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, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 0-29466
National Research Corporation
(Exact name of Registrant as specified in its charter)
Wisconsin 47-0634000
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1245 "Q" Street, Lincoln Nebraska 68508
(Address of principal executive offices) (Zip Code)
(402) 475-2525
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate 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 May 3, 2002: 7,130,577 shares
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NATIONAL RESEARCH CORPORATION
FORM 10-Q INDEX
For the Quarter Ended March 31, 2002
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 6-7
Item 2. Management's Discussion and Analysis of 8-10
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 10
Market Risk
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
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PART I - Financial Information
ITEM 1 Financial Statements
NATIONAL RESEARCH CORPORATION
CONDENSED BALANCE SHEETS
March 31, December 31,
2002 2001
----------------- -----------------
(unaudited)
Current assets:
Cash and cash equivalents $ 1,232,568 $ 1,080,053
Investments in marketable debt securities 7,124,085 6,636,543
Trade accounts receivable, less allowance for doubtful
accounts of $95,931 and $101,674 in 2002 and 2001, respectively 2,288,875 2,141,104
Unbilled revenues 1,679,914 1,671,079
Prepaid expenses and other 235,704 286,653
Income taxes recoverable 190,374 266,034
Deferred income taxes 212,450 210,452
----------------- -----------------
Total current assets 12,963,970 12,291,918
----------------- -----------------
Net property and equipment 12,661,081 12,907,197
----------------- -----------------
Customer lists, net of accumulated amortization 600,510 631,135
Goodwill and other intangible assets, net of accumulated amortization 7,908,043 7,908,043
Other 32,231 34,099
----------------- -----------------
Total assets $ 34,165,835 $ 33,772,392
================= =================
Liabilities and Shareholders' Equity
Current liabilities:
Current portion - notes payable $ 128,082 $ 132,312
Accounts payable 1,311,933 1,391,043
Accrued wages, bonuses and profit sharing 555,022 494,446
Accrued expenses 462,282 364,642
Billings in excess of revenues earned 2,584,960 2,649,370
----------------- -----------------
Total current liabilities 5,042,279 5,031,813
Notes payable, net of current portion 5,147,951 5,169,757
Deferred income taxes 303,711 217,424
----------------- -----------------
Total liabilities 10,493,941 10,418,994
----------------- -----------------
Shareholders' equity:
Preferred stock, $.01 per value; authorized 2,000,000 shares,
no shares issued and outstanding --- ---
Common stock, $.001 par value; authorized 20,000,000 shares,
issued 7,412,711 in 2002 and 7,395,593 in 2001, outstanding 7,111,011 in
2002 and 7,093,893 in 2001 7,406 7,395
Additional paid-in capital 17,300,073 17,255,917
Retained earnings 7,891,740 7,597,340
Accumulated other comprehensive loss (24,256) (4,185)
Treasury stock, at cost; 301,700 shares in 2002 and 2001 (1,503,069) (1,503,069)
----------------- -----------------
Total shareholders' equity 23,671,894 23,353,398
----------------- -----------------
Total liabilities and shareholders' equity $ 34,165,835 $ 33,772,392
================= =================
See accompanying notes to condensed financial statements.
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NATIONAL RESEARCH CORPORATION
CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three months ended
March 31,
--------------------------------------
2002 2001
----------------- -----------------
Revenues $ 4,048,627 $ 4,090,543
----------------- -----------------
Operating expenses:
Direct expenses 1,794,604 1,989,461
Selling, general and administrative 1,273,541 953,198
Depreciation and amortization 404,678 403,131
----------------- -----------------
Total operating expenses 3,472,823 3,345,790
----------------- -----------------
Operating income 575,804 744,753
Other income (expense):
Interest income 63,790 138,979
Interest expense (105,509) (116,861)
Other, net (66,443) (4,547)
----------------- -----------------
Total other income (expense) (108,162) 17,571
----------------- -----------------
Income before income taxes 467,642 762,324
Provision for income taxes 173,242 259,191
----------------- -----------------
Net income $ 294,400 $ 503,133
================= =================
Net income per share--basic
and diluted $ 0.04 $ 0.07
================= =================
Weighted average shares and share equivalents
outstanding--basic 7,099,436 7,039,269
================= =================
Weighted average shares and share equivalents
outstanding--diluted 7,165,989 7,058,365
================= =================
See accompanying notes to condensed financial statements.
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NATIONAL RESEARCH CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended
March 31,
--------------------------------------
2002 2001
----------------- -----------------
Cash flows from operating activities:
Net income $ 294,400 $ 503,133
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 404,678 403,131
Deferred income taxes 93,235 24,900
(Gain) loss on sale of property and equipment -- (300)
Loss on sale of other investments (18) --
Net changes in assets and liabilities:
Trade accounts receivable (147,771) (8,028)
Unbilled revenues (8,835) 21,403
Prepaid expenses and other 57,392 (124,060)
Accounts payable 53,906 105,509
Accrued expenses, wages, bonuses and profit sharing 158,216 (89,899)
Income taxes recoverable and payable 75,660 133,334
Billings in excess of revenues earned (64,410) 101,945
----------------- -----------------
Net cash provided by operating activities 916,453 1,071,068
----------------- -----------------
Cash flows from investing activities:
Purchases of property and equipment (265,528) (545,040)
Proceeds from sale of property and equipment -- 300
Purchases of securities available-for-sale (1,729,310) (4,879,058)
Proceeds from the maturities of securities available-for-sale 1,212,769 3,776,011
----------------- -----------------
Net cash used in investing activities (782,069) (1,647,787)
----------------- -----------------
Cash flows from financing activities:
Payments on notes payable (26,036) (32,571)
Proceeds from exercise of stock options 44,167 63,076
----------------- -----------------
Net cash provided by financing activities 18,131 30,505
----------------- -----------------
Net increase (decrease) in cash and cash equivalents 152,515 (546,214)
Cash and cash equivalents at beginning of period 1,080,053 3,218,805
----------------- -----------------
Cash and cash equivalents at end of period $ 1,232,568 $ 2,672,591
================= =================
Supplemental disclosure of cash paid for:
Interest expense $ 71,573 $ 116,861
================= =================
Income taxes $ 2,953 $ 100,958
================= =================
Accounts payable included $420,758 in 2002 and $453,178 in 2001 for purchases of property and equipment.
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, 2001 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, 2001, filed with the Securities and Exchange Commission
in March 2002.
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 (loss) from marketable debt securities was $(20,071) and
$25,437 for the three-month periods ended March 31, 2002 and 2001, respectively.
3. GOODWILL AND OTHER INTANGILBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142.
Goodwill and Other Intangible Assets. This statement replaces the requirement to
amortize goodwill and certain other intangible assets (with indefinite useful
lives) with an annual impairment test. SFAS No. 142 also requires an evaluation
of the estimated useful lives of intangible assets and an impairment test for
goodwill and non-amortizable assets upon adoption.
The Company adopted the provisions of SFAS No. 142 as of January 1, 2002. As a
result of adopting this standard, the Company ceased amortizing goodwill and
certain other non-amortizable intangible assets effective January 1, 2002. Total
amortization expense for goodwill and other intangible assets was $31,877 and
$74,781 during the three months ended March 31, 2002 and 2001, respectively.
Following is the March 31, 2002 and 2001 statement of income data, adjusted as
if SFAS No. 142 had been effective as of January 1, 2001:
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Three months ended March 31
--------------------------------
2002 2001
--------------------------------
Reported net income 294,400 503,133
Amortization of goodwill, net of taxes -- 45,406
Adjusted net income 294,400 548,539
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Reported net income per share $0.04 $0.07
Amortization of goodwill, net of taxes -- $0.01
Adjusted net income per share $0.04 $0.08
================================
During the three months ended March 31, 2002, the Company also finalized it's
allocation of purchase price for the acquisition of the healthcare survey
business of The Picker Institute (the "Picker acquisition"). In connection
therewith, the Company reclassified purchase price of $2 million from goodwill
to the following intangible assets: trade name and other $1.6 million, and
customer list $408,000. The Company has determined that the trade name and other
has an indefinite life under SFAS No. 142 and, therefore, is non-amortizable
beginning January 1, 2002. The Company's customer list has an estimated useful
life of 10 years.
All of the Company's goodwill and non-amortizable intangible assets are
allocated to one reporting unit- the healthcare survey business. The Company
also completed it's transitional evaluation of the recoverability of goodwill
and non-amortizable intangible assets as of January 1, 2002, using the fair
value methodology of SFAS No. 142. The Company's analysis did not result in the
recognition of an impairment loss on goodwill or other non-amortizable
intangible assets.
4. LEGAL PROCEEDINGS
In May 2000, Cap Gemini America, Inc., the software developer of the Company's
automated software process (a proprietary system that automates the creation and
processing of surveys), filed a lawsuit against the Company in the United States
District Court for the District of Nebraska seeking approximately $1.1 million
the Company owed but withheld under a consulting agreement between Cap Gemini
and the Company. The Company subsequently filed a counter suit against Cap
Gemini. On February 21, 2002, a jury returned a verdict partly in favor of Cap
Gemini and ordered that the Company pay to Cap Gemini approximately $700,000.
The Company had previously accrued approximately $800,000 for these invoices,
which included costs that were capitalized as software development cost and
amounts expensed for employee training. As a result of the court judgement, the
Company recorded interest expense of $63,731 for prejudgment interest awarded to
Cap Gemini during the first quarter of 2002. The Company also recorded a
reduction of $48,400 to the carrying value of capitalized software assets and a
reduction of $48,393 to direct expenses for the final settlement of the
liability to Cap Gemini during the first quarter of 2002.
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 March 31, 2002 and 2001, 43,109 and
74,649 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
----------------------------
Three months ended
March 31,
----------------------------
2002 2001
Revenues: 100.0% 100.0%
============================
Operating expenses:
Direct expenses 44.3 48.6
Selling, general and administrative 31.4 23.3
Depreciation and amortization 10.0 9.9
----------------------------
Total operating expenses: 85.7 81.8
----------------------------
Operating income 14.3% 18.2%
============================
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
Total revenues. Total revenues for the three-month period ended March 31, 2002
were $4,049,000 compared to $4,091,000 in the three month period ended March 31,
2001. The first quarter revenue were essentially flat compared to the prior
year.
Direct expenses. Direct expenses decreased 9.8% to $1,795,000 in the three-month
period ended March 31, 2002 from $1,989,000 in the same period during 2001. The
decrease in direct expenses in the 2002 period was due to decreases in labor and
payroll expenses of $201,000 and fieldwork and fees of $65,000; which were
offset by an increase in printing and postage expenses of $26,000 and licenses
fees of $45,000. Direct expenses decreased as a percentage of total revenues to
44.3% in the three month period ended March 31, 2002 from 48.6% during the same
period of 2001 due to internal processing improvements. Direct expenses as a
percentage of total revenues for the balance of 2002 are expected to remain at
similar or slightly higher levels.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 33.6% to $1,274,000 for the three-month period
ended March 31, 2002 from $953,000 for the same period in 2001. This increase
was primarily due to increases in salary and benefit expenses of $129,000, legal
and consulting fees of $124,000, product development of $27,000,
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other tax expense of $31,000 and marketing expenses of $19,000. Theses increases
were partially offset by a decrease in office expenses of $15,000. Selling,
general, and administrative expenses increased as a percentage of total revenues
to 31.4% for the three month period ended March 31, 2002 from 23.3% for the same
period in 2001. Selling, general, and administrative expenses as a percentage of
total revenues for the balance of 2002 are expected to decrease to the lower 20%
range.
Depreciation and amortization. Depreciation and amortization expenses increased
to $405,000 in the three-month period ended March 31, 2002 from $403,000 in the
same period of 2001. Depreciation and amortization expenses as a percentage of
total revenues increased to 10.0% in the three-month period ended March 31,
2002, from 9.9% in the same period of 2001. The depreciation as a percentage of
revenue should decrease during the balance 2002.
Other income(expense). Other income and expense increased to $(66,000) in the
three-month period ended March 31, 2002 from $(5,000) in the same period of
2001. The increase was due to the recording of $64,000 of prejudgment interest
related to the lawsuit resolved during the quarter. The other income and expense
should trend to last year's amounts for the balance of the year.
Provision for income taxes. The provision for income taxes totaled $173,000
(37.0% effective tax rate) for the three-month period ended March 31, 2002 as
compared to $259,000 (34.0% effective tax rate) for the same period in 2001. The
increase in expense is primarily because in 2001 the Company utilized certain
nonrecurring federal income tax credits. The effective tax rate for the rest of
2002 is expected to remain at a level similar to its first quarter 2002 level.
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, other than expenditures related to the
Company's building, which were paid, in part, from the proceeds of borrowings
and the sales of securities available-for-sale.
As of March 31, 2002, the Company had cash and cash equivalents of $1,233,000
and working capital of $7,922,000.
During the three months ended March 31, 2002, the Company generated $916,000 of
net cash from operating activities as compared to $1,071,000 of net cash
generated during the same period in the prior year. The decrease in cash flow
was mainly due to a lower net income and partially due to decrease in billings
in excess of revenues earned, net increases in trade accounts receivables and
unbilled revenues. The decrease in cash flow was partially offset by an increase
in accounts payable and accrued expenses.
For the three months ended March 31, 2002, net cash used in investing activities
was $782,000 as compared to $1,648,000 during the same period in the prior year.
The 2002 decrease in cash used was primarily due to the reduction of purchases
of property and equipment by $280,000 (primarily construction expenditures
related to the new office building during 2001) and by a decrease of the
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net of purchases of securities available-for-sale over the proceeds from the
maturities of securities of $587,000.
Net cash provided by financing activities was $18,000 for the three months ended
March 31, 2002, as compared to $31,000 for the three months ended March 31,
2001. The decrease in cash provided by financing activities during 2002 was due
to a decrease in the amount of proceeds from the exercise of stock options.
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, 2002 and as of December 31, 2001, the
Company had $2,585,000 and $2,649,000 of deferred revenues, respectively. In
addition, when work is performed in advance of billing, the Company records this
work as unbilled revenue. At March 31, 2002 and December 31, 2001, the Company
had $1,680,000 and $1,671,000 of unbilled revenue, respectively. Substantially
all deferred revenues earned and unbilled revenues will be earned and billed,
respectively, within 12 months of the respective period ends.
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 3, 2002, 56,700 shares have been
repurchased under the new authorization.
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, 2001.
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PART II - Other Information
ITEM 6 Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits
None.
b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
March 31, 2002.
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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: May 15, 2002 By: /s/ Michael D. Hays
---------------------------------------
Michael D. Hays
President and Chief Executive Officer
Date: May 15, 2002 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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