-----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, S2ZXZorta5DaSoqEc25SU8lB4lSzFTTrMdNWMoMlfe9OJzfCo2cT7E9f8/g86Om3 jalemOZYsUwUbzahQ4ux/g== 0000897069-99-000290.txt : 19990513 0000897069-99-000290.hdr.sgml : 19990513 ACCESSION NUMBER: 0000897069-99-000290 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990512 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: 99617982 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 FORM 10-Q 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 March 31, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission File Number 0-29466 National Research Corporation (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.) 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 April 30, 1999: 7,060,000 shares NATIONAL RESEARCH CORPORATION FORM 10-Q INDEX For the Quarter Ended March 31, 1999 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 7-10 Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 10 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds 11 Item 6. Exhibits and Reports on Form 8-K 11 Signatures 12 Exhibit Index 13 -2- PART I - Financial Information ITEM 1 Financial Statements NATIONAL RESEARCH CORPORATION CONDENSED BALANCE SHEETS
March 31, December 31, 1999 1998 --------------- ---------------- (unaudited) Assets Current assets: Cash and cash equivalents $ 2,164,954 $ 4,887,712 Investments in marketable debt securities 8,657,314 8,009,343 Trade accounts receivable, less allowance for doubtful accounts of $66,891 in 1999 and $77,808 in 1998 2,816,894 2,940,356 Unbilled revenues 754,264 1,030,351 Prepaid expenses and other 414,687 165,037 Deferred income taxes 227,229 222,500 ---------------- ---------------- Total current assets 15,035,342 17,255,299 ---------------- ---------------- Property and equipment, net of accumulated depreciation and amortization 4,301,358 2,288,583 Deferred income taxes 510,158 548,506 Goodwill and other intangibles, net of accumulated amortization 6,076,099 6,160,209 Other 26,582 26,582 ---------------- ---------------- Total assets $ 25,949,539 $ 26,279,179 ================ ================ Liabilities and Shareholders' Equity Current liabilities: Purchase price payable $ 1,500,000 $ 2,650,000 Current portion - notes payable 30,754 30,754 Accounts payable and accrued expenses 1,673,678 1,429,728 Accrued wages, bonuses and profit sharing 796,355 907,743 Income taxes payable 7,494 -- Billings in excess of revenues earned 4,098,988 3,283,462 ---------------- ---------------- Total current liabilities 8,107,269 8,301,687 Notes payable, net of current portion 67,236 74,694 Bonuses and profit sharing accruals 87,306 157,472 Other accrued expense 290,523 310,793 ---------------- ---------------- Total long-term liabilities 445,065 542,959 ---------------- ---------------- Total liabilities 8,552,334 8,844,646 ---------------- ---------------- Shareholders' equity: Common stock, $.001 par value; authorized 20,000,000 shares, issued 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 1,835,905 1,734,983 Treasury stock, at cost; 245,000 shares in 1999, 213,000 shares in 1998 (1,285,844) (1,147,594) ---------------- ---------------- Total shareholders' equity 17,397,205 17,434,533 ---------------- ---------------- Total liabilities and shareholders' equity $ 25,949,539 $ 26,279,179 ================ ================ See accompanying notes to condensed financial statements.
-3- NATIONAL RESEARCH CORPORATION CONDENSED STATEMENTS OF INCOME (Unaudited)
Three months ended March 31, ------------------------------------ 1999 1998 -------------- -------------- Revenues $ 3,662,923 $ 3,406,100 -------------- -------------- Operating expenses: Direct expenses 2,577,301 1,508,961 Selling, general and administrative 904,494 1,188,588 Depreciation and amortization 169,111 51,993 -------------- -------------- Total operating expenses 3,650,906 2,749,542 -------------- -------------- Operating income 12,017 656,558 Other income: Interest income 150,694 262,200 Other, net 7,749 - Interest expense (2,258) - -------------- -------------- Total other income 156,185 262,200 -------------- -------------- Income before income taxes 168,202 918,758 Provision for income taxes 67,280 357,000 -------------- -------------- Net income $ 100,922 $ 561,758 ============== ============== Net income per share--basic and diluted $ 0.01 $ 0.08 ============== ============== Weighted average shares and share equivalents outstanding--basic 7,077,056 7,305,000 ============== ============== Weighted average shares and share equivalents outstanding--diluted 7,084,549 7,305,000 ============== ============== See accompanying notes to condensed financial statements.
-4- NATIONAL RESEARCH CORPORATION CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Three months ended March 31, ----------------------------- 1999 1998 ------------- -------------- Cash flows from operating activities: Net income $ 100,922 $ 561,758 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 169,111 51,993 Deferred income taxes 33,619 - Loss on sale of other investments 144 - Changes in assets and liabilities, net of acquisition: Trade accounts receivable 123,462 1,763,029 Unbilled revenues 276,087 (74,016) Prepaid expenses and other (249,650) (392,541) Deferred income taxes - 34,000 Accounts payable and accrued expenses 223,680 286,457 Accrued wages, bonuses and profit sharing (181,554) (410,875) Income taxes payable 7,494 245,229 Billings in excess of revenues earned 815,841 (142,054) ------------- ------------- Net cash provided by operating activities 1,318,696 1,922,980 ------------- ------------- Cash flows from investing activities: Purchases of property and equipment (2,097,776) (287,400) Purchases of securities available-for-sale (4,967,115) (4,430,572) Proceeds from the maturities of securities available-for-sale 4,319,000 2,000,000 ------------- ------------- Net cash used in investing activities (2,745,891) (2,717,972) ------------- ------------- Cash flows from financing activities: Payments on notes payable (7,458) - Payment of purchase price payable (1,150,000) - Purchase of treasury stock (138,250) - ------------- ------------- Net cash used in financing activities (1,295,708) - ------------- ------------- Net decrease in cash and cash equivalents (2,722,758) (794,992) Cash and cash equivalents at beginning of period 4,887,712 4,688,352 ------------- ------------- Cash and cash equivalents at end of period $ 2,164,954 $ 3,893,360 ============= ============= Supplemental disclosure of cash paid for: Interest $ 2,258 $ - ============= ============== Taxes $ 23,277 $ - ============= ============== 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, 1998 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, 1998, filed with the Securities and Exchange Commission in March 1999. 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 periods ended March 31, 1999 and 1998, respectively. -6- 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 March 31, ------------------------------- 1999 1998 ------------------------------- Revenues: 100.0% 100.0% =============================== Operating expenses: Direct expenses 70.4 44.3 Selling, general and administrative 24.7 34.9 Depreciation and amortization 4.6 1.5 ------------------------------- Total operating expenses: 99.7 80.7 ------------------------------- Operating income 0.3% 19.3% =============================== Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998 Total revenues. Total revenues increased 7.5% in the three month period ended March 31, 1999 to $3.7 million from $3.4 million in the three month period ended March 31, 1998. The increase was due primarily to an increase in revenue from performance tracking services and custom research as a result of 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. The increase in revenues was partially offset by a decrease in recognized revenues from the Company's syndicated services. Billings for syndicated services during the period were up over 10% compared to the same period in 1998, but a larger percentage of sales were for 1999 services to be delivered in the third quarter of 1999. Direct expenses. Direct expenses increased 70.8% to $2.6 million in the three-month period ended March 31, 1999 from $1.5 million in the same period during 1998. The increase in direct expenses in the 1999 period was due primarily to an increase in labor and payroll expenses of $592,000 (which was due partially to increased costs associated with the addition of a telephone call center and with increased revenues) and, to a lesser extent, increases in postage expenses of $138,000, printing expenses of $65,000, communication/telephone expenses of $58,000, rent and office expenses of $17,000 and software conversion costs of $113,000. Direct expenses increased as a percentage of total revenues to 70.4% in the three month period ended March 31, 1999 from 44.3% during the same period of 1998. The increase in direct expenses as a percentage of total revenues was due primarily to expenses associated with the Company's planned conversion of internal software, which was not completed, and also to an increase in telephone methodology, which increases labor costs. Direct expenses as a percentage of total revenues are expected to remain at levels similar to the 1999 period until the internal software conversion is completed. -7- Selling, general and administrative expenses. Selling, general and administrative expenses decreased 23.9% to $904,000 for the three-month period ended March 31, 1999 from $1.2 million for the same period in 1998. This decrease was primarily due to a decrease in legal and accounting expenses of $53,000, salaries and benefit expenses of $153,000, research and development expenses of $36,000 and trade show expenses of $31,000. These decreases were offset by an increase in rent and office expenses of $48,000 associated with the Company's new office in Columbus, Ohio. Selling, general, and administrative expenses decreased as a percentage of total revenues to 24.7% for the three month period ended March 31, 1999 from 34.9% for the same period in 1998 due to the increase in revenue without a related increase in selling, general and administrative expenses. Depreciation and amortization. Depreciation and amortization expenses increased 225.3% to $169,000 in the three-month period ended March 31, 1999 from $52,000 in the same period of 1998. The increase in amortization and depreciation is primarily due to the acquisition of intangible assets of HRS and the purchase of computer equipment and software. Depreciation and amortization expenses as a percentage of total revenues increased to 4.6% in the three-month period ended March 31, 1999, from 1.5% in the same period of 1998. Provision for income taxes. The provision for income taxes totaled $67,000 (40.0% effective tax rate) for the three-month period ended March 31, 1999 as compared to $357,000 (38.9% effective tax rate) for the same period in 1998. The decrease in expense is due to the lower profit for the period. 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 March 31, 1999, the Company had cash and cash equivalents of $2.2 million and working capital of $6.9 million. During the three months ended March 31, 1999, the Company generated $1.3 million of net cash from operating activities as compared to $1.9 million of net cash generated during the same period in the prior year. The decrease in cash flow was mainly due to the timing of collections of accounts receivables, the timing of costs incurred in advance of billings on certain projects and a lower overall operating income. For the three months ended March 31, 1999, net cash used in investing activities was $2.8 million as compared to $2.7 million during the same period in the prior year. The 1999 increase in cash used was primarily due to the purchase of a new building for $1,475,000 and an investment of $627,000 in furniture, computer equipment, software and production equipment to meet the expansion of the Company's business. This was partially offset by the proceeds of maturities of securities available-for-sale of $4.3 million. The Company plans to spend an additional $3.0 million during 1999 to renovate the new building. Following renovation, the Company intends to move its headquarters to such building in December 1999. The Company expects to secure long-term financing on the building for approximately $3.8 million. The 1998 net cash used was primarily due to the purchase of investments in debt securities available-for-sale, which was partially offset by an investment of $287,000 in furniture, computer equipment, software and production equipment to meet the expansion of the Company's business. Net cash used in financing activities was $1.3 million and $0 for the three months ended March 31, 1999 and 1998, respectively. The most significant use of cash for financing activities in 1999 was the payment of purchase price payable related to the acquisition of HRS of $1.2 million. Other cash used in financing activities for 1999 was for the payments of notes payable and the purchase of treasury stock. -8- 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 March 31, 1999 and as of December 31, 1998, the Company had $4.1 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 March 31, 1999 and December 31, 1998, the Company had $754,000 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 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 May 12, 1999, no shares under the new authorization had been repurchased. 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 last quarter 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 will develop contingency plans before the last quarter of 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 $44,000 of such costs -9- 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. If problems with the Company's conversion of internal software systems are not corrected by year end, then the Company could incur additional costs to upgrade existing programs. 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. 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, 1998. -10- 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 are reasonably estimated to be applied as follows: 1. Temporary investments of United States government $-7,033,516 securities with maturities of two years or less 2. Acquisition of HRS and related acquisition costs 7,049,588 3. The acquisition of a new headquarters building 1,474,985 4. The repurchase of treasury stock 1,283,000 ----------- Total proceeds to the Company $16,841,089 =========== ITEM 6 Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibit Number Description -------------- ----------- (27) Financial Data Schedule (EDGAR version only) (b) Reports on Form 8-K There were no reports on Form 8-K filed during the quarter ended March 31, 1999. -11- 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: May 12, 1999 By: /s/ Michael D. Hays --------------------------------------- Michael D. Hays President and Chief Executive Officer Date: May 12, 1999 By: /s/ Patrick E. Beans --------------------------------------- Patrick E. Beans Vice President, Treasurer, Secretary and Chief Financial Officer (Principal Financial and Accounting Officer) -12- NATIONAL RESEARCH CORPORATION EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q For the Quarterly Period ended March 31, 1999 Exhibit ------- (27) Financial Data Schedule (EDGAR version only) -13- EX-27 2 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED FINANCIAL STATEMENTS OF NATIONAL RESEARCH CORPORATION AS OF AND FOR THE PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 2,165 8,657 2,884 67 0 15,035 5,179 878 25,950 8,107 98 0 0 7 17,390 25,950 0 3,663 0 2,577 1,074 5 2 168 67 101 0 0 0 101 .01 .01
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