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, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number: 0-29466
National Research Corporation
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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. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No |X|
Aggregate market value of the voting stock held by nonaffiliates of the
registrant at June 28, 2002: $15,398,303.
Number of shares of the registrant's common stock outstanding at March 3, 2003:
7,245,110 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2003 Annual Meeting of Shareholders are
incorporated by reference into Part III.
PART 1
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ITEM 1. BUSINESS
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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 21 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 22 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 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 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. In March 2003, the
Company acquired Smaller World Communications Inc., a Toronto, Ontario, Canada
based provider of survey-based performance measurement, analysis and evaluation
to the healthcare industry.
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. 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
2
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 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.
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 changing information
needs, NRC creates personalized questionnaires that evaluate service issues
specific to each respondent's 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
3
over surveying (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.
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. Conducted by
NRC bi-annually from 1988 to 1996 and annually since 1996, the study is the
largest consumer-based assessment of hospitals, health plans and physician
medical care in the healthcare industry representing the views of one in every
600 households across nearly every county in the continental United States. The
Healthcare Market Guide provides name-specific performance information on 3,000
hospitals and 800 health plans nationwide. More than 250 data items relevant to
healthcare payors, providers and purchasers are reported in the study, including
hospital quality and image ratings, product line preferences, hospital selection
factors, health plan market share, household preventative health behaviors,
presence of chronic conditions, and contemporary issues such as alternative
medicine usage and healthcare Internet utilization. Clients can purchase
customized versions specific to their local service areas, with the ability to
benchmark performance results to over 150 metro areas, 48 states or nationally.
The Healthcare Market Guide is delivered to clients via NRC's exclusive
web-based electronic delivery system, called IDEAS, which features easy to use
graphs, charts and various reports formats for multiple users within the clients
organization. Other features of the web-based system include national name
search which 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. Clients who have renewed to multiple years
of the study utilized the system's trending capability which details how the
performance of the healthcare organization changes over time. The proprietary
Healthcare Market Guide data results are also used to produce reports which are
customized to meet the specific information needs of existing clients, as well
as new health care markets beyond the Company's traditional client base.
CLIENTS
The Company's ten largest clients accounted for 51%, 50% and 41% of the
Company's total revenues in 2002, 2001 and 2000, respectively. A new customer,
the U.S. Department of Veterans Affairs, accounted for 18.2% of total revenues
in 2002. In addition, HealthSouth Corporation accounted for 8.1%, 11.0% and
12.9% of the Company's revenues in 2002, 2001 and 2000. Recently, HealthSouth
became the subject of investigations by several U.S. federal government
authorities, including the Department of Justice and the Securities and Exchange
Commission.
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, Alabama, Virginia and, beginning in 2003, Montreal, Canada.
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
4
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.
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
Consumer Choice award program recognizing top-ranking health systems in
approximately 120 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 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, and syndicated Market Guide, 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 depends in part upon its data collection processes,
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
5
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, 2002, the Company employed a total of 88 persons on a
full-time basis. In addition, as of such date, the Company had 93 part-time
associates primarily in its survey operations, representing approximately 65
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, 2003,
regarding the executive officers of the Company:
Name Age Positions
---- --- ---------
Michael D. Hays 48 President, Chief Executive Officer and Director
Jona S. Raasch 44 Vice President and Chief Operations Officer
Joseph W. Carmichael 39 Senior Vice President
Patrick E. Beans 45 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 Corporation.
Joseph W. Carmichael has served as Senior Vice President since May 2002.
Prior to May 2002, Mr. Carmichael held various positions with the Company since
April 1983, most recently as Vice President, Research and Technology, from
December 1997 to May 2002.
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.
6
ITEM 2. PROPERTIES
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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
-----------------
The Company is not subject to any material pending litigation.
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 2002 fiscal year.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
-----------------------------------------------------------------
MATTERS
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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, 2001 through December 31, 2002:
High Low
----- -----
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
First quarter ended March 31, 2002 $9.00 $6.25
Second quarter ended June 30, 2002 $8.00 $6.75
Third quarter ended September 30, 2002 $7.70 $5.85
Fourth quarter ended December 31, 2002 $9.43 $6.02
On March 14, 2003, there were approximately 27 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.
7
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The selected statement of income data for the years ended December 31,
2002, 2001 and 2000 and the balance sheet data at December 31, 2002 and 2001 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, 1999 and
1998 and the balance sheet data at December 31, 2000, 1999 and 1998 are derived
from audited financial statements not included herein.
Year Ended December 31,
---------------------------------------------------------
2002 (1) 2001 2000 1999 1998
-------- ---- ---- ---- ----
(In thousands, except per share data)
Statement of Income Data:
Revenues .......................................... $ 22,387 $ 17,674 $ 18,316 $ 18,184 $ 17,665
Operating expenses:
Direct expenses .................................. 9,556 8,059 9,120 11,133 9,422
Selling, general and administrative .............. 4,737 4,985 4,602 4,177 4,843
Depreciation and amortization .................... 1,675 1,917 1,269 817 426
Acquired-in-process research and development ..... -- -- -- -- 2,737
Cost of closing duplicate facilities and severance
charges ......................................... -- -- -- 364 304
-------- -------- -------- -------- --------
Total operating expenses ..................... 15,968 14,961 14,991 16,491 17,732
Operating income (loss) ........................... 6,419 2,713 3,325 1,693 (67)
Other income (expenses) ........................... (258) (89) 531 530 849
-------- -------- -------- -------- --------
Income before income taxes ........................ 6,161 2,624 3,856 2,223 782
Provision for income taxes ........................ 2,311 954 1,139 748 321
-------- -------- -------- -------- --------
Net income ........................................ $ 3,850 $ 1,670 $ 2,717 $ 1,475 $ 461
======== ======== ======== ======== ========
Net income per share - basic and diluted .......... $ 0.54 $ 0.24 $ 0.39 $ 0.21 $ 0.06
======== ======== ======== ======== ========
Weighted average shares outstanding - basic ....... 7,163 7,053 7,019 7,054 7,283
Weighted average shares outstanding - diluted ..... 7,193 7,089 7,025 7,056 7,301
December 31,
-----------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital ................................... $12,919 $ 7,260 $ 8,342 $ 5,246 $ 8,954
Total assets ...................................... 38,832 33,772 31,637 29,256 26,279
Total debt, including current portion.............. 5,176 5,302 5,430 3,619 105
Total shareholders' equity ........................ 28,018 23,353 21,382 18,566 17,435
___________________________
(1) On January 1, 2002, the Company adopted the provisions of SFAS No. 142,
Goodwill and Other Intangible Assets, and ceased amortizing goodwill and other
non-amortizable intangible assets. If the Company had not amortized goodwill and
other non-amortizable intangible assets during the four years ended December 31,
2001, net income would have been $2.00 million in 2001, $2.89 million in 2000,
$1.66 million in 1999 and $526,000 in 1998.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
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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 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;
o Valuation of long-lived assets; and
o Valuation of goodwill and identifiable intangible assets.
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.
9
Revenues and direct expenses for the Company's renewable performance tracking
services and custom research are recognized on a percentage of completion basis.
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, which effectively is based on output
measures, 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.
Valuation of Long-Lived Assets
In October 2001, the Financial Accounting Standards Board issued SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company
adopted the provisions of SFAS No. 144 effective January 1, 2002. Under this
standard, the Company monitors events and changes in circumstances that may
require the Company to review the carrying value of its long-lived assets. The
Company assesses the recoverability of its long-lived assets based on estimated
undiscounted future operating cash flows. The assessment of the recoverability
of long-lived assets will be impacted if estimated future operating cash flows
are not achieved.
The Company assesses the impairment of long-lived assets 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;
10
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
o The Company's market capitalization falling below the book value of
the Company's net assets.
Valuation of Goodwill and Other Intangible Assets
Goodwill represents the difference between the purchase price paid in
acquisitions, using the purchase method of accounting, and the fair value of the
net assets acquired.
The Company adopted the provisions of SFAS No. 142, Goodwill and Other
Intangible Assets, as of January 1, 2002. As a result of the adoption of this
standard, the Company stopped amortizing goodwill effective January 1, 2002, and
did not record any goodwill amortization expense in the Statement of Income for
the year ended December 31, 2002. Furthermore, the Company will not record such
amortization in future years.
All of the Company's goodwill is allocated to one reporting unit, the
healthcare survey business. During 2002, the Company completed its transitional
evaluation of the recoverability of goodwill as of January 1, 2002, using the
fair value methodology in SFAS No. 142. The Company's analysis did not result in
the recognition of an impairment loss on goodwill as of January 1, 2002.
As of December 31, 2002, the Company has goodwill of $7.9 million. At least
annually (or more frequently as changes in circumstance indicate) the Company
will evaluate the estimated fair value of the Company's goodwill. On these
evaluation dates, to the extent that the carrying value of the net assets of the
Company's reporting unit having goodwill is greater than the estimated fair
value, impairment charges will be recorded.
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.
11
Percentage of Total Revenues Percentage Increase
Year Ended December 31, (Decrease)
----------------------------------------- ---------------------------
2002 over 2001 over
2002 2001 2000 2001 2000
---- ---- ---- ---- ----
Revenues 100.0% 100.0% 100.0% 26.7% (3.5)%
Operating expenses:
Direct expenses 42.7 45.6 49.8 18.6 (11.6)
Selling, general and administrative 21.1 28.2 25.1 (5.0) 8.3
Depreciation and amortization (1) 7.5 10.8 6.9 (12.6) 50.1
----- ----- ----- ----- -----
Total operating expenses 71.3 84.6 81.8 6.7 --
----- ----- ----- ----- -----
Operating income 28.7% 15.4% 18.2% 136.6% (18.4)%
===== ===== ===== ===== -----
_______________
(1) During 2002, the Company adopted the provisions of SFAS No. 142, Goodwill
and Other Intangible Assets, and ceased amortizing goodwill.
YEAR ENDED DECEMBER 31, 2002, COMPARED TO YEAR ENDED DECEMBER 31, 2001
Total revenues. Total revenues increased 26.7% in 2002 to $22.4 million
from $17.7 million in 2001. The increase was primarily due to the addition of
new clients, including a major contract signed in January 2002 with the U.S.
Department of Veteran Affairs.
Direct expenses. Direct expenses increased 18.6% to $9.6 million in 2002
from $8.1 million in 2001. The increase in direct expenses in 2002 was due
primarily to increases in printing and postage expense of $1.3 million,
fieldwork expenses of $374,000, miscellaneous other costs and travel of $81,000,
computer equipment expenses of $74,000, and rent and maintenance costs of
$27,000. These increases were partially offset by decreases in labor and payroll
expenses of $320,000 and telephone expenses of $41,000. Direct expenses
decreased as a percentage of total revenues to 42.7% in 2002 from 45.6% during
2001 primarily due to the use of the new software for creating and processing
surveys. In 2003, direct expenses as a percentage of total revenues are expected
to remain at levels similar to 2002.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased 5.0% to $4.7 million in 2002 from $5.0 million
in 2001. This was primarily due to decreases in legal and consulting fees of
$627,000 (incurred primarily in connection with the legal proceeding discussed
in Item 3 of the Company's Annual Report on Form 10-K for the year ended
December 31, 2001), office expenses of $63,000 and taxes (other than income
taxes) of $11,000. These decreases were partially offset by increases in salary
and benefit expenses of $235,000, marketing expenses of $165,000 and contract
services of $66,000. Selling, general and administrative expenses decreased as a
percentage of total revenues to 21.1% in 2002 from 28.2% in 2001 mainly due to
the reduction in legal fees. In 2003, selling, general and administrative
expenses as a percentage of total revenues are expected to remain at levels
similar to 2002.
Depreciation and amortization. Depreciation and amortization expenses
decreased 12.6% to $1.7 million in 2002 from $1.9 million in 2001. The decrease
is primarily due to the adoption of SFAS No. 142 on January 1, 2002. In
connection with the adoption of SFAS No. 142, the Company ceased amortizing
goodwill and certain other intangible assets. The year 2001 included $500,000
for amortization of certain intangible assets no longer subject to amortization.
The decrease in amortization was partially offset by additional depreciation in
2002 of software, computer equipment and production equipment. Depreciation and
amortization expenses decreased as a percentage of total revenues to 7.5% in
2002 from 10.8% in 2001. Depreciation and amortization expenses as a percent of
total revenues are expected to decrease slightly in 2003 as compared to 2002.
12
Provision for income taxes. The provision for income taxes totaled $2.3
million (37.5% effective tax rate) for 2002 compared to $1.0 million (36.4%
effective tax rate) for 2001. The effective tax rate was lower in 2001 due to
differences in state income taxes.
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. This was due primarily to decreases in labor and
payroll expenses 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.
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 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 the Company's Annual Report on Form 10-K for the year ended December
31, 2001), taxes (other than income 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.
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.
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.
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, 2002, the Company had cash and cash equivalents of
$991,000 and working capital of $12.9 million.
During 2002, the Company generated $4.3 million of net cash from operating
activities as compared to $3.1 million and $2.0 million of net cash generated
during 2001 and 2000, respectively. The increase in operating cash flow was due,
in part, to an increase in billings in excess of revenues earned and an increase
13
in income taxes payable. These increases were partially offset by increases in
trade accounts receivables and unbilled revenues and a decrease in accounts
payable.
Net cash used in investing activities was $4.9 million for 2002, $5.4
million for 2001, and $1.9 million for 2000. The 2002 net cash used in investing
activities was primarily due to the investment of $1.5 million in furniture,
computer equipment, software and production equipment to support the expansion
of the Company's business and an increase of the net purchases of securities
available-for-sale over the proceeds from the maturities of securities of $3.3
million. The 2001 increase in cash used in investing activities 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 $3.3 million. The Company's investments
available-for-sale consist principally of United States government securities
with maturities of three years or less.
Net cash provided by financing activities was $473,000 for 2002, compared
to $133,000 for 2001 and $1.9 million in 2000. The 2002 cash provided was
primarily from the $692,000 of proceeds from issuance of common stock through
the exercise of stock options. 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.
On March 17, 2003, the Company purchased the stock of Smaller World
Communications Inc., a Toronto, Canada based company, for $950,000 in cash, plus
additional contingent consideration, as discussed below. The Company has
budgeted approximately $1,000,000 for additional expenditures in 2003 to be
funded through cash generated from operations. The Company expects that the
additional capital expenditures during 2003 will be primarily for computer
hardware and software, production equipment and furniture.
The Company typically bills clients for performance tracking and custom
research projects before they have been completed. Billed amounts are recorded
as billings in excess of revenues earned, or deferred revenue, on the Company's
financial statements and are recognized as income when earned. As of December
31, 2002 and 2001, the Company had $3.3 million and $2.7 million of deferred
revenues, respectively. In addition, when work is performed in advance of
billing, the Company records this work as revenues earned in excess of billings,
or unbilled revenue. At December 31, 2002 and 2001, the Company had $1.9 million
and $1.7 million of unbilled revenues, respectively. Substantially all deferred
and unbilled revenues will be earned and billed, respectively, within 12 months
of the respective period ends.
As of December 31, 2002, the Company had obligations to make cash payments
in the following amounts in the future:
Payments Due During
Total -----------------------------------------------------
Contractual Obligations Payments 2003-2004 2005-2006 After 2006
----------------------- -------- --------- --------- ----------
Long Term Debt $5,175,997 $280,880 $341,866 $4,553,251
Purchase Obligations (see below) -- -- -- --
Operating Leases 633,673 410,364 223,309 --
---------- -------- -------- ----------
Total Contractual Cash Obligations $5,809,670 $691,244 $565,175 $4,553,251
========== ======== ======== ==========
14
The Company generally does not make unconditional, non-cancelable purchase
commitments. The Company enters into purchase orders in the normal course of
business, but these purchase obligations do not exceed one year.
The purchase price for Smaller World Communications includes two additional
scheduled payments of additional purchase price in 2006 and 2008. The minimum
aggregate payments will be $407,000 and the maximum aggregate payments could be
$1,171,000, based upon certain revenue goals.
STOCK REPURCHASE PROGRAM
In April 1999, the Board of Directors of the Company authorized the
repurchase of an additional 150,000 shares of Common Stock in the open market or
in privately negotiated transitions. As of December 31, 2002, 70,500 shares have
been repurchased under that authorization.
ACCOUNTING PRONOUNCEMENTS
In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires the Company to record the fair value of an
asset retirement obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of tangible long-lived assets.
The Company is required to adopt SFAS No. 143 on January 1, 2003. The Company
has not yet determined the effect of the adoption of SFAS No. 143, but it is not
expected to have a material effect on the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity.
The provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002, with early application encouraged.
The adoption of SFAS No. 146 is not expected to have a material effect on the
Company's financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation -Transition and Disclosure, an amendment of FASB Statement No. 123.
This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to the
financial statements.
In October 2002, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board reached a consensus on the accounting for revenues in
transactions that involve multiple deliverables in EITF Issue 00-21. The
guidance governs how to identify whether goods or services or both, that are to
be delivered separately in a bundled sales arrangement, should be accounted for
separately. This guidance is effective for fiscal years beginning after December
15, 2003, so the Company expects to adopt the guidance in its financial
statements for the quarter ended March 31, 2004. The Company has not yet
determined the impact of this consensus on its financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about
15
its obligations under guarantees issued. The Interpretation also clarifies that
a guarantor is required to recognize, at inception of a guarantee, a liability
for the fair value of the obligation undertaken. The initial recognition and
measurement provisions of the Interpretation are not expected to have any effect
on the Company's financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51. This Interpretation
addresses the consolidation by business enterprises of variable interest
entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. The application of this Interpretation is not
expected to have any effect on the Company's financial statements.
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 three 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, 2002
and 2001, then the Company's interest income would have decreased, and pre-tax
income would have decreased approximately $50,000 and $34,000, 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, 2002 and 2001 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,
2002 2002 2002 2002 2001 2001 2001 2001
---- ---- ---- ---- ---- ---- ---- ----
Revenues ................................. $ 6,222 $ 7,317 $ 4,800 $ 4,048 $ 4,111 $ 6,105 $ 3,368 $ 4,090
Direct expenses .......................... 2,593 3,388 1,780 1,795 1,736 2,689 1,658 1,976
Selling, general and administrative ...... 1,175 1,200 1,088 1,274 1,468 1,384 1,167 966
Depreciation and amortization ............ 451 401 418 405 540 509 465 403
------- ------- ------- ------- ------- ------- ------- -------
Operating income ......................... 2,003 2,328 1,514 574 367 1,523 78 745
Other income (expense) ................... (33) (47) (70) (108) (53) (41) (12) 17
Provision for income taxes ............... 735 854 549 173 122 550 23 259
------- ------- ------- ------- ------- ------- ------- -------
Net income ............................... $ 1,235 $ 1,427 $ 895 $ 293 $ 192 $ 932 $ 43 $ 503
======= ======= ======= ======= ======= ======= ======= =======
Net income per share - basic and diluted . $ 0.17 $ 0.20 $ 0.13 $ 0.04 $ 0.03 $ 0.13 $ 0.01 $ 0.07
Weighted average shares outstanding -basic 7,236 7,176 7,140 7,099 7,070 7,057 7,046 7,039
Weighted average shares outstanding
-diluted ............................... 7,264 7,200 7,194 7,166 7,102 7,099 7,056 7,058
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, 2002 and 2001 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, 2002. 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, 2002 and 2001 and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 1 to the financial statements, the Company adopted the
provisions of SFAS No. 142, Goodwill and Other Intangible Assets, as of January
1, 2002.
KPMG LLP
February 7, 2003
Omaha, Nebraska
17
NATIONAL RESEARCH CORPORATION
Balance Sheets
December 31, 2002 and 2001
Assets 2002 2001
------ ---- ----
Current assets:
Cash and cash equivalents.............................................................. $ 991,217 $ 1,080,053
Investments in marketable debt securities.............................................. 9,986,677 6,636,543
Trade accounts receivable, less allowance for doubtful accounts of $67,320 and
$101,674 in 2002 and 2001, respectively............................................... 4,579,439 2,141,104
Unbilled revenues...................................................................... 1,933,415 1,671,079
Prepaid expenses and other............................................................. 274,112 286,653
Income taxes recoverable............................................................... --- 266,034
Deferred income taxes.................................................................. 183,575 210,452
----------- -----------
Total current assets.............................................................. 17,948,434 12,291,918
Net property and equipment............................................................. 12,345,896 12,907,197
Customer lists, net of accumulated amortization....................................... 607,004 673,741
Goodwill, net of accumulated amortization............................................. 7,888,714 7,865,437
Other.................................................................................. 41,923 34,099
----------- -----------
Total assets...................................................................... $38,831,971 $33,772,392
=========== ===========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Current portion of notes payable....................................................... $ 131,907 $ 132,312
Accounts payable....................................................................... 565,540 1,391,043
Accrued wages, bonus and profit sharing................................................ 632,837 494,446
Accrued expenses....................................................................... 366,943 364,642
Income taxes payable................................................................... 55,558 ---
Billings in excess of revenues earned.................................................. 3,276,813 2,649,370
----------- -----------
Total current liabilities......................................................... 5,029,598 5,031,813
Notes payable, net of current portion.................................................. 5,044,090 5,169,757
Deferred income taxes.................................................................. 740,008 217,424
----------- -----------
Total liabilities................................................................. 10,813,696 10,418,994
----------- -----------
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 7,560,610 in 2002
and 7,395,593 in 2001, outstanding 7,245,110 in 2002 and 7,093,893 in 2001............ 7,561 7,395
Additional paid-in capital............................................................. 18,123,603 17,255,917
Retained earnings...................................................................... 11,447,443 7,597,340
Accumulated other comprehensive income (loss), net of taxes............................ 35,371 (4,185)
Treasury stock, at cost; 315,500 shares in 2002 and 301,700 shares in 2001............. (1,595,703) (1,503,069)
----------- -----------
Total shareholders' equity........................................................ 28,018,275 23,353,398
----------- -----------
Total liabilities and shareholders' equity........................................ $38,831,971 $33,772,392
=========== ===========
See accompanying notes to financial statements.
18
NATIONAL RESEARCH CORPORATION
Statements of Income
Three years ended December 31, 2002
2002 2001 2000
---- ---- ----
Revenues............................................... $ 22,387,401 $ 17,673,988 $ 18,316,116
------------ ------------ ------------
Operating expenses:
Direct expenses..................................... 9,555,677 8,059,397 9,119,750
Selling, general and administrative................. 4,737,880 4,985,328 4,602,223
Depreciation and amortization....................... 1,674,856 1,916,740 1,269,535
------------ ------------ ------------
Total operating expenses...................... 15,968,413 14,961,465 14,991,508
------------ ------------ ------------
Operating income.............................. 6,418,988 2,712,523 3,324,608
------------ ------------ ------------
Other income (expense):
Interest income..................................... 257,922 385,949 661,675
Interest expense.................................... (450,104) (454,166) (91,709)
Other, net.......................................... (65,460) (20,351) (38,423)
------------ ------------ ------------
Total other income (expense).................. (257,642) (88,568) 531,543
------------ ------------ ------------
Income before income taxes.................... 6,161,346 2,623,955 3,856,151
Provision for income taxes............................. 2,311,243 953,634 1,139,424
Net income.................................... $ 3,850,103 $ 1,670,321 $ 2,716,727
============ ============ ============
Net income per share - basic and diluted............... $ 0.54 $ 0.24 $ 0.39
============ ============ ============
See accompanying notes to financial statements.
19
NATIONAL RESEARCH CORPORATION
Statements of Shareholders' Equity
and Comprehensive Income
Three years ended December 31, 2002
Accumulated
Additional Other
Preferred Common Paid-in Retained Comprehensive Treasury
Stock Stock Capital Earnings Income Stock Total
----- ----- ------- -------- ------ ----- -----
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 income, 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
----- ------ ----------- ----------- -------- ----------- -----------
Purchase of 13,800 shares of
treasury stock ................... -- -- -- -- -- (92,634) (92,634)
Issuance of 165,017 common shares
for the exercise of stock options -- 166 691,672 -- -- -- 691,838
Tax benefit from the exercise of
options .......................... -- -- 176,014 -- -- -- 176,014
Comprehensive income
Other comprehensive income, net
of income taxes of $20,378 .... -- -- -- -- 39,556 -- 39,556
Net income ..................... -- -- -- 3,850,103 -- -- 3,850,103
----- ------ ----------- ----------- -------- ----------- -----------
Total comprehensive income ........ -- -- -- 3,850,103 39,556 -- 3,889,569
----- ------ ----------- ----------- -------- ----------- -----------
Balances at December 31, 2002 ..... $ -- $7,561 $18,123,603 $11,447,443 $ 35,371 $(1,595,703) $28,018,275
===== ====== =========== =========== ======== =========== ===========
See accompanying notes to financial statements.
20
NATIONAL RESEARCH CORPORATION
Statements of Cash Flows
Three years ended December 31, 2002
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net income................................................... $ 3,850,103 $ 1,670,321 $ 2,716,727
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................. 1,674,856 1,916,740 1,269,535
Deferred income taxes...................................... 529,083 306,117 356,165
Gain (loss) on sale of property and equipment.............. (1,420) (587) 25,682
Gain (loss) on sale of other investments................... (86) --- 43
Tax benefit from exercise of stock options................ 176,014 30,199 11,828
Other non-cash charges..................................... --- 23,313 32,581
Change in assets and liabilities:
Trade accounts receivable................................ (2,438,335) (427,483) 1,204,504
Unbilled revenues........................................ (262,336) (423,783) (624,686)
Prepaid expenses and other............................... 25,123 (85,384) (145,272)
Accounts payable......................................... (356,345) 103,857 (464,158)
Accrued expenses, wages, bonus and profit sharing........ 138,391 (385,035) (585,956)
Income taxes payable and recoverable..................... 321,592 (203,201) (297,366)
Billings in excess of revenues earned.................... 627,443 554,578 (1,464,487)
------------ ------------ ------------
Net cash provided by operating activities............. 4,284,083 3,079,652 2,035,140
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment.......................... (1,534,080) (1,543,286) (6,194,318)
Acquisition, net of cash acquired............................ (23,277) (3,762,229) ---
Purchases of securities available-for-sale................... (10,802,926) (13,396,039) (12,947,873)
Proceeds from the maturities of securities available-for-sale 7,512,812 13,349,654 17,227,940
Proceeds from sale of property and equipment................. 1,420 698 27,978
------------ ------------ ------------
Net cash used in investing activities........................... (4,846,051) (5,351,202) (1,886,273)
------------ ------------ ------------
Cash flows from financing activities:
Payments under line of credit, net........................... --- --- (3,544,000)
Proceeds from issuance of debt............................... --- --- 5,440,000
Payments on notes payable.................................... (126,072) (128,263) (76,729)
Proceeds from exercise of stock options...................... 691,838 261,061 113,080
Purchase of treasury stock................................... (92,634) --- (12,000)
------------ ------------ ------------
Net cash provided by financing activities....................... 473,132 132,798 1,920,351
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents............ (88,836) (2,138,752) 2,069,218
Cash and cash equivalents at beginning of period................ 1,080,053 3,218,805 1,149,587
------------ ------------ ------------
Cash and cash equivalents at end of period...................... $ 991,217 $ 1,080,053 $ 3,218,805
============ ============ ============
Supplemental disclosures of noncash investing activities:
Accounts payable included $210,335 in 2001 for purchase of property and equipment.
In connection with the Company's acquisition of a business in 2001, the Company assumed unearned revenues of
$0.3 million for uncompleted customer contracts.
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 51%, 50% and 41% of the Company's total revenues in 2002,
2001 and 2000, respectively. One client accounted for 18.2% of total revenues in
2002. A second client accounted for 18.7% and 14.6% of total revenues in 2001
and 2000, respectively. A third client accounted for 11.0% and 12.9% of total
revenues in 2001 and 2000, 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 for 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 the most recent information.
Losses expected to be incurred, if any, on jobs 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 $372,000,
$913,000 and $596,000 of costs incurred for the development of internal use
software for the years ended December 31, 2002, 2001 and 2000, respectively,
with such costs classified as property and equipment.
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 five years for capitalized software
and forty years for the Company's new office building.
IMPAIRMENT OF LONG-LIVED ASSETS
In October 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. The Company adopted the provisions
of SFAS No. 144 effective January 1, 2002. Under this standard, the Company
monitors events and changes in circumstances that may require the Company to
review the carrying value of its long-lived assets. The Company assesses the
recoverability of its long-lived assets based on estimated undiscounted future
operating cash flows. The assessment of the recoverability of long-lived assets
will be impacted if estimated future operating cash flows are not achieved.
The Company assesses the impairment of long-lived assets 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
o The Company's market capitalization falling below the book value of
the Company's net assets.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the difference between the purchase price paid in
acquisitions, using the purchase method of accounting, and the fair value of the
net assets acquired.
23
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. This statement replaced the requirement to amortize goodwill and certain
other intangible assets with an annual impairment test, and required an
evaluation of the useful lives of intangible assets and an impairment test for
goodwill upon adoption.
The Company adopted the provisions of SFAS No. 142 as of January 1, 2002.
As a result of the adoption of this standard, the Company stopped amortizing
goodwill effective January 1, 2002, therefore, the Company has not recorded any
goodwill amortization expense in the Statement of Income for the year ended
December 31, 2002 and will not record such amortization in future years.
All of the Company's goodwill is allocated to one reporting unit, the
healthcare survey business. During 2002, the Company completed its transitional
evaluation of the recoverability of goodwill as of January 1, 2002, using the
fair value methodology in SFAS No. 142. The Company's analysis did not result in
the recognition of an impairment loss on goodwill as of January 1, 2002.
As of December 31, 2002, the Company has goodwill of $7.9 million. At least
annually (or more frequently as changes in circumstance indicate) the Company
will evaluate the estimated fair value of its goodwill. On these evaluation
dates, to the extent that the carrying value of the net assets of the Company's
reporting unit having goodwill greater than the estimated fair value, impairment
charges will be recorded.
Total amortization expense of goodwill was $-0-, $518,000, $274,000 during
the years ended 2002, 2001 and 2000 respectively. The following is the 2002,
2001 and 2000 statement of income data, adjusted as if SFAS No. 142 had been
effective as of January 1, 2000:
2002 2001 2000
---- ---- ----
Reported net income.................................. $ 3,850,104 $ 1,670,321 $ 2,716,727
Amortization of goodwill, net of taxes............... -- 329,854 173,007
-------------- ---------------- ---------------
Adjusted net income.................................. $ 3,850,104 $ 2,000,175 $ 2,889,734
============== ================ ===============
Reported net income per share........................ $0.54 $0.24 $0.39
Amortization of goodwill, net of taxes............... -- $0.05 $0.02
-------------- ---------------- ---------------
Adjusted net income per share........................ $0.54 $0.29 $0.41
============== ================ ===============
MARKETABLE SECURITIES
All marketable securities held by the Company at December 31, 2002 and 2001
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.
24
STOCK OPTION PLANS
The Company recognizes stock-based compensation expense for its stock
option plans using the intrinsic value method prescribed by Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations to account for its fixed-plan stock options. Under
this method, compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. SFAS
No. 123, Accounting for Stock-Based Compensation, established accounting and
disclosure requirements using a fair-value-based method of accounting for
stock-based employee compensation plans. As allowed by SFAS No. 123, the Company
has elected to continue to apply the intrinsic-value-based method of accounting.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation -Transition and Disclosure, an amendment of FASB Statement No. 123.
This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to the
financial statements. The following table illustrates the effect on net income
if the fair-value-based method had been applied to all outstanding and unvested
awards in each period:
2002 2001 2000
---- ---- ----
(in thousands, except per share amounts)
Pro forma:
Net income, as reported............................................ $3,850 $1,670 $2,717
Net income, adjusted for the fair value method..................... $3,796 $1,607 $2,687
Income per share, as reported (1).................................. $0.54 $0.24 $0.39
Income per share, adjusted for the fair value method (1)........... $0.53 $0.23 $0.39
(1) Amounts are the same for both basic and diluted income per share.
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, 2002, 2001 and 2000, the Company
had 2,000, 72,591 and 77,519 options, respectively, which 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:
25
2002 2001 2000
---- ---- -----
Common stock............................................ 7,163,194 7,053,245 7,019,097
Dilutive effect of options.............................. 29,853 35,289 5,409
--------- --------- ---------
Weighted average shares used for dilutive
per share............................................ 7,193,047 7,088,534 7,024,506
========= ========= =========
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.
COMPREHENSIVE INCOME
The Company's only source of other comprehensive income is unrealized gains
or losses on marketable debt securities.
RECLASSIFICATIONS
Certain prior-period amounts have been reclassified to conform to the 2002
presentation. These reclassifications did not affect net income for the periods
presented.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires the Company to record the fair value of an
asset retirement obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of tangible long-lived assets.
The Company is required to adopt SFAS No. 143 on January 1, 2003. The Company
has not yet determined the effect of the adoption of SFAS No. 143, but it is not
expected to have a material effect on the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity.
The provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002, with early application encouraged.
The adoption of SFAS No. 146 is not expected to have a material effect on the
Company's financial statements.
In October 2002, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board reached a consensus on the accounting for revenues in
transactions that involve multiple deliverables in EITF Issue 00-21. The
guidance governs how to identify whether goods or services or both, that are to
be delivered separately in a bundled sales arrangement, should be accounted for
separately. This guidance is effective for fiscal years beginning after December
15, 2003, so the Company expects to adopt the guidance in its financial
statements for the quarter ended March 31, 2004. The Company has not yet
determined the impact of this consensus on its financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are not expected to have any effect on the Company's financial
statements.
26
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51. This Interpretation
addresses the consolidation by business enterprises of variable interest
entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. The application of this Interpretation is not
expected to have any effect on the Company's financial statements.
(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. Prior to
2002, the goodwill was amortized using an estimated useful life of 10 years for
financial reporting purposes. The goodwill is being amortized over 15 years and
is fully deductible 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
(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, 2002,
were as follows:
Gross Gross
Unrealized Unrealized
Amortized Holding Holding
Cost Gains Losses Fair Value
--------- ---------- ----------- ----------
Debt securities:
Obligations of U.S. government agencies $ 9,933,084 $ 53,593 $ --- $ 9,986,677
------------ ------------ ------------ ------------
Total.................................... $ 9,933,084 $ 53,593 $ --- $ 9,986,677
============ ============ ============ ============
27
The amortized cost, gross unrealized holding gains and losses and fair
value 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 $ 6,642,884 $ --- $ (6,341) $ 6,636,543
------------ ------------ ------------ ------------
Total.................................... $ 6,642,884 $ --- $ (6,341) $ 6,636,543
============ ============ ============ ============
There were no sales of marketable securities in advance of scheduled
maturities of available-for-sale marketable debt securities during 2002, 2001 or
2000. The fair value and amortized cost of debt securities at December 31, 2002,
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, 2002
-----------------------------------------------
Fair Amortized
Value Cost
----- ----------
Due after three months through one year.................. $2,614,650 $2,608,584
Due after one year through five years.................... 7,372,017 7,324,500
---------- ----------
$9,986,667 $9,933,084
========== ==========
(4) PROPERTY AND EQUIPMENT
----------------------
At December 31, 2002 and 2001, property and equipment consisted of the
following:
2002 2001
---- ----
Furniture and equipment................................... $ 1,534,047 $ 1,429,032
Computer equipment and software........................... 7,314,006 6,390,505
Building.................................................. 7,919,793 7,888,355
Land...................................................... 425,000 425,000
----------- -----------
17,192,846 16,132,892
Less accumulated depreciation and amortization............ 4,846,950 3,225,695
----------- -----------
Net property and equipment................................ $12,345,896 $12,907,197
=========== ===========
28
(5) GOODWILL AND OTHER INTANGIBLE ASSETS
------------------------------------
Goodwill and other intangible assets consist of the following at December
31, 2002 and 2001:
2002 2001
---- ----
Customer lists...................................... $ 787,048 $ 787,048
Less accumulated amortization....................... 180,044 113,307
----------- -----------
Net customer lists 607,004 673,741
----------- -----------
Goodwill............................................ 9,060,980 9,037,703
Less accumulated amortization....................... 1,172,266 1,172,266
----------- -----------
Net goodwill..................................... 7,888,714 7,865,437
----------- -----------
Total net goodwill and intangible assets............ $ 8,495,718 $ 8,539,178
=========== ===========
The following represents a summary of changes in the Company's carrying
amount of goodwill for the year ended December 31, 2002:
Balance as of January 1,...................... $7,865,437
Impairment loss............................... --
Other......................................... 23,277
----------
Balance as of December 31,.......................... $7,888,714
==========
Aggregate amortization expense for customer lists for the year ended
December 31, 2002 was $67,000. Estimated amortization expense for the next five
years is $67,000 per year. In addition, the weighted average amortization period
for customer lists is 12.28 years.
(6) INCOME TAXES
------------
Income tax expense consisted of the following components:
Current Deferred Total
------- -------- -----
2002:
Federal.............................. $ 1,511,603 $ 453,133 $1,964,736
State................................ 270,557 75,950 346,507
----------- ----------- ----------
Total............................. $ 1,782,160 $ 529,083 $2,311,243
=========== =========== ==========
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
=========== =========== ==========
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:
29
2002 2001 2000
---- ---- ----
Expected federal income taxes............................ $2,094,900 $ 892,100 $1,311,100
State income taxes, net of federal benefit............... 228,700 74,100 153,600
Tax credits and incentives............................... (3,100) (2,600) (386,100)
Other.................................................... (9,257) (9,966) 60,824
---------- --------- ----------
Total.................................................... $2,311,243 $ 953,634 $1,139,424
========== ========= ==========
Deferred tax assets and liabilities at December 31, 2002 and 2001, were
comprised of the following:
2002 2001
---- ----
Deferred tax assets:
Allowance for doubtful accounts......................... $ 26,255 $ 39,649
Accrued expenses........................................ 168,319 170,800
Intangible assets....................................... 145,956 418,800
Investments available-for-sale.......................... -- 2,156
---------- ----------
Gross deferred tax assets............................. 340,530 631,405
Deferred tax liabilities:
Investments available-for-sale.......................... 18,222 --
Basis in property and equipment......................... 878,741 638,377
---------- ----------
Gross deferred tax liabilities........................ 896,963 638,377
---------- ----------
Net deferred tax liabilities............................ $ (556,433) $ (6,972)
========== ==========
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.
(7) NOTES PAYABLE
-------------
Notes payable consist of the following:
2002 2001
---- ----
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............................... $ 5,175,997 $ 5,297,839
Other note payable............................................ --- 4,230
------------ ------------
Total notes payable........................................... 5,175,997 5,302,069
Less current portion.......................................... 131,907 132,312
------------ ------------
Notes payable, net of current portion......................... $ 5,044,090 $ 5,169,757
============ ============
The aggregate maturities of notes payable for each of the five years
subsequent to December 31, 2002 are: 2003 - $131,907; 2004 - $150,973; 2005 -
$163,910; 2006 - $177,956; and 2007 - $193,155.
(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, 2002, there were no remaining shares
available for issuance under the 1997 Equity Incentive Plan.
30
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 employed by the Company. On the date of each annual meeting of shareholders
of the Company, each such director, if re-elected 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 3,000, 2,000 and 2,000 shares of the
Company's common stock were granted in 2002, 2001 and 2000, respectively. At
December 31, 2002, there were 19,000 shares available for issuance pursuant to
future grants under the Director Plan.
In August 2001, the Board of Directors adopted, and, on May 1, 2002, the
Company's shareholders approved, 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, 2002, there were 490,925 shares
available for issuance pursuant to future grants under the 2001 Equity Incentive
Plan. The Company has accounted for grants of 113,187 options under the Equity
Incentive Plan using the date of grant as the measurement date for financial
accounting purposes.
Options to purchase shares of common stock have been granted in 2002, 2001
and 2000 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.
As of December 31, 2002, 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 2002, 2001 and 2000
was $2.61, $1.97 and $2.14, respectively. Pro forma net income displayed in Note
1 reflects the allocation of compensation cost for stock option grants using the
fair value method. Compensation cost is allocated between periods based upon the
vesting period of the options. Therefore, the full impact of calculating
compensation cost using the fair value method is not reflected in pro forma net
income amounts displayed in Note 1, because compensation cost is amortized to
expense over the vesting period, and additional options may be granted in future
years. The fair value for these options for 2002, 2001 and 2000 was estimated at
the date of grant using the Black-Scholes model with the following assumptions:
2002 2001 2000
---- ---- ----
Expected dividend yield at date of grant........... 0 0 0
Expected stock price volatility.................... 45.0% 45.0% 45.0%
Risk-free interest rate............................ 3.2% 4.0% 6.0%
Expected life of options (in years)................ 3.75 to 5.00 3.75 to 5.00 3.75 to 5.00
31
The following information relates to options to purchase common stock:
Weighted Average
Number of Shares Exercise Price ($)
------------------- -------------------------
Balance at December 31, 1999........................... 449,219 5.70
Granted............................................ 38,218 4.99
Exercised.......................................... (27,413) 4.13
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
Granted............................................ 55,438 6.87
Exercised.......................................... (165,017) 4.19
Canceled........................................... (38,145) 12.70
---------
Balance at December 31, 2002........................... 159,518 5.36
=========
Exercisable at December 31, 2002....................... 79,276 4.50
=========
At December 31, 2002, the range of exercise prices for outstanding stock
options was $2.19 to $7.60 and the weighted average remaining contractual life
of outstanding stock options was 3.25 years, of which 49,850 shares are between
$4.99 and $6.87.
(9) LEASES
------
The Company previously leased office space for a monthly base rental
payment plus maintenance and utilities. Rental expense was $3,000, $11,067 and
$276,359 during 2002, 2001 and 2000, 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, 2002 are: 2003 - $205,182; 2004 - $205,182; 2005 -
$205,182; 2006 - $18,127; and 2007 - $-0-.
(10) ASSOCIATE BENEFITS
------------------
The Company sponsors a qualified defined contribution profit sharing plan
covering substantially all associates with a minimum service of 1,000 hours.
Employer contributions, which are discretionary, vest to participants at a rate
of 20% per year. No contributions were made by the Company in 2002, 2001 and
2000.
The Company also sponsors nonqualified profit sharing bonus and incentive
plans for associates and members of executive management of the Company. Expense
recorded under these plans was $102,084, $119,279 and $273,793 in 2002, 2001 and
2000, respectively.
32
(11) SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
For the years ended December 31, 2002, 2001 and 2000, the Company paid
interest of $450,104, $454,250 and $417,567, respectively, including capitalized
interest of $0, $0 and $325,963, respectively.
For the years ended December 31, 2002, 2001 and 2000, the Company paid
income taxes of $1,284,554, $820,519 and $1,068,798, respectively.
Accounts payable at December 31, 2002, 2001 and 2000, included $0, $210,335
and $555,270, 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.
(12) 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. This was paid during 2002 and the Company also paid prejudgment
interest of approximately $64,000.
(13) SUBSEQUENT EVENT
----------------
On March 17, 2003, the Company acquired the business of Smaller World
Communications Inc, based in Toronto, Canada, through an acquisition of all of
the outstanding shares of stock. Consideration paid by the Company at closing
included a cash payment of $950,000. The Company estimates its direct
acquisition costs to be $75,000.
The purchase price also includes two additional scheduled payments of
additional purchase price in 2006 and 2008. The minimum aggregate payments will
be $407,000 and the maximum aggregate payments could be $1,171,000, based upon
certain revenue goals.
33
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 2002 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 6
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 AND
------------------------------------------------------------------
RELATED SHAREHOLDER MATTERS
---------------------------
The information required by this Item with respect to security ownership of
certain beneficial owners and management is included under the caption
"Principal Shareholders" in the Proxy Statement and is hereby incorporated by
reference.
The following table sets forth information with respect to compensation
plans under which equity securities of the Company are authorized for issuance
as of December 31, 2002.
Number of securities
Number of securities to remaining available for
be issued upon the Weighted-average future issuance under equity
exercise of outstanding exercise price of compensation plans
options, warrants and outstanding options, (excluding securities
Plan Category rights warrants and rights reflected in the first column)
------------- ------------------------ -------------------- ------------------------------
Equity compensation plans
approved by security
holders(1) 159,518 $4.50 509,925
Equity compensation plans
not approved by security
holders -- -- --
------- ----- -------
Total 159,518 $4.50 509,925
======= ===== =======
(1) Includes the Company's 2001 Equity Incentive Plan, 1997 Equity Incentive Plan and Director Stock Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
None.
34
ITEM 14. CONTROLS AND PROCEDURES
-----------------------
(a) Based on their evaluation as of a date within 90 days of the filing of
this Annual Report on Form 10-K, the Company's principal executive officer and
principal financial officer have concluded that the Company's disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934 (the "Exchange Act")) are effective to ensure
that information required to be disclosed by the Company in reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms.
(b) No significant changes were made in the Company's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation.
ITEM 15. 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 schedule - The financial statement
schedule listed in the accompanying index to financial
statements and financial statement schedule is 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.
35
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 31st day of
March, 2003.
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 and Director March 31, 2003
- ------------------------------- (Principal Executive Officer)
Michael D. Hays
/s/ Patrick E. Beans Vice President, Treasurer, Secretary, Chief March 31, 2003
- ------------------------------- Financial Officer and Director (Principal Financial
Patrick E. Beans and Accounting Officer)
/s/ John N. Nunnelly Director March 31, 2003
- -------------------------------
John N. Nunnelly
/s/ Paul C. Schorr III Director March 31, 2003
- -------------------------------
Paul C. Schorr III
/s/ JoAnn M. Martin Director March 31, 2003
- -------------------------------
JoAnn M. Martin
36
CERTIFICATIONS
I, Michael D. Hays, certify that:
1. I have reviewed this annual report on Form 10-K of National Research
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003 /s/ Michael D. Hays
---------------------------------------
Michael D. Hays
President and Chief Executive Officer
37
I, Patrick E. Beans, certify that:
1. I have reviewed this annual report on Form 10-K of National Research
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003 /s/ Patrick E. Beans
-----------------------------------------
Patrick E. Beans
Vice President, Treasurer and Chief
Financial Officer
38
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULE
Page in this Form 10-K
----------------------
Independent Auditors' Report 17
Balance Sheets as of December 31, 2002 and 2001 18
Statements of Income for each of the years in the three-year period 19
ended December 31, 2002
Statements of Shareholders' Equity and Comprehensive Income for each of 20
the years in the three-year period ended December 31, 2002
Statements of Cash Flows for each of the years 21
in the three-year period ended December 31, 2002
Notes to Financial Statements 22-33
Independent Auditors' Report on Financial Statement Schedule 40
Financial Statement Schedule: 41
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.
39
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors
National Research Corporation:
Under date of February 7, 2003, we reported on the balance sheets of National
Research Corporation as of December 31, 2002 and 2001, 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, 2002,
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 of valuation and qualifying accounts 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.
As discussed in Note 1 to the financial statements, the Company adopted the
provisions of SFAS No. 142, Goodwill and Other Intangible Assets, as of January
1, 2002.
KPMG LLP
February 7, 2003
Omaha, Nebraska
40
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, 2000................. $ 63,098 $89,000 $74,822 $ 77,276
Year Ended December 31, 2001................. $ 77,276 $65,000 $40,602 $ 101,674
Year Ended December 31, 2002................. $ 101,674 $26,200 $60,554 $ 67,320
See accompanying independent auditors' report.
41
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 Registration Statement on Form S-1
(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 Registration Statement on Form S-1 (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
Registration Statement on Form S-1 (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, filed with the Securities and
Exchange Commission on April 3, 2002 (File No. 0-29466)]
(10.3)* National Research Corporation Director Stock Plan, as amended to date
[Incorporated by reference to Exhibit (10.2) to National Research
Corporation's Annual Report on 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 [Incorporated by
reference to Exhibit (10.4) to National Research Corporation's Annual
Report on Form 10-K for the year ended December 31, 2001 (File No.
0-29466)]
(23) Independent Auditors' Consent
(99.1) Certification of the President and Chief Executive Officer pursuant to
18 U.S.C. Section 1350
(99.2) Certification of the Vice President, Treasurer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350
(99.3) Proxy Statement for the 2003 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, 2002; except to the extent specifically
incorporated by reference, the Proxy Statement for the 2003 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.
42