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 June 30, 2001
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
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National Research Corporation
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(Exact name of Registrant as specified in its charter)
Wisconsin 47-0634000
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1245 "Q" Street, Lincoln Nebraska 68508
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(Address of principal executive offices) (Zip Code)
(402) 475-2525
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(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 August 2, 2001:7,056,738 shares
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NATIONAL RESEARCH CORPORATION
FORM 10-Q INDEX
For the Quarter Ended June 30, 2001
Page No.
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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 8-11
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 11
Market Risk
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
Exhibit Index 14
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PART I - Financial Information
ITEM 1 Financial Statements
NATIONAL RESEARCH CORPORATION
CONDENSED BALANCE SHEETS
June 30, December 31,
2001 2000
------------------- --------------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 1,136,955 $ 3,218,805
Investments in marketable debt securities 6,026,946 6,577,112
Trade accounts receivable, less allowance for doubtful
accounts of $87,276 and $77,276 in 2001 and 2000, respectively 1,998,456 1,713,621
Unbilled revenues 900,691 1,247,296
Prepaid expenses and other 792,904 213,075
Income taxes recoverable 56,140 62,833
Deferred income taxes 223,703 217,205
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Total current assets 11,135,795 13,249,947
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Net property and equipment 13,016,162 13,218,340
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Deferred income taxes 6,894 85,600
Goodwill and other intangibles, net of accumulated amortization 8,905,681 5,057,761
Other 23,074 25,825
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Total assets $ 33,087,606 $ 31,637,473
=================== ====================
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of notes payable $ 130,892 $ 134,518
Accounts payable 1,478,629 1,771,498
Accrued wages, bonuses and profit sharing 609,614 513,254
Accrued expenses 440,693 679,869
Billings in excess of revenues earned 3,144,538 1,809,090
------------------- --------------------
Total current liabilities 5,804,366 4,908,229
Notes payable, net of current portion 5,234,859 5,295,814
Bonuses, profit sharing accruals and other accrued expenses 11,670 50,999
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Total liabilities 11,050,895 10,255,042
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Shareholders' equity:
Preferred stock, $.01 par value; authorized 2,000,000
shares, no shares issued and outstanding - -
Common stock, $.001 par value; authorized 20,000,000
shares, issued 7,353,675 in 2001 and 7,332,413 in 2000
outstanding 7,051,975 in 2001 and 7,030,713 in 2000 7,354 7,332
Additional paid-in capital 17,053,644 16,964,720
Retained earnings 6,473,391 5,927,019
Accumulated other comprehensive income (loss), net of taxes 5,391 (13,571)
Treasury stock, at cost; 301,700 shares in 2001 and 2000 (1,503,069) (1,503,069)
------------------- --------------------
Total shareholders' equity 22,036,711 21,382,431
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Total liabilities and shareholders' equity $ 33,087,606 $ 31,637,473
=================== ====================
See accompanying notes to condensed financial statements.
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NATIONAL RESEARCH CORPORATION
CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three months ended Six months ended
June 30, June 30,
---------------------------------- ----------------------------------
2001 2000 2001 2000
--------------- --------------- --------------- ---------------
Revenues $ 3,367,555 $ 4,638,336 $ 7,458,098 $ 9,093,159
--------------- --------------- --------------- ---------------
Operating expenses:
Direct expenses 1,696,527 2,330,845 3,685,988 4,848,683
Selling, general and administrative 1,128,641 1,222,251 2,081,828 2,322,877
Depreciation and amortization 464,816 346,834 867,947 610,568
--------------- --------------- --------------- ---------------
Total operating expenses 3,289,984 3,899,930 6,635,763 7,782,128
--------------- --------------- --------------- ---------------
Operating income 77,571 738,406 822,335 1,311,031
Other income (expense):
Net interest income (expense) (7,440) 185,427 14,667 352,014
Other, net (4,620) (7,321) (9,166) (22,838)
--------------- --------------- --------------- ---------------
Total other income (expense) (12,060) 178,106 5,501 329,176
--------------- --------------- --------------- ---------------
Income before income taxes 65,511 916,512 827,836 1,640,207
Provision for income taxes 22,273 266,129 281,464 496,062
--------------- --------------- --------------- ---------------
Net income 43,238 650,383 546,372 1,144,145
=============== =============== =============== ===============
Net income per share--basic and diluted $ .01 $ .09 $ .08 $ .16
=============== =============== =============== ===============
Weighted average shares and share equivalents
outstanding--basic 7,046,367 7,012,922 7,042,838 7,009,638
=============== =============== =============== ===============
Weighted average shares and share equivalents
outstanding--diluted 7,057,007 7,061,860 7,053,478 7,058,576
=============== =============== =============== ===============
See accompanying notes to condensed financial statements.
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NATIONAL RESEARCH CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended
June 30,
------------------------------
2001 2000
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Cash flows from operating activities:
Net income $ 546,372 $ 1,144,145
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 867,947 610,568
Deferred income taxes 63,615 7,873
Loss (gain) on sale of property and equipment (300) 23,417
Loss on sale of other investments --- 43
Changes in assets and liabilities:
Trade accounts receivable (284,835) 617,671
Unbilled revenues 346,605 (443,354)
Prepaid expenses and other (566,658) (605,321)
Accounts payable 78,147 (185,837)
Accrued expenses, wages, bonuses, and profit sharing (182,145) (398,191)
Income taxes recoverable 6,693 (219,042)
Billings in excess of revenues earned 1,049,746 (15,494)
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Net cash provided by operating activities 1,925,187 536,478
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Cash flows from investing activities:
Purchases of property and equipment (837,195) (3,409,401)
Proceeds from sale of property and equipment 300 6,500
Acquisition of healthcare survey business (3,772,229) ---
Purchases of securities available-for-sale (6,330,290) (8,270,663)
Proceeds from the maturities of securities available-for-sale 6,908,012 11,523,709
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Net cash used in investing activities (4,031,402) (149,855)
-------------- --------------
Cash flows from financing activities:
Borrowings under line of credit --- 2,156,000
Payments on notes payable (64,581) (14,898)
Proceeds from exercise of stock options 88,946 46,470
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Net cash provided by financing activities 24,365 2,187,572
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Net increase (decrease) in cash and cash equivalents (2,081,850) 2,574,195
Cash and cash equivalents at beginning of period 3,218,805 1,149,587
-------------- --------------
Cash and cash equivalents at end of period $ 1,136,955 $ 3,723,782
============== ==============
Supplemental disclosure of cash paid for:
Interest, including capitalized interest of $176,575 in 2000 $ 229,211 $ 179,002
============== ==============
Taxes $ 211,267 $ 304,900
============== ==============
Supplemental disclosures of noncash investing activities:
Accounts payable included $184,254 in 2001 and $833,380 in 2000 for purchases of property and equipment. In
connection with the Company's acquisition of a business, the Company assumed unearned revenues of $0.3 million
for uncompleted customer contracts.
See accompanying notes to condensed financial statements.
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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, 2000 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 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, 2000, filed with the Securities and Exchange Commission
in March 2001.
2. COMPREHENSIVE INCOME
Other than its net income, the Company's only other source of comprehensive
income is unrealized gains or losses on marketable debt securities. Other
comprehensive income from marketable debt securities was $19,000 for the
six-month period ended June 30, 2001 and was not significant for the same period
in 2000.
3. FINANCIAL INSTRUMENTS
In June 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 138, Accounting for Certain Derivative
Investments and Certain Hedging Activities. The standard amends certain
provisions of SFAS No. 133, Accounting for Derivative Investments and Hedging
Activities, which was issued in June 1998 to establish accounting standards for
derivative instruments and for hedging activities. The Company adopted these
accounting pronouncements effective January 1, 2001. The adoption of these
standards did not impact the Company's financial statements.
4. ACQUISITIONS
On May 7, 2001, the Company acquired the healthcare survey business of The
Picker Institute. The purchase price was $3.2 million and acquisition costs were
approximately $0.6 million. The acquisition has been accounted for as a purchase
and, accordingly, the acquired assets and liabilities have been recorded at
their estimated fair values at the date of acquisition, and the results of
operations have been included in the accompanying financial statements since the
date of acquisition. There were no tangible assets purchased. The Company
assumed the remaining
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service obligations for unearned revenue on uncompleted customer contracts
(estimated fair value of $0.3 million at acquisition). Goodwill recognized in
connection with this acquisition was $4.1 million and will be amortized over an
estimated useful life of 10 years.
5. 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 common equivalent shares outstanding. At June 30, 2001 and 2000, 72,537 and
69,023 options, respectively, have been excluded from the diluted net income per
share computation because their exercise price exceeds the fair market value.
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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
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Three months ended Six months Ended
June 30, June 30,
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2001 2000 2001 2000
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Revenues: 100.0% 100.0% 100.0% 100.0%
============================= ===============================
Operating expenses:
Direct expenses 50.4 50.2 49.4 53.3
Selling, general and administrative 33.5 26.4 27.9 25.6
Depreciation and amortization 13.8 7.5 11.7 6.7
----------------------------- -------------------------------
Total operating expenses: 97.7 84.1 89.0 85.6
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Operating income 2.3% 15.9% 11.0% 14.4%
============================= ===============================
Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000
Total revenues. Total revenues decreased 27.4% in the three month period ended
June 30, 2001 to $3.4 million from $4.6 million in the three month period ended
June 30, 2000. The decrease was primarily due to $1.1 million of revenue on
contracts performed for certain customers that occurred during 2000 but did not
reoccur during 2001. In addition, total revenues were impacted by the timing of
certain projects.
Direct expenses. Direct expenses decreased 27.2% to $1.7 million in the
three-month period ended June 30, 2001 from $2.3 million in the same period
during 2000. The decrease in direct expenses in the 2001 period was primarily
due to lower levels of revenue and includes decreases in labor and payroll
expenses of $284,000, contract services of $268,000, telephone expense of
$72,000, and rents and maintenance of $42,000. This decrease was partially
offset by an increase in printing and postage costs of $31,000. Direct expenses
as a percentage of total revenues stayed basically the same at 50.4% in the
three month period ended June 30, 2001 and 50.2% during the same period of 2000.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased 7.7% to $1.1 million for the three-month
period ended June 30, 2001 from $1.2 million
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for the same period in 2000. This decrease was primarily due to decreases in
salaries and benefits expense of $219,000, product development of $62,000, rents
and maintenance of $58,000, and travel and meals of $18,000. This decrease was
offset by increases in legal and consulting fees of $269,000 incurred primarily
in connection with the previously disclosed legal proceeding. Selling, general,
and administrative expenses increased as a percentage of total revenues to 33.5%
for the three month period ended June 30, 2001 from 26.4% for the same period in
2000 primarily due to lower revenue levels. Selling, general, and administrative
expenses as a percentage of revenue for the balance of 2001 are expected to
decrease to levels lower than 2000.
Depreciation and amortization. Depreciation and amortization expenses increased
34.0% to $465,000 in the three-month period ended June 30, 2001 from $347,000 in
the same period of 2000. The increase is primarily due to the additional
amortization and depreciation of goodwill on the acquisition of a business,
software, computer equipment and the new office building. Depreciation and
amortization expenses as a percentage of total revenues increased to 13.8% in
the three-month period ended June 30, 2001, from 7.5% in the same period of
2000.
Provision for income taxes. The provision for income taxes totaled $22,000
(34.0% effective tax rate) for the three-month period ended June 30, 2001 as
compared to $266,000 (29.0% effective tax rate) for the same period in 2000. The
effective tax rate was lower in 2000 due to certain nonrecurring federal income
tax credits.
Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000
Total revenues. Total revenues decreased 18% in the six month period ended June
30, 2001 to $7.5 million from $9.1 million in the six month period ended June
30, 2000. The decrease was primarily due to $2.1 million of revenue on lower
margin contracts performed for certain customer's that occurred during 2000 but
did not reoccur during 2001. The decrease was partially offset by an increase in
scope of work from existing clients and, to a lesser extent, the addition of new
clients. In addition, total revenues were impacted by the timing of certain
projects.
Direct expenses. Direct expenses decreased 24.0% to $3.7 million in the
six-month period ended June 30, 2001 from $4.9 million in the same period during
2000. The decrease was primarily due to lower revenue levels and includes
decreases in labor and payroll expenses of $456,000, contract services of
$344,000, fieldwork and fees of $234,000, telephone expenses of $108,000, rents
and maintenance of $78,000, and travel expenses of $15,000. This decrease was
partially offset by an increase of printing and postage of $76,000. Direct
expenses decreased as a percentage of total revenues to 49.4% in the six month
period ended June 30, 2001 from 53.3% during the same period of 2000. Direct
expenses as a percentage of total revenues for the balance of 2001 are expected
to remain at levels lower than in 2000.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased 10.4% to $2.1 million for the six-month period
ended June 30, 2001 from $2.3 million for the same period in 2000. This decrease
was primarily due to decreases in salaries and benefits expense of $281,000,
rents and maintenance of $89,000, product development of $70,000, contract
services of $60,000, travel expenses of $52,000 and recruiting expenses of
$46,000. These decreases were partially offset by increases in legal and
consulting fees of $369,000 incurred
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primarily in connection with the previously disclosed legal proceeding. Selling,
general, and administrative expenses as a percentage of total revenues increased
to 27.9% for the six month period ended June 30, 2001 from 25.6% for the same
period in 2000 due primarily to lower revenue levels.
Depreciation and amortization. Depreciation and amortization expenses increased
42.2% to $868,000 in the six-month period ended June 30, 2001 from $611,000 in
the same period of 2000. Depreciation and amortization expenses as a percentage
of total revenues increased to 11.7% in the six-month period ended June 30, 2001
from 6.7% in the same period of 2000. The increase is primarily due to the
additional amortization and depreciation of goodwill on the acquisition of a
business, software, computer equipment and the new office building.
Provision for income taxes. The provision for income taxes totaled $281,000
(34.0% effective tax rate) for the six-month period ended June 30, 2001 as
compared to $496,000 (30.2% effective tax rate) for the same period in 2000. The
effective tax rate was lower in 2000 due to certain nonrecurring federal income
tax credits.
Liquidity and Capital Resources
The Company's principal source of funds historically has been cash flow from its
operations. The Company's cash flow has been sufficient to provide funds for
working capital and capital expenditures, with the exception of the purchase and
renovation of the new office building.
As of June 30, 2001, the Company had cash and cash equivalents of $1.1 million
and working capital of $5.3 million.
During the six months ended June 30, 2001, the Company generated $1.9 million of
net cash from operating activities as compared to $536,000 of net cash generated
during the same period in the prior year. The increase in cash flow was mainly
due to the timing of collections of accounts receivable and the timing of costs
incurred in advance of billings on certain projects.
For the six months ended June 30, 2001, net cash used in investing activities
was $4.0 million as compared to $150,000 during the same period in the prior
year. The 2001 net cash used in investing activities was primarily due to the
purchase of The Picker Institute's healthcare survey business ($4.1 million) and
investment of $837,000 in furniture, computer equipment, software and production
equipment to support the expansion of the Company's business, and was partially
offset by the net proceeds of maturities of securities available-for-sale over
the purchase of securities available for sale of $578,000. The 2000 cash used in
investing activities was primarily due to the net of proceeds from the
maturities of securities available-for-sale over the purchase of securities
available-for-sale of $3.3 million, which was offset by the purchase of property
and equipment of $3.4 million (primarily related to the new office building).
Net cash generated in financing activities was $24,000 for the six months ended
June 30, 2001 compared to $2.2 million during the same period in the prior year.
The cash provided by financing
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activities during 2001 was primarily due to proceeds from exercised stock
options and in 2000 net cash provided by financing activities was due to the
receipt of construction financing.
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 June 30, 2001 and as of December 31, 2000, the Company
had $3.1 million and $1.8 million of deferred revenues, respectively. The
increase in deferred revenues at June 30, 2001 results primarily from
pre-selling of the Company's annually published NRC Market Guide product. The
revenues related to the sales of the product are expected to be recognized
during the third quarter following completion of the product and delivery to the
customers. 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 June 30, 2001 and December 31, 2000, the Company had $0.9 and $1.2 million of
unbilled revenues, respectively, which also includes direct costs of producing
the annual Market Guide product. 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 transactions. 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 July 31, 2001, 56,700 shares under the new
authorization had been repurchased.
Accounting Pronouncements
On July 20,2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that all business combinations initiated after June 30, 2001 be accounted for
under a single method - the purchase method. Use of the pooling-of-interests
method no longer is permitted. Statement 142 requires that goodwill no longer be
amortized to earnings, but instead be reviewed for impairment. The amortization
of goodwill ceases upon the adoption of the Statement, which for calendar
year-end companies, will be January 1, 2002.
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk
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The Company has not experienced any material changes in its market risk
exposures since December 31, 2000.
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PART II - Other Information
ITEM 4 Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company held it annual meeting of shareholders on April 26, 2001.
At such meeting, Patrick E. Beans was reelected as a director of the Company for
a term to expire at the 2004 annual meeting of shareholders and until his
successor is duly elected and qualified pursuant to the following vote:
6,913,242 shares voted for, 70,300 withholding authority, 0 abstentions and 0
broker non-votes. The other directors of the Company whose terms of office
continued after the 2001 annual meeting of shareholders are as follows: terms
expiring at the 2002 meeting - Paul C. Schorr, III; terms expiring at the 2003
meeting - Michael D. Hays and John N. Nunnelly. JoAnn M. Martin was elected as a
director of the Company on June 13, 2001 for a term to expire at the 2002 annual
meeting of shareholders.
ITEM 6 Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
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(3.1) Amendment to the By-Laws of National Research
Corporation, adopted June 13, 2001.
(3.2) By-Laws of National Research Corporation, as
amended to date.
(b) Reports on Form 8-K
-------------------
On May 22, 2001, the Company filed a Current Report on Form
8-K, dated May 7, 2001 (and filed an amendment thereto on Form 8-K/A
on July 17, 2001), reporting under Item 2 the acquisition of the
healthcare survey business of The Picker Institute, Inc. No financial
statements were required to be filed.
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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: August 14, 2001 By: /s/ Michael D. Hays
--------------------------------------------
Michael D. Hays
President and Chief Executive Officer
Date: August 14, 2001 By: /s/ Patrick E. Beans
--------------------------------------------
Patrick E. Beans
Vice President, Treasurer, Secretary and
Chief Financial Officer (Principal
Financial and Accounting Officer)
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NATIONAL RESEARCH CORPORATION
EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the Quarterly Period ended June 30, 2001
Exhibit Description
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(3.1) Amendment to the By-Laws of National Research Corporation, adopted
June 13, 2001.
(3.2) By-Laws of National Research Corporation, as amended to date.
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