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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 September 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
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(Exact name of Registrant as specified in its charter)
Wisconsin 47-0634000
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1245 "Q" Street, Lincoln Nebraska 68508
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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 November 7, 2003: 7,310,756
shares
NATIONAL RESEARCH CORPORATION
FORM 10-Q INDEX
For the Quarter Ended September 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 5-6
Notes to Consolidated Condensed Financial Statements 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 14
Item 4. Controls and Procedures 14-15
PART II. OTHER INFORMATION
Item 5. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit Index 18
2
PART I - Financial Information
ITEM 1. Financial Statements
--------------------
NATIONAL RESEARCH CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, December 31,
2003 2002
------------- ------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 3,946,721 $ 991,217
Investments in marketable debt securities 12,155,150 9,986,677
Trade accounts receivable, less allowance for doubtful
accounts of $83,892 and $67,320 in 2003 and 2002, 2,552,054 4,579,439
respectively
Unbilled revenues 1,731,565 1,933,415
Prepaid expenses and other 606,291 274,111
Deferred income taxes 220,835 183,575
------------ ------------
Total current assets 21,212,616 17,948,434
------------ ------------
Net property and equipment 12,250,285 12,345,896
------------ ------------
Customer relationships, net of accumulated amortization 766,523 607,004
Goodwill, net of accumulated amortization 9,109,860 7,888,714
Other 36,111 41,923
------------ ------------
Total assets $ 43,375,395 $ 38,831,971
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of notes payable $ 139,181 $ 131,907
Accounts payable 658,538 565,540
Accrued wages, bonuses and profit sharing 803,794 632,837
Accrued expenses 460,089 366,943
Income taxes payable 510,814 55,558
Billings in excess of revenues earned 3,240,440 3,276,813
------------ ------------
Total current liabilities 5,812,856 5,029,598
Notes payable, net of current portion 4,937,648 5,044,090
Deferred income taxes 957,612 740,008
Other long-term liabilities 443,460 --
------------ ------------
Total liabilities 12,151,576 10,813,696
------------ ------------
Shareholders' equity:
Common stock, $.001 par value; authorized 20,000,000 shares,
issued 7,624,917 in 2003 and 7,560,610 in 2002, outstanding
7,305,617 in 2003 and 7,245,110 in 2002 7,625 7,561
Additional paid-in capital 18,659,724 18,123,603
Retained earnings 14,576,250 11,447,443
Unearned compensation (387,809) --
Accumulated other comprehensive income, net of taxes 12,605 35,371
Treasury stock, at cost; 319,300 and 315,500 shares in 2003
and 2002, respectively (1,644,576) (1,595,703)
------------ ------------
Total shareholders' equity 31,223,819 28,018,275
------------ ------------
Total liabilities and shareholders' equity $ 43,375,395 $ 38,831,971
============ ============
See accompanying notes to consolidated condensed financial statements
3
NATIONAL RESEARCH CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three months ended Nine months ended
September 30 September 30
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues $ 7,993,419 $ 7,317,037 $ 20,179,978 $ 16,165,316
------------ ------------ ------------ ------------
Operating expenses:
Direct expenses 3,797,360 3,388,030 9,280,730 6,962,252
Selling, general and administrative 1,563,760 1,200,381 4,380,916 3,562,212
Depreciation and amortization 535,904 400,884 1,463,842 1,223,240
------------ ------------ ------------ ------------
Total operating expenses 5,897,024 4,989,295 15,125,488 11,747,704
------------ ------------ ------------ ------------
Operating income 2,096,395 2,327,742 5,054,490 4,417,612
Other income (expense):
Interest income 76,697 63,091 213,666 187,976
Interest expense (107,506) (109,313) (321,044) (340,689)
Other, net 4,634 (696) 47,867 (72,250)
------------ ------------ ------------ ------------
Total other income (expense) (26,175) (46,918) (59,511) (224,963)
------------ ------------ ------------ ------------
Income before income taxes 2,070,220 2,280,824 4,994,979 4,192,649
Provision for income taxes 769,999 854,282 1,866,172 1,576,313
------------ ------------ ------------ ------------
Net income $ 1,300,221 $ 1,426,542 $ 3,128,807 $ 2,616,336
============ ============ ============ ============
Net income per share--basic and diluted $ .18 $ .20 $ .43 $ .37
============ ============ ============ ============
Weighted average shares and share
equivalents outstanding--basic 7,261,582 7,176,323 7,255,466 7,138,581
============ ============ ============ ============
Weighted average shares and share
equivalents outstanding--diluted 7,330,579 7,200,344 7,304,298 7,162,602
============ ============ ============ ============
See accompanying notes to consolidated condensed financial statements.
4
NATIONAL RESEARCH CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
September 30,
---------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net income $ 3,128,807 $ 2,616,336
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,463,842 1,223,240
Deferred income taxes 192,918 209,164
Gain on sale of property and equipment (2,850) (1,420)
Loss (gain) on sale of other investments 27 (18)
Non-cash stock compensation expense 20,412 --
Net changes in assets and liabilities:
Trade accounts receivable 2,174,027 (696,490)
Unbilled revenues 250,372 (613,221)
Prepaid expenses and other (300,356) 30,572
Accounts payable 42,683 (521,212)
Accrued expenses, wages, bonuses and profit sharing 133,792 204,250
Income taxes recoverable and payable 442,038 936,093
Billings in excess of revenues earned (54,523) 335,593
----------- -----------
Net cash provided by operating activities 7,491,189 3,722,887
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (1,296,442) (1,301,743)
Proceeds from sale of property and equipment 2,850 1,420
Acquisition, net of cash acquired (996,888) (21,565)
Purchases of securities available-for-sale (8,456,924) (7,536,519)
Proceeds from the maturities of securities available-for-sale 6,257,182 5,284,811
----------- -----------
Net cash used in investing activities (4,490,222) (3,573,596)
----------- -----------
Cash flows from financing activities:
Payments on notes payable (99,168) (95,417)
Proceeds from exercise of stock options 127,964 543,098
Purchase of treasury stock (48,873) (18,729)
----------- -----------
Net cash (used in) provided by financing activities (20,077) 428,952
----------- -----------
Effect of exchange rate changes on cash: (25,386) --
Net increase in cash and cash equivalents 2,955,504 578,243
Cash and cash equivalents at beginning of period 991,217 1,080,053
----------- -----------
Cash and cash equivalents at end of period $ 3,946,721 $ 1,658,296
=========== ===========
Supplemental disclosure of cash paid for:
Interest expense $ 321,044 $ 340,689
=========== ===========
Income taxes $ 1,216,112 $ 429,660
=========== ===========
Supplemental disclosures of non-cash 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 currency. 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
($22,766) and $28,705 for the nine-month periods ended September 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 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.
6
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 five years.
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 Nine months Ended
September 30, September 30,
------------------- ----------------------
2003 2002 2003 2002
------------------- ----------------------
(dollars in thousands, except per share amounts)
Revenues $ 7,993 $ 7,578 $ 20,443 $ 16,815
Net income $ 1,300 $ 1,415 $ 3,131 $ 2,568
Net income per share - basic $ 0.18 $ 0.20 $ 0.43 $ 0.36
Net income per share - diluted $ 0.18 $ 0.20 $ 0.43 $ 0.36
- --------------------------------------------------------------------------------
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 Nine months ended
September 30, September 30,
---------------------------------------
2003 2002 2003 2002
---------------------------------------
(in thousands, except per share amounts)
Pro forma:
Net income, as reported $1,300 $1,427 $3,129 $2,616
Less: stock based compensation
expense $ 43 $ 18 $ 5 $ 47
Net income, adjusted for the fair
value method $1,257 $1,409 $3,044 $2,569
Income per share - basic and diluted,
as reported $ 0.18 $ 0.20 $ 0.43 $ 0.37
Income per share- basic and diluted,
adjusted for the fair value method $ 0.17 $ 0.20 $ 0.42 $ 0.36
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.
The Company recognized $20,412 of non-cash compensation for the three and nine
months of 2003 related to this restricted stock.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following at September 30,
2003 and December 31, 2002:
2003 2002
------------ ------------
Customer relationships $ 1,024,299 $ 787,048
Less accumulated amortization 257,776 180,044
------------ ------------
Net customer relationships 766,523 607,004
------------ ------------
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 $ 9,876,383 $ 8,495,718
============ ============
8
The following represents a summary of changes in the Company's carrying amount
of net goodwill for the nine months ended September 30, 2003:
Balance as of January 1, 2003 $ 7,888,714
Additions - acquisition 1,221,146
------------
Balance as of September 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, 32,080 options
have been excluded from the diluted net income per share computations for 2002
because their exercise price exceeds the fair market value.
The following table shows the amounts used in computing earnings per share and
the effect on the weighted average number of shares of dilutive potential common
stock.
Three months ended Nine months ended
September 30, September 30,
---------------------------------------
2003 2002 2003 2002
---------------------------------------
(in thousands) (in thousands)
Weighted average shares and share
equivalents - basic 7,262 7,176 7,255 7,139
Weighted average dilutive effect
of options 63 24 47 24
Weighted average dilutive effect of
restricted stock 6 0 2 0
---------------------------------------
Weighted average shares and share
equivalents - dilutive 7,331 7,200 7,304 7,163
---------------------------------------
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.
9
Percentage of Total Revenues
---------------------------------------
Three months ended Nine months ended
September 30, September 30,
---------------------------------------
2003 2002 2003 2002
---------------------------------------
Revenues: 100.0% 100.0% 100.0% 100.0%
================== ==================
Operating expenses:
Direct expenses 47.5 46.3 46.0 43.1
Selling, general and administrative 19.6 16.4 21.7 22.0
Depreciation and amortization 6.7 5.5 7.3 7.6
------------------ ------------------
Total operating expenses: 73.8 68.2 75.0 72.7
------------------ ------------------
Operating income 26.2% 31.8% 25.0% 27.3%
================== ==================
Three Months Ended September 30, 2003 Compared to Three Months Ended September
30, 2002
Total revenues. Total revenues for the three-month period ended September 30,
2003 were $8.0 million compared to $7.3 million in the three month period ended
September 30, 2002. The increase was primarily due to the addition of new
clients, including a number of annual contracts signed over the last twelve
months.
Direct expenses. Direct expenses increased 12.1% to $3.8 million in the
three-month period ended September 30, 2003 from $3.4 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 labor and payroll expenses of $360,000, in fieldwork and fees of $218,000,
and in travel expenses of $54,000. The increases were partially offset by
decreases in printing and postage expenses of $240,000. Direct expenses
increased as a percentage of total revenues to 47.5% in the three month period
ended September 30, 2003 from 46.3% during the same period of 2002. The increase
in direct expense percentage in 2003 was due to a great extent, to the mix of
services provided during the periods.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 30.3% to $1.6 million for the three-month
period ended September 30, 2003 compared to $1.2 million for the same period in
2002. The net increase was primarily due to increases in salary and benefit
expenses of $237,000, contract services and office expenses of $58,000,
marketing expenses of $46,000, and utilities of $20,000. Selling, general, and
administrative expenses increased as a percentage of total revenues to 19.6% for
the three month period ended September 30, 2003 from 16.4% for the same period
in 2002.
Depreciation and amortization. Depreciation and amortization expenses increased
to $536,000 in the three-month period ended September 30, 2003 from $401,000 in
the same period of 2002. The increase is primarily due to the additional
depreciation of software, computer equipment and production equipment.
Depreciation and amortization expenses as a percentage of total revenues
increased to 6.7% in the three-month period ended September 30, 2003, from 5.5%
in the same period of 2002.
10
Other income (expense). Other income (expense) decreased to ($26,000) in the
three-month period ended September 30, 2003 compared to ($47,000) in the same
period of 2002. The change was due to an increase in interest income and other
income of $19,000.
Provision for income taxes. The provision for income taxes totaled $770,000
(37.2% effective tax rate) for the three-month period ended September 30, 2003
as compared to $854,000 (37.5% effective tax rate) for the same period in 2002.
The effective tax rate was lower in 2003 due to differences in state income
taxes.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30,
2002
Total revenues. Total revenues increased 24.8% in the nine month period ended
September 30, 2003 to $20.2 million from $16.2 million in the nine month period
ended September 30, 2002. The increase was primarily due to the addition of new
clients, including a number of annual contracts signed over the last twelve
months, and, to a lesser extent, by an increase in scope of work from existing
clients.
Direct expenses. Direct expenses increased 33.3% to $9.3 million in the
nine-month period ended September 30, 2003 from $7.0 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 labor and payroll expenses of $1,005,000, in printing and postage expenses of
$670,000, fieldwork and fees of $625,000, and in travel expenses of $105,000.
This increase was partially offset by decreases in computer related expenses of
$126,000 and telephone expenses of $29,000. Direct expenses increased as a
percentage of total revenues to 46.0% in the nine-month period ended September
30, 2003 from 43.14% during the same period of 2002. The Company expects direct
expenses as a percentage of total revenues for the balance of 2003 to decrease
slightly during the fourth quarter of 2003 due to the delivery of the Healthcare
Market Guide in the third quarter, and will be in line with the expected annual
percent of total revenues of 45%.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 23.0% to $4.4 million for the nine-month
period ended September 30, 2003 from $3.6 million for the same period in 2002.
The net increase was primarily due to increases in salary and benefit expenses
of $482,000, marketing expenses of $301,000, recording of bad debt expenses of
$98,000, utilities of $93,000, and contract services of $98,000. These increases
were partially offset by a decrease in legal and consulting fees of $253,000
relating to the resolution of a lawsuit in 2002. Selling, general, and
administrative expenses as a percentage of total revenues decreased to 21.7% for
the nine month period ended September 30, 2003 from 22.0% 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 increase slightly, and will be in line with the expected
annual range of 22 to 23% of total revenues.
Depreciation and amortization. Depreciation and amortization expenses increased
19.7% to $1.5 million in the nine-month period ended September 30, 2003 from
$1.2 million in the same period of 2002. The increase is primarily due to the
additional depreciation of software, computer equipment and production
equipment. Depreciation and amortization expenses as a percentage of total
revenues decreased to 7.3% in the nine-month period ended September 30, 2003
from 7.6% in the same period of 2002.
11
Other income (expense). Other income and (expense) decreased to $(60,000) in the
nine-month period ended September 30, 2003 from $(225,000) in the same period of
2002. The decrease was partially due to the recording in 2002 of $64,000 of
prejudgment interest related to the lawsuit resolved in 2002.
Provision for income taxes. The provision for income taxes totaled $1.9 million
(37.4% effective tax rate) for the nine-month period ended September 30, 2003 as
compared to $1.6 million (37.6% 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%.
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 September 30, 2003, the Company had cash and cash equivalents of $3.9
million and working capital of $15.4 million.
During the nine months ended September 2003, the Company generated $7.5 million
of net cash from operating activities as compared to $3.7 million of net cash
generated during the same period in the prior year. The increase in cash flows
was primarily due to a higher net income, increases in taxes payable and
decreases in trade accounts receivables and unbilled revenues, totaling $2.9
million. This increase in cash flows was partially offset by increases in
prepaid expenses of $300,000.
For the nine months ended September 30, 2003, net cash used in investing
activities was $4.5 million as compared to $3.6 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.
Net cash used by financing activities was $20,000 for the nine months ended
September 30, 2003, as compared to net cash provided of $429,000 for the nine
months ended September 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 September
30, 2003 and December 31, 2002, the Company had $3.2 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 September 30, 2003 and December 31, 2002, the
Company had $1.7 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 November 7, 2003, 77,300 shares have been repurchased under
that authorization.
In July 2003, the Board of Directors of the Company authorized the repurchase of
an additional 500,000 shares of Common Stock in the open market or in privately
negotiated transactions. As of November 7, 2003, no shares have been repurchased
under that authorization.
Accounting Pronouncements
In November 2002, the EITF reached a consensus on Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables" (EITF 00-21). EITF 00-21 addresses
certain aspects of the accounting by a vendor for arrangements under which the
vendor will perform multiple revenue generating activities. EITF 00-21 was
effective prospectively for new or modified contracts beginning July 1, 2003.
The adoption of EIFT 00-21 did not have a material impact on the Company's
financial statements.
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 was 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 had no 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 was effective for all financial instruments entered into or
modified after May 31, 2003. For unmodified financial instruments existing at
May 31, 2003, Statement 150 was effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of SFAS No. 150 had no
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
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 September 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
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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 September 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 5. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
None
(b) Reports on Form 8-K The Company furnished a Current Report on
Form 8-K, dated August 5, 2003, reporting (under Items 7 and 12)
the Company's second quarter earnings and related conference
call.
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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: November 14, 2003 By: /s/ Michael D. Hays
----------------------------------------
Michael D. Hays
President and Chief Executive Officer
Date: November 14, 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 September 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.
17