-----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, H22+7e4/P9ap67rBPn2Enew3DMRafzgRZOKAaYgacWvwBUfH5d6LsQE2P+HN9YiX JGUrTa4X20uXBH5NUj7oXA== 0000897069-98-000551.txt : 19981116 0000897069-98-000551.hdr.sgml : 19981116 ACCESSION NUMBER: 0000897069-98-000551 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 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-Q SEC ACT: SEC FILE NUMBER: 000-29466 FILM NUMBER: 98748062 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-Q 1 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, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission File Number 0-29466 National Research Corporation (Exact name of Registrant as specified in its charter) Wisconsin 47-063400 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1033 "O" Street, Lincoln Nebraska 68508 (Address of principal executive offices) (Zip Code) (402) 475-2525 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.001 par value, outstanding as of October 31, 1998: 7,283,000 shares NATIONAL RESEARCH CORPORATION FORM 10-Q INDEX For the Quarter Ended September 30, 1998 Page No. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Balance Sheets 3 Condensed Statements of Income 4 Condensed Statements of Cash Flows 5 Notes to Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of 9-13 Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds 13 Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15 Exhibit Index 16 -2- PART I - Financial Information ITEM 1 Financial Statements NATIONAL RESEARCH CORPORATION CONDENSED BALANCE SHEETS September 30, December 31, 1998 1997 ----------------- --------------- (unaudited) Assets Current assets: Cash and cash equivalents $ 911,276 $ 4,688,352 Investments in marketable debt securities 12,303,679 13,220,553 Trade accounts receivable less allowance for doubtful accounts of $77,808 in 1998 and $62,808 in 1997 2,958,318 3,094,772 Unbilled revenues 919,841 559,856 Prepaid expenses and other 177,715 184,156 Other receivables 402,878 - Deferred income taxes 112,905 127,225 ------------ ------------ Total current assets 17,786,612 21,874,914 ------------ ------------ Property and equipment, net of accumulated depreciation and amortization 1,730,804 519,955 Deferred income taxes 1,297,964 155,775 Other 15,592 12,482 Goodwill and other intangibles, net of accumulated amortization 3,349,495 - ------------ ------------ Total assets $ 24,180,467 $ 22,563,126 ============ ============ Liabilities and Shareholders' Equity Current liabilities: Current portion - notes payable $ 30,754 $ - Accounts payable and accrued expenses 1,301,314 615,930 Accrued wages, bonuses and profit sharing 1,101,547 1,161,917 Income taxes payable 228,166 118,000 Billings in excess of revenues earned 2,925,922 2,297,751 ------------ ------------ Total current liabilities 5,587,703 4,193,598 Notes payable, net of current portion 82,358 - Bonuses and profit sharing accruals 248,684 248,684 Other accrued expense 321,529 - ------------ ------------ Total long-term liabilities 652,571 248,684 ------------ ------------ Total liabilities 6,240,274 4,442,282 ------------ ------------ Shareholders' equity: Common stock, $.001 par value; authorized 20,000,000 shares, issued and outstanding 7,305,000 7,305 7,305 Preferred stock, $.01 par value; authorized 2,000,000 shares, no shares issued and outstanding - - Additional paid-in capital 16,839,839 16,839,839 Retained earnings 1,093,049 1,273,700 ------------ ------------ Total shareholders' equity 17,940,193 18,120,844 ------------ ------------ Total liabilities and shareholders' equity $ 24,180,467 $ 22,563,126 ============ ============ See accompanying notes to condensed financial statements. -3- NATIONAL RESEARCH CORPORATION CONDENSED STATEMENTS OF INCOME (Unaudited)
Three months ended Nine months ended September 30, September 30, ----------------------- --------------------------- 1998 1997 1998 1997 --------- -------- ---------- ---------- Revenues: Renewable performance tracking services and custom research $ 4,608,110 $3,878,813 $11,572,821 $10,385,079 Renewable syndicated service 1,006,414 852,493 1,477,520 1,296,805 ----------- ---------- ---------- ---------- Total revenues 5,614,524 4,731,306 13,050,341 11,681,884 ----------- ---------- ---------- ---------- Operating expenses: Direct expenses 3,390,400 2,326,750 6,915,322 5,337,475 Selling, general and administrative 1,238,991 995,258 3,670,390 2,832,679 Depreciation and amortization 126,417 43,032 244,773 122,600 Acquired in-process research and development cost - - 2,974,324 - Severance charge - - 303,740 - ----------- ---------- ---------- ---------- Total operating expenses 4,755,808 3,365,040 14,108,549 8,292,754 ----------- ---------- ---------- ---------- Operating income (loss) 858,716 1,366,266 (1,058,208) 3,389,130 Other income: Interest income 174,594 55,001 792,038 152,030 Interest expense (3,635) - (4,938) - ----------- ---------- ------------ ---------- Total other income 170,959 55,001 787,100 152,030 ----------- ---------- ------------ ---------- Income (loss) before income taxes 1,029,675 1,421,267 (271,108) 3,541,160 Income tax provision (benefit) 403,454 - (90,457) - ----------- ---------- ------------ ---------- Net income (loss) 626,221 1,421,267 (180,651) 3,541,160 Pro forma income taxes - 568,507 - 1,416,465 ----------- ---------- ------------ ---------- Pro forma net income (loss) $ 626,221 $ 852,760 (180,651) $2,124,695 =========== ========== ============ ========== Pro forma net income per share--basic and diluted $ 0.09 $ 0.14 (0.02) $ 0.34 =========== ========== ============ ========== Weighted average shares and share equivalents outstanding--basic and diluted 7,305,000 6,184,812 7,305,000 6,184,812 =========== ========== ============== =========== See accompanying notes to condensed financial statements.
-4- NATIONAL RESEARCH CORPORATION CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Nine months ended September 30, ------------------------------- 1998 1997 -------------- -------------- Cash flows from operating activities: Net income (loss) $ (180,651) $3,541,160 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 244,773 122,600 Acquired in-process research and development cost, net of tax 1,814,338 - Changes in assets and liabilities, net of acquisition: Trade accounts receivable 1,260,172 (882,567) Unbilled revenues (150.309) (174,045) Prepaid expenses and other 25,977 (362,472) Deferred income taxes 32,117 - Accounts payable and accrued expenses 94,802 (247,212) Accrued wages, bonuses and profit sharing (212,523) 630,926 Income taxes payable 110,166 - Billings in excess of revenues earned (451,186) (13,638) ------------- ----------- Net cash provided by operating activities 2,587,676 2,614,752 ------------- ----------- Cash flows from investing activities: Purchases of property and equipment (1,251,469) (286,414) Acquisition, net of cash acquired (5,616,353) - Accounts receivable - other (402,878) - Purchases of securities available-for-sale (8,432,047) (334,019) Proceeds from the maturities of securities available-for-sale 9,348,921 1,760,057 ----------- ----------- Net cash provided by (used in) investing activities (6,353,826) 1,139,624 ----------- ----------- Cash flows from financing activities: Dividends paid - (2,146,093) Payments on notes payable (10,926) - ----------- ------------ Net cash used in financing activities (10,926) (2,146,093) ----------- ----------- Net increase (decrease) in cash and cash equivalents (3,777,076) 1,608,283 Cash and cash equivalents at beginning of period 4,688,352 2,782,212 ----------- ----------- Cash and cash equivalents at end of period $ 911,276 $4,390,495 =========== ========== Supplemental disclosure of cash paid for: Interest $ 4,938 $ - ============= ========= Taxes $ 931,447 $ - ============= =========
See accompanying notes to condensed financial statements. -5- NATIONAL RESEARCH CORPORATION Notes to Condensed Financial Statements 1. INTERIM FINANCIAL REPORTING The condensed balance sheet of National Research Corporation (the "Company") at December 31, 1997 was derived from the Company's audited balance sheet as of that date. All other financial statements contained herein are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) the Company considers necessary for a fair presentation of financial position, results of operations and cash flows in accordance with generally accepted accounting principles. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed financial statements should be read in conjunction with the financial statements and notes thereto that are included in the Company's Form 10-K for the fiscal year ended December 31, 1997, filed with the Securities and Exchange Commission in March 1998. On January 1, 1998, the Company adopted the American Institute of Certified Public Accountants Statement of Position No. 98-1 (SOP 98-1), Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. Under that accounting standard, the Company expenses as incurred computer software costs incurred in the preliminary project stage, which involved the conceptual formulation, evaluation and selection of technology alternatives. Costs incurred related to the design, coding installation and testing of software during the application project stage are capitalized. Costs incurred for training and application maintenance are expensed as incurred. The Company has capitalized approximately $890,000 of costs incurred for the development of internal use software for the nine months ended September 30, 1998, with such costs classified as property and equipment. Prior to January 1, 1998, the Company's accounting policy was to expense as incurred all costs of software developed for internal use. Costs incurred prior to January 1, 1998, for the development of internal use software have not been adjusted or capitalized as a result of the Company's adoption of SOP 98-1. Statement of Financial Accounting Standard ("SFAS") 130, Reporting Comprehensive Income establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The standard also requires disclosure of the total of comprehensive income in interim financial statements. Other than its net income, the Company's only other source of comprehensive income is unrealized gains or losses on marketable debt securities. However, other comprehensive income from marketable debt securities is not significant for the three month and nine month periods ended September 30, 1998 and 1997, respectively. 2. S CORPORATION STATUS From August 1, 1994, through October 13, 1997 (three days prior to the Company's initial public offering), the Company was an S Corporation and, accordingly, was not subject to Federal and state income taxes for the nine months ended September 30, 1997. Pro forma net income reflects a pro forma tax provision at a combined Federal and state rate of 40% for the periods the Company was an S Corporation as if it had been a C Corporation. Since October 14, 1997, the Company has been C Corporation. -6- 3. ACQUISITION Effective June 1, 1998, the Company acquired the business of Healthcare Research Systems, Ltd. ("HRS") through an acquisition of assets. Consideration paid by the Company at closing included a fixed payment of $5,100,000 plus an estimated payment of $350,000 for the net working capital surplus assumed. The Company also incurred liabilities of $625,362 related to management's plans to exit certain activities of HRS and has paid or accrued $170,000 of direct acquisition costs. Management's exit plans include costs for the relocation of certain of HRS's employees and an accrual for minimum operating lease commitments for duplicative space which will be abandoned or sublet. Management's exit plans have not been finalized, however, and adjustments to the allocation of purchase price may result from the finalization of the these plans. The acquisition agreement was subsequently amended to return to the Company the entire $350,000 estimated payment for the net working capital surplus paid at closing and to provide for the Company's assumption of additional pre-acquisition liabilities of HRS of $629,588. The amendment to the acquisition agreement was recorded in the third quarter as an adjustment to the purchase price, increasing goodwill by $629,588. The acquisition of HRS has been accounted for as a purchase and, accordingly, the operating results of HRS have been included in the Company's financial statements since the date of acquisition. The excess of the aggregate purchase price over the fair value of net assets acquired of approximately $6,524,950 has been allocated to the following assets based upon management's preliminary estimates of the fair values of identifiable assets of HRS at the date of acquisition. Intangible assets, including in-process research and development, acquired are as follows: Estimated Fair Value Life Property and equipment $150,000 5-7 years Workforce in place 272,882 10 years Customer lists 359,048 15 years Goodwill 2,768,696 20 years --------- 3,550,626 In-process research and development 2,974,324 0 years --------- $6,524,950 ========== In October 1998, the amended acquisition agreement removed the contingencies associated with scheduled payments of additional purchase price in 1999. The amendment also reduced the amount of the first of those scheduled payments to approximately $1.2 million in March 1999. The liability for the purchase price payment commitments was recorded in the fourth quarter of 1998, with the additional purchase price allocated to goodwill of HRS. The additional goodwill will be amortized over its remaining estimated useful life of 20 years. The following unaudited pro forma data summarizes the results of operations for the periods indicated as if the acquisition of HRS had been completed on January 1, 1997. The pro forma data gives effect to the actual operating results prior to the acquisition, amortization of acquisition-related intangibles and income taxes. The pro forma amounts do not purport to be -7- indicative of the results that would have actually been obtained if the acquisition had occurred on January 1, 1997, or that may be obtained in the future. Nine months ended September 30, ------------------------------- 1998 1997 ---- ---- (dollars in thousands, except per share amounts) Revenues $16,219 $16,483 Net income (loss) $1,347 $(204) Net income (loss) per share - basic and diluted $0.18 $(0.05) -8- ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The following table sets forth, for the periods indicated, selected financial information derived from the Company's condensed financial statements, expressed as a percentage of total revenues. The trends illustrated in the following table may not necessarily be indicative of future results. The discussion that follows the table should be read in conjunction with the condensed financial statements.
Percentage of Total Revenues ------------------------------------------- Three months ended Nine months ended September 30, September 30, -------------------- ------------------ 1998 1997 1998 1997 -------------------- ------------------ Revenues: Renewable performance tracking services and custom research 82.1% 82.0% 88.7% 88.9% Renewable syndicated service 17.9 18.0 11.3 11.1 --------- --------- -------- -------- Total revenues 100.0 100.0 100.0 100.0 --------- --------- -------- -------- Operating expenses: Direct expenses 60.4 49.2 53.0 45.7 Selling, general and administrative 22.1 21.0 28.1 24.3 Depreciation and amortization 2.3 1.0 1.9 1.0 Acquired in-process research and development cost -- -- 22.8 -- Severance charge -- -- 2.3 -- --------- --------- -------- -------- Total operating expenses: 84.8 71.2 108.1 71.0 --------- --------- -------- -------- Operating income (loss) 15.2% 28.8% (8.1%) 29.0% ========= ========= ======== ========
Three Months Ended September 30, 1998 Compared to Three Months Ended September 30, 1997 Total revenues. Total revenues increased 18.7% in the three-month period ended September 30, 1998, to $5.6 million from $4.7 million in the three-month period ended September 30, 1997. Revenues from the Company's renewable performance tracking services and custom research increased 18.8% to $4.6 million in the three month period ended September 30, 1998 from $3.9 million in the same period during 1997 primarily due to the addition of new clients, the acquisition of HRS in June 1998 and, to a lesser extent, an increase in the scope of existing tracking projects. Revenues for the Company's renewable syndicated service increased 18.1% to $1.0 million in the three month period ended September 30, 1998 compared to $852,000 in the same three month period in 1997. Such an increase reflects increased sales of the 1997 annual edition of the NRC Healthcare Market Guide following its release in the prior year. Direct expenses. Direct expenses increased 45.7% to $3.4 million in the three-month period ended September 30, 1998 from $2.3 million in the same period during 1997. The increase in direct expenses in the 1998 period was due to increases in postage and printing expenses of $72,000, -9- telephone expense of $101,000, outside field services of $172,000 and labor and payroll expenses of $651,000, which were due partially to increased costs associated with the addition of a telephone call center and to increased revenues. Direct expenses increased as a percentage of total revenues to 60.4% in the three-month period ended September 30, 1998, from 49.2% during the same period of 1997. Selling, general and administrative expenses. Selling general and administrative expenses increased 24.5% to $1.2 million for the three-month period ended September 30, 1998 from $995,000 for the same period in 1997. This increase was primarily due to an increase of $186,000 associated with the increase in the Company's rent expense and other costs associated with the Company's new location in Columbus, Ohio since June 1998 and $15,000 associated with being a public company. Sales, general and administrative expenses increased as a percentage of total revenues to 22.1% for the three-month period ended September 30, 1998, from 30.9% for the same period in 1997. Depreciation and amortization. Depreciation and amortization expenses increased 193.8% to $126,000 in the three-month period ended September 30, 1998 from $43,000 in the same period of 1997 partially due to the acquisition of HRS. Depreciation and amortization expenses as a percentage of total revenues increased to 2.3% in the three-month period ended September 30, 1998, from 1.0% in the same period of 1997. Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30, 1997 Total revenues. Total revenues increased 11.7% in the first nine months of 1998 to $13.1 million from $11.7 million in the first nine months of 1997. Revenues from the Company's renewable performance tracking services and custom research increased 11.4% to $11.6 million in the first nine months of 1998 from $10.4 million in the same period of 1997 primarily due to the addition of new clients, the acquisition of HRS in June 1998, and, to a lesser extent, an increase in the scope of existing tracking projects. Revenues from the Company's renewable syndicated service increased 13.9% to $1.5 million in the first nine months of 1998 from $1.3 million in the same period of 1997. Such increase reflects the addition of new syndicated service clients. Direct expenses. Direct expenses increased 29.6% to $6.9 million in the first nine months of 1998 from $5.3 million in the first nine months of 1997. The increase in direct expenses in the 1998 period was due to increases in outside field services of $201,000, telephone expenses of $71,000, rent and office expenses of $34,000 and labor and payroll expenses of $1.1 million due partially to increased costs associated with the addition of a telephone call center and to increased revenues. Direct expenses increased as a percentage of total revenues to 53.0% in the first nine months of 1998 from 45.7% during the first nine months of 1997. Selling, general and administrative expenses. Selling, general and administrative expenses increased 29.6% to $3.7 million for the first nine months of 1998 from $2.8 million for the first nine months of 1997. This increase was primarily due to an increase of $488,000 associated with the expansion of the Company's sales and marketing workforce, an increase of $261,000 associated with the increase in the Company's rent expenses and other costs associated with the Company's new location in Columbus, Ohio since June 1998 and an increase of $206,000 associated with being a public company, which were offset by a decrease of $123,000 in expenses related to enhancements to the Company's software. Selling, general and administrative expenses -10- increased as a percentage of total revenues to 28.1% for the first nine months of 1998 from 24.3% for the first nine months of 1997. Acquired In-Process Research and Development Cost and Severance Charge. In connection with the acquisition of HRS in June 1998, the Company incurred a one-time, non-recurring charge of $3.0 million for costs assigned to in-process research and development activities of the acquired company and operating expenses for severance costs of $304,000 for duplicative employees of the Company as a result of the acquisition. The aggregate charges to income net of taxes associated with the acquisition were approximately $2.0 million, or $0.27 per share. Depreciation and amortization. Depreciation and amortization expenses increased 99.7% to $245,000 in the first nine months of 1998 from $123,000 in the first nine months of 1997 partially due to the acquisition of HRS. Depreciation and amortization expenses increased as a percentage of total revenues to 1.9% in the first nine months of 1998 from 1.0% in the first nine months of 1997. Liquidity and Capital Resources The Company's principal source of funds historically has been cash flow from its operations. The Company's cash flow has been sufficient to provide funds for working capital and capital expenditures. As of September 30, 1998, the Company had cash and cash equivalents of $911,000 and working capital of $12.2 million. During the nine months ended September 30, 1998, the Company generated $2.6 million of net cash from operating activities, the same amount as, during the same period in the prior year. For the nine months ended September 30, 1998, net cash used in investing activities was $6.4 million as compared to net cash provided of $1.1 million during the same period in the prior year. The 1998 increase in cash used was primarily due to the acquisition of HRS in June 1998 for approximately $5.6 million, the accounts receivable-other related to the acquisition of $403,000 and investment of $1.3 million in furniture, computer equipment, software and production equipment to meet the expansion of the Company's business, which was partially offset by the maturing of investments in debt securities available-for-sale. The 1997 net cash provided was primarily the maturing of investments available for sale which was partially offset by an investment of $286,000 in furniture, computer equipment and production equipment. The Company's investments available-for-sale consist principally of United States government securities with maturities of twelve months or less. Net cash used in financing activities was $11,000 and $2.1 million for the nine months ended September 1998 and 1997, respectively. Net cash used in financing activities for 1998 was for the payments of notes payable and for 1997 was the result of S Corporation distributions to shareholders. The Company typically bills clients for projects before they have been completed. Billed amounts are recorded as billings in excess of costs or deferred revenue on the Company's financial statements and are recognized as income when earned. As of September 30, 1998 and as of December 31, 1997, the Company had $2.9 million and $2.3 million of deferred revenues, respectively. In addition, when work is performed in advance of billing, the Company records this -11- work as a cost in excess of billings or unbilled revenue. At September 30, 1998 and December 31, 1997, the Company had $920,000 and $560,000 of unbilled revenues, respectively. Substantially all deferred and unbilled revenues will be earned and billed, respectively, within 12 months of the respective period ends. In October 1998, the Company announced plans to repurchase up to 245,000 shares of common stock in the open market or in privately negotiated transitions. The Company repurchased 22,000 shares during October 1998. Year 2000 The Year 2000 ("Y2K") issue is the result of computer systems using two digits, as opposed to four digits, to indicate the year. Such computer systems will be unable to interpret dates beyond the year 1999, which could cause a system failure or other computer errors, leading to a disruption in operations. The Company uses software and related technologies throughout its business that could be affected by the date change in Y2K. At the end of 1997, an independent third party conducted an assessment of the Company's computer systems and, based on such assessment, the Company developed plans to address issues related to the impact of Y2K on its information systems. The Company has completed the assessment phase for all of its information technology systems and developed a plan of repair or replacement for those systems that were not Y2K compliant. Many of the external software programs used by the Company were already Y2K compliant. The remaining software is currently being upgraded to new vendor versions, which, in addition to providing increased functionality, address the Y2K issue. The Company's internal software systems presented no Y2K compatibility issues. Most of the Company's internal hardware systems presented no Y2K compatibility issues. The Company has been upgrading its computer hardware that is not Y2K compliant on an ongoing basis and all mission-critical hardware will be Y2K compliant before the end of 1999. The software used by the Company to deliver information to its clients contains no date related data or code other than that related to licensing issues, and therefore, is not affected by the Y2K issue. Many of the services sold by the Company originate from data provided by the Company's clients. The Company generally does not use live data provided by its clients, instead the clients transmit member or patient information on a weekly or monthly basis. As a result, the Company's ability to provide services to these clients is dependent on whether such clients' systems for transmitting data to the Company are Y2K compliant. If a client cannot transmit member or patient information to the Company, then the Company cannot provide its services to the client. Therefore, there can be no assurance that the failure of clients of the Company to be Y2K compliant will not have a material adverse effect on the Company. To be prepared to address unexpected occurrences, the Company expects to develop contingency plans during 1999 to assess alternative methods to obtain data from its clients. The current estimate of total Y2K compliance cost is $126,000. A majority of these costs have been included in the ongoing upgrading and standardization of the Company's systems. Approximately $26,000 of such costs have been incurred to date. Based upon progress to date, the Company does not believe that future costs of Y2K compliance will materially affect the Company's operating results or financial condition. -12- The estimated costs of, and timetable for, becoming Y2K compliant constitute "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Shareholders, potential investors and other readers are cautioned that such estimates are based on numerous assumptions by management, including assumptions regarding the accuracy of representations made by third parties concerning their compliance with Y2K issues and other factors. PART II - Other Information ITEM 2 Changes in Securities and Use of Proceeds (a) Not applicable. (b) Not applicable. (c) Not applicable. (d) The Company's Registration Statement on Form S-1 (Registration No. 333-33273) (the "Registration Statement") relating to the offer and sale (the "Offering") of an aggregate of 2,415,000 shares of Common Stock was declared effective by the Securities and Exchange Commission on October 9, 1997. Of the 2,415,000 shares of Common Stock registered under the Registration Statement, 1,250,000 shares were sold by the Company and 1,165,000 shares (including 315,000 shares sold pursuant to the exercise of an over-allotment option granted to the underwriters) were sold by a certain shareholder of the Company, Michael D. Hays (the "Selling Shareholder"). During the fourth quarter of 1997, all of the shares of Common Stock registered were sold in the Offering at a price of $15.00 per share, for an aggregate price of $18,750,000 and $17,475,000 for the shares of Common Stock sold by the Company and the Selling Shareholder, respectively. After deducting the underwriting discount of $1.05 per share, the Selling Shareholder received net proceeds equal to $16,251,750 and the Company received net proceeds equal to $17,437,500 less expenses of $596,411 incurred in connection with the Offering. The net proceeds to the Company were reasonably estimated to be applied as follows: 1. Temporary investments of United States government securities with maturities of two years or less $11,224,736 2. Acquisition of HRS and related acquisition costs 5,616,353 ------------ Total proceeds to the Company $16,841,089 =========== -13- ITEM 6 Exhibits and Reports on Form 8-K (a) Exhibit Number Description (2) Addendum to Asset Purchase Agreement, dated October 23, 1998, among National Research Corporation, Healthcare Research Systems, Ltd. and the members of Healthcare Research System, Ltd. (27) Financial Data Schedule (EDGAR version only) (b) Reports on Form 8-K -------------------- On August 13, 1998, the Company filed an amendment on Form 8-K/A to the Company's Current Report on Form 8-K dated June 11, 1998. The report, as amended, included (under Item 7 of Form 8-K) the following financial statements: for HRS - audited Balance Sheet as of December 31, 1997, audited Statement of Operations and Statement of Cash Flows for the year ended December 31, 1997, audited Statement of Members' Equity for the year ended December 31, 1997, unaudited Condensed Balance Sheets as of March 31, 1998 and December 31, 1997 and unaudited Condensed Statements of Operations and Statements of Cash Flows for the three months ended March 31, 1998 and 1997; and for the Company - unaudited Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1998 and unaudited Pro Forma Condensed Consolidated Statements of Operations for the year ended December 31, 1997 and for the three months ended March 31, 1998. -14- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NATIONAL RESEARCH CORPORATION ----------------------------- Date: November 12, 1998 By:/s/ Michael D. Hays ----------------------------------------- Michael D. Hays President and Chief Executive Officer Date: November 12, 1998 By:/s/ Patrick E. Beans ----------------------------------------- Patrick E. Beans Vice President, Treasurer, Secretary and Chief Financial Officer (Principal Financial and Accounting Officer) -15- NATIONAL RESEARCH CORPORATION EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q For the Quarterly Period ended September 30, 1998 Exhibit ------- (2) Addendum to Asset Purchase Agreement, dated October 23, 1998, among National Research Corporation, Healthcare Research Systems, Ltd. and the members of Healthcare Research Systems, Ltd. (27) Financial Data Schedule (EDGAR version only) -16- EX-2 2 PLAN OF ACQUISITION, REORGANIZATION, ETC. Exhibit (2) ADDENDUM TO ASSET PURCHASE AGREEMENT AMONG NATIONAL RESEARCH CORPORATION, HEALTHCARE RESEARCH SYSTEMS, LTD. AND THE MEMBERS OF HEALTHCARE RESEARCH SYSTEMS, LTD. THIS ADDENDUM ("Addendum") is made and entered into as of this 23rd day of October, 1998, by and among National Research Corporation, a Wisconsin corporation ("Buyer"), Healthcare Research Systems, Ltd., an Ohio limited liability company ("Company"), and all of the members of Company (individually, "Member" and collectively, "Members"). WHEREAS, Buyer, Company and Members have entered into that certain Asset Purchase Agreement, dated as of June 11, 1998 (the "Purchase Agreement"); WHEREAS, Buyer, Company and Members desire to supplement and amend the Purchase Agreement in accordance with the terms set forth herein; and WHEREAS, Section 12.6 of the Purchase Agreement provides that the Purchase Agreement may be amended by the written agreement of Buyer, Company and Members. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree to supplement and amend the Purchase Agreement as follows: 1. Notwithstanding anything contained in Sections 2.1 or 2.2 of the Purchase Agreement (or in any Schedules identified in such Sections 2.1 or 2.2 of the Purchase Agreement) to the contrary, the parties hereto agree that Buyer or Company, as the case may be, will be responsible for and pay the Company's accounts payable set forth under their respective names on Schedule A attached hereto. 2. In settlement of all amounts payable under Sections 3.2.(c), 3.3 and 3.4 of the Purchase Agreement, Company is hereby delivering to Buyer a check payable to the order of Buyer in the amount of $350,000. 3. Section 3.6.(a) of the Purchase Agreement shall be deleted in its entirety. 4. Section 3.6.(b) of the Purchase Agreement shall be deleted in its entirety and the following, which shall be reordered to become Section 3.6.(a), shall be substituted therefor: 3.6.(a) Revenues Payment. On March 31, 1999, Buyer shall deliver to Company an aggregate sum equal to $1,500,000 less the Company Revenues Difference (as hereinafter defined in Section 3.6.(b)) and less the dollar amount, if any, of all accounts receivable of Company as reflected on the Closing Balance Sheet (net of the reserve shown on the Closing Balance Sheet for doubtful accounts) that have not been collected by Buyer pursuant to the provisions of Section 6.9 on or prior to December 31, 1998, without interest (the "Revenues Payment"). Such amount, if any, shall be paid by delivery to Company of a certified or bank cashier's check payable to the order of Company or, at Company's option, by wire transfer of immediately available funds to an account designated by Company not less than 48 hours prior to the time for payment specified herein. 5. Section 3.6.(c) of the Purchase Agreement shall be amended by reordering such section to become Section 3.6.(b) and by adding the following sentence after the current last sentence thereof: Notwithstanding anything to the contrary in this Section 3.6, the parties hereto agree that the Company Revenues Difference shall be $350,000. 6. Section 3.6.(d) of the Purchase Agreement shall be deleted in its entirety. 7. Section 3.6.(e) of the Purchase Agreement shall be deleted in its entirety and the following, which shall be reordered to become Section 3.6.(c), shall be substituted therefor: 3.6.(c) Anniversary Payment. On the first anniversary of the Closing Date, Buyer shall deliver to Company the sum equal to $1,500,000, without interest (the "Anniversary Payment"). 8. All references in the Purchase Agreement to Sections 3.6.(a) and 3.6.(d) shall hereafter be deleted and all references in the Purchase Agreement to Sections 3.6.(b), 3.6.(c) and 3.6.(e) shall hereafter be to Sections 3.6.(a), 3.6.(b) and 3.6.(c), respectively. 9. Section 6.9 of the Purchase Agreement shall be amended by deleting therefrom all references to "costs in excess of billings," "and costs in excess of billings" and "and/or costs in excess of billings." 10. In settlement of the amounts due Buyer under the introductory paragraph of Article 10 of the Purchase Agreement (i.e., to effectuate the Closing as of the close of business on May 31, 1998), Company is hereby delivering to Buyer a check payable to the order of Buyer in the amount of $49,878.36. 11. New Section 12.12 of the Purchase Agreement shall be added to read as follows: -2- 12.12. Certain Definitions. For purposes of this Agreement, the following terms have the meanings set forth below: "Buyer's Accountants" shall mean KPMG Peat Marwick LLP. 12. The references to the "Agreement," "hereof," "hereunder" or words of like import in the Purchase Agreement shall be deemed, from and after the date of this Addendum, to encompass the Purchase Agreement as amended and supplemented by this Addendum. 13. Defined terms used and not defined in this Addendum shall have the same meaning assigned to them in the Purchase Agreement. 14. Except as expressly supplemented and amended pursuant to this Addendum, all of the terms, conditions and provisions of the Purchase Agreement shall remain in full force and effect. 15. This Addendum may be executed in counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. -3- IN WITNESS WHEREOF, the parties hereto have executed this Addendum as of the date and year first above written. NATIONAL RESEARCH CORPORATION ("Buyer") By: /s/ Michael Hays Name: Michael Hays Title: President and CEO HEALTHCARE RESEARCH SYSTEMS, LTD. ("Company") By: Stephen Strasser Name: Stephen Strasser Title: President MEMBERS: /s/ Stephen Strasser Stephen Strasser /s/ Donald Strasser Donald Strasser /s/ Peter Strasser Peter Strasser /s/ Charles L. Fabrikant Charles L. Fabrikant /s/ Fred C. Farkouh Fred C. Farkouh /s/ Charles Fabrikant Charles Fabrikant, as trustee of the Scott Strasser 1995 Trust, established under an agreement dated August 21, 1995 -4- EX-27 3 FDS --
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED FINANCIAL STATEMENTS OF NATIONAL RESEARCH CORPORATION AS OF AND FOR THE 9 MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 911 12,304 3,036 78 0 17,787 2,469 738 24,180 5,588 113 0 0 7 17,933 24,180 0 13,050 0 6,915 7,193 15 5 (1,058) (90) (1,058) 0 0 0 (181) (.02) (.02)
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