UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 0-29466
National Research Corporation
-----------------------------
(Exact name of Registrant as specified in its charter)
Wisconsin 47-0634000
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1245 "Q" Street, Lincoln Nebraska 68508
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(Address of principal executive offices) (Zip Code)
(402) 475-2525
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.001 par value, outstanding as of August 1, 2003: 7,296,688
- --------------------------------------------------------------------------
shares
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NATIONAL RESEARCH CORPORATION
FORM 10-Q INDEX
For the Quarter Ended June 30, 2003
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets 3
Consolidated Condensed Statements of Income 4
Consolidated Condensed Statements of Cash Flows 5
Notes to Consolidated Condensed Financial Statements 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 13
Item 4. Controls and Procedures 13-14
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibit Index 17
-2-
PART I - Financial Information
ITEM 1. Financial Statements
--------------------
NATIONAL RESEARCH CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, December 31,
2003 2002
--------------- ---------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 2,698,477 $ 991,217
Investments in marketable debt securities 11,089,291 9,986,677
Trade accounts receivable, less allowance for doubtful
accounts of $80,087 and $67,320 in 2003 and 2002, 4,127,266 4,579,439
respectively
Unbilled revenues 1,174,647 1,933,415
Prepaid expenses and other 1,437,036 274,111
Income taxes recoverable 60,009 ---
Deferred income taxes 221,727 183,575
--------------- ---------------
Total current assets 20,808,453 17,948,434
--------------- ---------------
Net property and equipment 12,398,429 12,345,896
--------------- ---------------
Customer relationships, net of accumulated amortization 796,148 607,004
Goodwill, net of accumulated amortization 9,109,860 7,888,714
Other 45,654 41,923
--------------- ---------------
Total assets $ 43,158,544 $ 38,831,971
=============== ===============
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of notes payable $ 136,286 $ 131,907
Accounts payable 640,224 565,540
Accrued wages, bonuses and profit sharing 819,822 632,837
Accrued expenses 396,215 366,943
Income taxes payable 125,944 55,558
Billings in excess of revenues earned 4,834,033 3,276,813
--------------- ---------------
Total current liabilities 6,952,524 5,029,598
Notes payable, net of current portion 4,973,108 5,044,090
Deferred income taxes 883,787 740,008
Other long-term liabilities 445,620 ---
--------------- ---------------
Total liabilities 13,255,039 10,813,696
--------------- ---------------
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 7,609,679 in 2003 and 7,560,610 in 2002,
outstanding 7,294,179 in 2003 and 7,245,110 in 2002 7,608 7,561
Additional paid-in capital 18,589,713 18,123,603
Retained earnings 13,276,029 11,447,443
Unearned compensation (408,221) -
Accumulated other comprehensive income, net of taxes 34,079 35,371
Treasury stock, at cost; 315,500 shares in 2003 and 2002 (1,595,703) (1,595,703)
--------------- ---------------
Total shareholders' equity 29,903,505 28,018,275
--------------- ---------------
Total liabilities and shareholders' equity $ 43,158,544 $ 38,831,971
=============== ===============
See accompanying notes to consolidated condensed financial statements.
-3-
NATIONAL RESEARCH CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three months ended Six months ended
June 30, June 30,
---------------------------------- ---------------------------------
2003 2002 2003 2002
--------------- ---------------- ---------------- ---------------
Revenues $ 6,128,692 $ 4,799,653 $ 12,186,559 $ 8,848,280
--------------- ---------------- ---------------- ---------------
Operating expenses:
Direct expenses 2,667,675 1,779,618 5,483,370 3,574,222
Selling, general and administrative 1,532,973 1,088,291 2,817,156 2,361,831
Depreciation and amortization 482,242 417,678 927,938 822,356
--------------- ---------------- ---------------- ---------------
Total operating expenses 4,682,890 3,285,587 9,228,464 6,758,409
--------------- ---------------- ---------------- ---------------
Operating income 1,445,802 1,514,066 2,958,095 2,089,871
Other income (expense):
Interest income 68,141 61,095 136,969 124,885
Interest expense (107,013) (125,867) (213,538) (231,376)
Other, net 39,037 (5,111) 43,233 (71,554)
--------------- ---------------- ---------------- ---------------
Total other income (expense) 165 (69,883) (33,336) (178,045)
--------------- ---------------- ---------------- ---------------
Income before income taxes 1,445,967 1,444,183 2,924,759 1,911,826
Provision for income taxes 537,976 548,789 1,096,173 722,031
--------------- ---------------- ---------------- ---------------
Net income $ 907,991 $ 895,394 $ 1,828,586 $ 1,189,795
=============== ================ ================ ===============
Net income per share--basic $ .13 $ .13 $ .25 $ .17
=============== ================ ================ ===============
Net income per share--diluted $ .12 $ .12 $ .25 $ .17
=============== ================ ================ ===============
Weighted average shares and share equivalents
outstanding--basic 7,255,662 7,139,946 7,252,339 7,119,803
=============== ================ ================ ===============
Weighted average shares and share equivalents
outstanding--diluted 7,302,614 7,193,515 7,298,085 7,173,372
=============== ================ ================ ===============
See accompanying notes to consolidated condensed financial statements.
-4-
NATIONAL RESEARCH CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended
June 30,
--------------------------
2003 2002
Cash flows from operating activities:
Net income $ 1,828,586 $ 1,189,795
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 927,938 822,356
Deferred income taxes 105,233 133,167
Gain on sale of property and equipment -- (1,420)
Loss on sale of other investments -- (18)
Net changes in assets and liabilities:
Trade accounts receivable 628,166 (196,559)
Unbilled revenues 787,557 (348,257)
Prepaid expenses and other (1,145,202) (614,546)
Accounts payable 22,684 (362,096)
Accrued expenses, wages, bonuses and profit sharing 86,026 105,419
Income taxes recoverable and payable (2,048) 698,107
Billings in excess of revenues earned 1,540,069 850,324
----------- -----------
Net cash provided by operating activities 4,779,009 2,276,272
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (936,047) (960,014)
Proceeds from sale of property and equipment -- 1,420
Acquisition, net of cash acquired (996,888) --
Purchases of securities available-for-sale (5,956,924) (3,816,042)
Proceeds from the maturities of securities available-for-sale 4,858,454 3,042,487
----------- -----------
Net cash used in investing activities (3,031,405) (1,732,149)
----------- -----------
Cash flows from financing activities:
Payments on notes payable (66,603) (55,073)
Proceeds from exercise of stock options 57,936 300,876
----------- -----------
Net cash (used in) provided by financing activities (8,667) 245,803
----------- -----------
Effect of exchange rate changes on cash: (31,677) --
Net increase in cash and cash equivalents 1,707,260 789,926
Cash and cash equivalents at beginning of period 991,217 1,080,053
----------- -----------
Cash and cash equivalents at end of period $ 2,698,477 $ 1,869,979
=========== ===========
Supplemental disclosure of cash paid for:
Interest expense $ 213,538 $ 194,034
=========== ===========
Income taxes $ 991,531 $ 1,410
=========== ===========
Supplemental disclosures of noncash activities:
In connection with the Company's acquisition of a business in March 2003, the
Company acquired current assets of $171,635 and assumed current liabilities of
$164,294.
See accompanying notes to consolidated condensed financial statements.
-5-
NATIONAL RESEARCH CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL REPORTING
The consolidated condensed balance sheet of National Research Corporation (the
"Company") at December 31, 2002 was derived from the Company's audited balance
sheet as of that date. All other financial statements contained herein are
unaudited and, in the opinion of management, include all adjustments (consisting
only of normal recurring adjustments) the Company considers necessary for a fair
presentation of financial position, results of operations and cash flows in
accordance with accounting principles generally accepted in the United States of
America.
Information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted. These consolidated
condensed financial statements should be read in conjunction with the financial
statements and notes thereto that are included in the Company's Form 10-K for
the fiscal year ended December 31, 2002, filed with the Securities and Exchange
Commission in March 2003.
The consolidated condensed financial statements include the accounts of National
Research Corporation, and its wholly-owned subsidiaries National Research
Corporation Canada and Smaller World Communications Inc. All significant
intercompany transactions and balances have been eliminated.
The functional currency of the Company's foreign subsidiaries are those
subsidiaries' local currencies. The Company translates the assets and
liabilities of foreign subsidiaries at the period-end rate of exchange, and
income statement items at the average rate prevailing during the period. The
Company records the resulting translation adjustment as a component of
shareholders' equity.
2. COMPREHENSIVE INCOME
Other than its net income, the Company's other sources of comprehensive income
(loss) are unrealized gains or losses on marketable debt securities and foreign
currency translation adjustments. Other comprehensive gain (loss) from
marketable debt securities and foreign currency translation adjustments was
($1,292) and $16,371 for the six-month periods ended June 30, 2003 and 2002,
respectively.
3. ACQUISITION
On March 17, 2003, the Company acquired 100% of the outstanding common shares of
Smaller World Communications Inc. ("SWC"), based in Toronto, Canada. The results
of SWC's operations have been included in the consolidated condensed financial
statements since the effective date of March 1, 2003. SWC is a provider of
performance measurement services for healthcare organizations in Canada. As a
result of the acquisition, the Company is expected to be able to accelerate its
expansion in Canada. The aggregate minimum purchase price was $1,361,000, of
which $950,000 was paid at closing. The purchase price also includes two
additional scheduled payments in 2006 and 2008. The minimum aggregate payments
of $407,000 have been recorded
-6-
as other long-term liabilities, and the maximum aggregate payments could be
$1,171,000, based upon certain revenue goals. The Company estimates it direct
acquisition costs to be $85,000.
The following table summarizes the estimated fair value of the assets acquired
and liabilities assumed at the date of acquisition. The Company is still in the
process of finalizing the valuations of certain assets; thus, the allocation of
the purchase price is subject to refinement:
Fair Value
----------
Current assets $ 171,635
Customer relationships 217,863
Goodwill 1,221,146
----------
Total acquired assets 1,610,644
Less total liabilities 164,294
----------
Net assets acquired $1,446,350
==========
Customer relationships are being amortized over the five year term of the
Ontario Health Association contract.
The results of operations from this acquisition have been included in the
consolidated condensed statements of income from the date of the acquisition.
The following unaudited pro forma information for the Company has been prepared
as if this acquisition had occurred on January 1, 2002. The information is based
on the historical results of the separate companies, and may not necessarily be
indicative of the results that could have been achieved, or of results that may
occur in the future.
Three months ended Six months Ended
June 30, June 30,
---------------------- ---------------------
2003 2002 2003 2002
---------------------- ---------------------
(dollars in thousands, except per share amounts)
Revenues $6,128 $4,937.00 $12,376 $9,124.00
Net income $ 908 $ 880.00 $ 1,829 $1,158.00
Net income per share -basic $ 0.13 $ 0.12 $ 0.25 $ 0.16
Net income per share -diluted $ 0.12 $ 0.12 $ 0.25 $ 0.16
4. STOCK OPTION PLANS AND RESTRICTED STOCK
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. Statement of
Financial Accounting Standards ("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.
-7-
In December 2002, the Financial Accounting Standards Board issued SFAS No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosure, an
amendment of FASB Statement No. 123. SFAS No. 148 amends SFAS No. 123 to provide
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements. The following table
illustrates the effect on net income if the fair-value-based method had been
applied to all outstanding awards in each period.
Three months ended Six months ended
June 30, June 30,
---------------- ---------------
2003 2002 2003 2002
---------------- ---------------
(in thousands, except per share amounts)
Pro forma:
Net income, as reported $ 908 $ 895 $1,829 $1,190
Less: stock based compensation expense $ 15 $ 14 $ 43 $ 29
Net income, adjusted for the fair value method $ 893 $ 881 $1,786 $1,161
Income per share - basic, as reported $0.13 $0.13 $ 0.25 $ 0.17
Income per share- basic, adjusted for the fair value method $0.12 $0.12 $ 0.25 $ 0.16
Income per share - diluted, as reported $0.12 $0.12 $ 0.25 $ 0.17
Income per share- diluted, adjusted for the fair value method $0.12 $0.12 $ 0.24 $ 0.16
In June 2003, the Company granted 37,111 restricted shares of common stock under
the 2001 Equity Incentive Plan. These shares were awarded at a value of $11.00
per share on the date of grant. The applicable compensation expense will be
recognized by the Company over the next five years based on the vesting period
of the restricted stock. The unearned compensation is reflected in the
accompanying consolidated balance sheet as a component of shareholders' equity.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following at June 30, 2003
and December 31, 2002:
2003 2002
---- ----
Customer relationships $ 1,025,455 $ 787,048
Less accumulated amortization 229,307 180,044
------------ ------------
Net customer relationships 796,148 607,004
------------ ------------
Goodwill 10,282,126 9,060,980
Less accumulated amortization 1,172,266 1,172,266
------------ ------------
Net goodwill 9,109,860 7,888,714
------------ ------------
Total net goodwill and intangible assets $ 9,906,008 $ 8,495,718
============ ============
The following represents a summary of changes in the Company's carrying amount
of net goodwill for the six months ended June 30, 2003:
-8-
Balance as of January 1, 2003 $ 7,888,714
Impairment loss --
Additions - acquisition 1,221,146
------------
Balance as of June 30, 2003 $ 9,109,860
============
6. EARNINGS PER SHARE
Net income per share has been calculated and presented for "basic" and "diluted"
data. "Basic" net income per share is computed by dividing net income by the
weighted average number of common shares outstanding, whereas "diluted" net
income per share is computed by dividing net income by the weighted average
number of common shares outstanding adjusted for the dilutive effects of options
and restricted stock. For the income statement periods presented, -0- and 42,053
options, have been excluded from the diluted net income per share computations
for 2003 and 2002 respectively, because their exercise price exceeds the fair
market value.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
Results of Operations
The following table sets forth, for the periods indicated, selected financial
information derived from the Company's consolidated condensed financial
statements, expressed as a percentage of total revenues. The trends illustrated
in the following table may not necessarily be indicative of future results. The
discussion that follows the table should be read in conjunction with the
consolidated condensed financial statements.
Percentage of Total Revenues
-----------------------------------------------------
Three months ended Six months Ended
June 30, June 30,
-----------------------------------------------------
2003 2002 2003 2002
-----------------------------------------------------
Revenues: 100.0% 100.0% 100.0% 100.0%
===================== =====================
Operating expenses:
Direct expenses 43.5 37.1 45.0 40.4
Selling, general and administrative 25.0 22.7 23.1 26.7
Depreciation and amortization 7.9 8.7 7.6 9.3
--------------------- ---------------------
Total operating expenses: 76.4 68.5 75.7 76.4
--------------------- ---------------------
Operating income 23.6% 31.5% 24.3% 23.6%
===================== =====================
Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002
Total revenues. Total revenues for the three-month period ended June 30, 2003
were $6.1 million compared to $4.8 million in the three month period ended June
30, 2002. The second quarter
-9-
revenue increased 27.7% compared to the prior year. The increase was primarily
due to the addition of new clients, including a major contract signed in March
2003 with the Ontario Hospital Association which added revenue of $796,000 for
the three-month period ended June 30, 2003. The balance of the increase is a
number of annual contracts signed over the last twelve months.
Direct expenses. Direct expenses increased 49.9% to $2,668,000 in the
three-month period ended June 30, 2003 from $1,780,000 in the same period during
2002. The increase in direct expenses in the 2003 period was primarily due to
the incremental costs of servicing additional clients. The increases were in
printing and postage expenses of $471,000, in labor and payroll expenses of
$393,000, and in travel and dues expenses of $30,000. The increases were
partially offset by decreases in fieldwork and fees of $18,000. Direct expenses
increased as a percentage of total revenues to 43.5% in the three month period
ended June 30, 2003 from 37.1% during the same period of 2002. The increase in
direct expense percentage in 2003 was partially due to the events relating to
HealthSouth during the quarter and, to a greater extent, the mix of services
provided during the periods, with 2002 expenses as a percentage of revenue being
lower than usual.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 40.9% to $1,533,000 for the three-month period
ended June 30, 2003 compared to $1,088,000 for the same period in 2002. The net
increase was primarily due to increases in marketing expenses of $68,000, salary
and benefit expenses of $264,000, recording of bad debt expenses of $100,000,
utilities of $39,000, and contract services and office expenses of $36,000.
These increases were partially offset by a decrease in legal and consulting fees
of $76,000 relating to the resolution of a lawsuit in 2002. Selling, general,
and administrative expenses increased as a percentage of total revenues to 25.0%
for the three month period ended June 30, 2003 from 22.7% for the same period in
2002 due partially to the increase in bad debt expense.
Depreciation and amortization. Depreciation and amortization expenses increased
to $482,000 in the three-month period ended June 30, 2003 from $418,000 in the
same period of 2002. Depreciation and amortization expenses as a percentage of
total revenues decreased to 7.9% in the three-month period ended June 30, 2003,
from 8.7% in the same period of 2002.
Other income (expense). Other income (expense) was under $1,000 in the
three-month period ended June 30, 2003 compared to ($70,000) in the same period
of 2002. The change was due to the recording in 2002 of $64,000 of prejudgment
interest related to the lawsuit resolved during the first quarter of 2002.
Provision for income taxes. The provision for income taxes totaled $538,000
(37.2% effective tax rate) for the three-month period ended June 30, 2003 as
compared to $549,000 (38.0% effective tax rate) for the same period in 2002. The
effective tax rate was lower in 2003 due to differences in state income taxes.
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
Total revenues. Total revenues increased 37.7% in the six month period ended
June 30, 2003 to $12.2 million from $8.8 million in the six month period ended
June 30, 2002. The increase was
-10-
primarily due to the addition of new clients, including the U.S. Department of
Veteran Affairs signed in January 2002, which was not fully implemented until
the end of the first quarter of 2002, and the Ontario Hospital Association,
which added revenue of over $930,000 during the first six months of 2003, and,
to a lesser extent, by an increase in scope of work from existing clients.
Direct expenses. Direct expenses increased 53.4% to $5.5 million in the
six-month period ended June 30, 2003 from $3.6 million in the same period during
2002. The increase in direct expenses in the 2003 period was primarily due to
the incremental costs of servicing additional clients. The increases were in
printing and postage expenses of $893,000, in labor and payroll expenses of
$644,000, fieldwork and fees of $322,000, in travel and dues expenses of $25,000
and utilities of $24,000. Direct expenses increased as a percentage of total
revenues to 45.0% in the six-month period ended June 30, 2003 from 40.4% during
the same period of 2002. The Company expects that direct expenses as a
percentage of total revenues for the balance of 2003 to increase slightly during
the third quarter of 2003 due to the delivery of the Healthcare Market Guide,
but will decrease during the fourth quarter and be in line with the expected
annual margin.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 19.3% to $2.8 million for the six-month period
ended June 30, 2003 from $2.4 million for the same period in 2002. The net
increase was primarily due to increases in salary and benefit expenses of
$352,000, marketing expenses of $205,000, recording of bad debt expenses of
$100,000, and utilities of $58,000. These increases were partially offset by a
decrease in legal and consulting fees of $260,000 relating to the resolution of
a lawsuit in 2002. Selling, general, and administrative expenses as a percentage
of total revenues decreased to 23.1% for the six month period ended June 30,
2003 from 26.7% for the same period in 2002 primarily due to the decrease in
legal fees. For the balance of 2003, the Company expects selling, general and
administrative expenses as a percentage of total revenues to decrease and remain
at levels similar to the first quarter of 2003.
Depreciation and amortization. Depreciation and amortization expenses increased
12.8% to $928,000 in the six-month period ended June 30, 2003 from $822,000 in
the same period of 2002. The increase is primarily due to the the additional
depreciation of software, computer equipment and production equipment.
Depreciation and amortization expenses as a percentage of total revenues
decreased to 7.6% in the six-month period ended June 30, 2003 from 9.3% in the
same period of 2002. The Company expects depreciation and amortization as a
percentage of revenue to decrease slightly during 2003.
Other income (expense). Other income and expense decreased to $(33,000) in the
six-month period ended June 30, 2003 from $(178,000) in the same period of 2002.
The decrease was partially due to the recording of $64,000 of prejudgment
interest related to the lawsuit resolved in 2002.
Provision for income taxes. The provision for income taxes totaled $1.1 million
(37.5% effective tax rate) for the six-month period ended June 30, 2003 as
compared to $722,000 (37.8% effective tax rate) for the same period in 2002. The
effective tax rate was lower in 2003 due to differences in state income taxes.
For the balance of 2003, the Company expects the effective tax rate to range
between 37% and 38%.
-11-
Liquidity and Capital Resources
The Company's principal source of funds historically has been cash flows from
its operations. The Company's cash flow has been sufficient to provide funds for
working capital and capital expenditures, other than expenditures related to the
Company's building, which were paid, in part, from the proceeds of borrowings
and the sale of securities available-for-sale.
As of June 30, 2003, the Company had cash and cash equivalents of $2.7 million
and working capital of $13.9 million.
During the six months ended June 2003, the Company generated $4.8 million of net
cash from operating activities as compared to $2.3 million of net cash generated
during the same period in the prior year. The increase in cash flows was due to
a higher net income and due to increases in billings in excess of revenues
earned, increases in accounts payable and decreases in trade accounts
receivables and unbilled revenues, totaling $3.7 million. This increase in cash
flows was offset by increases in prepaid expenses and decreases in taxes payable
totaling $1.2 million.
For the six months ended June 30, 2003, net cash used in investing activities
was $3.0 million as compared to $1.7 million during the same period in the prior
year. The 2003 increase in cash used in investing activities was primarily due
to the $997,000 acquisition in March 2003 of Smaller World Communications Inc.,
a Toronto, Canada based company. In addition, cash used in investing activities
increased due to an increase of the net of purchases of securities
available-for-sale over the proceeds from the maturities of securities of
$325,000.
Net cash used by financing activities was $9,000 for the six months ended June
30, 2003, as compared to net cash provided of $246,000 for the six months ended
June 30, 2002. The decrease in cash provided by financing activities during 2003
was primarily due to a decrease in the amount of proceeds from exercise of stock
options.
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 June 30,
2003 and December 31, 2002, the Company had $4.8 million and $3.3 million of
deferred revenues, respectively. In addition, when work is performed in advance
of billing, the Company records this work as revenues earned in excess of
billings, or unbilled revenue. At June 30, 2003 and December 31, 2002, the
Company had $1.2 million and $1.9 million of unbilled revenue, respectively.
Substantially all deferred revenues earned and unbilled revenues will be earned
and billed, respectively, within 12 months of the respective period ends.
-12-
Stock Repurchase Program
In April 1999, the Board of Directors of the Company authorized the repurchase
of 150,000 shares of Common Stock in the open market or in privately negotiated
transactions. As of August 1, 2003, 70,500 shares have been repurchased under
that authorization.
In July 2003, the Board of Directors of the Company authorized the repurchase of
500,000 shares of Common Stock in the open market or in privately negotiated
transactions. As of August 1, 2003, no shares have been repurchased under that
authorization.
Restricted Stock
In June 2003, the Company granted 37,111 restricted shares of common stock under
the 2001 Equity Incentive Plan. These shares were awarded at a value of $11.00
per share on the date of grant. The applicable compensation expense will be
recognized by the Company over the next five years based on the vesting period
of the restricted stock. The unearned compensation is reflected in the
accompanying consolidated balance sheet as a component of shareholders' equity.
Accounting Pronouncements
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" "SFAS No. 149." SFAS No. 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities "SFAS No. 133". Except for the
provisions of SFAS No. 149 that relate to SFAS No. 133 implementation issues
that have been effective for fiscal quarters that began prior to June 15, 2003,
SFAS No. 149 is effective for contracts entered into or modified after June 30,
2003 and for hedging relationships designated after June 30, 2003. The adoption
of SFAS No. 149 is not expected to have a material effect on the Company's
financial statements.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" "SFAS No. 150".
SFAS No 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS No. 150 is effective for all financial instruments entered into or
modified after May 31, 2003. For unmodified financial instruments existing at
May 31, 2003, Statement 150 is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of SFAS No. 150 is not
expected to have a material effect on the Company's financial statements.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The Company has not experienced any material changes in its market risk
exposures since December 31, 2002.
ITEM 4. Controls and Procedures
-----------------------
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The Company's management, with the participation of the Company's principal
executive officer and principal financial officer, has evaluated the Company's
disclosure controls and procedures as of June 30, 2003. Based on that
evaluation, the Company's principal executive officer and principal financial
officer have concluded that the Company's disclosure controls and procedures
were effective to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
There was no significant change in the Company's internal control over financial
reporting that occurred during the three months ended June 30, 2003, that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
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PART II - Other Information
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company held its annual meeting of shareholders on May 1, 2003. At such
meeting, Michael D. Hays and John N. Nunnelly were reelected as directors of the
Company for terms to expire at the 2006 annual meeting of shareholders and until
their successors are duly elected and qualified pursuant to the following votes:
Michael D. Hays -- 7,224,531 shares voted for, 7,200 shares withholding
authority, 0 abstentions and 0 broker non-votes, and John N. Nunnelly --
7,231,681 shares voted for, 50 shares withholding authority, 0 abstentions and 0
broker non-votes. The other directors of the Company whose terms of office
continued after the 2003 annual meeting of shareholders are as follows: term
expiring at the 2004 meeting - Patrick E. Beans; and terms expiring at the 2005
meeting - JoAnn M. Martin and Paul C. Schorr III.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
(31.1) Certification by the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2) Certification by the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1) Certification of Periodic Financial Report by the Chief
Executive Officer and Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
-------------------
1. The Company furnished a Current Report on Form 8-K, dated April 29,
2003, reporting (under Items 7 and 9) the Company's first quarter
earnings and related conference call.
2. The Company filed a Current Report on Form 8-K, dated June 11,
2003, reporting (under items 5 and 7) a modification of its contract
with HealthSouth Corporation and a revised earnings guidance for the
second quarter of 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL RESEARCH CORPORATION
Date: August 15, 2003 By: /s/ Michael D. Hays
-----------------------------------------
Michael D. Hays
President and Chief Executive Officer
Date: August 15, 2003 By: /s/ Patrick E. Beans
-----------------------------------------
Patrick E. Beans
Vice President, Treasurer, Secretary and
Chief Financial Officer (Principal
Financial and Accounting Officer)
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NATIONAL RESEARCH CORPORATION
EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the Quarterly Period ended June 30, 2003
Exhibit
-------
(31.1) Certification by the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2) Certification by the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1) Certification of Periodic Financial Report by the Chief
Executive Officer and Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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