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, 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 47-0634000
(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 May 1, 1998: 7,305,000
shares
NATIONAL RESEARCH CORPORATION
FORM 10-Q INDEX
For the Quarter Ended March 31, 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
Financial Condition and Results of Operations 7-9
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
Exhibit Index 12
PART I - Financial Information
ITEM 1 Financial Statements
NATIONAL RESEARCH CORPORATION
CONDENSED BALANCE SHEETS
March 31, December 31,
1998 1997
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 3,893,360 $ 4,688,352
Investments in marketable debt securities 15,651,125 13,220,553
Trade accounts receivable less allowance for doubtful
accounts of $67,808 in 1998 and $62,808 in 1997 1,331,743 3,094,772
Unbilled revenues 633,872 559,856
Prepaid expenses and other 576,697 184,156
Deferred income taxes 112,255 127,225
----------- -----------
Total current assets 22,199,052 21,874,914
----------- -----------
Property and equipment, net of accumulated
depreciation and amortization 725,306 519,955
Deferred income taxes 136,745 155,775
Other 42,538 12,482
----------- -----------
Total assets $23,103,641 $22,563,126
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 902,387 $ 615,930
Accrued wages, bonuses and profit sharing 710,025 1,161,917
Income taxes payable 363,229 118,000
Billings in excess of revenues earned 2,155,697 2,297,751
----------- -----------
Total current liabilities 4,131,338 4,193,598
Bonuses and profit sharing accruals 289,701 248,684
----------- -----------
Total liabilities 4,421,039 4,442,282
----------- -----------
Shareholders' equity:
Common stock, $.001 par value; authorized 20,000,000
shares, issued and outstanding 7,305,000
Preferred stock, $.01 par value; authorized 2,000,000 7,305 7,305
shares, no shares issued and outstanding
Additional paid-in capital -- --
Retained earnings 16,839,839 16,839,839
1,835,458 1,273,700
---------- ----------
Total shareholders' equity
18,682,602 18,120,844
---------- ----------
Total liabilities and shareholders' equity $23,103,641 $22,563,126
========== ==========
See accompanying notes to condensed financial statements.
NATIONAL RESEARCH CORPORATION
CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
1998 1997
Revenues:
Renewable performance tracking services $2,787,493 $2,871,051
Renewable syndicated service 301,104 340,621
Custom and other research 317,503 228,122
--------- ---------
Total revenues 3,406,100 3,439,794
--------- ---------
Operating expenses:
Direct expenses 1,508,961 1,393,421
Selling, general and administrative 1,188,588 950,802
Depreciation and amortization 51,993 41,597
--------- ---------
Total operating expenses 2,749,542 2,385,820
--------- ---------
Operating income 656,558 1,053,974
Interest and other income, net 262,200 45,067
Income before income taxes 918,758 1,099,041
Provision for income taxes 357,000 --
--------- ---------
Net income $ 561,758 $1,099,041
========= =========
Net income $ 561,759 $1,099,041
Pro forma income taxes -- 439,614
--------- ---------
Pro forma net income 561,758 659,427
========= =========
Pro forma net income per share - basic
and diluted $ .08 $ .11
========= =========
Weighted average common shares
outstanding 7,305,000 6,184,812
========= =========
See accompanying notes to condensed financial statements.
NATIONAL RESEARCH CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
1998 1997
Cash flows from operating activities:
Net income $ 561,758 $ 1,099,041
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 51,993 41,597
Changes in assets and liabilities:
Trade accounts receivable 1,763,029 (1,199,219)
Unbilled revenues (74,016) (55,635)
Prepaid expenses and other (392,541) 2,523
Deferred income taxes 34,000 --
Accounts payable and accrued expenses 286,457 354,459
Accrued wages, bonuses and profit sharing (410,875) (40,184)
Income taxes payable 245,229 --
Billings in excess of revenues earned (142,054) 394,781
---------- ---------
Net cash provided by operating activities 1,922,980 597,363
---------- ---------
Cash flows from investing activities:
Purchases of property and equipment (287,400) (184,539)
Purchases of securities available-for-sale (4,430,572) (24,295)
Proceeds from the maturities of securities
available-for-sale 2,000,000 1,500,000
---------- ---------
Net cash provided by (used in) investing
activities (2,717,972) 1,291,166
---------- ---------
Cash used in financing activity:
Dividends paid -- (359,384)
---------- ---------
Net increase (decrease) in cash and cash (794,992) 1,529,145
equivalents
Cash and cash equivalents at beginning of period 4,688,352 2,782,212
---------- ---------
Cash and cash equivalents at end of period $3,893,360 $4,311,357
========== =========
See accompanying notes to condensed financial statements.
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 involves 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 $195,000 of costs incurred for the development of
internal use software for the three months ended March 31, 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.
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 three months ended March 31, 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 a C Corporation.
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,
1998 1997
Revenues:
Renewable performance tracking services 81.8% 83.5%
Renewable syndicated service 8.8 9.9
Custom and other research 9.4 6.6
------ ------
Total revenues 100.0 100.0
====== ======
Operating expenses:
Direct expenses 44.3 40.5
Selling, general and administrative 34.9 27.6
Depreciation and amortization 1.5 1.2
------ -----
Total operating expenses 80.7 69.3
------ -----
Operating income 19.3% 30.7%
====== =====
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997
Total revenues. Total revenues remained constant in the three month
periods ended March 31, 1998 and 1997 at $3.4 million. Revenues from the
Company's renewable performance tracking services decreased 2.9% to $2.8
million in the three month period ended March 31, 1998 from $2.9 million
in the same period during 1997 primarily due to the loss of a large
client, Kaiser Permanente-Northern California Region ("Kaiser"), which was
largely offset by an increase in the scope of existing tracking projects
and, to a lesser extent, the addition of new clients. Revenues for the
Company's renewable syndicated service decreased 11.6% to $301,000 in the
three month period ended March 31, 1998 compared to $341,000 in the same
three month period in 1997 due to timing of sales. The Company's custom
research revenue increased 39.2% to $318,000 in the three month period
ended March 31, 1998 from $228,000 in the same period of 1997 primarily
due to the timing of the start and completion of projects during the
quarter.
Direct expenses. Direct expenses increased 8.3% to $1.5 million in the
three month period ended March 31, 1998 from $1.4 million in the same
period during 1997. The increase in direct expenses in the 1998 period
was due to an increase in labor and payroll expenses of $132,000 primarily
due to the Company not reducing its full-time labor force in proportion
with the reduction in revenues due to the loss of Kaiser as a client,
which was partially offset by a decrease in postage and printing expenses
of $79,000. Direct expenses increased as a percentage of total revenues
to 44.3% in the three month period ended March 31, 1998 from 40.5% during
the same period of 1997. The increase in direct expenses as a percentage
of total revenues in the 1998 period was due to the Company maintaining
its full-time labor force and not reducing such labor force in proportion
with the reduction in revenues due to the loss of Kaiser as a client.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 25.0% to $1.2 million for the three
month period ended March 31, 1998 from $951,000 for the same period in
1997. This increase was primarily due to an increase of $182,000
associated with the expansion of the Company's sales and marketing
workforce and expenses of $127,000 associated with being a public company.
Sales, general and administrative expenses increased as a percentage of
total revenues to 34.9% for the three month period ended March 31, 1998
from 27.6% for the same period in 1997.
Depreciation and amortization. Depreciation and amortization expenses
increased 25.0% to $52,000 in the three month period ended March 31, 1998
from $42,000 in the same period of 1997. Depreciation and amortization
expenses increased as a percentage of total revenues to 1.5% in the three
month period ended March 31, 1998 from 1.2% in the same period 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 March 31, 1998, the Company had cash and cash equivalents of $3.9
million and working capital of $18.1 million.
During the three months ended March 31, 1998, the Company generated $1.9
million of net cash from operating activities as compared to $597,000 of
net cash generated during the same period in the prior year. The increase
in cash flow was mainly due to the timing of the collection of a $717,000
account receivable in January 1998 and the timing of costs incurred in
advance of billings on certain projects, combined with a decline in
accounts receivable and unchanging balances in unbilled revenues and
billings in excess of cost.
For the three months ended March 31, 1998, net cash used by investing
activities was $2.7 million as compared to net cash provided of $1.3
million during the same period in the prior year. The 1998 decrease in
cash provided was primarily due to the purchase of investments available-
for-sale, which was partially offset by an investment of $287,000 in
furniture, computer equipment, software and production equipment to meet
the needs of the Company's business. The 1997 cash provided was primarily
due to the maturing of investments available-for-sale, which was partially
offset by an investment of $185,000 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 $0 and $359,000 for the three
months ended March 31, 1998 and 1997, respectively. Net cash used in
financing activities for the 1997 period 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 March 31, 1998 and as of December 31, 1997,
the Company had $2.1 million and $2.3 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, 1998 and December 31, 1997, the Company had
$634,000 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.
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 entire net proceeds to the Company of $16,841,089 are
currently being held in temporary investments of United States
government securities with maturities of two years or less.
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, 1998.
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
(Registrant)
Date: May 15, 1998 By: /s/ Michael D. Hays
Michael D. Hays
President and Chief Executive Officer
Date: May 15, 1998 By: /s/ Patrick E. Beans
Patrick E. Beans
Vice President, Treasurer, Secretary
and Chief Financial Officer Principal
Financial and Accounting Officer)
NATIONAL RESEARCH CORPORATION
EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q
for the Quarterly Period ended March 31, 1998
Exhibit
(27) Financial Data Schedule (EDGAR version only)