UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
1245 "Q" Street
Lincoln, Nebraska 68508
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (402) 475-2525
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
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Common Stock, $.001 par value
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Aggregate market value of the voting stock held by nonaffiliates of the
registrant at March 1, 2002: $15,246,917.
Number of shares of the registrant's common stock outstanding at March 1, 2002:
7,099,548 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2002 Annual Meeting of Shareholders are
incorporated by reference into Part III.
PART 1
ITEM 1. BUSINESS
GENERAL
National Research Corporation ("NRC" or the "Company") believes it is a
leading provider of ongoing survey-based performance measurement, analysis and
tracking services to the healthcare industry. The Company believes it has
achieved this leadership position based on its over 20 years of industry
experience and its relationships with many of the industry's largest payers and
providers. The Company addresses the growing need of healthcare providers and
payers to measure the care outcomes, specifically satisfaction and health
status, of their patients and/or members. NRC has been at the forefront of the
industry in developing tools that enable healthcare organizations to obtain
service quality information necessary to comply with industry and regulatory
standards and to improve their business practices so that they can maximize new
member and/or patient attraction, member retention and profitability.
Since its founding 21 years ago as a Nebraska corporation (the Company
reincorporated in Wisconsin in September 1997), NRC has focused on the
information needs of the healthcare industry. The Company's primary types of
information services are renewable performance tracking services, custom
research and a renewable syndicated service.
One of the Company's growth strategies has been to expand its client
base by adding new sales associates, direct marketing and by pursuing strategic
opportunities to acquire other healthcare performance information providers. In
June 1998, the Company acquired Healthcare Research Systems, Ltd., an Ohio-based
provider of survey-based performance measurement, analysis and tracking services
to the healthcare industry. In May 2001, the Company also acquired the Picker
Institute's healthcare survey business. The Picker Institute's family of patient
and employee surveys are highly regarded in the field of healthcare quality
assessment and improvement.
While performance data has always been of interest to healthcare
providers and payers, such information has become increasingly important to
these entities as a result of regulatory, industry and competitive requirements.
In recent years, the healthcare industry has been under significant pressure
from consumers, employers and the government to reduce costs. Through the
implementation of managed care, which currently covers a majority of all
Americans, the rate of growth in healthcare costs has been substantially
reduced. However, the same parties that demanded cost reductions are now
concerned that healthcare service quality is being compromised under managed
care. This concern has created a demand for consistent, objective performance
information by which healthcare providers and payers can be measured and
compared and on which physicians' compensation can, in part, be based.
THE NRC SOLUTION
The Company addresses healthcare organizations' growing need to track
their performance at the enterprise-wide, departmental and physician/caregiver
levels. The Company has been at the forefront of the industry in developing
tools that enable its clients to collect, in an unobtrusive manner, a
substantial amount of comparative service quality information in order to
analyze and improve their practices to maximize new member and/or patient
attraction, member retention and profitability. NRC's performance assessments
offer the tangible measurement of health service quality currently demanded by
consumers, employers, industry accreditation organizations and lawmakers.
The Company's innovative solutions respond to managed care's redefined
relationships among consumers, employers, payers and providers. While many
vendors exclusively use static, mass produced questionnaires, NRC also utilizes
its dynamic data collection process to create a personalized questionnaire
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that evaluates service issues specific to each respondent's specific healthcare
experience. The flexibility of the Company's data collection process allows
healthcare organizations to add timely, market driven questions relevant to
matters such as industry performance mandates, employer performance guarantees
and internal quality improvement initiatives. In addition, the Company assesses
core service factors relevant to all healthcare respondent groups (patients,
members, employers, employees, physicians, etc.) and to all service points of a
healthcare system (inpatient, emergency room, outpatient, home health,
rehabilitation, long-term care, hospice, dental, etc.).
NRC offers renewable performance tracking services, custom research and
a renewable syndicated service. The NRC Listening System (the "Listening
System") is a renewable performance tracking tool for gathering and analyzing
data from survey respondents. The Company has the capacity to measure
performance beyond the enterprise-wide level and has the ability and experience
to determine key performance indicators at the department and individual
physician/caregiver measurement levels, where the Company's services can best
guide the efforts of its clients to improve quality and enhance their market
position. Additional offerings include functional disease-specific and health
status measurement tools. The Company's custom research enables NRC's clients to
conduct specific studies in order to identify areas of improvement and measure
market issues and opportunities. The syndicated NRC Healthcare Market Guide (the
"Market Guide"), a stand-alone market information and competitive intelligence
source as well as a comparative performance database, allows the Company's
clients to assess their performance relative to the industry, to access best
practice examples and to utilize competitive information for marketing purposes.
During 2000 and 2001, the Company piloted the new syndicated NRC DoctorGuide, a
stand-alone individual report card on primary care physicians, although there
were no significant revenues from this product in 2000 or 2001. The DoctorGuide
allows health plans and consumers to review service quality measures of
individual physicians. Recognizing the increasing applications for self-reported
healthcare assessments, NRC works with its clients to integrate satisfaction
measurement into various areas of their businesses, including physician
compensation. As the Company partners with its clients, it seeks to enhance
relationships throughout the healthcare organization and thereby both broaden
and deepen the scope of its projects.
GROWTH STRATEGY
The Company believes that it can continue to grow through: (i)
expanding the depth and breadth of its current clients' performance tracking
programs, since healthcare organizations are increasingly interested in
gathering performance information at deeper levels of their organizations and
from more of their constituencies, (ii) increasing the cross-selling of its
complementary services, (iii) adding new clients through penetrating the
sizeable portion of the healthcare industry that is not yet conducting
performance assessments beyond the enterprise-wide level or is not yet
outsourcing this function and (iv) pursuing acquisitions of, or investments in,
firms providing products, services or technologies that complement those of the
Company.
INFORMATION SERVICES
The Listening System is NRC's state-of-the-art data collection process
which provides ongoing, renewable performance tracking. This performance
tracking program efficiently coordinates and centralizes an organization's
satisfaction monitoring, thereby establishing a uniform methodology and survey
instrument needed to obtain valid performance information and improve quality.
Using the industry method of mail and/or telephone based data collection, this
assessment process monitors satisfaction across healthcare respondent groups
(patients, members, employers, employees, physicians, etc.) and service settings
(inpatient, emergency room, outpatient, etc.). Rather than be limited to only
static, mass produced questionnaires that provide limited flexibility and
performance insights, NRC's proprietary software generates individualized
questionnaires, which include personalization such as patient name, treating
caregiver name, encounter date and, in some cases, the services received. This
personalization enhances the response rates and the relevance of performance
data. Flexible and responsive to healthcare organizations
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changing information needs, NRC creates personalized questionnaires that
evaluate service issues specific to each respondent's specific healthcare
experience and include questions that address core service factors throughout a
healthcare organization.
Unlike most of its competitors, the Company gathers data through one
efficient questionnaire, the contents of which are selected from the Company's
library of questions after a client's needs are determined, as opposed to
multiple questionnaires that often bombard the same respondents. As a result,
the Company's renewable performance tracking programs and data collection
process (i) realize higher response rates, obtain data more efficiently, and
thereby provide healthcare organizations with more feedback, (ii) eliminate
oversurveying (where one respondent receives multiple surveys) and (iii) allow
healthcare organizations to adapt questionnaire content to address management
objectives and to assess quality improvement programs or other timely
marketplace issues.
Recognizing that performance programs must do more than just measure
satisfaction, NRC has developed a one-page reporting format called the NRC
Action Plan that provides a basis on which to make improvements. NRC Action
Plans show healthcare organizations which service factors their customer groups
value, which have the greatest impact on satisfaction levels and how their
performance in relationship to these key indicators changes over time. NRC has
also developed on-line access to satisfaction performance results, which the
Company believes provides NRC's clients the fastest and easiest way to access
measurement results. IDEAS, NRC's exclusive web-based electronic delivery
system, provides clients the ability to review results and reports on-line,
independently analyze data, query data sets, customize some reports and
distribute reports electronically.
In order to be a sole source provider to its clients, the Company also
conducts custom research that measures and monitors market characteristics or
issues specific to individual healthcare organizations. NRC's custom research
includes consumer recall of promotional and branding campaigns, consumer
response to new service offerings and provider perception of health plans and
healthcare organizations. The Company generally utilizes phone interviews to
collect relevant data for these custom studies.
The Company's renewable nationally syndicated service, the NRC
Healthcare Market Guide, serves as a stand-alone market information and
competitive intelligence source as well as a comparative performance database.
Published by NRC bi-annually from 1988 to 1996 and annually since 1996, this
survey, which is the largest of its kind, asks consumers via a pre-recruited
third-party panel, members of which are sent Market Guide questionnaires to
complete, to evaluate their health plans, health systems, physicians/caregivers
and personal health status. Representing the views of one in every 570
households across every county in the continental United States, the Market
Guide provides name specific performance data on 365 managed care plans and
2,800 hospitals nationwide and addresses more than 250 data items relevant to
healthcare payers, providers and purchasers. Utilizing this proprietary
database, the Company is able to produce reports which are customized to meet
individual client's specific information needs. Similarly, the service's
national name search feature allows a healthcare organization with a national or
regional presence to simultaneously compare the performance of all its sites and
pinpoint where strengths and weaknesses exist. The service's trending capacity
details how the performance of a healthcare organization changes over time.
Other data collected in the Market Guide profile health plan market share,
consumers' health plan decision making factors, physician/caregiver
accessibility, hospital/healthcare system quality and chronic patient
populations. The Company gives clients easy access to the customized version of
the Market Guide they purchase via NRC's exclusive web-based electronic delivery
system. This delivery system allows healthcare professionals to generate reports
in numerous formats to support their decision making.
The Company piloted its new renewable syndicated service, the NRC
DoctorGuide, in 2000 and 2001. The NRC DoctorGuide serves as a stand-alone
report card on service quality of individual physicians. The first market was
completed in the fall of 2000, with a second market completed in the fall of
2001. The
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report cards on the individual physicians can be sold to health plans, employees
and physician management groups, with summary reports available to the general
public via DoctorGuide.com.
CLIENTS
The Company's ten largest clients accounted for 50%, 41% and 43% of the
Company's total revenues in 2001, 2000 and 1999, respectively. The United States
Department of Defense, through a primary contractor, United Healthcare
Corporation, accounted for 18.7% of total revenues in 2001.
SALES AND MARKETING
The Company has generated the majority of its revenues from client
renewals, supplemented by its internal marketing efforts and a direct sales
force. Sales associates now direct NRC's sales efforts from Nebraska,
California, Kansas, and Virginia. The Company is also in the process of
searching for an additional sales associate. As compared to the typical industry
practice of compensating salespeople with relatively high base pay and a
relatively small sales commission, NRC compensates its sales associates with
relatively low base pay and a relatively high, per sale commission. The Company
believes this compensation structure provides incentives to its sales associates
to surpass sales goals and increases the Company's ability to attract top
quality sales associates. The average healthcare/market research industry
experience of the Company's sales associates was 11 years at year-end.
Numerous marketing efforts support the direct sales force's new
business generation and project renewal initiatives. NRC conducts an annual
direct marketing campaign around scheduled trade shows, including leading
industry conferences. NRC uses this lead generation mechanism to track the
effectiveness of marketing efforts and add generated leads to its database of
current and potential client contacts. Finally, the Company's public relations
program includes (i) an ongoing presence in leading industry trade press and in
the mainstream press; (ii) public speaking at strategic industry conferences;
(iii) fostering relationships with key industry constituencies; and (iv) an
annual Quality Leaders award program recognizing top-ranking health systems in
approximately 107 markets.
The Company's integrated marketing activities facilitate its ongoing
receipt of project requests-for-proposals as well as direct sales force
initiated prospect contact. The sales process typically spans a 120-day period
encompassing the identification of a healthcare organization's information
needs, the education of prospects on NRC solutions (via proposals and in-person
sales presentations) and the closing of the sale. The Company's sales cycle
varies depending on the particular service being marketed and the size of the
potential project.
COMPETITION
The healthcare information and market research industry is highly
competitive. The Company has traditionally competed both with healthcare
organizations' internal marketing, market research and/or quality improvement
departments which create their own performance measurement tools and with
relatively small specialty research firms which provide survey-based healthcare
market research and/or performance assessment. The Company, to a certain degree,
currently competes with, and anticipates that in the future it may increasingly
compete with (i) traditional market research firms which are significant
providers of survey-based, general market research and (ii) firms which provide
services or products that complement healthcare performance assessments, such as
healthcare software or information systems. Although only a few of these
competitors have to date offered survey-based, healthcare market research that
competes directly with the Company's services, many of these competitors have
substantially greater financial, information gathering and marketing resources
than the Company and could decide to increase their resource commitments to the
Company's market. There are relatively few barriers to entry into the Company's
market, and the Company expects increased competition in its market, which could
adversely affect the
5
Company's operating results through pricing pressure, increased marketing
expenditures and market share losses, among other factors. There can be no
assurance that the Company will continue to compete successfully against
existing or new competitors.
The Company believes the primary competitive factors within its market
include quality of service, timeliness of delivery, service uniqueness,
credibility of provider, industry experience and price. NRC believes that its
industry leadership position, exclusive focus on the healthcare industry,
dynamic questionnaire, syndicated Market Guide and DoctorGuide, and comparative
performance database, and its relationships with leading healthcare payers and
providers position the Company to compete in this market.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company's success is in part dependent upon its data collection
process, research methods, data analysis techniques and internal systems and
procedures that it has developed specifically to serve clients in the healthcare
industry. The Company has no patents; consequently, it relies on a combination
of copyright, trademark and trade secret laws and employee nondisclosure
agreements to protect its systems and procedures. There can be no assurance that
the steps taken by the Company to protect its rights will be adequate to prevent
misappropriation of such rights or that third parties will not independently
develop functionally equivalent or superior systems or procedures. The Company
believes that its systems and procedures and other proprietary rights do not
infringe upon the proprietary rights of third parties. There can be no
assurance, however, that third parties will not assert infringement claims
against the Company in the future or that any such claims will not result in
protracted and costly litigation, regardless of the merits of such claims.
ASSOCIATES
As of December 31, 2001, the Company employed a total of 87 persons on
a full-time basis. In addition, as of such date, the Company had 60 part-time
associates primarily in its survey operations, representing approximately 33
full-time equivalent associates. None of the Company's associates are
represented by a collective bargaining agreement. The Company considers its
relationship with its associates to be good.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information, as of March 1,
2002, regarding the executive officers of the Company:
Name Age Positions
---- --- ---------
Michael D. Hays 47 President, Chief Executive Officer and Director
Jona S. Raasch 43 Vice President and Chief Operations Officer
Patrick E. Beans 44 Vice President, Treasurer, Chief Financial
Officer, Secretary and Director
Michael D. Hays has served as President and Chief Executive Officer and
as a director since he founded the Company in 1981. Prior thereto, Mr. Hays
served for seven years as a Vice President and a director of SRI Research
Center, Inc. (n/k/a the Gallup Organization).
Jona S. Raasch has served as Vice President and Chief Operations
Officer since September 1988. Prior to joining the Company, Ms. Raasch held
various positions with A.C. Nielsen.
6
Patrick E. Beans has served as Vice President, Treasurer, Chief
Financial Officer and Secretary and as a director since 1997 and as the
principal financial officer since he joined the Company in August 1994. From
June 1993 until joining the Company, Mr. Beans was the finance director for the
Central Interstate Low-Level Radioactive Waste Commission, a five-state compact
developing a low-level radioactive waste disposal plan. From 1979 to 1988 and
from June 1992 to June 1993, he practiced as a certified public accountant.
Executive officers of the Company are elected by, and serve at the
discretion of, the Company's Board of Directors. There are no family
relationships between any directors or executive officers of NRC.
ITEM 2. PROPERTIES
The Company's headquarters is located in an owned 47,000 square foot
office building in Lincoln, Nebraska. This facility houses all the capabilities
necessary for NRC's survey programming, printing and distribution; telephone
interviewing; data processing, analysis and report generation; marketing; and
corporate administration.
ITEM 3. 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 is also required to pay prejudgment interest of
approximately $64,000. The Company had a liability of $800,000 recorded related
to the acquisition of software, so the verdict is not expected to have a
significant impact on the operations or financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders
during the fourth quarter of the Company's 2001 fiscal year.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock, $.001 par value ("Common Stock"), is traded
on the Nasdaq National Market under the symbol "NRCI." The following table sets
forth the range of high and low closing sales prices for the Common Stock for
the period from January 1, 2000 through December 31, 2001:
High Low
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First quarter ended March 31, 2000 $6.38 $3.44
Second quarter ended June 30, 2000 $8.13 $4.53
Third quarter ended September 30, 2000 $6.75 $4.63
Fourth quarter ended December 31, 2000 $5.56 $3.38
First quarter ended March 31, 2001 $5.25 $3.50
Second quarter ended June 30, 2001 $6.25 $3.50
Third quarter ended September 30, 2001 $6.35 $5.37
Fourth quarter ended December 31, 2001 $8.00 $4.95
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On March 15, 2002, there were approximately 18 shareholders of record
and approximately 500 beneficial owners for the Common Stock.
The Company does not intend to pay any cash dividends on its Common
Stock in the foreseeable future. The Company intends to retain all of its future
earnings for use in the expansion and operation of its business. Any future
determination to pay cash dividends will be at the discretion of the Company's
Board of Directors and will depend upon, among other things, the Company's
results of operations, financial condition, contractual restrictions and such
other factors deemed relevant by the Board of Directors.
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ITEM 6. SELECTED FINANCIAL DATA
The selected statement of income data for the years ended December 31,
2001, 2000 and 1999 and the balance sheet data at December 31, 2001 and 2000 are
derived from, and are qualified by reference to, the audited financial
statements of the Company included elsewhere in this Annual Report on Form 10-K.
The selected statement of income data for the years ended December 31, 1998 and
1997 and the balance sheet data at December 31, 1999, 1998 and 1997 are derived
from audited financial statements not included herein.
Year Ended December 31,
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2001 2000 1999 1998(1) 1997
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(In thousands, except per share data)
Statement of Income Data:
Revenues........................................... $ 17,674 $ 18,316 $ 18,184 $ 17,665 $ 16,284
Operating expenses:
Direct expenses................................. 8,059 9,120 11,133 9,422 7,178
Selling, general and administrative............. 4,985 4,602 4,177 4,843 3,980
Depreciation and amortization................... 1,917 1,269 817 426 159
Acquired-in-process research and development
cost........................................... - - - 2,737 -
Cost of closing duplicate facilities and
severance charges.............................. - - 364 304 -
Special compensation charge..................... - - - - 1,740
-------- -------- -------- -------- --------
Total operating expenses.................... 14,961 14,991 16,491 17,732 13,057
-------- -------- -------- -------- --------
Operating income (loss)............................ 2,713 3,325 1,693 (67) 3,227
Other income and expenses, net..................... (89) 531 530 849 367
-------- -------- -------- -------- --------
Income before income taxes......................... 2,624 3,856 2,223 782 3,594
Provision for income taxes......................... 954 1,139 748 321 376
Pro forma income taxes(2).......................... - - - - 804
-------- -------- -------- -------- --------
Pro forma net income(2)............................ $ 1,670 $ 2,717 $ 1,475 $ 461 $ 2,414
======== ======== ======== ======== ========
Pro forma net income per share - basic
and diluted(2)................................... $ 0.24 $ 0.39 $ 0.21 $ 0.06 $ 0.37
======== ======== ======== ======== ========
Weighted average shares outstanding - basic(3)..... 7,053 7,019 7,054 7,283 6,440
Weighted average shares outstanding - diluted(3)... 7,089 7,025 7,056 7,301 6,440
December 31,
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2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data:
Working capital.................................... $ 7,260 $ 8,342 $ 5,246 $ 8,954 $ 17,681
Total assets....................................... 33,772 31,637 29,256 26,279 22,563
Total debt, including current portion.............. 5,302 5,430 3,619 105 -
Total shareholders' equity......................... 23,353 21,382 18,566 17,435 18,121
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(1) On January 1, 1998, the Company adopted the American Institute of Certified Public Accountants Statement of
Position No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.
(2) From August 1, 1994 through October 13, 1997, the Company was an S Corporation and, accordingly, was not subject to
Federal and state income taxes for the year ended December 31, 1996 or from January 1, 1997 to October 13, 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.
(3) Includes 129,812 shares of Common Stock in 1997 and 1996, which, had they been issued (at $13.95 per share, the
initial public offering price less the underwriting discount), would have generated cash sufficient to fund the
portion of the estimated S Corporation distributions and special (cash) compensation expense that are in excess of
the Company's 1996 net income.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain matters discussed below in this Annual Report on Form 10-K are
"forward-looking statements" intended to qualify for the safe harbors from
liability established by the Private Securities Litigation Reform Act of 1995.
These forward-looking statements can generally be identified as such because the
context of the statement includes phrases such as the Company "believes,"
"expects" or other words of similar import. Similarly, statements that describe
the Company's future plans, objectives or goals are also forwarding-looking
statements. Such forward-looking statements are subject to certain risks and
uncertainties which could cause actual results or outcomes to differ materially
from those currently anticipated. Factors that could affect actual results or
outcomes include, without limitation, the Company's reliance on a limited number
of key clients for a substantial portion of its revenues, the Company's
dependence on performance tracking contract renewals, fluctuations in the
Company's operating results related to the Market Guide, increased competition,
changes in conditions affecting the healthcare industry, the Company's ability
to manage its growth and to successfully integrate the Picker Institute business
and any possible future acquisitions and the Company's ability to provide timely
and accurate performance tracking and market research to its clients.
Shareholders, potential investors and other readers are urged to consider these
factors in evaluating the forward-looking statements and are cautioned not to
place undue reliance on such forward-looking statements. The forward-looking
statements included are only made as of the date of this Annual Report on Form
10-K and the Company undertakes no obligation to publicly update such
forward-looking statements to reflect subsequent events or circumstances.
OVERVIEW AND CRITICAL ACCOUNTING POLICIES
The Company believes it is a leading provider of ongoing survey-based
performance measurement, analysis and tracking services to the healthcare
industry. The Company's primary types of information services are renewable
performance tracking services, custom research and a renewable syndicated
service.
The Company believes its critical accounting policies are:
o Revenue recognition and
o Valuation of long-lived assets, identifiable intangible assets
and goodwill.
Revenue Recognition
The Company's renewable performance tracking service, the Listening
System, is a performance tracking tool for gathering and analyzing data from
survey respondents. Such services are provided pursuant to contracts which are
generally renewable annually and that provide for a customer specific study
which is conducted via a series of surveys and delivered via a series of updates
or reports, the timing and frequency of which vary by contract (such as monthly
or weekly). These contracts are generally cancelable on short or no notice
without penalty and, since progress on these contracts can be tracked and
regular updates and reports are made, clients are entitled to any
work-in-process but are obligated to pay for all services performed through
cancellation. Typically, these contracts are fixed fee arrangements and a
portion of the project fee is billed in advance, and the remainder is billed
periodically over the duration of the project. The Company conducts custom
research which measures and monitors market issues specific to individual
healthcare organizations. The majority of the Company's custom research is
performed under contracts which provide for advance billing of 65% of the total
project fee with the remainder due upon delivery. Revenues and direct expenses
for the Company's renewable performance tracking services and custom research
are recognized on a percentage of completion basis.
10
Significant management judgments and estimates must be made and used in
connection with revenue recognized using the percentage of completion accounting
method. If management made different judgements and estimates, then the amount
and timing of revenue for any period could differ materially from the reported
revenue. The underlying assumptions and judgments that are the most critical to
this policy include the estimated progress to date and the estimated costs
required to complete the work required under individual customer contracts. The
Company uses cost-to-cost methodology in applying the percentage of completion
method of accounting. Consequently, the accuracy of estimates may be most
sensitive to the Company's ability to efficiently utilize its human resources
and the availability and cost of human resources. The Company's estimates are
also sensitive, to a lesser degree, to the costs of postage, telephone and
related communications and information technology.
The Company's renewable nationally syndicated service, the Market
Guide, serves as a stand-alone market information and competitive intelligence
source as well as a comparative performance database. Published by NRC
bi-annually from 1988 to 1996 and annually since 1996, this survey is a
comprehensive consumer-based healthcare assessment. Market Guide services are
generally provided pursuant to contracts which have durations of four to six
months and that provide for the receipt of survey results that are customized to
meet an individual client's specific information needs. Typically, these
contracts are not cancelable by clients, clients receive no rights in the
comprehensive healthcare database which results from this survey, other than the
right to use the customized reports purchased pursuant thereto, and amounts due
for the Market Guide are billed prior to or at delivery. The Company recognizes
revenue when the Market Guides are delivered to customers pursuant to their
contracts, typically in the third quarter of the year. Substantially all of the
related costs are deferred and subsequently charged to direct expenses
contemporaneously with the recognition of the revenue. The Company generally has
some incidental sales of the Market Guide subsequent to completion of each
edition. Revenues and marginal expenses related to such incidental sales are
recognized upon delivery. The profit margin earned on such revenues is generally
higher than that earned on revenues realized from customers under contract at
the time of delivery. As a result, the Company's margins vary throughout the
year. The Company's revenue recognition policy for the Market Guide is not
sensitive to significant estimates and judgments.
The Company piloted its new renewable syndicated service, the NRC
DoctorGuide, in 2000 and 2001. The NRC DoctorGuide serves as a stand-alone
report card on service quality of individual physicians. The first market was
completed in the fall of 2000, and the second market was completed in the fall
of 2001. The report cards on the individual physicians can be sold to health
plans, employees, and physician management groups, with summary reports
available to the general public via DoctorGuide.com. There were no significant
revenues recognized by the Company in connection with this product during 2001
or 2000.
Valuation of Long-Lived Assets, Identifiable Intangible Assets and
Goodwill
The Company assesses the impairment of long-lived assets, identifiable
intangible assets and goodwill whenever events or changes in circumstances
indicate that the carrying value of such assets may not be recoverable.
Management believes the following circumstances are important indicators of
potential impairment of such assets and as a result they may trigger an
impairment review:
o Significant underperformance in comparison to historical or
projected operating results;
o Significant changes in the manner or use of acquired assets or
the Company's overall strategy;
o Significant negative trends in the Company's industry or the
overall economy;
o A significant decline in the market price for the Company's
common stock for a sustained period; and
11
o The Company's market capitalization falling below the book value
of the Company's net assets.
When the Company determines the carrying value of intangibles and goodwill may
not be recoverable based upon the existence of one or more of the above
indicators of impairment and future estimated (undiscounted) cash flows are not
sufficient to recover the carrying value of those assets, the Company recognizes
an impairment loss equal to the difference between the carrying value of the
assets less their estimated fair value.
In 2002, Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets, became effective, and as a result the Company will
cease the amortization of $9.5 million of goodwill. The Company recorded
$543,000 of amortization expense on these assets during 2001. This goodwill was
amortized using estimated lives of 10 to 20 years. In lieu of amortizing
goodwill, the Company is required to perform an initial impairment review of its
goodwill in 2002 and an annual impairment review thereafter. The Company expects
that it will complete its initial review during the first six months of 2002.
The Company does not expect to recognize an impairment loss upon the completion
of its initial impairment review. However, there can be no assurance that at the
time the review is completed a material impairment loss will not be recognized.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
financial information derived from the Company's financial statements, expressed
as a percentage of total revenues and the percentage change in such items versus
the prior comparable period. 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 Company's financial statements.
Percentage of Total Revenues Percentage Increase
Year Ended December 31, (Decrease)
----------------------------- -------------------
2001 over 2000 over
2001 2000 1999 2000 1999
Revenues 100.0% 100.0% 100.0% (3.5)% 0.7%
Operating expenses:
Direct expenses 45.6 49.8 61.2 (11.6) (18.1)
Selling, general and administrative 28.2 25.1 23.0 8.3 10.2
Depreciation and amortization 10.8 6.9 4.5 50.1 55.3
Cost of closing duplicate facilities and
severance charges - - 2.0 - (100.0)
------ ------ ------ ------ ------
Total operating expenses 84.6 81.8 90.7 (0.02) (9.1)
------ ------ ------ ------ ------
Operating income 15.4% 18.2% 9.3% N/A N/A
====== ====== ====== ====== ======
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Total revenues. Total revenues decreased 3.5% in 2001 to $17.7 million
from $18.3 million in 2000. The decrease was primarily due to $2.1 million of
revenue on lower margin contracts performed for certain customers during 2000
that did not reoccur during 2001. The decrease was partially offset by
additional revenues from the Picker acquisition of approximately $1.0 million,
the addition of new clients and, to a lesser extent, an increase in scope of
work from existing clients.
Direct expenses. Direct expenses decreased 11.6% to $8.1 million in
2001 from $9.1 million in 2000. The decrease in direct expenses in 2001 was due
primarily to decreases in labor and payroll expenses
12
of $1.1 million, telephone expenses of $132,000, rent and maintenance costs of
$130,000, and computer equipment expenses of $119,000. These decreases were
partially offset by increases in printing and postage expense of $244,000 and
fieldwork expenses of $38,000. Direct expenses decreased as a percentage of
total revenues to 45.6% in 2001 from 49.8% during 2000 primarily due to the use
of the new software for creating and processing surveys. Direct expenses as a
percentage of total revenues are expected to increase by about 1% in 2002.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 8.3% to $5 million in 2001 from $4.6 million
in 2000. This increase was primarily due to increases in legal and consulting
fees of $1 million (incurred primarily in connection with the legal proceeding
discussed in Item 3 of this Annual Report on Form 10-K), taxes of $127,000 and
contract services of $117,000. These increases were partially offset by
decreases in salary and benefit expenses of $308,000 and product development
expenses of $135,000. Selling, general and administrative expenses increased as
a percentage of total revenues to 28.2% in 2001 from 25.1% in 2000 mainly due to
legal fees. Excluding legal and consulting fees, selling, general and
administrative expenses were 22.7% of revenues in 2001 and 24.9% of revenues in
2000. Selling, general and administrative expenses as a percentage of total
revenues are expected to decrease in 2002 to around 22%.
Depreciation and amortization. Depreciation and amortization expenses
increased 50.1% to $1.9 million in 2001 from $1.3 million in 2000. The increase
is primarily due to the internal development of software and the May 2001
acquisition of the Picker Institute's healthcare survey business. Depreciation
and amortization expenses increased as a percentage of total revenues to 10.8%
in 2001 from 6.9% in 2000. Depreciation and amortization expenses as a percent
of total revenues are expected to decrease in 2002 back to the 2000 levels,
mainly due to the new accounting rules for amortization of goodwill.
Provision for income taxes. The provision for income taxes totaled $1.0
million (36.4% effective tax rate) for 2001 compared to $1.1 million (29.5%
effective tax rate) for 2000. The effective tax rate was lower in 2000 due to
certain nonrecurring federal income tax credits. The effective tax rate for 2002
is expected to increase to 38%.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Total revenues. Total revenues increased 0.7% in 2000 to $18.3 million
from $18.2 million in 1999 primarily due to the addition of new clients.
Direct expenses. Direct expenses decreased 18.1% to $9.1 million in
2000 from $11.1 million in 1999. The decrease in direct expenses in 2000 was due
primarily to decreases in labor and payroll expenses of $853,000, software
conversion costs of $356,000, printing and postage expenses of $216,000,
contract service expenses of $216,000, fieldwork expenses of $112,000, and, to a
lesser extent, decreases in travel expenses of $54,000, product development
expenses of $48,000, and telephone costs of $47,000. Direct expenses decreased
as a percentage of total revenues to 49.8% in 2000 from 61.2% during 1999
primarily due to the use of the new software for creating and processing
surveys.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 10.2% to $4.6 million in 2000 from $4.2
million in 1999. This increase was primarily due to increases in salary and
benefit expenses of $306,000, product development expenses of $231,000,
marketing costs of $105,000, legal and accounting expenses of $68,000, bad debt
expenses of $44,000, and human resources recruitment expenses of $20,000. These
increases were partially offset by decreases in rent, utilities and repair costs
of $218,000 and contract service expenses of $131,000. Selling, general and
administrative expenses increased as a percentage of total revenues to 25.1% in
2000 from 23.0% in 1999 mainly due to product development charges.
13
Depreciation and amortization. Depreciation and amortization expenses
increased 55.3% to $1.3 million in 2000 from $817,000 in 1999. The increase is
primarily due to the internal development of software and the completion of the
new facilities. Depreciation and amortization expenses increased as a percentage
of total revenues to 6.9% in 2000 from 4.5% in 1999.
Provision for income taxes. The provision for income taxes totaled $1.1
million (29.5% effective tax rate) for 2000 compared to $748,000 (33.6%
effective tax rate) for 1999. The effective tax rate was lower in 2000 due to
certain federal income tax credits.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of funds 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 or
the sales of securities available-for-sale.
As of December 31, 2001, the Company had cash and cash equivalents of
$1.1 million and working capital of $7.3 million.
During 2001, the Company generated $3.1 million of net cash from
operating activities as compared to $2.0 million and $3.5 million of net cash
generated during 2000 and 1999, respectively. The increase in operating cash
flow was due, in part, to an increase in billings in excess of revenues earned,
net of increases in trade accounts receivables and unbilled revenues. The
increase in cash flows was partially offset by a decrease in accounts payable
and accrued expenses, wages and profit sharing, largely due to timing.
Net cash used in investing activities was $5.4 million for 2001, $1.9
million for 2000, and $7.8 million for 1999. The 2001 increase in cash used was
primarily due to the $3.8 million acquisition of the Picker Institute's
healthcare survey business and an investment of $1.5 million for the renovation
of the Company's new building and the purchase of furniture, computer equipment
and software. The 2000 use of cash was primarily a result of an investment of
$6.2 million in the renovation of the Company's new building and the purchase of
furniture, computer equipment and software. These uses of cash were partially
offset by a decrease in investments available-for-sale of $6.9 million. The 1999
use of cash was primarily a result of the purchase and renovation of an office
building for $3.6 million and the purchase of securities available for sale for
$2.9 million. These uses of cash were partially offset by a decrease in cash
used for investment in furniture, computer equipment and software of $600,000.
The Company's investments available-for-sale consist principally of United
States government securities with maturities of two years or less.
Net cash provided by financing activities was $133,000 for 2001,
compared to $1.9 million in 2000 and $533,000 in 1999. The 2001 cash provided
was primarily from the $261,000 of proceeds from issuance of common stock
through the exercise of stock options. The 2000 cash provided was primarily from
additional borrowings of $1.8 million for the financing to renovate the
Company's new office building and the $113,000 proceeds from issuance of common
stock through the exercise of stock options. The 1999 cash provided was
primarily from the $3.5 million construction financing for the renovation of the
Company's new office building and was partially offset by the Company's payment
of the $2,637,000 purchase price for such office building and the Company's
repurchase of 85,700 shares of stock during 1999 at a cost of $343,000.
The Company has budgeted approximately $700,000 for expenditures in
2002 to be funded through cash generated from operations. The Company expects
that capital expenditures during 2002 will be primarily for computer hardware
and software, production equipment and furniture.
14
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 December 31, 2001, 2000 and 1999, the Company had $2.7
million, $1.8 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 December 31, 2001,
2000 and 1999, the Company had $1.7 million, $1.2 million and $600,000 of
unbilled revenues, respectively. Substantially all deferred and unbilled
revenues will be earned and billed, respectively, within 12 months of the
respective period ends.
The Company has obligations to make cash payments in the following
amounts in the future:
Payments Due During
Total -------------------------------------------------
Contractual Obligations Payments 2002 2003-2004 2005-2006 After 2006
----------------------- -------- ---- --------- --------- ----------
Long Term Debt $5,302,069 $132,312 $290,030 $341,866 $4,537,861
Operating Leases 866,851 233,178 410,364 223,309 --
--------- ------- ------- ------- ----------
Total Contractual Cash Obligations $6,168,920 $365,490 $700,394 $565,175 $4,537,861
========== ======== ======== ======== ==========
STOCK REPURCHASE PROGRAM
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 December 31, 2001, 56,700
shares have been repurchased under the new authorization.
ACCOUNTING PRONOUNCEMENTS
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 instrument 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. The
Company had no derivative financial instruments subject to the requirements of
these standards at December 31, 2001.
In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, Business Combinations, which requires all business combinations initiated
after June 30, 2001 to be accounted for using the purchase method.
In June 2001, the Financial Accounting Standards Board also issued SFAS
No. 142, Goodwill and Other Intangible Assets. This statement:
o replaces the requirement to amortize goodwill and certain other
intangible assets with an annual impairment test, and
o requires an evaluation of the useful lives of intangible assets
and an impairment test for goodwill upon adoption.
The provisions of this statement are effective for fiscal years
beginning after December 15, 2001, so the Company must adopt the provisions of
SFAS No. 142 for the quarter ended March 31, 2002.
15
In October 2001, the Financial Accounting Standards Board issued SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The
provisions of this statement are effective for fiscal years beginning after
December 15, 2001, so the Company must adopt the provisions of SFAS No. 144 for
the quarter ended March 31, 2002. The Company does not expect the adoption of
this statement to significantly effect its financial reporting.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The impact of financial market risk exposure to the Company is not
significant. The Company's primary financial market risk exposure consists of
interest rate risk related to interest income from the Company's investments in
United States government securities with maturities of two years or less. The
Company has invested and expects to continue to invest a substantial portion of
its excess cash in such securities. See Note 3 to the Company's financial
statements. Generally, if the overall average return on such securities
decreased .5% from the average return during the year ended December 31, 2001
and 2000, then the Company's interest income would have decreased, and pre-tax
income would have decreased approximately $34,000 and $50,000, respectively.
These amounts were determined by considering the impact of a hypothetical change
in interest rates on the Company's interest income.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected unaudited quarterly financial information for the fiscal years
ended December 31, 2001 and 2000 is as follows (in thousands, except per share
data):
Quarter Ended
------------------------------------------------------------------------------------
Dec. 31, Sept.30, June 30, Mar.31, Dec. 31, Sept. 30, June 30, Mar.31,
2001 2001 2001 2001 2000 2000 2000 2000
Revenues................................. $ 4,111 $ 6,105 $ 3,368 $ 4,090 $ 4,206 $ 5,017 $ 4,638 $ 4,455
Direct expenses.......................... 1,736 2,689 1,658 1,976 1,822 2,449 2,331 2,518
Selling, general and administrative...... 1,468 1,384 1,167 966 1,068 1,212 1,222 1,100
Depreciation and amortization............ 540 509 465 403 316 342 347 264
------- ------- ------- ------- ------- ------- ------- -------
Operating income......................... 367 1,523 78 745 1,000 1,014 738 573
Other income and expenses, net........... (53) (41) (12) 17 29 173 178 151
Provision for income taxes............... 122 550 23 259 287 356 266 230
------- ------- ------- ------- ------- ------- ------- -------
Net income............................... $ 192 $ 932 $ 43 $ 503 $ 742 $ 831 $ 650 $ 494
======= ======= ======= ======= ======= ======= ======= =======
Net income per share-basic and diluted... $ 0.03 $ 0.13 $ 0.01 $ 0.07 $ 0.11 $ 0.12 $ 0.09 $ 0.07
Weighted average shares outstanding
-basic.................................. 7,070 7,057 7,046 7,039 7,032 7,025 7,013 7,006
Weighted average shares outstanding
-diluted................................ 7,102 7,099 7,056 7,058 7,038 7,069 7,062 7,037
16
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
National Research Corporation:
We have audited the accompanying balance sheets of National Research Corporation
as of December 31, 2001 and 2000 and the related statements of income,
shareholders' equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of National Research Corporation
as of December 31, 2001 and 2000 and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America.
KPMG LLP
Lincoln, Nebraska
February 12, 2002, except as to Note 13, which is as of February 21, 2002
17
NATIONAL RESEARCH CORPORATION
BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
Assets 2001 2000
------ ---- ----
Current assets:
Cash and cash equivalents..................................................... $ 1,080,053 $ 3,218,805
Investments in marketable debt securities..................................... 6,636,543 6,577,112
Trade accounts receivable, less allowance for doubtful accounts of $101,674
and $77,276 in 2001 and 2000, respectively................................... 2,141,104 1,713,621
Unbilled revenues............................................................. 1,671,079 1,247,296
Prepaid expenses and other.................................................... 286,653 213,075
Income taxes recoverable...................................................... 266,034 62,833
Deferred income taxes......................................................... 210,452 217,205
----------- -----------
Total current assets..................................................... 12,291,918 13,249,947
Net property and equipment.................................................... 12,907,197 13,218,340
Deferred income taxes......................................................... --- 85,600
Goodwill and other intangible assets, net of accumulated amortization......... 8,539,178 5,057,761
Other......................................................................... 34,099 25,825
----------- -----------
Total assets............................................................. $33,772,392 $31,637,473
=========== ===========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Current portion of notes payable.............................................. $ 132,312 $ 134,518
Accounts payable.............................................................. 1,391,043 1,771,498
Accrued wages, bonus and profit sharing....................................... 494,446 513,254
Accrued expenses.............................................................. 364,642 679,869
Billings in excess of revenues earned......................................... 2,649,370 1,809,090
----------- -----------
Total current liabilities................................................ 5,031,813 4,908,229
Notes payable, net of current portion......................................... 5,169,757 5,295,814
Deferred income taxes......................................................... 217,424 ---
Bonuses, profit sharing accruals and other accrued expenses................... --- 50,999
----------- -----------
Total liabilities........................................................ 10,418,994 10,255,042
----------- -----------
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
7,395,593 in 2001 and 7,332,413 in 2000, outstanding 7,093,893 in 2001
and 7,030,713 in 2000........................................................ 7,395 7,332
Additional paid-in capital.................................................... 17,255,917 16,964,720
Retained earnings............................................................. 7,597,340 5,927,019
Accumulated other comprehensive loss.......................................... (4,185) (13,571)
Treasury stock, at cost; 301,700 shares in 2001 and 301,700 shares in 2000.... (1,503,069) (1,503,069)
----------- -----------
Total shareholders' equity............................................... 23,353,398 21,382,431
----------- -----------
Total liabilities and shareholders' equity............................... $33,772,392 $31,637,473
=========== ===========
See accompanying notes to financial statements.
18
NATIONAL RESEARCH CORPORATION
STATEMENTS OF INCOME
THREE YEARS ENDED DECEMBER 31, 2001
2001 2000 1999
---- ---- ----
Revenues $ 17,673,988 $ 18,316,116 $ 18,184,007
------------ ------------ ------------
Operating expenses:
Direct expenses..................................... 8,059,397 9,119,750 11,133,090
Selling, general and administrative................. 4,985,328 4,602,223 4,177,185
Depreciation and amortization....................... 1,916,740 1,269,535 816,740
Cost of closing duplicate facilities and
severance charges................................... --- --- 363,965
------------ ------------ ------------
Total operating expenses...................... 14,961,465 14,991,508 16,490,980
------------ ------------ ------------
Operating income.............................. 2,712,523 3,324,608 1,693,027
------------ ------------ ------------
Other income (expense):
Interest income..................................... 385,949 661,675 573,460
Interest expense.................................... (454,166) (91,709) (7,706)
Other, net.......................................... (20,351) (38,423) (35,778)
------------ ------------ ------------
Total other income (expense).................. (88,568) 531,543 529,976
------------ ------------ ------------
Income before income taxes.................... 2,623,955 3,856,151 2,223,003
Provision for income taxes............................. 953,634 1,139,424 747,691
------------ ------------ ------------
Net income.................................... $ 1,670,321 $ 2,716,727 $ 1,475,312
============ ============ ============
Net income per share - basic and diluted............... $ 0.24 $ 0.39 $ 0.21
============ ============ ============
See accompanying notes to financial statements.
19
NATIONAL RESEARCH CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
THREE YEARS ENDED DECEMBER 31, 2001
Accumulated
Additional Other
Preferred Common Paid-in Retained Comprehensive Treasury
Stock Stock Capital Earnings Income Stock Total
Balances at December 31, 1998...... $ --- $ 7,305 $ 16,839,839 $ 1,734,980 $ --- $ (1,147,594) $ 17,434,530
Comprehensive income...............
Net income/total comprehensive
income......................... --- --- --- 1,475,312 --- --- 1,475,312
--------- -------- ------------ ----------- ---------- ------------ ------------
Purchase of 85,700 shares of
treasury stock.................... --- --- --- --- --- (343,475) (343,475)
--------- -------- ------------ ----------- ---------- ------------ ------------
Balances at December 31, 1999...... --- 7,305 16,839,839 3,210,292 --- (1,491,069) 18,566,367
Issuance of 27,413 common shares
for the exercise of stock options. --- 27 113,053 --- --- --- 113,080
Tax benefit from the exercise of
options........................... --- --- 11,828 --- --- --- 11,828
Comprehensive income
Other comprehensive loss, net
of income taxes of $5,816...... --- --- --- --- (13,571) --- (13,571)
Net income...................... --- --- --- 2,716,727 --- --- 2,716,727
--------- -------- ------------ ----------- ---------- ------------ ------------
Total comprehensive income......... --- --- --- 2,716,727 (13,571) --- 2,703,156
--------- -------- ------------ ----------- ---------- ------------ ------------
Purchase of 3,000 shares of
treasury stock.................... --- --- --- --- --- (12,000) (12,000)
--------- -------- ------------ ----------- ---------- ------------ ------------
Balances at December 31, 2000...... $ --- $ 7,332 $ 16,964,720 $ 5,927,019 $ (13,571) $ (1,503,069) $ 21,382,431
Issuance of 63,180 common shares
for the exercise of stock options. --- 63 260,998 --- --- --- 261,061
Tax benefit from the exercise of
options........................... --- --- 30,199 --- --- --- 30,199
Comprehensive income
Other comprehensive loss, net
of income taxes of $3,660...... --- --- --- --- 9,386 --- 9,386
Net income...................... --- --- --- 1,670,321 --- --- 1,670,321
--------- -------- ------------ ----------- ---------- ------------ ------------
Total comprehensive income......... --- --- --- 1,670,321 9,386 --- 1,679,707
--------- -------- ------------ ----------- ---------- ------------ ------------
Balances at December 31, 2001...... $ --- $ 7,395 $ 17,255,917 $ 7,597,340 $ (4,185) $ (1,503,069) $ 23,353,398
========= ======== ============ =========== ========== ============ ============
See accompanying notes to financial statements.
20
NATIONAL RESEARCH CORPORATION
STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 2001
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net income $ 1,670,321 $ 2,716,727 $ 1,475,312
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,916,740 1,269,535 816,740
Impairment losses --- --- 230,813
Deferred income taxes 306,117 356,165 117,852
Loss on sale of property and equipment (587) 25,682 22,106
Loss on sale of other investments --- 43 788
Tax benefit of stock options 30,199 11,828 ---
Other non-cash charges 23,313 32,581 25,920
Change in assets and liabilities:
Trade accounts receivable (427,483) 1,204,504 22,232
Unbilled revenues (423,783) (624,686) 407,741
Prepaid expenses and other (85,384) (145,272) 122,300
Accounts payable 103,857 (464,158) 135,326
Accrued expenses, wages and profit sharing (385,035) (585,956) (101,491)
Income taxes payable and recoverable (203,201) (297,366) 234,533
Billings in excess of revenues earned 554,578 (1,464,487) (9,885)
----------- ----------- -----------
Net cash provided by operating activities 3,079,652 2,035,140 3,500,287
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (1,543,286) (6,194,318) (4,904,156)
Acquisition, net of cash acquired (3,762,229) --- ---
Purchases of securities available-for-sale (13,396,039) (12,947,873) (13,028,838)
Proceeds from the maturities of securities available-for-sale 13,349,654 17,227,940 10,160,785
Proceeds from sale of property and equipment 698 27,978 1,000
----------- ----------- -----------
Net cash used in investing activities (5,351,202) (1,886,273) (7,771,209)
----------- ----------- -----------
Cash flows from financing activities:
Borrowings (payments) under line of credit, net --- (3,544,000) 3,544,000
Proceeds from issuance of debt --- 5,440,000 ---
Payments on notes payable (128,263) (76,729) (30,792)
Payment of purchase price payable --- --- (2,636,936)
Proceeds from issuance of common stock 261,061 113,080 ---
Purchase of treasury stock --- (12,000) (343,475)
----------- ----------- -----------
Net cash provided by financing activities 132,798 1,920,351 532,797
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (2,138,752) 2,069,218 (3,738,125)
Cash and cash equivalents at beginning of period 3,218,805 1,149,587 4,887,712
----------- ----------- -----------
Cash and cash equivalents at end of period $ 1,080,053 $ 3,218,805 $ 1,149,587
=========== =========== ===========
See accompanying notes to financial statements.
21
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
National Research Corporation (the "Company") is a provider of ongoing
survey-based performance measurement, analysis and tracking services to the
healthcare industry. The Company provides market research services to hospitals
and insurance companies on an unsecured credit basis. The Company's ten largest
clients accounted for 50%, 41% and 43% of the Company's total revenues in 2001,
2000 and 1999, respectively. One client accounted for 18.7%, 14.6%, and 15.7% of
total revenues in 2001, 2000 and 1999, respectively. A second client accounted
for 11.0%, 12.9% and 10.2% of total revenues in 2001, 2000 and 1999,
respectively. The Company operates in a single industry segment.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company derives a substantial majority of its operating revenues
from its annually renewable services, which include the NRC Listening System
("Performance Tracking Services") and the NRC Healthcare Market Guide
("Renewable Syndicated Service"). Under the NRC Listening System, the Company
provides interim and annual performance tracking to its clients under annual
client service contracts, although such contracts are generally cancelable on
short or no notice without penalty. Through its syndicated NRC Healthcare Market
Guide, the Company publishes healthcare market information to its clients
generally on an annual basis. The Company also derives revenues from custom and
other research projects.
The Company recognizes revenues from its Performance Tracking Services
and its custom and other research projects using the percentage of completion
method of accounting. These services typically include a series of surveys and
deliverable reports in which the timing and frequency vary by contract. Progress
on a contract can be tracked reliably and customers are obligated to pay as
services are performed. The recognized revenue is the percent of estimated total
revenues that incurred costs to date bear to estimated total costs after giving
effect to estimates of costs to complete based upon most recent information.
Losses expected to be incurred on jobs (if any) in progress are charged to
income as soon as such losses are known. Revenues earned on contracts in
progress in excess of billings are classified as a current asset. Amounts billed
in excess of revenues earned are classified as a current liability. Client
projects are generally completed within a twelve-month period.
The Company recognizes revenue on a completed contract basis for its
Renewable Syndicated Service contracts with its principal customers.
Characteristics of these contracts include durations of four to six months,
progress to completion cannot be reasonably defined, and various intermediate
steps in the process overlap in stages of progress for different contracts. The
Company defers direct costs of preparing the survey data for the Renewable
Syndicated Service. The Company recognizes revenues and related direct costs for
its Renewable Syndicated Service upon delivery to its principal customers.
Customers have no obligation to pay for these services until the services are
delivered. The Company generates additional revenues from incidental customers
subsequent to the completion of each edition. Revenues and costs for these
services are recognized as the customization services are performed and
completed.
22
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Major expenditures to
purchase property or to substantially increase useful lives of property are
capitalized. Maintenance, repairs and minor renewals are expensed as incurred.
When assets are retired or otherwise disposed of, their costs and related
accumulated depreciation are removed from the accounts and resulting gains or
losses are included in income.
For costs of software developed for internal use, 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 $913,000,
$596,000 and $1,491,000 of costs incurred for the development of internal use
software for the years ended December 31, 2001, 2000 and 1999, respectively,
with such costs classified as property and equipment. Prior to January 1, 1999,
the Company's accounting policy was to expense as incurred all costs of software
developed for internal use.
The Company provides for depreciation and amortization of property and
equipment using annual rates which are sufficient to amortize the cost of
depreciable assets over their estimated useful lives. The Company uses both
straight-line and accelerated methods of depreciation and amortization over
estimated useful lives of five to ten years for furniture and fixtures, three to
five years for computer equipment, three to four years for capitalized software
and forty years for the Company's new office building.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets, which represent the excess of
purchase price over fair value of net assets acquired, are amortized on a
straight-line basis over the expected periods to be benefited, ten to twenty
years. The Company assesses the recoverability of these intangible assets by
determining whether the amortization of the intangible asset balances over their
remaining life can be recovered through undiscounted future operating cash flows
of the acquired operation. Assets to be disposed of or abandoned are assessed
for recoverability by determining whether the carrying value of the asset is
less than estimated net realizable value.
In June 2001, the Financial Accounting Standards Board also issued SFAS
No. 142, Goodwill and Other Intangible Assets. This statement:
o replaces the requirements to amortize goodwill and certain
other intangible assets with an annual impairment test, and
o requires an evaluation of the useful lives of intangible
assets and an impairment test for goodwill upon adoption.
The provisions of this statement are effective for fiscal years beginning after
December 15, 2001, so the Company must adopt the provisions of SFAS No. 142 for
the quarter ended March 31, 2002.
In 2002, the Company will cease amortization of $9.5 million of
goodwill. Total goodwill amortization expense in 2001 was approximately
$543,000. No goodwill amortization expense will be recorded in 2002. In lieu of
amortizing goodwill, the Company is required to perform an initial impairment
review of goodwill in 2002 and an annual impairment review thereafter. The
company expects to complete its initial review during the first six months of
2002. The Company does not expect to recognize an impairment loss on completion
of its initial impairment review, however, there can be no assurance that at the
time the review is completed a material impairment loss will not be recognized.
23
MARKETABLE SECURITIES
All marketable securities held by the Company at December 31, 2001 and
2000 were classified as available-for-sale and recorded at fair market value.
Unrealized holding gains and losses (if any), net of the related tax effect, on
available-for-sale securities are reported as other comprehensive income or
loss. Realized gains and losses from the sale of available-for-sale securities
are determined on a specific-identification basis. Fair values are estimated
based on quoted market prices.
INCOME TAXES
The Company uses the asset and liability method of accounting for
income taxes. Under that method, deferred income tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases using enacted tax rates. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Valuation allowances, if any, are
established when necessary to reduce deferred tax assets to the amount that is
more likely than not to be realized.
STOCK OPTION PLANS
The Company recognizes stock-based compensation expense for its stock
option plans using the intrinsic value method. Under that method, no
compensation expense is recorded if the exercise price of the employee stock
options equals or exceeds the market price of the underlying stock on the date
of grant. For disclosure purposes, pro forma net income and income per share are
provided as if the fair value method had been applied.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less to be
cash equivalents.
EARNINGS PER SHARE
Net income per share has been calculated and presented for "basic" and
"diluted" per share data. Net income per share is computed by dividing net
income by the weighted average number of common shares outstanding. Diluted
income per share is computed by dividing net income by the weighted average
number of common shares adjusted for the dilutive effects of options and common
equivalent shares outstanding. At December 31, 2001, 2000 and 1999, 72,591,
77,519 and 378,456 options, respectively, have been excluded from the diluted
net income per share computation because their exercise price exceeds the fair
market value.
The weighted average shares outstanding is calculated as follows:
2001 2000 1999
---- ---- ----
Common stock............................. 7,053,245 7,019,097 7,054,487
Dilutive effect of options............... 35,289 5,409 1,936
---------- ---------- ----------
Weighted average shares used for
dilutive per share.................... 7,088,534 7,024,506 7,056,423
========== ========== ==========
There are no reconciling items between the Company's reported net
income and net income used in the computation of basic and diluted income per
share.
24
COMPREHENSIVE INCOME
The Company's only source of other comprehensive income is unrealized
gains or losses on marketable debt securities. Other comprehensive income from
marketable debt securities was not significant for the year ended December 31,
1999.
(2) ACQUISITIONS
On May 7, 2001, the Company acquired the healthcare survey business of
The Picker Institute. The aggregate purchase price for the acquisition was $4.1
million, consisting of cash of $3.2 million, assumed liabilities for uncompleted
customer contracts of $0.3 million and direct costs of acquisition of $0.6
million. The results of the acquired business have been included in the
Company's operating results since the acquisition. The Company allocated the
excess of purchase price over net assets acquired entirely to goodwill until the
valuation is completed and the purchase price is allocated in accordance
therewith. The goodwill was amortized using an estimated useful life of 10 years
for financial reporting purposes during 2001, and is fully deductible over 15
years for income tax purposes.
The following unaudited pro forma information presents the combined
results of operations of the Company as if the acquisition occurred on January
1, 2000. These results included certain adjustments, including amortization of
goodwill and related income tax effects. The pro forma financial information
does not necessarily reflect the results of operations if the acquisitions had
been in effect at the beginning of each period or which may be attained in the
future.
Pro Forma Years
Ended December 31,
---------------------------------------
2001 2000
---- ----
(Dollars in thousands)
(unaudited)
Revenues 18,760 21,574
Net income 1,743 2,161
Earnings per share 0.25 0.31
During 1999, the Company paid $2.6 million of remaining purchase price
payable related to the 1998 acquisition of Healthcare Research Systems, Ltd.
(3) INVESTMENTS IN MARKETABLE DEBT SECURITIES
The amortized cost, gross realized holding gains and losses and fair
value of securities by major security type and class of security at December 31,
2001, were as follows:
Gross Gross
Unrealized Unrealized
Amortized Holding Holding
Cost Gains Losses Fair Value
Debt securities: ----------- ---------- --------- -----------
Obligations of U.S. government agencies $ 6,641,938 $ --- $ (6,341) $ 6,635,597
Other 946 --- --- 946
----------- ---------- --------- -----------
Total $ 6,642,884 $ --- $ (6,341) $ 6,636,543
=========== ========== ========= ===========
25
The amortized cost, gross unrealized holding gains and losses and fair
value by major security type and class of security at December 31, 2000 were as
follows:
Gross Gross
Unrealized Unrealized
Amortized Holding Holding
Cost Gains Losses Fair Value
Debt securities: ----------- ---------- --------- -----------
Obligations of U.S. government agencies $ 6,595,541 $ --- $ (19,387) $ 6,576,154
Other 958 --- --- 958
----------- ---------- --------- -----------
Total $ 6,596,499 $ --- $ (19,387) $ 6,577,112
=========== ========== ========= ===========
There were no sales of marketable securities in advance of scheduled
maturities of available-for-sale marketable debt securities during 2001, 2000 or
1999. The fair value and amortized cost of debt securities at December 31, 2001,
by contractual maturity, are shown below. Expected maturities will differ from
the contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
At December 31, 2001
---------------------------
Fair Amortized
Value Cost
----- ----
Due after three months through one year... $3,197,330 $3,186,170
Due after one year through five years..... 3,438,267 3,455,768
---------- ----------
$6,635,597 $6,641,938
========== ==========
(4) PROPERTY AND EQUIPMENT
At December 31, 2001 and 2000 property and equipment consisted of the
following:
2001 2000
---- ----
Furniture and equipment.........................$ 1,429,032 $1,415,522
Computer equipment and software................. 6,390,505 5,407,782
Building........................................ 7,888,355 7,862,117
Land............................................ 425,000 425,000
---------- ----------
16,132,892 15,110,421
Less accumulated depreciation and amortization.. 3,225,695 1,892,081
----------- ----------
Net property and equipment......................$12,907,197 $13,218,340
=========== ===========
(5) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following at
December 31, 2001 and 2000:
2001 2000
---- ----
Customer lists......................... $ 359,048 $ 359,048
Goodwill............................... 9,465,703 5,417,771
----------- -----------
9,824,751 5,776,819
Less accumulated amortization.......... 1,285,573 719,058
----------- -----------
Net goodwill and intangible assets..... $ 8,539,178 $ 5,057,761
=========== ===========
26
(6) INCOME TAXES
Income tax expense (benefit) consisted of the following components:
Current Deferred Total
2001:
Federal................ $ 573,511 $ 267,808 $ 841,319
State.................. 74,006 38,309 112,315
----------- ----------- ------------
Total............... $ 647,517 $ 306,117 $ 953,634
=========== =========== ============
2000:
Federal................ $ 608,400 $ 310,500 $ 918,900
State.................. 174,859 45,665 220,524
----------- ----------- ------------
Total............... $ 783,259 $ 356,165 $ 1,139,424
=========== =========== ============
1999:
Federal................ $ 523,658 $ 102,767 $ 626,425
State.................. 106,181 15,085 121,266
----------- ----------- ------------
Total............... $ 629,839 $ 117,852 $ 747,691
=========== =========== ============
The difference between the Company's income tax expense as reported in
the accompanying financial statements and that which would be calculated
applying the U.S. Federal income tax rate of 34% on pretax income is as follows:
2001 2000 1999
---- ---- ----
Expected federal income taxes $ 892,100 $ 1,311,100 $ 755,800
State income taxes, net of federal benefit 74,100 153,600 80,100
Tax credits and incentives (2,600) (386,100) (66,000)
Other (9,966) 60,824 (22,209)
--------- ----------- ----------
Total $ 953,634 $ 1,139,424 $ 747,691
========= =========== ==========
Deferred tax assets and liability at December 31, 2001 and 2000, were
comprised of the following:
2001 2000
---- ----
Deferred tax assets:
Allowance for doubtful accounts.............. $ 39,649 $ 30,100
Accrued expenses............................. 170,800 157,800
Bonus and profit sharing accruals............ --- 34,000
Intangible assets............................ 418,800 461,000
Investments available-for-sale............... 2,156 5,816
---------- ----------
Gross deferred tax assets.................. 631,405 688,716
Deferred tax liability:......................
Basis in property and equipment.............. 638,377 385,911
---------- ----------
Net deferred tax assets (liability)........ $ (6,972) $ 302,805
=========== ==========
The Company did not record a valuation allowance for its deferred tax
assets because management believes that it is more likely than not that the
Company will generate sufficient taxable income to fully realize these deferred
tax benefits.
27
(7) NOTES PAYABLE
Notes payable consist of the following:
2001 2000
---- ----
Note payable to US Bank, at 8.25%, payable
in monthly installments of $46,690 including
interest, with final payment of principal and
interest due October 31, 2010, secured by
land and building $5,297,839 $5,410,050
Note payable to National Computer Systems, at
8.50%, payable in monthly installments of
$1,430 including interest, with final payment
of principal and interest due March 1, 2002,
secured by an asset of the Company 4,230 20,282
---------- ---------
Total notes payable 5,302,069 5,430,332
Less current portion 132,312 134,518
---------- ----------
Notes payable, net of current portion $5,169,757 $5,295,814
========== ==========
The aggregate maturities of notes payable for each of the five years
subsequent to December 31, 2001 are: 2002 - $132,312; 2003 - $139,057; 2004 -
$150,973; 2005 - $163,910; and 2006 - $177,956.
(8) STOCK OPTION PLANS
In August 1997, the Board of Directors adopted and the Company's
shareholders approved the National Research Corporation 1997 Equity Incentive
Plan (the " 1997 Equity Incentive Plan"). The 1997 Equity Incentive Plan
provides for the granting of options, stock appreciation rights, restricted
stock and/or performance shares with respect to up to an aggregate of 730,000
shares of the Company's common stock through the date of the Company's annual
meeting of shareholders in the year 2001. Options granted may be either
nonqualified or incentive stock options. Vesting terms vary with each grant, and
option terms are generally five years. At December 31, 2001, there were no
remaining shares available for issuance under the 1997 Equity Incentive Plan.
In October 1997, the Board of Directors adopted and the Company's
shareholders approved the National Research Corporation Director Stock Plan (the
"Director Plan"). As amended in December 1997, the Director Plan provides for
formula grants of nonqualified options to each director of the Company who is
not an employee of the Company. On the date of each annual meeting of
shareholders of the Company, each such director, if reelected or retained as a
director at such meeting, is granted an option to purchase 1,000 shares of the
Company's common stock. Option exercise prices equal the fair market value of
the Company's common stock on the date of grant. Options vest one year following
the date of grant and may be exercisable for a period of up to 10 years
following the date of grant. Options to purchase 2,000 shares of the Company's
common stock were granted in each of 2001, 2000 and 1999. At December 31, 2001,
there were 22,000 shares available for issuance pursuant to future grants under
the Director Plan.
In August 2001, the Board of Directors adopted, subject to the approval
of the Company's shareholders in May 2002, the National Research Corporation
2001 Equity Incentive Plan (the "2001 Equity Incentive Plan"). The 2001 Equity
Incentive Plan provides for the granting of options, stock appreciation rights,
restricted stock and/or performance shares with respect to up to an aggregate of
600,000 shares of the Company's common stock. Options granted may be either
nonqualified or incentive stock options. Vesting terms vary with each grant, and
option terms are generally five years. At December 31, 2001, there were
28
546,363 shares available for issuance pursuant to future grants under the 2001
Equity Incentive Plan. The Company has accounted for grants of 81, 962 options
under the Equity Incentive Plan using the date of grant as the measurement date
for financial accounting purposes. Although grants of options under the plan are
subject to shareholder approval in 2002, shareholder approval is essentially a
formality because management and members of the board control a sufficient
number of votes to approve the plan and management and members of the board
intend to vote to approve the plan in 2002.
Options to purchase shares of common stock have been granted in 2001,
2000 and 1999 with exercise prices equal to the fair value of the common stock
on the date of grant. Accordingly, no compensation expense was recorded for
these grants. Had compensation cost for the stock option grants been determined
using the fair value method, the Company's net income and net income per share
would have been reduced to the pro forma amounts indicated below:
2001 2000 1999
---- ---- ----
(in thousands, except per share amounts)
Pro forma:
Net income, as reported................................... $1,670 $2,717 $1,475
Net income, adjusted for the fair value method............ 1,607 2,687 1,324
Income per share, as reported (1)......................... $0.24 $0.39 $0.21
Income per share, adjusted for the fair value method (1).. 0.23 0.39 0.19
(1) Amounts are the same for both basic and diluted income per share.
As of December 31, 2001, no stock appreciation rights, restricted stock or
performance shares have been granted under the 1997 Equity Incentive Plan or the
2001 Equity Incentive Plan.
The weighted average fair value of options granted in 2001, 2000 and
1999 was $1.97, $2.14 and $1.52, respectively. Pro forma net income reflects the
allocation of compensation cost for stock option grants using the fair value
method. Compensation cost is allocated between periods based upon the vesting
period of the options. Therefore, the full impact of calculating compensation
cost using the fair value method is not reflected in pro forma net income
amounts presented above because compensation cost is amortized to expense over
the vesting period, and additional options may be granted in future years. The
fair value for these options for 2001, 2000 and 1999 was estimated at the date
of grant using the Black-Scholes model with the following assumptions:
2001 2000 1999
---- ---- ----
Expected dividend yield at date of grant..... 0 0 0
Expected stock price volatility.............. 45.0% 45.0% 45.0%
Risk-free interest rate...................... 4.0% 6.0% 6.0%
Expected life of options (in years).......... 3.75 to 5.00 3.75 to 5.00 3.75 to 5.00
29
The following information relates to options to purchase common stock:
Number of Weighted Average
Shares Exercise Price
Balance at December 31, 1998........... 402,630 $6.33
Granted............................ 135,930 3.71
Canceled........................... (89,341) 5.51
---------
Balance at December 31, 1999........... 449,219 5.70
Granted............................ 38,218 4.99
Exercised.......................... (27,413) 4.13
Number of Weighted Average
Shares Exercise Price
Canceled........................... (118,332) 5.26
--------
Balance at December 31, 2000........... 341,692 5.90
Granted............................ 80,197 5.09
Exercised.......................... (63,180) 4.13
Canceled........................... (51,467) 6.51
---------
Balance at December 31, 2001........... 307,242 5.95
========
Exercisable at December 31, 2001....... 226,304 6.27
========
At December 31, 2001, the range of exercise prices for outstanding
stock options was $2.188 to $15.00 and the weighted average remaining
contractual life of outstanding stock options was 2.58 years, of which 197,774
shares are between $3.71 and $5.09.
(9) LEASES
The Company leased office space for a monthly base rental payment plus
maintenance and utilities. Rental expense was $11,067, $276,359 and $401,105
during 2001, 2000 and 1999, respectively, and is included in selling, general
and administrative expenses in the statements of income. During 2000 the Company
moved out of the leased office space and into its own building. The Company also
leases printing equipment and services. The future minimum lease payments under
noncancelable operating leases for each of the five years subsequent to December
31, 2001 are: 2002 - $233,178; 2003 - $205,182; 2004 - $205,182: 2005 - 205,182:
and 2006 - $18,127.
(10) EMPLOYEE BENEFITS
The Company sponsors a qualified defined contribution profit sharing
plan covering substantially all employees with a minimum service of 1,000 hours
and one year of service except for highly compensated employees covered by other
nonqualified profit sharing plans. Employer contributions, which are
discretionary, vest to participants at a rate of 20% per year. No contributions
were made by the Company in 2001, 2000 and 1999.
The Company also sponsors nonqualified profit sharing bonus and
incentive plans for employees and members of executive management of the
Company. Certain bonuses under the executive management incentive plan are paid
over a five-year period. Expense recorded under these plans was $119,279,
$273,793 and $162,458 in 2001, 2000 and 1999, respectively.
30
(11) RESTRUCTURING EXPENSES AND IMPAIRMENT OF ASSETS
During 1999, the Company recorded provisions related to restructuring
expenses and impairments of long-lived assets. The Company's restructuring
activities included the elimination of substantially all of the Company's
Columbus, Ohio work force and the abandonment of duplicative facilities. The
Company's restructuring plan commitments, which were fully completed in 1999,
included the following:
o Severance costs of $104,437 were accrued related to the
termination of fourteen employees at the Company's Columbus, Ohio
location. These employees represent substantially all of the
Company's full-time work force in Columbus, Ohio. These severance
benefits were paid in full during 2000.
o Impairment losses of $230,813 were recorded in 1999 for the
Company's intangible asset, workforce in place, which was
acquired in connection with the Company's 1998 acquisition of
Healthcare Research Systems, Ltd.. The abandonment of this
intangible asset occurred concurrent with management's plans to
eliminate substantially all of its full-time Columbus, Ohio
workforce.
o Impairment losses of $17,428 were recognized in 1999 in
connection with property and equipment abandoned with the
Columbus, Ohio facilities.
o Lease costs of $11,287 were accrued for contractual commitments
on abandoned facilities.
After income taxes, these actions reduced 1999 net income by approximately
$235,000, or $.03 per share.
Management terminated its remaining call center work force in Columbus,
Ohio during 2000. The cost of terminating this remaining workforce was not
significant.
(12) SUPPLEMENTAL CASH FLOW INFORMATION
For the years ended December 31, 2001, 2000 and 1999, the Company paid
interest of $454,250, $417,567 and $62,685, respectively, including capitalized
interest of $0, $325,963 and $54,617, respectively.
For the years ended December 31, 2001, 2000 and 1999, the Company paid
income taxes of $820,519, $1,068,798 and $397,540, respectively.
Accounts payable at December 31, 2001, 2000 and 1999, included $70,958,
$555,270 and $863,216, respectively, for purchases of property and equipment.
In connection with the Company's acquisition of a business during 2001,
the Company assumed unearned revenues of $285,702 for uncompleted customer
contracts.
(13) 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 is also required to pay prejudgment interest of
approximately $64,000. The Company had a liability of $800,000 recorded related
to the acquisition of software. An expense will be recorded by the Company in
2002 related to the prejudgment interest awarded to the plaintiff.
31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to directors and
Section 16 compliance is included under the captions "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance", respectively, in the
Company's definitive Proxy Statement for its 2001 Annual Meeting of Shareholders
("Proxy Statement") and is hereby incorporated herein by reference. Information
with respect to the executive officers of the Company appears in Part I, page 7
of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included under the captions
"Board of Directors-Director Compensation" and "Executive Compensation" in the
Proxy Statement and is hereby incorporated herein by reference; provided,
however, that the subsection entitled "Executive Compensation-Report on
Executive Compensation" shall not be deemed to be incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is included under the caption
"Principal Shareholders" in the Proxy Statement and is hereby incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial statements - The financial statements listed in the
accompanying index to financial statements and financial statement
schedules are filed as part of this Annual Report on Form 10-K.
2. Financial statement schedules - The financial statement schedules
listed in the accompanying index to financial statements and financial
statement schedules are filed as part of this Annual Report on Form
10-K.
3. Exhibits - The exhibits listed in the accompanying index to exhibits
are filed as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K
None.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on this 29th day of
March, 2001.
NATIONAL RESEARCH CORPORATION
By /s/ Michael D. Hays
-------------------------------------
Michael D. Hays
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Michael D. Hays President, Chief Executive Officer March 29, 2002
- ------------------------- and Director (Principal Executive
Michael D. Hays Officer)
/s/ Patrick E. Beans Vice President, Treasurer, Secretary, March 29, 2002
- ------------------------- Chief Financial Officer and Director
Patrick E. Beans (Principal Financial and Accounting
Officer)
/s/ John N. Nunnelly Director March 29, 2002
- -------------------------
John N. Nunnelly
/s/ Paul C. Schorr, III Director March 29, 2002
- -------------------------
Paul C. Schorr, III
/s/ JoAnn M. Martin Director March 29, 2002
- -------------------------
JoAnn M. Martin
33
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULE
Page in this Form 10-K
----------------------
Independent Auditors' Report 17
Balance Sheets as of December 31, 2001 and 2000 18
Statements of Income for each of the years in the
three-year period ended December 31, 2001 19
Statements of Shareholders' Equity and Comprehensive 20
Income for each of the years in the three-year period
ended December 31, 2001
Statements of Cash Flows for each of the three years 21
in the period ended December 31, 2001
Notes to Financial Statements 22-31
Independent Auditors' Report on Financial Statement Schedule 35
Financial Statement Schedule: 36
II - Valuation and Qualifying Accounts
All other financial statement schedules are omitted since the required
information is not present or is not present in amounts sufficient to require
submission of the schedules, or because the information required is included in
the consolidated financial statements and notes thereto.
34
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors
National Research Corporation:
Under date of February 12, 2002, except as to Note 13, which is as of February
21, 2002, we reported on the balance sheets of National Research Corporation as
of December 31, 2001 and 2000, and the related statements of income,
shareholders' equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 2001, which are included in
the Company's Annual Report on Form 10-K. In connection with our audits of the
aforementioned financial statements, we also audited the related financial
statement schedule in the Form 10-K. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG LLP
Lincoln, Nebraska
February 12, 2002
35
NATIONAL RESEARCH CORPORATION
Schedule II -- VALUATION AND QUALIFYING ACCOUNTS
Balance at Write-offs, Balance
Beginning Bad Debt Net of at End
of Year Expense Recoveries of Year
Allowance for doubtful accounts:
Year Ended December 31, 1999..... $61,891 45,000 43,793 63,098
Year Ended December 31, 2000..... $63,098 89,000 74,822 77,276
Year Ended December 31, 2001..... $77,276 65,000 40,602 101,674
See accompanying independent auditors' report.
36
EXHIBIT INDEX
Exhibit
Number Exhibit Description
(3.1) Articles of Incorporation of National Research Corporation, as amended
to date [Incorporated by reference to Exhibit (3.1) to National
Research Corporation's Form S-1 Registration Statement (Registration
No. 333-33273)]
(3.2) By-Laws of National Research Corporation, as amended to date
[Incorporated by reference to Exhibit (3.2) to National Research
Corporation's Form S-1 Registration Statement (Registration No.
333-33273)]
(10.1)* National Research Corporation 1997 Equity Incentive Plan [Incorporated
by reference to Exhibit (10.2) to National Research Corporation's Form
S-1 Registration Statement (Registration No. 333-33273)]
(10.2)* National Research Corporation 2001 Equity Incentive Plan [Incorporated
by reference to National Research Corporation's Proxy Statement for
the 2002 Annual Meeting of Shareholders]
(10.3)* National Research Corporation Director Stock Plan, as amended to date
[Incorporated by reference to Exhibit (10.2) to National Research
Corporation's Form 10-K for the year ended December 31, 1997 (File No.
0-29466)]
(10.4)+ Contract, dated January 23, 2002, between National Research
Corporation and the Department of Veterans Affairs
(23) Consent of KPMG LLP
(99) Proxy Statement for the 2002 Annual Meeting of Shareholders, to be
filed within 120 days of December 31, 2002 [To be filed with the
Securities and Exchange Commission under Regulation 14A within 120
days after December 31, 2001; except to the extent specifically
incorporated by reference, the Proxy Statement for the 2002 Annual
Meeting of Shareholders shall not be deemed to be filed with the
Securities and Exchange Commission as part of this Annual Report on
Form 10-K]
- --------------------
* A management contract or compensatory plan or arrangement.
+ Portions of this exhibit have been redacted and are subject to a
confidential treatment request filed with the Secretary of the Securities
and Exchange Commission pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934, as amended. The redacted material was filed
separately with the Securities and Exchange Commission.
37