIM FINANCIAL REPORTING The consolidated condensed balance sheet of National Research Corporation (the "Company") at December 31, 2002 was derived from the Company's audited balance sheet as of that date. All other financial statements contained herein are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) the Company considers necessary for a fair presentation of financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States of America. Information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These consolidated condensed financial statements should be read in conjunction with the financial statements and notes thereto that are included in the Company's Form 10-K for the fiscal year ended December 31, 2002, filed with the Securities and Exchange Commission in March 2003. The consolidated condensed financial statements include the accounts of National Research Corporation, and its wholly-owned subsidiaries National Research Corporation Canada and Smaller World Communications, Inc. All significant intercompany transactions and balances have been eliminated. The functional currency of the Company's foreign subsidiaries are those subsidiaries' local currency. The Company translates the assets and liabilities of foreign subsidiaries at the period-end rate of exchange, and income statement items at the average rate prevailing during the period. The Company records the resulting translation adjustment as a component of shareholders' equity. 2. COMPREHENSIVE INCOME Other than its net income, the Company's other sources of comprehensive income (loss) are unrealized gains or losses on marketable debt securities and foreign currency translation adjustments. Other comprehensive gain (loss) from marketable debt securities and foreign currency translation adjustments was ($22,766) and $28,705 for the nine-month periods ended September 30, 2003 and 2002, respectively. 3. ACQUISITION On March 17, 2003, the Company acquired 100% of the outstanding common shares of Smaller World Communications Inc. ("SWC"), based in Toronto, Canada. The results of SWC's operations have been included in the consolidated condensed financial statements since the effective date of March 1, 2003. SWC is a provider of performance measurement services for healthcare organizations in Canada. As a result of the acquisition, the Company is expected to be able to accelerate its expansion in Canada. The aggregate minimum purchase price was $1,361,000, of which $950,000 was paid at closing. The purchase price also includes two additional scheduled payments in 2006 and 2008. The minimum aggregate payments of $407,000 have been recorded as other long-term liabilities, and the maximum aggregate payments could be $1,171,000, based upon certain revenue goals. The Company estimates it direct acquisition costs to be $85,000. 6 The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition. The Company is still in the process of finalizing the valuations of certain assets; thus, the allocation of the purchase price is subject to refinement: Fair Value ---------- Current assets $ 171,635 Customer relationships 217,863 Goodwill 1,221,146 ---------- Total acquired assets 1,610,644 Less total liabilities 164,294 ---------- Net assets acquired $1,446,350 ========== Customer relationships are being amortized over five years. The results of operations from this acquisition have been included in the consolidated condensed statements of income from the date of the acquisition. The following unaudited pro forma information for the Company has been prepared as if this acquisition had occurred on January 1, 2002. The information is based on the historical results of the separate companies, and may not necessarily be indicative of the results that could have been achieved, or of results that may occur in the future. -------------------------------------------------------------------------------- Three months ended Nine months Ended September 30, September 30, ------------------- ---------------------- 2003 2002 2003 2002 ------------------- ---------------------- (dollars in thousands, except per share amounts) Revenues $ 7,993 $ 7,578 $ 20,443 $ 16,815 Net income $ 1,300 $ 1,415 $ 3,131 $ 2,568 Net income per share - basic $ 0.18 $ 0.20 $ 0.43 $ 0.36 Net income per share - diluted $ 0.18 $ 0.20 $ 0.43 $ 0.36 -------------------------------------------------------------------------------- 4. STOCK OPTION PLANS AND RESTRICTED STOCK The Company recognizes stock-based compensation expense for its stock option plans using the intrinsic value method prescribed by Accounting Principles Board "APB" Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting. 7 In December 2002, the Financial Accounting Standards Board issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123. SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements. The following table illustrates the effect on net income if the fair-value-based method had been applied to all outstanding awards in each period. Three months ended Nine months ended September 30, September 30, --------------------------------------- 2003 2002 2003 2002 --------------------------------------- (in thousands, except per share amounts) Pro forma: Net income, as reported $1,300 $1,427 $3,129 $2,616 Less: stock based compensation expense $ 43 $ 18 $ 5 $ 47 Net income, adjusted for the fair value method $1,257 $1,409 $3,044 $2,569 Income per share - basic and diluted, as reported $ 0.18 $ 0.20 $ 0.43 $ 0.37 Income per share- basic and diluted, adjusted for the fair value method $ 0.17 $ 0.20 $ 0.42 $ 0.36 In June 2003, the Company granted 37,111 restricted shares of common stock under the 2001 Equity Incentive Plan. These shares were awarded at a value of $11.00 per share on the date of grant. The applicable compensation expense will be recognized by the Company over the next five years based on the vesting period of the restricted stock. The unearned compensation is reflected in the accompanying consolidated balance sheet as a component of shareholders' equity. The Company recognized $20,412 of non-cash compensation for the three and nine months of 2003 related to this restricted stock. 5. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill and other intangible assets consist of the following at September 30, 2003 and December 31, 2002: 2003 2002 ------------ ------------ Customer relationships $ 1,024,299 $ 787,048 Less accumulated amortization 257,776 180,044 ------------ ------------ Net customer relationships 766,523 607,004 ------------ ------------ Goodwill 10,282,126 9,060,980 Less accumulated amortization 1,172,266 1,172,266 ------------ ------------ Net goodwill 9,109,860 7,888,714 ------------ ------------ Total net goodwill and intangible assets $ 9,876,383 $ 8,495,718 ============ ============ 8 The following represents a summary of changes in the Company's carrying amount of net goodwill for the nine months ended September 30, 2003: Balance as of January 1, 2003 $ 7,888,714 Additions - acquisition 1,221,146 ------------ Balance as of September 30, 2003 $ 9,109,860 ============ 6. EARNINGS PER SHARE Net income per share has been calculated and presented for "basic" and "diluted" data. "Basic" net income per share is computed by dividing net income by the weighted average number of common shares outstanding, whereas "diluted" net income per share is computed by dividing net income by the weighted average number of common shares outstanding adjusted for the dilutive effects of options and restricted stock. For the income statement periods presented, 32,080 options have been excluded from the diluted net income per share computations for 2002 because their exercise price exceeds the fair market value. The following table shows the amounts used in computing earnings per share and the effect on the weighted average number of shares of dilutive potential common stock. Three months ended Nine months ended September 30, September 30, --------------------------------------- 2003 2002 2003 2002 --------------------------------------- (in thousands) (in thousands) Weighted average shares and share equivalents - basic 7,262 7,176 7,255 7,139 Weighted average dilutive effect of options 63 24 47 24 Weighted average dilutive effect of restricted stock 6 0 2 0 --------------------------------------- Weighted average shares and share equivalents - dilutive 7,331 7,200 7,304 7,163 --------------------------------------- ITEM 2. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations ------------- Results of Operations The following table sets forth for the periods indicated, selected financial information derived from the Company's consolidated condensed financial statements, expressed as a percentage of total revenues. The trends illustrated in the following table may not necessarily be indicative of future results. The discussion that follows the table should be read in conjunction with the consolidated condensed financial statements. 9 Percentage of Total Revenues --------------------------------------- Three months ended Nine months ended September 30, September 30, --------------------------------------- 2003 2002 2003 2002 --------------------------------------- Revenues: 100.0% 100.0% 100.0% 100.0% ================== ================== Operating expenses: Direct expenses 47.5 46.3 46.0 43.1 Selling, general and administrative 19.6 16.4 21.7 22.0 Depreciation and amortization 6.7 5.5 7.3 7.6 ------------------ ------------------ Total operating expenses: 73.8 68.2 75.0 72.7 ------------------ ------------------ Operating income 26.2% 31.8% 25.0% 27.3% ================== ================== Three Months Ended September 30, 2003 Compared to Three Months Ended September 30, 2002 Total revenues. Total revenues for the three-month period ended September 30, 2003 were $8.0 million compared to $7.3 million in the three month period ended September 30, 2002. The increase was primarily due to the addition of new clients, including a number of annual contracts signed over the last twelve months. Direct expenses. Direct expenses increased 12.1% to $3.8 million in the three-month period ended September 30, 2003 from $3.4 million in the same period during 2002. The increase in direct expenses in the 2003 period was primarily due to the incremental costs of servicing additional clients. The increases were in labor and payroll expenses of $360,000, in fieldwork and fees of $218,000, and in travel expenses of $54,000. The increases were partially offset by decreases in printing and postage expenses of $240,000. Direct expenses increased as a percentage of total revenues to 47.5% in the three month period ended September 30, 2003 from 46.3% during the same period of 2002. The increase in direct expense percentage in 2003 was due to a great extent, to the mix of services provided during the periods. Selling, general and administrative expenses. Selling, general and administrative expenses increased 30.3% to $1.6 million for the three-month period ended September 30, 2003 compared to $1.2 million for the same period in 2002. The net increase was primarily due to increases in salary and benefit expenses of $237,000, contract services and office expenses of $58,000, marketing expenses of $46,000, and utilities of $20,000. Selling, general, and administrative expenses increased as a percentage of total revenues to 19.6% for the three month period ended September 30, 2003 from 16.4% for the same period in 2002. Depreciation and amortization. Depreciation and amortization expenses increased to $536,000 in the three-month period ended September 30, 2003 from $401,000 in the same period of 2002. The increase is primarily due to the additional depreciation of software, computer equipment and production equipment. Depreciation and amortization expenses as a percentage of total revenues increased to 6.7% in the three-month period ended September 30, 2003, from 5.5% in the same period of 2002. 10 Other income (expense). Other income (expense) decreased to ($26,000) in the three-month period ended September 30, 2003 compared to ($47,000) in the same period of 2002. The change was due to an increase in interest income and other income of $19,000. Provision for income taxes. The provision for income taxes totaled $770,000 (37.2% effective tax rate) for the three-month period ended September 30, 2003 as compared to $854,000 (37.5% effective tax rate) for the same period in 2002. The effective tax rate was lower in 2003 due to differences in state income taxes. Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002 Total revenues. Total revenues increased 24.8% in the nine month period ended September 30, 2003 to $20.2 million from $16.2 million in the nine month period ended September 30, 2002. The increase was primarily due to the addition of new clients, including a number of annual contracts signed over the last twelve months, and, to a lesser extent, by an increase in scope of work from existing clients. Direct expenses. Direct expenses increased 33.3% to $9.3 million in the nine-month period ended September 30, 2003 from $7.0 million in the same period during 2002. The increase in direct expenses in the 2003 period was primarily due to the incremental costs of servicing additional clients. The increases were in labor and payroll expenses of $1,005,000, in printing and postage expenses of $670,000, fieldwork and fees of $625,000, and in travel expenses of $105,000. This increase was partially offset by decreases in computer related expenses of $126,000 and telephone expenses of $29,000. Direct expenses increased as a percentage of total revenues to 46.0% in the nine-month period ended September 30, 2003 from 43.14% during the same period of 2002. The Company expects direct expenses as a percentage of total revenues for the balance of 2003 to decrease slightly during the fourth quarter of 2003 due to the delivery of the Healthcare Market Guide in the third quarter, and will be in line with the expected annual percent of total revenues of 45%. Selling, general and administrative expenses. Selling, general and administrative expenses increased 23.0% to $4.4 million for the nine-month period ended September 30, 2003 from $3.6 million for the same period in 2002. The net increase was primarily due to increases in salary and benefit expenses of $482,000, marketing expenses of $301,000, recording of bad debt expenses of $98,000, utilities of $93,000, and contract services of $98,000. These increases were partially offset by a decrease in legal and consulting fees of $253,000 relating to the resolution of a lawsuit in 2002. Selling, general, and administrative expenses as a percentage of total revenues decreased to 21.7% for the nine month period ended September 30, 2003 from 22.0% for the same period in 2002 primarily due to the decrease in legal fees. For the balance of 2003, the Company expects selling, general and administrative expenses as a percentage of total revenues to increase slightly, and will be in line with the expected annual range of 22 to 23% of total revenues. Depreciation and amortization. Depreciation and amortization expenses increased 19.7% to $1.5 million in the nine-month period ended September 30, 2003 from $1.2 million in the same period of 2002. The increase is primarily due to the additional depreciation of software, computer equipment and production equipment. Depreciation and amortization expenses as a percentage of total revenues decreased to 7.3% in the nine-month period ended September 30, 2003 from 7.6% in the same period of 2002. 11 Other income (expense). Other income and (expense) decreased to $(60,000) in the nine-month period ended September 30, 2003 from $(225,000) in the same period of 2002. The decrease was partially due to the recording in 2002 of $64,000 of prejudgment interest related to the lawsuit resolved in 2002. Provision for income taxes. The provision for income taxes totaled $1.9 million (37.4% effective tax rate) for the nine-month period ended September 30, 2003 as compared to $1.6 million (37.6% effective tax rate) for the same period in 2002. The effective tax rate was lower in 2003 due to differences in state income taxes. For the balance of 2003, the Company expects the effective tax rate to range between 37% and 38%. Liquidity and Capital Resources The Company's principal source of funds historically has been cash flows from its operations. The Company's cash flow has been sufficient to provide funds for working capital and capital expenditures, other than expenditures related to the Company's building, which were paid, in part, from the proceeds of borrowings and the sale of securities available-for-sale. As of September 30, 2003, the Company had cash and cash equivalents of $3.9 million and working capital of $15.4 million. During the nine months ended September 2003, the Company generated $7.5 million of net cash from operating activities as compared to $3.7 million of net cash generated during the same period in the prior year. The increase in cash flows was primarily due to a higher net income, increases in taxes payable and decreases in trade accounts receivables and unbilled revenues, totaling $2.9 million. This increase in cash flows was partially offset by increases in prepaid expenses of $300,000. For the nine months ended September 30, 2003, net cash used in investing activities was $4.5 million as compared to $3.6 million during the same period in the prior year. The 2003 increase in cash used in investing activities was primarily due to the $997,000 acquisition in March 2003 of Smaller World Communications Inc., a Toronto, Canada based company. Net cash used by financing activities was $20,000 for the nine months ended September 30, 2003, as compared to net cash provided of $429,000 for the nine months ended September 30, 2002. The decrease in cash provided by financing activities during 2003 was primarily due to a decrease in the amount of proceeds from exercise of stock options. The Company typically bills clients for performance tracking and custom research projects before they have been completed. Billed amounts are recorded as billings in excess of revenues earned or deferred revenue on the Company's financial statements and are recognized as income when earned. As of September 30, 2003 and December 31, 2002, the Company had $3.2 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 revenues earned in excess of billings, or unbilled revenue. At September 30, 2003 and December 31, 2002, the Company had $1.7 million and $1.9 million of unbilled revenue, respectively. Substantially all deferred revenues earned and unbilled revenues will be earned and billed, respectively, within 12 months of the respective period ends. 12 Stock Repurchase Program In April 1999, the Board of Directors of the Company authorized the repurchase of 150,000 shares of Common Stock in the open market or in privately negotiated transactions. As of November 7, 2003, 77,300 shares have been repurchased under that authorization. In July 2003, the Board of Directors of the Company authorized the repurchase of an additional 500,000 shares of Common Stock in the open market or in privately negotiated transactions. As of November 7, 2003, no shares have been repurchased under that authorization. Accounting Pronouncements In November 2002, the EITF reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables" (EITF 00-21). EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which the vendor will perform multiple revenue generating activities. EITF 00-21 was effective prospectively for new or modified contracts beginning July 1, 2003. The adoption of EIFT 00-21 did not have a material impact on the Company's financial statements. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (SFAS No. 149). SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133). Except for the provisions of SFAS No. 149 that relate to SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003, SFAS No. 149 was effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 had no material effect on the Company's financial statements. In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" (SFAS No. 150). SFAS No 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 was effective for all financial instruments entered into or modified after May 31, 2003. For unmodified financial instruments existing at May 31, 2003, Statement 150 was effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 had no material effect on the Company's financial statements. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk The Company has not experienced any material changes in its market risk exposures since December 31, 2002. ITEM 4. Controls and Procedures The Company's management, with the participation of the Company's principal executive officer and principal financial officer, has evaluated the Company's disclosure controls and procedures as of September 30, 2003. Based on that evaluation, the Company's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures 13 were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There was no significant change in the Company's internal control over financial reporting that occurred during the three months ended September 30, 2003, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 14 PART II - Other Information ITEM 5. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits None (b) Reports on Form 8-K The Company furnished a Current Report on Form 8-K, dated August 5, 2003, reporting (under Items 7 and 12) the Company's second quarter earnings and related conference call. 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NATIONAL RESEARCH CORPORATION Date: November 14, 2003 By: /s/ Michael D. Hays ---------------------------------------- Michael D. Hays President and Chief Executive Officer Date: November 14, 2003 By: /s/ Patrick E. Beans ---------------------------------------- Patrick E. Beans Vice President, Treasurer, Secretary and Chief Financial Officer (Principal Financial and Accounting Officer) 16 NATIONAL RESEARCH CORPORATION EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q For the Quarterly Period ended September 30, 2003 Exhibit (31.1) Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (31.2) Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (32.1) Certification of Periodic Financial Report by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 17