UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
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x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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|
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For
the quarterly period ended March 31,
2010
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|
¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from ________ to
________
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Commission
File Number
0-29466
National Research Corporation
(Exact
name of Registrant as specified in its charter)
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Wisconsin
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47-0634000
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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1245 “Q” Street, Lincoln,
Nebraska 68508
(Address
of principal executive offices) (Zip Code)
(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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). (Registrant is not yet required to provide
financial disclosure in an Interactive Data File
format.) Yes
¨
No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
|
Large
accelerated filer
¨
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Accelerated
filer
¨
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Non-accelerated
filer
x
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Smaller
reporting company
¨
|
(Do not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the 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 May 3, 2010: 6,659,600 shares
NATIONAL
RESEARCH CORPORATION
FORM 10-Q
INDEX
For the
Quarter Ended March 31, 2010
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Page No.
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PART
I.
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FINANCIAL
INFORMATION
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Item
1.
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Financial
Statements
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Condensed
Consolidated Balance Sheets
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4
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Condensed
Consolidated Statements of Income
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5
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Condensed
Consolidated Statements of Cash Flows
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6
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Condensed
Notes to Consolidated Financial Statements
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7-13
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Item
2.
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Management’s
Discussion and Analysis of
Financial
Condition and Results of Operations
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13-16
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Item
3.
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Quantitative
and Qualitative Disclosures About
Market
Risk
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16
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Item
4.
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Controls
and Procedures
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17
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PART
II.
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OTHER
INFORMATION
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Item
1A.
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Risk
Factors
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18
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Item
2.
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Unregistered
Sales of Equity Securities and
Use
of Proceeds
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18
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Item
6.
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Exhibits
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18
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Signatures
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19
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Exhibit
Index
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20
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Special Note Regarding
Forward-Looking Statements
Certain
matters discussed in this Quarterly Report on Form 10-Q are “forward-looking
statements” within the meaning of Section 21E of the Securities Exchange
Act of 1934, as amended. These forward-looking statements can
generally be identified as such because the context of the statement includes
phrases such as National Research Corporation (the “Company”) “believes,”
“expects,” or other words of similar import. Similarly, statements
that describe the Company’s future plans, objectives or goals are also
forward-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 following factors:
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·
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The
possibility of non-renewal of the Company’s performance tracking
contracts;
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·
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The
Company’s ability to compete in its markets, which are highly competitive,
and the possibility of increased price pressure and
expenses;
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·
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The
effects of the economic downturn:
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·
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The
possibility of consolidation in the healthcare
industry;
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·
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The
Company’s ability to retain its limited number of key
clients;
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·
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The
Company’s ability to manage its growth, including identifying acquisition
candidates and effectively integrating acquired
companies;
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·
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The
Company’s ability to collect the data on which its business
relies;
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·
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The
Company’s ability to attract and retain key managers and other
personnel;
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·
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The
possibility that the Company’s intellectual property and other proprietary
information technology could be copied or independently developed by its
competitors;
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·
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Errors
in, or dissatisfaction with, performance tracking and other surveys
provided by the Company;
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·
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Regulatory
developments; and
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·
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The
factors set forth under the caption “Risk Factors” in Part I, Item 1A of
the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2009, as such section may be updated by Part II,
Item 1A of the Company’s subsequently filed Quarterly Reports on Form 10-Q
(including this Report).
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Shareholders,
potential investors and other readers are urged to consider these and other
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
Quarterly Report on Form 10-Q and the Company undertakes no obligation to
publicly update such forward-looking statements to reflect subsequent events or
circumstances.
PART
I – Financial Information
ITEM
1.
Financial
Statements
NATIONAL
RESEARCH CORPORATION AND SUBSIDIARY
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except share amounts)
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March 31,
2010
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December 31,
2009
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(Unaudited)
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Assets
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Current
assets:
|
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Cash
and cash equivalents
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$
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6,261
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$
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2,512
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Trade
accounts receivable, less allowance for doubtful accounts of $283 and $279
in 2010 and 2009, respectively
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8,113
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5,214
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Unbilled
revenue
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1,131
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1,173
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Prepaid
expenses and other
|
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1,668
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1,864
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Recoverable
income taxes
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—
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803
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Deferred
income taxes
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53
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|
|
|
98
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Total
current assets
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17,226
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11,664
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Property
and equipment, net
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13,503
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13,975
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Intangible
assets, net
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6,595
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6,883
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Goodwill
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40,010
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39,924
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Other
|
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50
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|
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53
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|
|
|
|
|
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|
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Total
assets
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$
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77,384
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|
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$
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72,499
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Liabilities and Shareholders’
Equity
|
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Current
liabilities:
|
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|
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Current
portion of note payable
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$
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808
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$
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816
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Accounts
payable
|
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|
794
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|
598
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Accrued
wages, bonus and profit sharing
|
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1,640
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1,926
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Accrued
expenses
|
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|
1,653
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848
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|
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Income
taxes payable
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374
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|
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—
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Deferred
revenue
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14,139
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11,907
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Total
current liabilities
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19,408
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16,095
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Note
payable, net of current portion
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6,357
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6,903
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Deferred
income taxes
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5,299
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5,126
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Deferred
revenue
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198
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204
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Other
long term liabilities
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18
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—
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Total
liabilities
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31,280
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28,328
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Shareholders’
equity:
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Common
stock, $.001 par value; authorized 20,000,000 shares, issued 8,027,282 in
2010 and 8,018,044 in 2009, outstanding 6,657,600 in 2010 and 6,662,111 in
2009
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8
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8
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Additional
paid-in capital
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28,057
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27,871
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Retained
earnings
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39,768
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37,905
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Accumulated
other comprehensive income
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|
953
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|
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|
769
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Treasury
stock, at cost; 1,369,682 shares in 2010 and 1,355,933 shares in
2009
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(22,682
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)
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(22,382
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)
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Total
shareholders’ equity
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46,104
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44,171
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|
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|
|
|
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Total
liabilities and shareholders’ equity
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$
|
77,384
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$
|
72,499
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See
accompanying condensed notes to consolidated financial
statements.
NATIONAL
RESEARCH CORPORATION AND SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(In
thousands, except for share amounts, unaudited)
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Three months ended
March
31,
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2010
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2009
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Revenue
|
|
$
|
17,370
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$
|
16,740
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Operating
expenses:
|
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Direct
expenses
|
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|
6,456
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7,276
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Selling,
general and administrative
|
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|
4,469
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|
3,980
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Depreciation
and amortization
|
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|
1,098
|
|
|
|
1,110
|
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|
Total operating
expenses
|
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|
12,023
|
|
|
|
12,366
|
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|
|
|
|
|
|
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Operating income
|
|
|
5,347
|
|
|
|
4,374
|
|
|
|
|
|
|
|
|
|
|
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|
Other
income (expense):
|
|
|
|
|
|
|
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|
|
Interest
income
|
|
|
1
|
|
|
|
1
|
|
|
Interest
expense
|
|
|
(98
|
)
|
|
|
(138
|
)
|
|
Other, net
|
|
|
(43
|
)
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
(expense)
|
|
|
(140
|
)
|
|
|
(97
|
)
|
|
|
|
|
|
|
|
|
|
|
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Income before income
taxes
|
|
|
5,207
|
|
|
|
4,277
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
2,079
|
|
|
|
1,627
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,128
|
|
|
$
|
2,650
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share – basic
|
|
$
|
.47
|
|
|
$
|
.40
|
|
|
Net
income per share – diluted
|
|
$
|
.47
|
|
|
$
|
.39
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares and share equivalents outstanding – basic
|
|
|
6,640
|
|
|
|
6,633
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares and share equivalents outstanding – diluted
|
|
|
6,711
|
|
|
|
6,713
|
|
NATIONAL
RESEARCH CORPORATION AND SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands, unaudited)
|
|
|
Three months ended
|
|
|
|
|
March 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
3,128
|
|
|
$
|
2,650
|
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,098
|
|
|
|
1,110
|
|
|
Deferred
income taxes
|
|
|
219
|
|
|
|
515
|
|
|
Non-cash
share-based compensation expense
|
|
|
186
|
|
|
|
168
|
|
|
Net
changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Trade
accounts receivable
|
|
|
(2,872
|
)
|
|
|
(3,153
|
)
|
|
Unbilled
revenue
|
|
|
59
|
|
|
|
(195
|
)
|
|
Prepaid
expenses and other
|
|
|
144
|
|
|
|
(13
|
)
|
|
Accounts
payable
|
|
|
195
|
|
|
|
319
|
|
|
Accrued
expenses, wages, bonuses and profit sharing
|
|
|
713
|
|
|
|
391
|
|
|
Income
taxes recoverable and payable
|
|
|
1,174
|
|
|
|
874
|
|
|
Deferred
revenue
|
|
|
2,207
|
|
|
|
730
|
|
|
Net
cash provided by operating activities
|
|
|
6,251
|
|
|
|
3,396
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(339
|
)
|
|
|
(776
|
)
|
|
Payment
of acquisition earn-out obligation
|
|
|
(172
|
)
|
|
|
—
|
|
|
Net
cash used in investing activities
|
|
|
(511
|
)
|
|
|
(776
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from notes payable
|
|
|
—
|
|
|
|
1,676
|
|
|
Payments
on notes payable
|
|
|
(493
|
)
|
|
|
(3,622
|
)
|
|
Payments
on other long term liabilities
|
|
|
(8
|
)
|
|
|
|
|
|
Purchases
of treasury stock
|
|
|
(236
|
)
|
|
|
—
|
|
|
Common
stock withheld from vested restricted shares for payroll tax
withholdings
|
|
|
(64
|
)
|
|
|
(67
|
)
|
|
Excess
tax benefit from share-based compensation
|
|
|
—
|
|
|
|
2
|
|
|
Payment
of dividends on common stock
|
|
|
(1,265
|
)
|
|
|
(1,066
|
)
|
|
Net
cash used in financing activities
|
|
|
(2,066
|
)
|
|
|
(3,077
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
75
|
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
3,749
|
|
|
|
(489
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
2,512
|
|
|
|
1,109
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
6,261
|
|
|
$
|
620
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash paid for:
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$
|
99
|
|
|
$
|
136
|
|
|
Income
taxes
|
|
$
|
688
|
|
|
$
|
191
|
|
See
accompanying condensed notes to consolidated financial
statements.
NATIONAL
RESEARCH CORPORATION AND SUBSIDIARY
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
BASIS
OF CONSOLIDATION AND PRESENTATION
|
National
Research Corporation (the “Company”) is a provider of ongoing survey-based
performance measurement, analysis, tracking, improvement services and governance
education to the healthcare industry in the United States and
Canada. The Company provides market research services to hospitals
and insurance companies and develops tools that enable healthcare organizations
to obtain performance measurement information necessary to comply with industry
and regulatory standards, and to improve their business practices.
The
Company has six operating segments that are aggregated into one reporting
segment because they have similar economic characteristics and meet the other
aggregation criteria from the Financial Accounting Standards Board (“FASB”)
guidance on segment disclosure. The six operating segments are as
follows: NRC Picker U.S. and NRC Picker Canada, which each offer renewable
performance tracking and improvement services, custom research,
subscription-based educational services, and a renewable syndicated service;
Ticker offers stand-alone market information as well as a comparative
performance database to allow 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; Payer Solutions offers
functional disease-specific and health status measurement tools; The Governance
Institute offers subscription-based governance information and educational
conferences designed to improve the effectiveness of hospital and healthcare
systems by continually strengthening their healthcare boards, medical
leadership, and management performance in the United States; and My InnerView
(“MIV”) provides quality and performance improvement solutions to the senior
care industry.
The
consolidated balance sheet of the Company at December 31, 2009, was derived from
the Company’s audited consolidated 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.
Information
and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted. These consolidated 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, 2009, filed with the Securities and Exchange Commission on
March 31, 2010.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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
revenue and expenses during the reporting period. Actual results
could differ from those estimates.
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary, National Research Corporation Canada. All significant
intercompany transactions and balances have been eliminated. Because
there are no minority interests in the consolidated subsidiary, all of the
Company’s net income, comprehensive income and shareholders’ equity are
attributable to controlling interests.
The
functional currency of the Company’s foreign subsidiary, National Research
Corporation Canada, is the subsidiary’s local currency. The Company
translates the assets and liabilities of its foreign subsidiary 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 in accumulated other comprehensive income (loss), a
component of shareholders’ equity. Gains and losses related to
transactions denominated in a currency other than the subsidiary’s local
currency and short-term intercompany accounts are included in other income
(expense), net in the consolidated statements of income.
Fair
Value Measurements
The
Company’s valuation techniques are based on maximizing observable inputs and
minimizing the use of unobservable inputs when measuring fair
value. Observable inputs reflect readily obtainable data from
independent sources, while unobservable inputs reflect the Company’s market
assumptions. The inputs are then classified into the following
hierarchy: (1) Level 1 Inputs—quoted prices in active markets for identical
assets and liabilities, (2) Level 2 Inputs—observable market-based inputs other
than Level 1 inputs, such as quoted prices for similar assets or liabilities in
active markets, quoted prices for similar or identical assets or liabilities in
markets that are not active, or other inputs that are observable or can be
corroborated by observable market data, (3) Level 3 Inputs—unobservable
inputs.
The
following details the Company’s financial assets and liabilities within the fair
value hierarchy at March 31, 2010:
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
(In
thousands)
|
|
|
Money
Market Funds
|
|
$
|
221
|
|
|
$
|
—
|
|
|
$
|
—
|
|
During
the three-month period ended March 31, 2010, the Company did not have transfers
between the Level measurements, but did have U.S. government notes classified as
Level 2 inputs that matured during the period for $1.6 million.
The
Company believes that the carrying amounts of accounts receivable, accounts
payable, accrued expenses and long term debt, approximate their fair
value. All non-financial assets that are not recognized or disclosed
at fair value in the financial statements on a recurring basis, which includes
goodwill and non-financial long-lived assets, are measured at fair value in
certain circumstances (for example, when there is evidence of
impairment). As of March 31, 2010, there was no indication of
impairment related to our non-financial assets.
Comprehensive
income, including components of other comprehensive income, was as
follows:
|
|
|
Three months ended
March 31
,
|
|
|
|
|
(In
thousands)
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
3,128
|
|
|
$
|
2,650
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
184
|
|
|
|
(
91
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
other comprehensive income (loss)
|
|
|
184
|
|
|
|
(
91
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
3,312
|
|
|
$
|
2,559
|
|
In
assessing the realizablility of deferred tax assets, the Company considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. The
Company considers projected future taxable income, carryback opportunities and
tax planning strategies in making this assessment. Based upon the
level of historical taxable income and projections for future taxable income
over the periods which the deferred tax assets are deductible, the Company
believes it is more likely than not that it will realize the benefits of these
deductible differences, net of the valuation allowance recorded.
There was
no change in the three-month period ended March 31, 2010, to the capital loss
carryforwards net of valuation allowances.
The
Company recognizes the effect of income tax positions only if these positions
are more than likely than not of being sustained. Additionally, for
tax positions meeting this more likely than not threshold, the amount of benefit
is limited to the largest benefit that has a greater than 50% probability of
being realized upon ultimate settlement. Changes in recognition or
measurement are reflected in the period in which the change in judgment
occurs.
The
change in the unrecognized tax benefits for 2010 is as follows:
|
|
|
(In thousands)
|
|
|
Balance
of unrecognized tax benefits at December 31, 2009
|
|
$
|
541
|
|
|
Increases
for tax positions established for the current period
|
|
|
5
|
|
|
Balance
of unrecognized tax benefits at March 31, 2010
|
|
$
|
546
|
|
The
Company’s effective tax rate increased to 39.9% in the three-month period ended
March 31, 2010, from 38.0% in the same period in 2009. The effective
tax rate increased based on projected taxable income moving the Company’s
federal tax rate from 34% to 35%. This increased rate adjusted
deferred tax balances by $152,000 with the offset to income tax
expense.
The
Company accrues interest and penalties related to uncertain tax position in the
statements of income as income tax expense. The Company files a U.S.
federal income tax return, various state jurisdictions and a Canada federal and
provincial income tax return. The 2006 to 2009 U.S. federal and state
returns remain open to examination. The 2005 to 2009 Canada federal
and provincial income tax returns remain open to examination.
On
December 19, 2008, the Company borrowed $9.0 million under a term note to
partially finance the acquisition of MIV. The term note is payable in
35 equal installments of $97,000 with the balance of principal and interest
payable in a balloon payment due on December 31, 2011. Borrowings
under the term note bear interest at a rate of 5.2% per year.
The term
note is secured by certain of the Company’s assets, including the Company’s
land, building, accounts receivable and intangible assets. The term
note contains various restrictions and covenants applicable to the Company,
including requirements that the Company maintain certain financial ratios at
prescribed levels and restrictions on the ability of the Company to consolidate
or merge, create liens, incur additional indebtedness or dispose of
assets. As of March 31, 2010, the Company was in compliance with
these restrictions and covenants.
The
Company also entered into a revolving credit note in 2006. The
maximum aggregate amount available under the revolving credit note was
originally $3.5 million, but an addendum to the note dated March 26, 2008,
changed the amount to $6.5 million. The revolving credit note was
renewed in July 2009 to extend the term to July 31, 2010. The Company
may borrow, repay and re-borrow amounts under the revolving credit note from
time to time until its maturity on July 31, 2010.
The
maximum aggregate amount available under the revolving credit note is $6.5
million, subject to a borrowing base equal to 75% of the Company’s eligible
accounts receivable. Borrowings under the revolving credit note bear
interest at a variable rate equal to (1) prime (as defined in the credit
facility) less 0.50% or (2) one-, two-, three-, six- or twelve-month
LIBOR. As of March 31, 2010, the revolving credit note did not have a
balance. According to borrowing base requirements, the Company had
the capacity to borrow $5.7 million as of March 31, 2010.
|
5.
|
SHARE-BASED
COMPENSATION
|
The
Company measures and recognizes compensation expense for all share-based
payments. The compensation expense is recognized based on the
grant-date fair value of those awards. All of the Company’s existing
stock option awards and non-vested stock awards have been determined to be
equity-classified awards.
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 (“2001 Equity Incentive Plan”). The 2001 Equity Incentive Plan
provides for the granting of stock options, stock appreciation rights,
restricted stock, performance shares and other share-based awards and benefits
up to an aggregate of 600,000 shares of the Company’s common
stock. Options granted may be either nonqualified or incentive stock
options. Options vest over one to five years following the date of
grant and option terms are generally five to ten years following the date of
grant. At March 31, 2010, there were 3,770 shares available for
issuance pursuant to future grants under the 2001 Equity Incentive
Plan.
The
National Research Corporation 2004 Non-Employee Director Stock Plan (the “2004
Director Plan”) is a nonqualified plan that provides for the granting of options
with respect to 250,000 shares of the Company’s common stock. The
2004 Director Plan provides for 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, options to purchase 12,000
shares of the Company’s common stock are granted to directors that are
re-elected or retained as a director at such meeting. On May 7, 2009,
the Board of Directors amended the plan to increase the number of shares of
common stock authorized for issuance under the plan from 250,000 to 550,000
shares, subject to approval of the Company’s shareholders at the 2010 annual
meeting of shareholders. The grants of options to directors on the
date of the 2009 annual meeting of shareholders were also made subject to
approval of the Company’s shareholders at the 2010 annual meeting of
shareholders. Given the ownership by the CEO and grantor retained
annuity trusts that he established in February 2010, approval will be
perfunctory. Options vest one year following the date of grant and
option terms are generally ten years following the date of grant, or three years
in the case of termination of the outside director’s service. At
March 31, 2010, pending shareholder approval of the increased number of shares
at the 2010 annual meeting of shareholders, there will be 277,000 shares
available for issuance pursuant to future grants under the 2004 Director
Plan.
In
February 2006, the Board of Directors adopted, and on May 4, 2006, the Company’s
shareholders approved the National Research Corporation 2006 Equity Incentive
Plan (the “2006 Equity Incentive Plan”). The 2006 Equity Incentive
Plan provides for the granting of options, stock appreciation rights, restricted
stock, performance shares and other share-based awards and benefits up to an
aggregate of 600,000 shares of the Company’s common stock. Options
granted may be either incentive stock options or nonqualified stock
options. Vesting terms vary with each grant, and option terms are
generally five to ten years. Options vest over one to five years
following the date of grant and option terms are generally five to ten years
following the date of grant. At March 31, 2010, there were
417,819 shares available for issuance pursuant to future grants under the 2006
Equity Incentive Plan.
The
Company granted options to purchase 74,647 and 54,739 shares of the Company’s
common stock during the three-month periods ended March 31, 2010 and 2009,
respectively. Options to purchase shares of common stock were granted
with exercise prices equal to the fair value of the common stock on the date of
grant. The fair value of stock options granted was estimated using a
Black-Scholes valuation model with the following assumptions:
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Expected
dividend yield at date of grant
|
|
|
3.09
|
%
|
|
|
1.93
|
%
|
|
Expected
stock price volatility
|
|
|
27.00
|
%
|
|
|
24.20
|
%
|
|
Risk-free
interest rate
|
|
|
2.56
|
%
|
|
|
1.55
|
%
|
|
Expected
life of options (in years)
|
|
|
6.00
|
|
|
|
6.00
|
|
The
risk-free interest rate assumptions were based on the U.S. Treasury yield curve
in effect at the time of the grant. The expected volatility was based
on historical monthly price changes of the Company’s stock based on the expected
life of the options at the date of grant. The expected life of
options is the average number of years the Company estimates that options will
be outstanding prior to exercise. The Company considers groups of
associates that have similar historical exercise behavior separately for
valuation purposes.
As of
March, 31, 2010 there were 22,636 non-vested shares of restricted common stock
outstanding under the 2006 Equity Incentive plan. Granted during the
three-month periods ended March 31, 2010, and 2009, were 9,238 and -0- shares of
restricted common stock under the 2006 Equity Incentive Plan,
respectively. These shares vest over one to five years following the
date of grant, and holders thereof are entitled to receive dividends from the
date of grant, whether vested or not vested. The fair value of the
awards is calculated as the fair market value of the shares on the date of
grant.
|
6.
|
GOODWILL
AND OTHER INTANGIBLE ASSETS
|
The
following represents a summary of changes in the Company’s carrying amount of
goodwill for the three months ended March 31, 2010.
|
|
|
(In thousands)
|
|
|
Balance
as of December 31, 2009
|
|
$
|
39,924
|
|
|
Foreign
currency translation
|
|
|
86
|
|
|
Balance
as of March 31, 2010
|
|
$
|
40,010
|
|
Intangible
assets consisted of the following:
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
(In thousands)
|
|
|
Non-amortizing
other intangible assets:
|
|
|
|
|
|
|
|
Trade
name
|
|
|
1,191
|
|
|
|
1,191
|
|
|
Amortizing
other intangible assets:
|
|
|
|
|
|
|
|
|
|
Customer
related intangibles
|
|
|
8,183
|
|
|
|
8,174
|
|
|
Trade
name
|
|
|
1,572
|
|
|
|
1,572
|
|
|
Total
other intangible assets
|
|
|
10,946
|
|
|
|
10,937
|
|
|
Less
accumulated amortization
|
|
|
4,351
|
|
|
|
4,054
|
|
|
Other
intangible assets, net
|
|
$
|
6,595
|
|
|
$
|
6,883
|
|
|
7.
|
PROPERTY
AND EQUIPMENT
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
(In thousands)
|
|
|
Property
and equipment
|
|
$
|
25,218
|
|
|
$
|
29,105
|
|
|
Accumulated
depreciation
|
|
|
(11,715
|
)
|
|
|
(15,130
|
)
|
|
Property
and equipment, net
|
|
$
|
13,503
|
|
|
$
|
13,975
|
|
8. EARNINGS
PER SHARE
Net
income per share has been calculated and presented for “basic” and “diluted”
data. “Basic” net income per share was computed by dividing net
income by the weighted average number of common shares outstanding, whereas
“diluted” net income per share was computed by dividing net income by the
weighted average number of common shares outstanding adjusted for the dilutive
effects of options and restricted stock. As of March 31, 2010 and
2009, the Company excluded 432,320 and 214,423 options, and 8,827 and -0- shares
of restricted stock, respectively, from the diluted net income per share
computation because their exercise or grant price exceeded the fair
market value of the common stock on such date.
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
March
31,
|
|
|
|
|
(In thousands)
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares and share equivalents - basic
|
|
|
6,640
|
|
|
|
6,633
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average dilutive effect of options
|
|
|
62
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average dilutive effect of restricted stock
|
|
|
9
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares and share equivalents - diluted
|
|
|
6,711
|
|
|
|
6,713
|
|
|
9.
|
ADOPTION
OF NEW ACCOUNTING PRONOUNCEMENTS
|
In
January 2010, the FASB amended fair value guidance to require companies to make
new disclosures about recurring and or non-recurring fair value measurements
including significant transfers into and out of Level 1 and Level 2
measurements. This guidance was effective for annual or interim
reporting periods beginning after December 15, 2009. The adoption of
this pronouncement has not had an effect on the consolidated financial
statements, as it pertains only to disclosure requirements. In
addition, as part of this guidance and effective for annual or interim reporting
periods beginning after December 15, 2010, disclosure of purchases,
sales, issuances, and settlement of assets must be on a gross basis for Level 3
measurements, where currently it is on a net basis. Also, the level
of disaggregation will be increased by “class” instead of “major
category.” Management believes this will not affect the consolidated
financial statements as it pertains to only disclosure
requirements.
In
February 2010, the FASB changed guidance on “Subsequent
Events.” Previous guidance established general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. The
February 2010 update eliminated the requirement for an SEC filer to
disclose the date through which subsequent events have been evaluated, along
with the requirement to disclose whether that date is the date the financial
statements were issued or the date the financial statements were available to be
issued. The adoption of this pronouncement has not had an effect on
the consolidated financial statements, as it pertains only to disclosure
requirements.
|
10.
|
RECENT
ACCOUNTING PRONOUNCEMENTS
|
In
September 2009, the FASB issued new guidance for revenue recognition with
multiple deliverables, which is effective for revenue arrangements entered into
or materially modified in fiscal years beginning on or after June 15, 2010,
although early adoption is permitted. This guidance eliminates the
residual method under the current guidance and replaces it with the “relative
selling price” method when allocating revenue in a multiple deliverable
arrangement. The selling price for each deliverable shall be
determined using vendor specific objective evidence of selling price, if it
exists, otherwise third-party evidence of selling price. If neither
exists for a deliverable, the vendor shall use its best estimate of the selling
price for that deliverable. After adoption, this guidance will also
require expanded qualitative and quantitative disclosures. As of
March 31, 2010, the Company is assessing the potential impact on its financial
position and results of operations
|
11.
|
RELATED
PARTY TRANSACTIONS
|
A Board
member of the Company also serves as an officer of Ameritas Life Insurance
Corp. In connection with the Company’s regular assessment of its
insurance-based associate benefits and the costs associated therewith, which is
conducted by an independent insurance broker, in 2007 the Company began
purchasing dental insurance for certain of its associates from Ameritas Life
Insurance Corp. and in 2009, the Company also began purchasing vision insurance
for certain of its associates from Ameritas Life Insurance Corp. The
total value of these purchases was $37,000 and $40,000 for the three-month
periods ended March 31, 2010 and 2009, respectively.
|
ITEM
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
The
Company believes it is a leading provider of ongoing survey-based performance
measurement, analysis, tracking, improvement services and governance education
to the healthcare industry in the United States and Canada. Since
1981, the Company has provided these services using traditional market research
methodologies, such as direct mail, telephone-based surveys, focus groups and
in-person interviews. The current primary data collection methodology
used is direct mail, but the Company uses other methodologies for certain types
of studies. The Company addresses the growing need of healthcare
providers, payers, nursing homes, and assisted living facilities to measure the
care outcomes, specifically experience and health status of their patients
and/or members, and provides information on governance issues. The
Company develops tools that enable healthcare organizations to obtain
performance measurement information necessary to comply with industry and
regulatory standards, and to improve their business practices so they can
maximize new member and/or patient attraction, experience, member retention and
profitability. The Company believes that a driver of its future
growth, and the growth of its industry in general, will be the increase in
demand for performance measurement, improvement, and educational services as a
result of more public reporting programs. The Company’s primary types
of information services are renewable performance tracking and improvement
services, custom research, subscription-based educational services, and a
renewable syndicated service.
Results
of Operations
The
following table sets forth for the periods indicated select financial
information derived from the Company’s consolidated financial statements
expressed as a percentage of total revenue. 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 financial statements.
|
|
|
Three months ended
|
|
|
|
|
March
31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
Direct
expenses
|
|
|
37.2
|
|
|
|
43.5
|
|
|
Selling,
general and administrative
|
|
|
25.7
|
|
|
|
23.8
|
|
|
Depreciation
and amortization
|
|
|
6.3
|
|
|
|
6.6
|
|
|
Total
operating expenses
|
|
|
69.2
|
|
|
|
73.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
30.8
|
%
|
|
|
26.1
|
%
|
Three
Months Ended March 31, 2010, Compared to Three Months Ended March 31,
2009
Revenue
. Revenue
for three-month period ended March 31, 2010, increased 3.8% to $17.4
million, compared to $16.7 million in the three-month period ended
March 31, 2009. The increase was due to the addition of new clients
and expanded sales from existing clients in several of the operating
segments. Revenue for the Payer Solutions operating segment is
highest during the three-month period ended March 31 than during the rest of the
year, because a portion of the services provided are related to the timing of
new enrollees in health plans, which is always highest during the first quarter
of a calendar year.
Direct
expenses
. Direct expenses decreased 11.3% to $6.5 million in
the three-month period ended March 31, 2010, compared to $7.3 million in the
same period during 2009. Direct expenses decreased as a percentage of
revenue to 37.2% in the three-month period ended March 31, 2010, from 43.5%
during the same period of 2009, due to the growth in subscription-based products
with lower variable costs and increased use of more cost efficient survey
methodology. Direct expenses projected as a percentage of revenue for
the remainder of 2010 are expected to be lower than the prior year, but up one
or two percentage points compared to the first quarter.
Selling, general and administrative
expenses.
Selling, general and administrative expenses
increased 12.3% to $4.5 million for the three-month period ended March 31, 2010,
compared to $4.0 million for the same period in 2009. The increase
was primarily due to expansion of the sales force in several of the operating
segments. Selling, general, and administrative expenses increased as
a percentage of revenue to 25.7% for the three-month period ended March 31,
2010, from 23.8% for the same period in 2009, mainly due to an expansion of the
sales force in the latter portion of 2009 and beginning of
2010. Due to the continuing sales force expansion, these higher
percentages are expected to continue through the rest of 2010.
Depreciation and
amortization.
Depreciation and amortization expenses remained
constant at $1.1 million for the three-month periods ended March 31, 2010 and
2009. Depreciation and amortization expenses as a percentage of
revenue decreased to 6.3% for the three-month period ended March 31, 2010, from
6.6% in the same period of 2009, due to the increased
revenue. Depreciation and amortization is projected to remain fairly
constant in dollar amounts through 2010.
Provision for income taxes.
The provision for income taxes totaled $2.1 million (39.9% effective tax
rate) for the three-month period ended March 31, 2010, compared to $1.6 million
(38.0% effective tax rate) for the same period in 2009. The effective
tax rate increased based on projected taxable income, moving the Company’s
federal tax rate from 34% to 35%. This increased rate adjusted
deferred tax balances by $152,000 with the offset to income tax
expense. The effective tax rate for the remainder of 2010 is
estimated at 37.5%.
In March
2010, President Obama signed into law the Patient Protection and Affordable Care
Act. and Health Care and Education Reconciliation Act of 2010. The
new legislation makes extensive changes to the current system of health care
insurance and benefits that will include changes in Medicare and Medicaid
payment policies and other healthcare delivery reforms that could potentially
impact our business. At this time, it is difficult to estimate this
impact to the Company: however, it is expected that the Company’s health care
costs could increase in 2011 as a result of this legislation. The
Company will continue to assess what effect this legislation will have on future
revenues as it better understands the impact on its clients.
Liquidity
and Capital Resources
The
Company believes it has adequate capital resources and operating cash flow to
meet its projected capital and debt maturity needs for the foreseeable
future. Requirements for working capital, capital expenditures, and
debt maturities will continue to be funded by operations and the Company’s
borrowing arrangements.
Working
Capital
The
Company had a working capital deficiency of $2.2 million as of March 31, 2010,
compared to a working capital deficiency of $4.4 million on December 31,
2009. The decrease in the working capital deficiency was primarily
due to a $3.7 million increase in cash and cash equivalents and accounts
receivable of $2.9 million, offset by decreases in deferred revenue and
recoverable income taxes of $2.2 million and $1.2 million,
respectively. The working capital deficiency balance was primarily
due to a deferred revenue balance of $14.1 million as of March 31, 2010, and
$11.9 million as of December 31, 2009.
The
deferred revenue balance is mainly due to timing of initial billings on new and
renewal contracts. The Company typically invoices clients for
performance tracking services and custom research projects before they have been
completed. Billed amounts are recorded as billings in excess of
revenue earned, or deferred revenue, on the Company’s consolidated financial
statements, and are recognized as income when earned. In addition,
when work is performed in advance of billing, the Company records this work as
revenue earned in excess of billings, or unbilled
revenue. Substantially all deferred revenue and all unbilled revenue
will be earned and billed respectively, within 12 months of the respective
period ends.
Capital
Expenditures
Capital
expenditures for the three-month period ended March 31, 2010 were
$339,000. The Company expects that the additional capital
expenditures during 2010 will be primarily for computer hardware and software,
production equipment, and furniture, and will be funded by cash generated from
operations.
Debt
and Equity
On
December 19, 2008, the Company borrowed $9.0 million under a term note to
partially finance the acquisition of MIV. The term note is payable in
35 equal installments of $97,000 with the balance of principal and interest
payable in a balloon payment due on December 31, 2011. Borrowings
under the term note bear interest at a rate of 5.2% per year.
The term
note is secured by certain of the Company’s assets, including the Company’s
land, building, accounts receivable and intangible assets. The term
note contains various restrictions and covenants applicable to the Company,
including requirements that the Company maintain certain financial ratios at
prescribed levels and restrictions on the ability of the Company to consolidate
or merge, create liens, incur additional indebtedness or dispose of
assets. As of March 31, 2010, the Company was in compliance with
these restrictions and covenants.
The
Company also entered into a revolving credit note in 2006. The
maximum aggregate amount available under the revolving credit note was
originally $3.5 million, but an addendum to the note dated March 26, 2008,
changed the amount to $6.5 million. The revolving credit note was
renewed in July 2009 to extend the term to July 31, 2010. The Company
may borrow, repay and re-borrow amounts under the revolving credit note from
time to time until its maturity on July 31, 2010.
The
maximum aggregate amount available under the revolving credit note is $6.5
million, subject to a borrowing base equal to 75% of the Company’s eligible
accounts receivable. Borrowings under the revolving credit note bear
interest at a variable rate equal to (1) prime (as defined in the credit
facility) less 0.50% or (2) one-, two-, three-, six- or twelve-month
LIBOR. As of March 31, 2010, the revolving credit note did not have a
balance. The Company expects to extend the term of the revolving
credit note for at least one year beyond the maturity date. If,
however, the note cannot be extended, the Company believes it has adequate cash
flows from operations to meet its debt and capital needs. As of March
31, 2010, the revolving credit note did not have a balance. According
to borrowing base requirements, the Company had the capacity to borrow $5.7
million as of March 31, 2010.
The
agreement under which the Company acquired MIV provides for contingent earn-out
payments over three years based on growth in revenue and
earnings. The 2009 earn-out payment, paid in February 2010, was
$172,000 net of closing valuation adjustments. The Company currently
estimates that the earn outs for 2010 and 2011 could be $2.0 million for each
year, and expects to fund these through cash flow from operations.
Shareholders’
equity increased $1.9 million to $46.1 million as of March 31, 2010, from $44.2
million as of December 31, 2009. The increase was primarily due to
net income, partly offset by dividends paid of $1.3 million.
Stock
Repurchase Program
In
February 2006, the Board of Directors of the Company authorized the repurchase
of 750,000 shares of common stock in the open market or in privately negotiated
transactions. As of March 31, 2010, the remaining number of shares
that could be purchased under this authorization was 275,316.
|
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, 2009.
|
ITEM4.
|
Controls and
Procedures
|
The
Company’s management, with the participation of the Company’s principal
executive officer and principal financial officer, has evaluated the
effectiveness of the design and operation of the Company’s disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934) as of the end of the period covered by this
report and has concluded that, as of the end of such period, the Company’s
disclosure controls and procedures were effective.
There
have been no changes in the Company’s internal control over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934) that occurred during the Company’s most recent fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting.
PART
II – Other Information
Risk
factors relating to the Company are contained in Part I, Item 1A of its Annual
Report on Form 10-K for the fiscal year ended December 31, 2009. No
material change to such risk factors has occurred during the three months ended
March 31, 2010.
|
ITEM
2.
|
Unregistered Sales of
Equity Securities and Use of
Proceeds
|
In
February 2006, the Board of Directors of the Company authorized the repurchase
of an additional 750,000 shares of Common Stock in the open market or in
privately negotiated transactions. Unless terminated earlier by
resolution of the Company’s Board of Directors, the repurchase program will
expire when the Company has repurchased all shares authorized for repurchase
thereunder. As of May 3, 2010, 474,684 shares have been repurchased
under that authorization.
The table
below summarizes stock repurchases for the three-month period ended March 31,
2010.
|
Period
|
|
Total
Number of
Shares
Purchased
|
|
|
Average
Price
Paid per
Share
|
|
|
Total Number of
Shares Purchased
as Part of Publicly
Announced
Plans or Programs
|
|
|
Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
1 – January 31, 2010
|
|
|
0
|
|
|
$
|
0.00
|
|
|
|
0
|
|
|
|
289,065
|
|
|
February
1 – February 28, 2010
|
|
|
2,876
|
|
|
$
|
22.41
|
|
|
|
2,876
|
|
|
|
286,189
|
|
|
March
1 – March 31, 2010
|
|
|
10,873
|
|
|
$
|
21.71
|
|
|
|
10,873
|
|
|
|
275,316
|
|
The
exhibits listed in the accompanying index of exhibits are filed as part of this
Quarterly Report on Form 10-Q.
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:
May 12, 2010
|
By:
|
/s/ Michael D. Hays
|
|
|
|
Michael
D. Hays
|
|
|
|
President
and Chief Executive Officer
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
Date:
May 12, 2010
|
By:
|
/s/ Patrick E. Beans
|
|
|
|
Patrick
E. Beans
|
|
|
|
Vice
President, Treasurer, Secretary and
|
|
|
|
Chief
Financial Officer (Principal
|
|
|
|
Financial
and Accounting
Officer)
|
NATIONAL
RESEARCH CORPORATION
EXHIBIT
INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the
Quarterly Period ended March 31, 2010
Exhibit
|
(31.1)
|
Certification
by the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a)
under the Securities Exchange Act of 1934.
|
|
|
|
|
(31.2)
|
Certification
by the Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a)
under the Securities Exchange Act of 1934.
|
|
|
|
|
(32)
|
Written
Statement of the Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section
1350.
|
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