NATIONAL RESEARCH CORP
10-Ks and 10-Qs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
|
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
fiscal year ended December 31, 2009
or
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from _______________ to _______________
Commission
file number: 0-29466
National Research Corporation
(Exact
name of registrant as specified in its charter)
|
Wisconsin
|
47-0634000
|
|
|
(State
or other jurisdiction
|
(I.R.S.
Employer
|
|
|
of
incorporation or organization)
|
Identification
No.)
|
|
|
1245
Q Street
|
||
|
Lincoln, Nebraska
|
68508
|
|
|
(Address
of principal executive offices)
|
(Zip
code)
|
Registrant’s
telephone number, including area code: (402) 475-2525
Securities
registered pursuant to Section 12(b) of the Act:
|
Title of Class
|
Name of Each Exchange on Which
Registered
|
|
|
Common
Stock, $.001 par value
|
The
NASDAQ Global Market
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes
¨
No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes
¨
No
x
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
¨
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
¨
Accelerated
filer
¨
Non-accelerated
filer
x
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
Aggregate
market value of the voting stock held by nonaffiliates of the registrant at June
30, 2009: $42,810,239.
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 March 30, 2010: 6,657,600 shares
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Proxy Statement for the 2010 Annual Meeting of Shareholders are
incorporated by reference into Part III.
TABLE
OF CONTENTS
|
Page
|
||
|
PART
I
|
||
|
Item
1.
|
Business
|
1
|
|
Item
1A.
|
Risk
Factors
|
6
|
|
Item
1B.
|
Unresolved
Staff Comments
|
11
|
|
Item
2.
|
Properties
|
11
|
|
Item
3.
|
Legal
Proceedings
|
11
|
|
PART
II
|
||
|
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
12
|
|
Item
6.
|
Selected
Financial Data
|
14
|
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
15
|
|
Item
7A.
|
Quantitative
and Qualitative Disclosure About Market Risk
|
22
|
|
Item
8.
|
Financial
Statements and Supplementary Data
|
23
|
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
44
|
|
Item
9A.
|
Controls
and Procedures
|
44
|
|
Item
9B.
|
Other
Information
|
45
|
|
PART
III
|
||
|
Item
10.
|
Directors
and Executive Officers of the Registrant
|
46
|
|
Item
11.
|
Executive
Compensation
|
46
|
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
46
|
|
Item
13.
|
Certain
Relationships and Related Transactions
|
47
|
|
Item
14.
|
Principal
Accountant Fees and Services
|
47
|
|
PART
IV
|
||
|
Item
15.
|
Exhibits
and Financial Statement Schedules
|
48
|
|
Signatures
|
51
|
|
i
|
Item
1.
|
Business
|
Special
Note Regarding Forward-Looking Statements
Certain
matters discussed below in this Annual Report on Form 10-K are “forward-looking
statements” intended to qualify for the safe harbors from liability established
by the Private Securities Litigation Reform Act of 1995. These
forward-looking statements can generally be identified as such because the
context of the statements include phrases such as the Company “believes,”
“expects” or other words of similar import. Similarly, statements
that describe the Company’s future plans, objectives or goals are also
forwarding-looking statements. Such forward-looking statements are
subject to certain risks and uncertainties which could cause actual results or
outcomes to differ materially from those currently
anticipated. Factors that could affect actual results or outcomes
include, without limitation, the factors set forth in “Risk
Factors.” 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 Annual Report on Form 10-K and the Company
undertakes no obligation to publicly update such forward-looking statements to
reflect subsequent events or circumstances.
General
National
Research Corporation (“NRC” or the “Company”) believes it is a leading provider
of ongoing survey-based performance measurement, improvement services and
governance education to the healthcare industry in the United States and
Canada. The Company believes it has achieved this leadership position
based on 29 years of industry experience and its relationships with many of the
industry’s largest payers and providers. The Company addresses the
growing needs of healthcare providers and payers to measure the care outcomes,
specifically experience and health status, of their patients, residents or
members. NRC 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 that they can
maximize resident and/or patient attraction, experience, retention and
profitability.
Since its
founding 29 years ago in 1981 as a Nebraska corporation (the Company
reincorporated in Wisconsin in September 1997), NRC has focused on the
information needs of the healthcare industry. The Company’s primary
types of information services are renewable performance tracking and improvement
services, subscription-based governance information and educational services,
and a renewable syndicated service.
While
performance data has always been of interest to healthcare providers and payers,
such information has become increasingly important to these entities as a result
of regulatory, industry and competitive requirements. In recent
years, the healthcare industry has been under significant pressure from
consumers, employers and the government to reduce costs. However, the
same parties that demanded cost reductions are now concerned that healthcare
service quality is being compromised under managed care. This concern
has created a demand for consistent, objective performance information by which
healthcare providers and payers can be measured and compared, and on which
physicians’ compensation can, in part, be based.
1
The
NRC Solution
The
Company addresses healthcare organizations’ growing need to track their
performance at the enterprise-wide, departmental and physician/caregiver
levels. The Company has been developing tools designed to enable its
clients to collect, in an unobtrusive manner, a substantial amount of
comparative performance information in order to analyze and improve their
practices to maximize resident and/or patient attraction, experience, retention
and profitability. NRC’s performance assessments offer a tangible
measurement of health service quality of the type currently demanded by
consumers, employers, industry accreditation organizations and
lawmakers.
The
Company’s solutions are designed to respond to managed care’s redefined
relationships among consumers, employers, payers and
providers. Instead of relying exclusively on static, mass-produced
questionnaires, NRC utilizes a dynamic data collection process to create a
personalized questionnaire which evaluates service issues specific to each
respondent’s healthcare experience. The flexibility of the Company’s
data collection process allows healthcare organizations to add timely,
market-driven questions relevant to matters such as industry performance
mandates, employer performance guarantees and internal quality improvement
initiatives. In addition, the Company assesses core service factors
relevant to all healthcare respondent groups (patients, members, employers,
employees, physicians, residents, families, etc.) and to all service points of a
healthcare system (inpatient, emergency room, outpatient, home health,
rehabilitation, behavioral health, long-term care, hospice, assisted living,
dental, etc.).
NRC
offers renewable performance tracking and improvement services,
subscription-based educational services, and a renewable syndicated
service. The Company has renewable performance tracking tools,
including those produced and delivered under its NRC Picker trade name and My
InnerView, Inc. (“MIV”), for gathering and analyzing data from survey
respondents on an ongoing basis with comparisons over time. These
performance tracking tools may be coupled with the Company’s improvement tools
to help clients not only measure performance, but know where to focus with ideas
and solutions for making improvements. The Company has the capacity
to measure performance beyond the enterprise-wide level. It has the
ability and experience to determine key performance indicators at the department
and individual physician/caregiver measurement levels, where the Company’s
services can best guide the efforts of its clients to improve quality and
enhance their market position. The improvement services of NRC Picker
provide a way of bridging the gap between measurement and
improvement. Additional offerings under the Company’s Payer Solutions
division include functional disease-specific and health status measurement
tools.
Through
its division known as The Governance Institute (“TGI”), NRC offers
subscription-based governance information and educational conferences designed
to improve the effectiveness of hospital and healthcare systems by continually
strengthening their boards, medical leadership, and management performance in
the United States. TGI conducts timely conferences, produces
publications, videos, white papers and research studies, and tracks industry
trends showcasing the best practices of healthcare boards across the
country.
The
syndicated NRC Healthcare Market Guide (“Ticker”), a stand-alone market
information and competitive intelligence source, as well as a comparative
performance database, allows the Company’s clients to assess their performance
relative to the industry, to access best practice examples, and to utilize
competitive information for marketing purposes.
Growth
Strategy
The
Company believes that it can continue to grow through (1) expanding the depth
and breadth of its current clients’ performance tracking services programs,
since healthcare organizations are increasingly interested in gathering
performance information at deeper levels of their organizations and from more of
their constituencies, (2) increasing the cross-selling of its complementary
services, including subscription-based governance information, (3) adding new
clients through penetrating the sizeable portion of the healthcare industry
which is not yet conducting performance assessments beyond the enterprise-wide
level or is not yet outsourcing this function, and (4) pursuing acquisitions of,
or investments in, firms providing products, services or technologies which
complement those of the Company.
2
Product
Offerings
NRC’s
data collection process provides ongoing, renewable performance tracking and is
the platform of the Company’s online tools. This performance tracking
program efficiently coordinates and centralizes an organization’s satisfaction
monitoring, thereby establishing a uniform methodology and survey instrument
needed to obtain valid performance information and improve
quality. Using the industry method of mail, telephone, or
internet-based data collection, this assessment process monitors the patient’s
or stakeholder’s experience across healthcare respondent groups (patients,
members, employers, employees, physicians, resident, family, etc.) and service
settings (inpatient, emergency room, outpatient, long-term care
etc.). Rather than be limited to only static, mass-produced
questionnaires which provide limited flexibility and performance insights, NRC’s
proprietary software generates individualized questionnaires, including
personalization such as patient name, treating caregiver name, encounter date
and, in some cases, the services received. To enhance the response
rates and the relevance of performance data and to be flexible and responsive to
healthcare organizations’ changing information needs, NRC creates personalized
questionnaires which evaluate service issues specific to each respondent’s
healthcare experience and includes questions which address core service factors
throughout a healthcare organization.
Unlike
some of its competitors, which use multiple questionnaires often sent to the
same respondents, the Company gathers data through one questionnaire, the
contents of which are selected from the Company’s library of questions after a
client’s needs are determined. As a result, the Company’s renewable
performance tracking programs and data collection processes (1) realize higher
response rates, obtain data more efficiently, and thereby provide healthcare
organizations with more feedback, (2) eliminate over-surveying (where one
respondent receives multiple surveys), and (3) allow healthcare organizations to
adapt questionnaire content to address management objectives and to assess
quality improvement programs or other timely marketplace issues.
The
Company recognizes that performance programs must do more than just measure the
experiences; they must measure and facilitate improvement. The
Company offers solutions designed to effectively measure and improve the most
important aspects of the patient’s or stakeholder’s experience. NRC’s
proprietary web-based electronic delivery systems provide clients the ability to
review results and reports online, independently analyze data, query data sets,
customize a number of reports and distribute reports
electronically. The Company has developed online improvement tools,
including a one-page report which provides a basis on which improvements can be
made, shows healthcare organizations which service factors impact their customer
group’s value and which have the greatest impact on satisfaction levels, and how
their performance in relationship to these key indicators changes over
time.
Ticker
serves as a stand-alone market information and competitive intelligence source,
as well as a comparative performance database. Ticker is the largest
consumer-based assessment of consumers’ perceptions of, and satisfaction with,
hospitals and health systems in more than 300 markets across the country,
representing the views of more than 267,000 households across nearly every
county in the continental United States. Ticker provides
comprehensive assessments, including consumer quality perceptions, product-line
preferences, service use and visit satisfaction for more than 3,200 hospitals
and health systems.
More
than 200 data items relevant to healthcare payers, providers and purchasers are
reported in the Ticker, including hospital quality and image ratings, hospital
selection factors, household preventative health behaviors, presence of chronic
conditions, and contemporary issues such as healthcare internet
utilization. Clients can purchase customized versions specific to
their local service areas, with the ability to benchmark performance results to
over 300 metro areas, 48 states or nationally. Ticker is delivered to
clients via Ticker’s exclusive web-based electronic delivery system, which
features easy to use graphs, charts and various report formats for multiple
users within the client’s organization. Another feature of the
web-based system is a national name search designed to allow a healthcare
organization with a national or regional presence to simultaneously compare the
performance of all its sites and pinpoint where strengths and weaknesses
exist. Clients who have renewed for multiple years of the study may
utilize the system’s trending capability which details how the performance of
the healthcare organization changes over time. The proprietary Ticker
data results are also used to produce reports which are customized to meet the
specific information needs of existing clients, as well as new healthcare
markets beyond the Company’s traditional client base.
3
Through
TGI, the Company offers subscription-based membership services. The
information and education services are provided for the boards of directors and
medical leadership of hospital and healthcare systems. These services are sold
and delivered in the form of a twelve-month subscription membership and include
accredited leadership conference and educational programs, customized research
reports, board advisory services, videos, books, policy guidelines, board
self-assessment tools, white papers, newsletters, and fax
surveys. The Company’s leadership conferences are available to all
prospective members by paying the applicable conference fee. The
Company also sells publications, periodicals, reference books, and associated
videos through its resource catalog.
The
Company’s MIV division is a leading provider of quality and performance
improvement solutions to the senior care profession. MIV offers
resident, family and employee satisfaction measurement and improvement products
to the long-term care, assisted and independent living markets in the United
States. MIV works with over 8,000 senior-care providers throughout
the United States, housing what the Company believes is the largest dataset of
senior-care satisfaction metrics in the nation.
Clients
The
Company’s ten largest clients accounted for 14%, 24%, and 29% of the Company’s
total revenue in 2009, 2008 and 2007, respectively. Approximately 8%,
8%, and 9% of the Company’s revenue was derived from foreign customers in 2009,
2008, and 2007, respectively.
Sales
and Marketing
The
Company generates the majority of its revenue from client renewals, supplemented
by its internal marketing efforts and a direct sales force. Sales
associates direct NRC’s sales efforts from Nebraska, Wisconsin and California in
the United States, and from Toronto in Canada. As compared to the
typical industry practice of compensating sales people with relatively high base
pay and a relatively small sales commission, NRC compensates its sales
associates with relatively low base pay and a relatively high per-sale
commission. The Company believes this compensation structure provides
incentives to its sales associates to surpass sales goals and increases the
Company’s ability to attract top-quality sales associates.
Marketing
efforts support the direct sales force’s new business generation and project
renewal initiatives. NRC conducts direct marketing campaigns and
public relations programs. NRC uses lead generation mechanisms to add
generated leads to its database of current and potential client
contacts. Finally, the Company’s public relations program includes
(1) an ongoing presence in leading industry trade press and in the mainstream
press, (2) public speaking at strategic industry conferences, (3) fostering
relationships with key industry constituencies and (4) the annual Consumer
Choice Award program recognizing top-ranking hospitals in more than 250
markets.
The
Company’s integrated marketing activities facilitate its ongoing receipt of
project requests-for-proposals, as well as direct sales force initiated prospect
contacts. The sales process typically spans a 120-day period
encompassing the identification of a healthcare organization’s information
needs, the education of prospects on NRC solutions (via proposals and in-person
sales presentations), and the closing of the sale. The Company’s
sales cycle varies depending on the particular service being marketed and the
size of the potential project. The subscription-based services
typically have a shorter sales cycle.
4
Competition
The
healthcare information and market research industry is highly
competitive. The Company has traditionally competed with healthcare
organizations’ internal marketing, market research and/or quality improvement
departments which create their own performance measurement tools, and with
relatively small specialty research firms which provide survey-based healthcare
market research and/or performance assessment. The Company’s main
competitors among such specialty firms are Press Ganey, which NRC believes has
revenue that is significantly larger than the Company’s revenue, and three or
four other companies which NRC believes have revenue smaller than the Company’s
revenue. The Company, to a certain degree, currently competes with,
and anticipates that in the future it may increasingly compete with, (1)
traditional market research firms which are significant providers of
survey-based, general market research and (2) firms which provide services or
products that complement healthcare performance assessments, such as healthcare
software or information systems. Although only a few of these
competitors have to-date offered survey-based, healthcare market research that
competes directly with the Company’s services, many of these competitors have
substantially greater financial, information gathering, and marketing resources
than the Company and could decide to increase their resource commitments to the
Company’s market. There are relatively few barriers to entry into the
Company’s market, and the Company expects increased competition in its market
which could adversely affect the Company’s operating results through pricing
pressure, increased marketing expenditures, and market share losses, among other
factors. There can be no assurance that the Company will continue to
compete successfully against existing or new competitors.
The
Company believes the primary competitive factors within its market include
quality of service, timeliness of delivery, service uniqueness, credibility of
provider, industry experience, and price. NRC believes that its
industry leadership position, exclusive focus on the healthcare industry,
dynamic questionnaire, syndicated products, accredited leadership conferences,
educational programs, comparative performance database, and relationships with
leading healthcare payers and providers position the Company to compete in this
market.
Intellectual
Property and Other Proprietary Rights
The
Company’s success depends in part upon its data collection processes, research
methods, data analysis techniques and internal systems, and procedures that it
has developed specifically to serve clients in the healthcare
industry. The Company has no patents. Consequently, it
relies on a combination of copyright and trade secret laws and associate
nondisclosure agreements to protect its systems, survey instruments and
procedures. There can be no assurance that the steps taken by the
Company to protect its rights will be adequate to prevent misappropriation of
such rights or that third parties will not independently develop functionally
equivalent or superior systems or procedures. The Company believes
that its systems and procedures and other proprietary rights do not infringe
upon the proprietary rights of third parties. There can be no
assurance, however, that third parties will not assert infringement claims
against the Company in the future or that any such claims will not result in
protracted and costly litigation, regardless of the merits of such claims or
whether the Company is ultimately successful in defending against such
claims.
Associates
As of
December 31, 2009, the Company employed a total of 260 persons on a full-time
basis. In addition, as of such date, the Company had 42 part-time
associates primarily in its survey operations, representing approximately 20
full-time equivalent associates. None of the Company’s associates are
represented by a collective bargaining unit. The Company considers
its relationship with its associates to be good.
5
Executive
Officers of the Registrant
The
following table sets forth certain information as of March 1, 2010, regarding
the executive officers of the Company:
|
Name
|
Age
|
Position
|
||
|
Michael
D. Hays
|
55
|
President,
Chief Executive Officer and Director
|
||
|
Patrick
E. Beans
|
52
|
Vice
President, Treasurer, Chief Financial Officer, Secretary and
Director
|
Michael D. Hays
has
served as Chief Executive Officer and a director since he founded the Company in
1981. He was appointed to the additional role of President of the
Company in July 2008, a position in which he also served from 1981 to
2004. Prior to founding the Company, Mr. Hays served for seven years
as a Vice President and a director of SRI Research Center, Inc. (n/k/a the
Gallup Organization).
Patrick E. Beans
has
served as Vice President, Treasurer, Chief Financial Officer, Secretary and a
director since 1997. He has served as the principal financial officer
since he joined the Company in August 1994. From June 1993 until
joining the Company, Mr. Beans was the finance director for the Central
Interstate Low-Level Radioactive Waste Commission, a five-state compact
developing a low-level radioactive waste disposal plan. From 1979 to
1988 and from June 1992 to June 1993, he practiced as a certified public
accountant.
Executive
officers of the Company are elected by and serve at the discretion of the
Company’s Board of Directors. There are no family relationships
between any directors or executive officers of NRC.
|
Item
1A.
|
Risk
Factors
|
You
should carefully consider each of the risks described below, together with all
of the other information contained in this Annual Report on Form 10-K, before
making an investment decision with respect to our securities. If any
of the following risks develop into actual events, our business, financial
condition or results of operations could be materially and adversely affected
and you may lose all or part of your investment.
We
depend on performance tracking contract renewals for a large share of our
revenue and our operating results could be adversely affected.
We expect
that a substantial portion of our revenue for the foreseeable future will
continue to be derived from renewable performance tracking
services. Substantially all contracts for such services are renewable
annually at the option of our clients, although a client generally has no
minimum purchase commitment under a contract and the contracts are generally
cancelable on short or no notice without penalty. To the extent that
clients fail to renew or defer their renewals from the quarter we anticipate,
our quarterly results may be materially adversely affected. Our
ability to secure renewals depends on, among other things, our ability to gather
and analyze performance data in a consistent, high-quality, and timely
fashion. In addition, the performance tracking and market research
activities of our clients are affected by accreditation requirements, enrollment
in managed care plans, the level of use of satisfaction measures in healthcare
organizations’ overall management and compensation programs, the size of
operating budgets, clients’ operating performance, industry and economic
conditions, and changes in management or ownership. As these factors
are beyond our control, we cannot assure you that we will be able to maintain
our renewal rates. Any material decline in renewal rates from
existing levels would have an adverse effect on our revenue and a corresponding
effect on our operating and net income.
6
Our
operating results may fluctuate on a quarterly basis and this may cause our
stock price to decline.
Our
operating results have fluctuated from period to period in the past and will
likely fluctuate significantly in the future due to various
factors. There has historically been fluctuation in our financial
results related to Ticker, a stand-alone market information intelligence source
and comparative performance database. In the future, we expect such
fluctuations will continue, but to a lesser degree. Until May 2008,
Ticker was deliverable on an annual basis, and historically we recognized
revenue when it was delivered to the principal customers pursuant to their
contracts, typically in the third quarter of the year. Substantially
all of the related costs were deferred and subsequently charged to direct
expenses contemporaneously with the recognition of the
revenue. Starting in May 2008, the Company began providing Ticker
subscription-based services to clients on a monthly basis generally over a
twelve-month period. Accordingly, we now recognize much of the Ticker
revenue ratably over a twelve-month period and, since October of 2008, all of
the related costs are expensed in the month they are incurred. We
will continue to have some annual sales which could increase fluctuation of
operating results in the third quarter. A delay in completing and
delivering Ticker, the timing of which is dependent upon our ability to access a
third-party’s respondent panel on a timely basis, could delay recognition of
such revenue and expenses which could materially affect operating results for
the affected periods. We generate additional revenue from incidental
customers subsequent to the completion of each monthly
edition. Revenue and costs for these subsequent services are
recognized as the services are performed and completed.
In
addition, our overall operating results may fluctuate as a result of a variety
of other factors, including the size and timing of orders from clients, client
demand for our services (which, in turn, is affected by factors such as
accreditation requirements, enrollment in managed care plans, operating budgets
and clients’ operating performance), the hiring and training of additional
staff, postal rate changes, and industry and general economic
conditions. Because a significant portion of our overhead,
particularly some costs associated with owning and occupying our building and
full-time personnel expenses, is fixed in the short-term, our results of
operations may be materially adversely affected in any particular quarter if
revenue falls below our expectations. These factors, among others,
make it possible that in some future quarter our operating results may be below
the expectations of securities analysts and investors which would have a
material adverse effect on the market price of our common stock.
We
operate in a highly competitive market and could experience increased price
pressure and expenses as a result.
The
healthcare information and market research industry is highly
competitive. We compete with healthcare organizations’ internal
marketing, market research and/or quality improvement departments that create
their own performance measurement tools, and with relatively small specialty
research firms that provide survey-based healthcare market research and/or
performance assessment. Our main competitors among such specialty
firms are Press Ganey, which we believe has revenue that is significantly larger
than our revenue, and three or four other companies that we believe have revenue
that is smaller than our revenue. We, to a certain degree, currently
compete with, and we anticipate that in the future we may increasingly compete
with, traditional market research firms that are significant providers of
survey-based, general market research and firms that provide services or
products that complement healthcare performance assessments, such as healthcare
software or information systems. Although only a few of these
competitors have to-date offered survey-based, healthcare market research that
competes directly with our services, many of these competitors have
substantially greater financial, information gathering and marketing resources
than we do, and could decide to increase their resource commitments to our
market. There are relatively few barriers to entry into our market,
and we expect increased competition in our market, which could adversely affect
our operating results through pricing pressure, increased client service and
marketing expenditures and market share losses, among other
factors. We cannot assure you that we will continue to compete
successfully against existing or new competitors, and our revenue and operating
net income could be adversely affected as a result.
7
Because
our clients are concentrated in the healthcare industry, our revenue and
operating results may be adversely affected by changes in regulations, a
business downturn or consolidation with respect to the healthcare
industry.
Substantially
all of our revenue is derived from clients in the healthcare
industry. As a result, our business, financial condition and results
of operations are influenced by conditions affecting this industry, including
changing political, economic, competitive and regulatory influences that may
affect the procurement practices and operation of healthcare providers and
payers. Recently, Congressional leaders enacted a comprehensive
healthcare reform plan, including provisions to control healthcare costs,
improve healthcare quality and expand access to affordable health
insurance. These programs could result in lower reimbursement rates
and otherwise change the environment in which providers and payers
operate. In addition, large private purchasers of healthcare services
are placing increasing cost pressure on providers. Healthcare
providers may react to these cost pressures and other uncertainties by
curtailing or deferring purchases, including purchases of our
services. Moreover, there has been consolidation of companies in the
healthcare industry, a trend which we believe will continue to
grow. Consolidation in this industry, including the potential
acquisition of certain of our clients, could adversely affect aggregate client
budgets for our services, or could result in the termination of a client’s
relationship with us. The impact of these developments on the
healthcare industry is difficult to predict and could have an adverse effect on
our revenue and a corresponding effect on our operating and net
income.
We
rely on a limited number of key clients and a loss of one or more of these key
clients will adversely affect our operating results.
We rely
on a limited number of key clients for a substantial portion of our
revenue. The Company’s ten largest clients accounted for 14%, 24%,
and 29% of the Company’s total revenue in 2009, 2008, and 2007,
respectively.
We cannot
assure you that we will maintain our existing client base, maintain or increase
the level of revenue or profits generated by our existing clients, or be able to
attract new clients. Furthermore, the healthcare industry continues
to undergo consolidation and we cannot assure you that such consolidation will
not cause us to lose clients. The loss of one or more of our large
clients or a significant reduction in business from such clients, regardless of
the reason, will have a negative effect on our revenue and a corresponding
effect on our operating and net income. See “Risk Factors - Because
our clients are concentrated in the healthcare industry, our revenue and
operating results may be adversely affected by changes in regulations, a
business downturn or consolidation with respect to the healthcare
industry.”
Our
future success depends on our ability to manage our growth, including
identifying acquisition candidates and effectively integrating acquired
companies.
Since our
inception, our growth has placed significant demands on our management,
administrative, operational and financial resources. In order to
manage our growth, we will need to continue to implement and improve our
operational, financial and management information systems, and continue to
expand, motivate and effectively manage an evolving workforce. If our
management is unable to effectively manage under such circumstances, the quality
of our services, our ability to retain key personnel, and our results of
operations could be materially adversely affected. Furthermore, we
cannot assure you that our business will continue to
expand. Reductions in clients’ spending on performance tracking and
market research, increased competition, pricing pressures, and other general
economic and industry trends could adversely affect our growth.
8
We may
achieve a portion of our future revenue growth, if any, through acquisitions of
complimentary businesses, products, services or technologies, although we
currently have no commitments or agreements with respect to any such
acquisitions. We have encountered minor problems with integrating
people and processes in connection with past acquisitions. We cannot
assure you that the integration of any possible future acquisitions will be
managed without incurring higher than expected costs and expenses. In
addition, we cannot assure you that, as a result of such unexpected costs and
expenses, any possible future acquisition will not negatively affect our
operating and net income.
We
face several risks relating to our ability to collect the data on which our
business relies.
Our
ability to provide timely and accurate performance tracking and market research
to our clients depends on our ability to collect large quantities of
high-quality data through surveys and interviews. If receptivity to
our survey and interview methods by respondents declines, or for some other
reason their willingness to complete and return surveys declines, or if we, for
any reason, cannot rely on the integrity of the data we receive, then our
revenue could be adversely affected, with a corresponding effect on our
operating and net income. In addition, we currently rely primarily on
mail and telephone surveys for gathering information. If one or more
of our competitors were to develop an online survey process that more
effectively and efficiently gathers information, then we would be at a
competitive disadvantage and our revenue could be adversely affected, with a
corresponding effect on our operating and net income.
We also
rely on third-party panels of pre-recruited consumer households to produce
Ticker in a timely manner. If we are not able to continue to use
these panels, or the time period in which we use these panels is altered and we
cannot find alternative panels on a timely, cost-competitive basis, we could
face an increase in our costs or an inability to effectively produce
Ticker. In either case, our operating and net income would be
negatively affected.
Our
principal shareholder effectively controls our company.
Michael
D. Hays, our President and Chief Executive Officer, beneficially owned 26.7% of
our outstanding common stock as of March 30, 2010. In addition, Mr.
Hays and his wife have created certain grantor retained annuity trusts and have
transferred to such trusts shares representing, in the aggregate, approximately
45.1% of our outstanding common stock as of March 30, 2010, all or a portion of
which will be returned to Mr. Hays or his wife over the next two
years. As a result, Mr. Hays can, or will be able to, control matters
requiring shareholder approval, including the election of directors and the
approval of significant corporate matters such as change of control
transactions. The effects of such influence could be to delay or
prevent a change of control of our company unless the terms are approved by Mr.
Hays.
Our
business and operating results could be adversely affected if we are unable to
attract or retain key managers and other personnel.
Our
future performance will depend, to a significant extent, upon the efforts and
ability of our key personnel who have expertise in gathering, interpreting and
marketing survey-based performance information for healthcare
markets. Although client relationships are managed at many levels
within our company, the loss of the services of Michael D. Hays, our President
and Chief Executive Officer, or one or more of our other senior managers, could
have a material adverse effect, at least in the short to medium term, on most
significant aspects of our business, including strategic planning, product
development, and sales and customer relations. As of
December 31, 2009, we maintained $500,000 of key officer life insurance on
Mr. Hays. Our success will also depend on our ability to hire, train
and retain skilled personnel in all areas of our business. Currently,
we do not have employment agreements with our officers or our other key
personnel. Competition for qualified personnel in our industry is
intense, and many of the companies that compete with us for qualified personnel
have substantially greater financial and other resources than
us. Furthermore, we expect competition for qualified personnel to
become more intense as competition in our industry increases. We
cannot assure you that we will be able to recruit, retain and motivate a
sufficient number of qualified personnel to compete
successfully.
9
If
intellectual property and other proprietary information technology were copied
or independently developed by our competitors, our operating results could be
negatively affected.
Our
success depends in part upon our data collection process, research methods, data
analysis techniques, and internal systems and procedures that we have developed
specifically to serve clients in the healthcare industry. We have no
patents. Consequently, we rely on a combination of copyright, trade
secret laws and associate nondisclosure agreements to protect our systems,
survey instruments and procedures. We cannot assure you that the
steps we have taken to protect our rights will be adequate to prevent
misappropriation of such rights, or that third parties will not independently
develop functionally equivalent or superior systems or procedures. We
believe that our systems and procedures and other proprietary rights do not
infringe upon the proprietary rights of third parties. We cannot
assure you, however, that third parties will not assert infringement claims
against us in the future, or that any such claims will not result in protracted
and costly litigation, regardless of the merits of such claims, or whether we
are ultimately successful in defending against such claims.
Errors
in, or dissatisfaction with, performance tracking and other surveys could
adversely affect our business.
Many
healthcare providers, payers and other entities or individuals use our renewable
performance tracking and other healthcare surveys in promoting and/or operating
their businesses, and as a factor in determining physician or employee
compensation. Consequently, any errors in the data received or in the
final surveys, as well as the actual results of such surveys, can have a
significant impact on such providers’, payers’ or other entities’ businesses,
and on any such individual’s compensation. In addition, parties who
have not performed well in our surveys may be dissatisfied with the results of
the surveys or the manner in which the results may be used by competitors or
others. Although any such errors or dissatisfaction with the results
of the surveys, or the manner in which the surveys have been used, has not
resulted in litigation against us, we cannot assure you that we will not face
future litigation, which may be costly, as a result of a healthcare provider’s,
payer’s, other entity’s or individual’s allegation of errors in our surveys or
dissatisfaction with the results thereof.
Regulatory
developments could adversely affect our revenue and results of
operations.
In the
operation of our business, we have access to, or gather certain confidential
information, such as medical histories of our respondents. As a
result, we could be subject to potential liability for any inappropriate
disclosure or use of such information. Even if we do not improperly
disclose confidential information, privacy laws, including the U.S. Health
Insurance Portability and Accountability Act of 1996, the U.S. Patriot Act and
Canadian legislation relating to personal health information, have had, and
could in the future have, the effect of increasing our costs and restricting our
ability to gather and disseminate information which could ultimately have a
negative effect on our revenue.
Several
years ago, the Centers for Medicare and Medicaid Services initiated a nationwide
effort to collect and publicly report hospital quality data, including the
patient experience of care questionnaire. This questionnaire is
called the HCAHPS questionnaire and was developed by the Agency for Healthcare
Research and Quality. After several years of development and
consensus building, the HCAHPS survey program began in 2006. This
survey program may increase competition and pricing pressures, which could
adversely affect our operating and net income.
The
enactment of the new comprehensive healthcare reform plan will include changes
in Medicare and Medicaid payment policies and other healthcare delivery reforms
that could potentially impact our business.
10
|
Item
1B.
|
Unresolved Staff
Comments
|
The
Company has no unresolved staff comments to report pursuant to this
item.
|
Item
2.
|
Properties
|
The
Company’s headquarters is located in an owned office building in Lincoln,
Nebraska, of which 62,000 square feet are used for the Company’s
operations. This facility houses all the capabilities necessary for
NRC’s survey programming, printing and distribution, data processing, analysis
and report generation, marketing, and corporate administration. The
Company’s Canadian office is located in a rented 2,600 square foot office
building in Markham, Ontario. The operations of TGI are located in
San Diego, California, where the Company leases 6,100 square feet of office
space. MIV’s operations are located in Wausau, Wisconsin, where the
Company leases 8,500 square feet of office space.
|
Item
3.
|
Legal
Proceedings
|
The
Company is not subject to any material pending litigation.
11
Item
5.
Market for the Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
The
Company’s Common Stock, $.001 par value (“Common Stock”), is traded on the
NASDAQ Global Market under the symbol “NRCI.” The following table
sets forth the range of high and low sales prices for, and dividends declared
on, the Common Stock for the period from January 1, 2008, through December 31,
2009:
|
High
|
Low
|
Dividends
Declared Per
Common Share
|
||||||||||
|
2008 Quarter Ended:
|
||||||||||||
|
March
31
|
$ | 27.94 | $ | 24.75 | $ | .14 | ||||||
|
June
30
|
$ | 32.06 | $ | 25.14 | $ | .14 | ||||||
|
September
30
|
$ | 35.58 | $ | 23.01 | $ | .14 | ||||||
|
December
31
|
$ | 34.93 | $ | 19.00 | $ | .14 | ||||||
|
2009 Quarter Ended:
|
||||||||||||
|
March
31
|
$ | 29.01 | $ | 19.48 | $ | .16 | ||||||
|
June
30
|
$ | 28.10 | $ | 23.10 | $ | .16 | ||||||
|
September
30
|
$ | 26.74 | $ | 23.55 | $ | .16 | ||||||
|
December
31
|
$ | 25.30 | $ | 20.32 | $ | .16 | ||||||
On March
30, 2010, there were approximately 19 shareholders of record, and approximately
500
beneficial
owners of the Common Stock.
In March
2005, the Company announced the commencement of a quarterly cash
dividend. Cash dividends of $4.3 million and $3.8 million in the
aggregate were declared and paid during the twelve-month periods ended December
31, 2009 and 2008, respectively. The payment and amount of future
dividends is at the discretion of the Company’s Board of Directors and will
depend on the Company’s future earnings, financial condition, general business
conditions and other factors.
The table
below summarizes the Company’s repurchases of its common stock during the
three-month period ended December 31, 2009.
|
Period
|
Total Number
of Shares
Purchased
|
Average
Price Paid
Per Share
|
Total Number
of Shares
Purchased as Part
of Publicly
Announced Plans
or Programs
(1)
|
Maximum Number of
Shares That May Yet Be
Purchased Under
the Plans or Programs
|
||||||||||||
|
October
1 - October 31, 2009
|
— | — | — | 289,275 | ||||||||||||
|
November
1 - November 30, 2009
|
— | — | — | 289,275 | ||||||||||||
|
December
1 - December 31, 2009
|
210 | $ | 21.69 | 210 | 289,065 | |||||||||||
|
(1)
|
In
February 2006, the Company’s Board of Directors authorized a stock
repurchase plan providing for the repurchase of an additional 750,000
shares. The plan has no expiration
date.
|
12
The
following graph compares the cumulative 5-year total return provided
shareholders on National Research Corporation's common stock relative to the
cumulative total returns of the NASDAQ Composite Index and the Russell 2000
Index. An investment of $100 (with reinvestment of all dividends) is
assumed to have been made in our common stock and in each of the indexes on
December 31, 2004, and its relative performance is tracked through December 31,
2009.
COMPARISON
OF FIVE-YEAR CUMULATIVE TOTAL RETURN DATA
|
|
12/04 | 12/05 | 12/06 | 12/07 | 12/08 | 12/09 | ||||||||||||||||||
|
National
Research Corporation
|
100.00 | 109.35 | 146.03 | 177.05 | 193.68 | 142.27 | ||||||||||||||||||
|
NASDAQ
Composite
|
100.00 | 101.33 | 114.01 | 123.71 | 73.11 | 105.61 | ||||||||||||||||||
|
Russell
2000
|
100.00 | 104.55 | 123.76 | 121.82 | 80.66 | 102.58 |
The
stock price performance included in this graph is not necessarily indicative of
future stock price performance
.
13
|
Item
6.
|
Selected Financial
Data
|
The
selected statement of income data for the years ended December 31, 2009,
2008, and 2007, and the selected balance sheet data at December 31, 2009 and
2008, are derived from, and are qualified by reference to, the audited
consolidated financial statements of the Company included elsewhere in this
Annual Report on Form 10-K. The selected statement of income data for
the years ended December 31, 2006 and 2005, and the balance sheet data at
December 31, 2007, 2006, and 2005, are derived from audited consolidated
financial statements not included herein. The Company has made
acquisitions and began recognizing share-based compensation expense during
the five years covered by the selected statement financial data.
See Note 2 and Note 7 to the Company's consolidated financial
statements.
|
Year
Ended December 31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
(In
thousands, except per share data)
|
||||||||||||||||||||
|
Statement
of Income Data:
|
||||||||||||||||||||
|
Revenue
|
$ | 57,692 | $ | 51,013 | $ | 48,923 | $ | 43,771 | $ | 32,437 | ||||||||||
|
Operating
expenses:
|
||||||||||||||||||||
|
Direct
expenses
|
24,574 | 23,611 | 21,801 | 19,445 | 13,642 | |||||||||||||||
|
Selling,
general and administrative
|
15,590 | 12,728 | 13,173 | 12,158 | 8,617 | |||||||||||||||
|
Depreciation
and amortization
|
3,831 | 2,685 | 2,583 | 2,260 | 1,762 | |||||||||||||||
|
Total
operating expenses
|
43,995 | 39,024 | 37,557 | 33,863 | 24,021 | |||||||||||||||
|
Operating
income
|
13,697 | 11,989 | 11,366 | 9,908 | 8,416 | |||||||||||||||
|
Other
income (expenses)
|
(580 | ) | (6 | ) | (248 | ) | (402 | ) | 99 | |||||||||||
|
Income
before income taxes
|
13,117 | 11,983 | 11,118 | 9,506 | 8,515 | |||||||||||||||
|
Provision
for income taxes
|
4,626 | 4,538 | 4,278 | 3,622 | 3,279 | |||||||||||||||
|
Net
income
|
$ | 8,491 | $ | 7,445 | $ | 6,840 | $ | 5,884 | $ | 5,236 | ||||||||||
|
Net
income per share - basic
|
$ | 1.28 | $ | 1.11 | $ | 1.00 | $ | 0.86 | $ | 0.74 | ||||||||||
|
Net
income per share - diluted
|
$ | 1.26 | $ | 1.09 | $ | 0.98 | $ | 0.85 | $ | 0.74 | ||||||||||
|
Dividends
per share
|
$ | 0.64 | $ | 0.56 | $ | 0.48 | $ | 0.40 | $ | 0.32 | ||||||||||
|
Weighted
average shares outstanding – basic
|
6,637 | 6,685 | 6,850 | 6,836 | 7,038 | |||||||||||||||
|
Weighted
average shares outstanding – diluted
|
6,723 | 6,831 | 7,011 | 6,954 | 7,118 | |||||||||||||||
|
December
31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||
|
Working
capital (deficit)
|
$ | (4,432 | ) | $ | (10,650 | ) | $ | (2,384 | ) | $ | (1,482 | ) | $ | 8,058 | ||||||
|
Total
assets
|
72,499 | 72,145 | 61,869 | 61,532 | 44,675 | |||||||||||||||
|
Total
debt, including current portion
|
7,719 | 12,954 | 2,993 | 11,093 | 1,471 | |||||||||||||||
|
Total
shareholders’ equity
|
$ | 44,171 | $ | 38,598 | $ | 42,286 | $ | 36,751 | $ | 32,593 | ||||||||||
14
|
Item
7.
|
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, internet-based surveys, focus
groups and in-person interviews. Since 2002, the current primary data
collection methodology used is direct mail, but the Company still uses other
methodologies for certain types of studies. The Company addresses the
growing need of healthcare providers and payers to measure the care outcomes,
specifically experience and health status of their patients and/or members, and
provides information on governance issues. NRC 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 that they can maximize resident and/or patient attraction,
experience, retention and profitability. The Company believes that a
driver of its growth and the growth of its industry 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 performance tracking services, subscription-based
educational and improvement services, and Ticker.
Acquisitions
On
December 19, 2008, the Company acquired My InnerView, Inc. (“MIV”), a leading
provider of quality and performance improvement solutions to the senior care
profession. MIV offers resident, family and employee satisfaction
measurement and improvement products to the long-term care, assisted and
independent living markets in the United States. MIV works with over
8,000 senior care providers throughout the United States housing what the
Company believes is the largest dataset of senior care satisfaction metrics in
the nation. The consideration paid at closing for MIV included
payment of $11,500,000 in cash and $440,000 of direct expenses capitalized as
purchase price. The merger agreement under which the Company acquired
MIV provided for contingent earn-out payments of which $581,000 of the 2009
earn-out was included in this amount.
On April
1, 2008, approximately 10 customer contracts were purchased from SQ Strategies
for $249,000. The recording of this asset purchase increased customer
related intangibles by $260,000 and deferred revenue by $11,000.
Critical
Accounting Policies and Estimates
The
preparation of financial statements requires management to make estimates and
assumptions that affect amounts reported therein. The most
significant of these areas involving difficult or complex judgments made by
management with respect to the preparation of the Company’s consolidated
financial statements for fiscal year 2009 include:
|
|
·
|
Revenue
recognition;
|
|
|
·
|
Valuation
of long-lived assets;
|
|
|
·
|
Valuation
of goodwill and identifiable intangible assets;
and
|
|
|
·
|
Income
taxes.
|
15
Revenue
Recognition
The
Company derives a majority of its operating revenue from its annually renewable
services, which include performance tracking services, subscription-based
educational services and Ticker. The Company provides interim and
annual performance tracking to its clients under annual client service
contracts, although such contracts are generally cancelable on short or no
notice without penalty. The Company provides subscription-based
educational services to clients generally under annual service contracts over a
twelve-month period and publishes healthcare market information for its clients
through its Ticker. Starting in May 2008, the Company began providing
Ticker subscription-based services to clients on a monthly basis generally over
a twelve-month period, however, some Ticker subscriptions will continue to be
sold and delivered on an annual basis. The Company also derives
revenue from its custom and other research projects.
The
Company’s performance tracking services are performance tracking and improvement
tools for gathering and analyzing data from survey respondents. Such
services are provided pursuant to contracts which are generally renewable
annually, and that provide for a customer-specific study which is conducted via
a series of surveys and delivered via a series of updates or reports, the timing
and frequency of which vary by contract (such as monthly or
weekly). These contracts are generally cancelable on short or no
notice without penalty and, since progress on these contracts can be tracked and
regular updates and reports are made, clients are entitled to any
work-in-process, but are obligated to pay for all services performed through
cancellation. Typically, these contracts are fixed-fee arrangements
with a portion of the project fee billed in advance and the remainder billed
periodically over the duration of the project. Revenue and direct
expenses for the Company’s performance tracking services are recognized under
the proportional performance method.
Under the
proportional performance method, the Company recognizes revenue based on output
measures or key milestones such as survey set-up, survey mailings, survey
returns and reporting. The Company measures its progress based on the
level of completion of these output measures and recognizes revenue
accordingly. Management judgments and estimates must be made and used
in connection with revenue recognized using the proportional performance
method. If management made different judgments and estimates, then
the amount and timing of revenue for any period could differ materially from the
reported revenue.
The
Company recognizes subscription-based educational service revenue over the
period of time the service is provided. Generally, the subscription
periods are for twelve months and revenue is recognized equally over the
subscription period.
Ticker
was published by NRC solely on an annual basis from 1996 to September
2008. The Company recognizes revenue on Ticker contracts upon
delivery to the principal customers. Revenue under some annual
contracts which do not include monthly updates is fully recognized upon
delivery, typically in the third quarter of the year. Starting in May
2008, the Company added subscription-based services, the revenue from which is
generally recognized on a monthly basis over a twelve-month
period. Until September 2008, the Company would defer costs of
preparing the survey data for Ticker and expense these at the time the annual
contract revenue was recognized. Starting in October 2008, these
costs were expensed monthly. The Company generates additional revenue
from incidental customers subsequent to the completion of each monthly
edition. Revenue and costs for these subsequent services are
recognized as the services are performed and completed. Ticker is
generally provided pursuant to contracts that provide for the receipt of survey
results that are customized to meet an individual client’s specific information
needs. Typically, these contracts are not cancelable by clients,
clients receive no rights in the comprehensive healthcare database which results
from this survey, other than the right to use the customized reports purchased
pursuant thereto, and amounts due for Ticker are billed prior to or at
delivery.
16
As a
result of the timing of recognition of revenue and costs associated with Ticker,
the Company’s margins vary throughout the year. The Company’s revenue
recognition policy for Ticker is not sensitive to significant estimates and
judgments.
Valuation
of Long-Lived Assets
The
Company monitors events and changes in circumstances that may require the
Company to review the carrying value of its long-lived assets. The
Company assesses whether an impairment of assets held and used may have occurred
using undiscounted future operating cash flows. Impairments, if they
occur, are measured using the fair value of the assets. The
assessment of the recoverability of long-lived assets may be adversely impacted
if estimated future operating cash flows are not achieved.
The
Company assesses the impairment of long-lived assets whenever events or changes
in circumstances indicate that the carrying value of such assets may not be
recoverable. Among others, management believes the following
circumstances are important indicators of potential impairment of such assets
and, as a result, may trigger an impairment review:
|
|
·
|
Significant
underperformance in comparison to historical or projected operating
results;
|
|
|
·
|
Significant
changes in the manner or use of acquired assets or the Company’s overall
strategy;
|
|
|
·
|
Significant
negative trends in the Company’s industry or the overall
economy;
|
|
|
·
|
A
significant decline in the market price for the Company’s common stock for
a sustained period; and
|
|
|
·
|
The
Company’s market capitalization falling below the book value of the
Company’s net assets.
|
Valuation
of Goodwill and Identifiable Intangible Assets
Intangible
assets include customer relationships, trade name and
goodwill. Goodwill represents the difference between the purchase
price paid in acquisitions using the purchase method of accounting, and the fair
value of the net assets acquired. Goodwill and indefinite-lived
intangibles are assessed annually for impairment and are not
amortized.
As of
December 31, 2009, the Company had goodwill of $39.9 million. As of
October 1 of each year (or more frequently as changes in circumstances
indicate), the Company evaluates the estimated fair value of the Company’s
goodwill. On these evaluation dates, to the extent that the carrying
value of the net assets of the Company’s reporting units having goodwill is
greater than the estimated fair value, impairment charges will be
recorded. The Company’s analysis has resulted in fair value
substantially exceeding its carrying value in four of the five business units
having goodwill. For the newest business unit, MIV, the estimated fair value did
not substantially exceed its carrying value. This was due, in part,
to the 2009 MIV revenues and operating margins being below original projections,
but management believes that the performance is improving during the first part
of 2010. No impairment loss has been recorded on goodwill in 2009,
2008 or 2007. The Company will continue to evaluate for impairment as
unforeseen future events may impact the goodwill valuation.
Income
Taxes
The
Company uses the asset and liability method of accounting for income
taxes. Under that method, deferred income tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases using enacted tax
rates. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment
date. Valuation allowances, if any, are established when necessary to
reduce deferred tax assets to the amount that is more likely than not to be
realized. Management judgment is required to determine the provision
for income taxes and to determine whether deferred income taxes will be realized
in full or in part.
17
Results
of Operations
The
following table sets forth, for the periods indicated, selected financial
information derived from the Company’s consolidated financial statements,
expressed as a percentage of total revenue and the percentage change in such
items versus the prior comparable period. The trends illustrated in
the following table may not necessarily be indicative of future
results. The discussion that follows the table should be read in
conjunction with the Company’s consolidated financial statements.
|
Percentage of Total Revenue
Year Ended December 31,
|
Percentage
Increase (Decrease)
|
|||||||||||||||||||
|
2009
|
2008
|
2007
|
2009
over
2008
|
2008
over
2007
|
||||||||||||||||
|
Revenue
|
100.0 | % | 100.0 | % | 100.0 | % | 13.1 | % | 4.3 | % | ||||||||||
|
Operating
expenses:
|
||||||||||||||||||||
|
Direct
expenses
|
42.6 | 46.3 | 44.6 | 4.1 | 8.3 | |||||||||||||||
|
Selling,
general and administrative
|
27.0 | 25.0 | 26.9 | 22.5 | (3.4 | ) | ||||||||||||||
|
Depreciation
and amortization
|
6.6 | 5.3 | 5.3 | 42.7 | 4.0 | |||||||||||||||
|
Total
operating expenses
|
76.3 | 76.5 | 76.8 | 12.7 | 3.9 | |||||||||||||||
|
Operating
income
|
23.7 | % | 23.5 | % | 23.2 | % | 14.2 | % | 5.5 | % | ||||||||||
Year
Ended December 31, 2009, Compared to Year Ended December 31, 2008
Revenue
. Revenue
increased 13.1% in 2009 to $57.7 million from $51.0 million in
2008. This was primarily due to the acquisition of MIV in December
2008.
Direct
expenses
. Direct expenses increased 4.1% to $24.6 million in
2009 from $23.6 million in 2008. The change was mainly due to
increased costs of servicing the additional revenue from the MIV business,
partially offset by the reductions in costs of servicing decreased revenue in
other areas of the Company. Direct expenses decreased as a percentage
of revenue to 42.6% in 2009 from 46.3% in 2008, primarily due to MIV’s current
business model with direct expenses as a percentage of revenue lower than the
other operating business units of the Company and growth in margin in the Ticker
division.
Selling, general and administrative
expenses
. Selling, general and administrative expenses
increased 22.5% to $15.6 million in 2009 from $12.7 million in
2008. The change was primarily due to increases in expenses related
to the MIV acquisition and expansions in the sales force. Selling,
general and administrative expenses increased as a percentage of revenue to
27.0% in 2009 from 25.0% in 2008, mainly due to sales expansion efforts in the
latter portion of 2009 throughout the Company.
Depreciation and
amortization
. Depreciation and amortization expenses increased
42.7% to $3.8 million in 2009 from $2.7 million in 2008. Depreciation
and amortization increased as a percentage of revenue to 6.6%
in 2009 from 5.3% in 2008. The increase was primarily due to the
depreciation of the fixed assets and amortization of intangible assets
associated with the acquisition of MIV.
18
Provision for income
taxes
. The provision for income taxes totaled $4.6 million
(35.3% effective tax rate) for 2009 compared to $4.5 million (37.9% effective
tax rate) for 2008. The effective tax rate was lower in 2009 due to
increases in research and development tax credits and state investment and
growth act credits, and decreases in Canadian statutory income tax
rates.
Year
Ended December 31, 2008, Compared to Year Ended December 31, 2007
Revenue
. Revenue
increased 4.3% in 2008 to $51.0 million from $48.9 million in
2007. This was primarily due to increases in the scope of work from
existing clients and the addition of new clients.
Direct
expenses
. Direct expenses increased 8.3% to $23.6 million in
2008 from $21.8 million in 2007. The change was primarily due to an
increase in salaries, benefits and travel of $1.2 million, the result of the
change in the business model, and the allocation of responsibilities related to
sales and servicing clients. In 2008, the Company divided its sales
force into two groups, one focused only on bringing in prospective new clients
and the second focused exclusively on servicing current clients. As a
result, salaries, benefits and travel attributable to the group focused on
current clients are now classified as direct expenses rather than selling,
general and administrative expenses. Direct expenses increased as a
percentage of revenue to 46.3% in 2008 from 44.6% in 2007.
Selling, general and administrative
expenses
. Selling, general and administrative expenses
decreased 3.4% to $12.7 million in 2008 from $13.2 million in
2007. The change was largely due to the 2008 change in the business
model and the allocation of responsibilities related to sales and servicing
clients. Selling, general and administrative expenses decreased as a
percentage of revenue to 25.0% in 2008 from 26.9% in 2007.
Depreciation and
amortization
. Depreciation and amortization expenses increased
4.0% to $2.7 million in 2008 from $2.6 million in 2007. Depreciation
and amortization as a percentage of revenue remained at 5.3% in 2008
and 2007 respectively.
Provision for income
taxes
. The provision for income taxes totaled $4.5 million
(37.9% effective tax rate) for 2008 compared to $4.3 million (38.5% effective
tax rate) for 2007. The effective tax rate was lower in 2008 due to
decreases in provincial income tax rates.
Inflation
and Changing Prices
Inflation
and changing prices have not had a material impact on revenues or net income
from continuing operations in the last three years.
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 $4.4 million on December 31, 2009,
as compared to a $10.7 million working capital deficiency on December 31,
2008. The decrease in the working capital deficiency was primarily
due to paying off the line of credit in 2009 that had a balance of $3.9 million
as of December 31, 2008. The working capital deficiency balance is
primarily due to a deferred revenue balance of $11.9 million and $12.9 million
as of December 31, 2009 and 2008, respectively.
19
The
deferred revenue balance is primarily 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 year ended December 31, 2009, were $2.9
million. These expenditures consisted mainly of computer software,
computer hardware, and furniture and other equipment. The Company
expects capital expenditure purchases in 2010, consisting primarily
of computer software and hardware and other equipment, to be funded through cash
generated from operations.
Debt
and Equity
On May
26, 2006, the Company entered into a credit facility pursuant to which it
borrowed $9.0 million under a term note and $3.5 million under a revolving
credit note in order to partially finance the acquisition of TGI. The
term note was refinanced on February 25, 2008, for the remaining balance of the
term note of $1.6 million. The refinanced term note required payments
of principal and interest in 17 monthly installments of $93,000, beginning March
31, 2008, and ending August 31, 2009. Borrowings under the
refinanced term note bore interest at an annual rate of 5.14%. The
Company paid off the term note in October 2008.
The
maximum aggregate amount available under the revolving credit note was
originally $3.5 million, but an addendum to the revolving credit note dated
March 26, 2008, changed the revolving credit note 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. 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 December 31, 2009, the
revolving credit note did not have a balance. According to borrowing
base requirements, the Company had the capacity to borrow $4.2 million as of
December 31, 2009.
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. In
2009, the Company made principal payments, in addition to the monthly
installments, on the term loan totaling $650,000.
The term
note is secured by certain of the Company’s assets, including the Company’s
land, building, accounts receivable and intangibles. 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 December 31, 2009, the Company was in compliance with these restrictions and
covenants.
The
merger agreement under which the Company acquired MIV provided for contingent
earn-out payments over three years based on growth in revenue and
earnings. As of December 31, 2009, a contingent earn-out payment of
$795,000 was accrued, which was then paid in February 2010. The
Company currently projects that the earn-out for 2010 and 2011 could be $3.0
million and $1.0 million, respectfully to be funded through cash flow from
operations.
20
Debt
assumed through the MIV acquisition included $90,000 in capital
leases. The capital leases are for production and mailing equipment
meeting capitalization requirements where the lease term exceeds more than 75%
of the estimated useful life. The equipment is being depreciated over
the lease term of 4.25 years ending in 2011.
The
Company had contractual obligations to make payments in the following amounts in
the future as of December 31, 2009:
|
Contractual Obligations
|
Total
Payments
|
Less than
One Year
|
One to
Three Years
|
Three to
Five Years
|
After
Five Years
|
|||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||
|
Operating
leases
|
$ | 1,600 | $ | 524 | $ | 1,066 | $ | 10 | $ | — | ||||||||||
|
Capital
leases
(1)
|
65 | 37 | 28 | — | — | |||||||||||||||
|
Uncertain
tax positions
(2)
|
78 | — | — | — | — | |||||||||||||||
|
Long-term
debt
(1)
|
8,376 | 1,162 | 7,214 | — | — | |||||||||||||||
|
Total
|
$ | 10,119 | $ | 1,723 | $ | 8,386 | $ | 10 | $ | — | ||||||||||
(1)
Includes
interest
(2)
It
is uncertain when the tax benefits will be settled.
The
Company generally does not make unconditional, non-cancelable purchase
commitments. The Company enters into purchase orders in the normal
course of business, but these purchase obligations do not exceed one
year.
Shareholders’
equity increased $5.6 million to $44.2 million in 2009 from $38.6 million in
2008. The increase was primarily due to net income of $8.5 million,
non-cash stock compensation expense of $619,000, and change in cumulative
translation adjustment of $775,000, offset by dividends paid of $4.3
million.
Stock
Repurchase Program
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. As of December 31, 2009, the
remaining shares that can be purchased are 289,065.
Off-Balance
Sheet Obligations
The
Company has no significant off-balance sheet obligations other than the
operating lease commitments disclosed in “Liquidity and Capital
Resources.”
Adoption
of New Accounting Pronouncements
In June
2009, FASB issued the Accounting Standards Codification™ (“Codification”) as the
source of authoritative U.S. generally accepted accounting principles (“GAAP”)
recognized by FASB to be applied by nongovernmental entities. The
Codification supersedes all then-existing non-SEC accounting and reporting
standards. In accordance with the Codification, references to
accounting literature in this report are presented in plain
English. The Codification did not change GAAP, but reorganizes the
literature. The Codification is effective for financial statements
issued for interim and annual periods ending after September 15,
2009. The adoption of the Codification has not had an impact on the
consolidated financial statements.
21
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. Management
continues to assess the impact of this authoritative guidance.
|
Item
7A.
|
Quantitative and
Qualitative Disclosure About Market
Risk
|
The
Company’s primary market risk exposure is changes in foreign currency exchange
rates and interest rates.
The
Company’s Canadian subsidiary uses as its functional currency the local currency
of the country in which it operates. It translates its assets and
liabilities into U.S. dollars at the exchange rate in effect at the balance
sheet date. It translates its revenue and expenses at the average
exchange rate during the period. The Company includes translation
gains and losses in accumulated other comprehensive income (loss), a component
of shareholders’ equity. Foreign currency translation gains or
(losses) were $775,000, ($937,000), and $568,000 in 2009, 2008, and 2007,
respectively. Gains and losses related to transactions denominated in
a currency other than the functional currency of the countries in which the
Company operates and short-term intercompany accounts are included in other
income (expense) in the consolidated statements of income.
The
Company’s primary interest rate risk is related to interest expense from the
Company’s revolving credit note with a variable interest
rate. However, the revolving credit note had no balance as of
December 31, 2009.
The
Company has limited interest rate risk related to interest income from the
Company’s investments in United States government notes with maturities of 90
days or less at the purchase date for the security. The Company has
classified these as cash equivalents. The discounted notes bear
interest at .041% and .091% annually. One of the notes matured on
February 3, 2010, and payment was received for the full principal
amount.
22
|
Item
8.
|
Financial Statements
and Supplementary Data
|
Quarterly
Financial Data (Unaudited)
The
following table sets forth selected financial information for each of the eight
quarters in the two-year period ended December 31, 2009. This
unaudited information has been prepared by the Company on the same basis as the
consolidated financial statements and includes all normal recurring adjustments
necessary to present fairly this information when read in conjunction with the
Company’s audited consolidated financial statements and the notes
thereto.
|
(In
thousands, except per share data)
|
||||||||||||||||||||||||||||||||
|
Quarter
Ended
|
||||||||||||||||||||||||||||||||
|
Dec.
31,
2009
|
Sept
30,
2009
|
June
30,
2009
|
Mar.
31,
2009
|
Dec.
31,
2008
|
Sept
30,
2008
|
June
30,
2008
|
Mar.
31,
2008
|
|||||||||||||||||||||||||
|
Revenue
|
$ | 13,841 | $ | 13,517 | $ | 13,594 | $ | 16,740 | $ | 12,189 | $ | 13,469 | $ | 11,901 | $ | 13,454 | ||||||||||||||||
|
Direct
expenses
|
5,548 | 5,446 | 6,304 | 7,276 | 5,766 | 6,598 | 5,320 | 5,927 | ||||||||||||||||||||||||
|
Selling,
general and administrative
|
4,042 | 3,872 | 3,697 | 3,979 | 2,768 | 3,053 | 3,348 | 3,559 | ||||||||||||||||||||||||
|
Depreciation
and amortization
|
929 | 901 | 891 | 1,110 | 682 | 661 | 676 | 666 | ||||||||||||||||||||||||
|
Operating
income
|
3,322 | 3,298 | 2,702 | 4,375 | 2,973 | 3,157 | 2,557 | 3,302 | ||||||||||||||||||||||||
|
Other
income (expense)
|
(134 | ) | (166 | ) | (183 | ) | (97 | ) | 70 | 14 | (58 | ) | (32 | ) | ||||||||||||||||||
|
Provision
for income taxes
|
951 | 1,138 | 910 | 1,627 | 1,148 | 1,205 | 918 | 1,267 | ||||||||||||||||||||||||
|
Net
income
|
$ | 2,237 | $ | 1,994 | $ | 1,609 | $ | 2,651 | $ | 1,895 | $ | 1,966 | $ | 1,581 | $ | 2,003 | ||||||||||||||||
|
Net
income per share – basic
|
$ | 0.34 | $ | 0.30 | $ | 0.24 | $ | 0.40 | $ | 0.29 | $ | 0.30 | $ | 0.24 | $ | 0.29 | ||||||||||||||||
|
Net
income per share – diluted
|
$ | 0.33 | $ | 0.30 | $ | 0.24 | $ | 0.39 | $ | 0.28 | $ | 0.29 | $ | 0.23 | $ | 0.29 | ||||||||||||||||
|
Weighted
average shares outstanding – basic
|
6,639 | 6,637 | 6,637 | 6,633 | 6,642 | 6,644 | 6,637 | 6,818 | ||||||||||||||||||||||||
|
Weighted
average shares outstanding – diluted
|
6,725 | 6,735 | 6,734 | 6,713 | 6,782 | 6,803 | 6,793 | 6,970 | ||||||||||||||||||||||||
23
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the
Shareholders and Board of Directors
National
Research Corporation:
We have
audited the accompanying consolidated balance sheets of National Research
Corporation and subsidiary as of December 31, 2009 and 2008, and the
related consolidated statements of income, shareholders’ equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2009. In connection with our audits of
the consolidated financial statements, we have also audited the financial
statement schedule listed in Item 15(a)(2) of this Form 10-K. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of National Research
Corporation and subsidiary as of December 31, 2009 and 2008, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2009, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ KPMG
LLP
Lincoln,
Nebraska
March 31,
2010
24
NATIONAL
RESEARCH CORPORATION AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
(
In thousands, except share
amounts
)
|
|
2009
|
2008
|
||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 2,512 | $ | 1,109 | ||||
|
Trade
accounts receivable, less allowance for doubtful accounts of $279 and $241
in 2009 and 2008, respectively
|
5,214 | 6,531 | ||||||
|
Unbilled
revenue
|
1,173 | 810 | ||||||
|
Prepaid
expenses and other
|
1,864 | 1,300 | ||||||
|
Recoverable
income taxes
|
803 | 574 | ||||||
|
Deferred
income taxes
|
98 | 115 | ||||||
|
Total
current assets
|
11,664 | 10,439 | ||||||
|
Net
property and equipment
|
13,975 | 13,747 | ||||||
|
Intangible
assets, net
|
6,883 | 8,056 | ||||||
|
Goodwill
|
39,924 | 39,276 | ||||||
|
Other
|
53 | 627 | ||||||
|
Total
assets
|
$ | 72,499 | $ | 72,145 | ||||
|
Liabilities and Shareholders’
Equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Current
portion of note payable
|
$ | 816 | $ | 4,581 | ||||
|
Accounts
payable
|
598 | 863 | ||||||
|
Accrued
wages, bonus and profit sharing
|
1,926 | 1,375 | ||||||
|
Accrued
expenses
|
848 | 1,344 | ||||||
|
Deferred
revenue
|
11,907 | 12,926 | ||||||
|
Total
current liabilities
|
16,095 | 21,089 | ||||||
|
Note
payable, net of current portion
|
6,903 | 8,374 | ||||||
|
Deferred
income taxes
|
5,126 | 4,084 | ||||||
|
Deferred
revenue
|
204 | — | ||||||
|
Total
liabilities
|
28,328 | 33,547 | ||||||
|
Shareholders’
equity:
|
||||||||
|
Common
stock, $.001 par value; authorized 20,000,000 shares, issued
8,018,044
in
2009 and 8,019,922
in 2008, outstanding
6,662,111 in 2009 and 6,667,517 in 2008
|
8 | 8 | ||||||
|
Additional
paid-in capital
|
27,871 | 27,217 | ||||||
|
Retained
earnings
|
37,905 | 33,677 | ||||||
|
Accumulated
other comprehensive income (loss), net of taxes
|
769 | (6 | ) | |||||
|
Treasury
stock, at cost; 1,355,933 shares in 2009 and 1,352,405 shares in
2008
|
(22,382 | ) | (22,298 | ) | ||||
|
Total
shareholders’ equity
|
44,171 | 38,598 | ||||||
|
Total
liabilities and shareholders’ equity
|
$ | 72,499 | $ | 72,145 | ||||
See
accompanying notes to consolidated financial statements.
25
NATIONAL
RESEARCH CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF INCOME
(
In thousands, except for per
share amounts
)
|
2009
|
2008
|
2007
|
||||||||||
|
Revenue
|
$ | 57,692 | $ | 51,013 | $ | 48,923 | ||||||
|
Operating
expenses:
|
||||||||||||
|
Direct
expenses
|
24,574 | 23,611 | 21,801 | |||||||||
|
Selling,
general and administrative
|
15,590 | 12,728 | 13,174 | |||||||||
|
Depreciation
and amortization
|
3,831 | 2,685 | 2,583 | |||||||||
|
Total
operating expenses
|
43,995 | 39,024 | 37,558 | |||||||||
|
Operating
income
|
13,697 | 11,989 | 11,365 | |||||||||
|
Other
income (expense):
|
||||||||||||
|
Interest
income
|
2 | 42 | 139 | |||||||||
|
Interest
expense
|
(405 | ) | (139 | ) | (483 | ) | ||||||
|
Other,
net
|
(177 | ) | 91 | 96 | ||||||||
|
Total
other expense
|
(580 | ) | (6 | ) | (248 | ) | ||||||
|
Income
before income taxes
|
13,117 | 11,983 | 11,117 | |||||||||
|
Provision
for income taxes
|
4,626 | 4,538 | 4,278 | |||||||||
|
Net
income
|
$ | 8,491 | $ | 7,445 | $ | 6,839 | ||||||
|
Net
income per share - basic
|
$ | 1.28 | $ | 1.11 | $ | 1.00 | ||||||
|
Net
income per share - diluted
|
$ | 1.26 | $ | 1.09 | $ | 0.98 | ||||||
|
Weighted
average shares and shares equivalent outstanding - basic
|
6,637 | 6,685 | 6,850 | |||||||||
|
Weighted
average shares and shares equivalent outstanding - diluted
|
6,723 | 6,831 | 7,011 | |||||||||
See
accompanying notes to consolidated financial statements.
26
NATIONAL
RESEARCH CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
AND
COMPREHENSIVE INCOME
(In
thousands except share and per share amounts)
|
Common
Stock
|
Additional
Paid-in
Capital
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
Income
|
Treasury
Stock
|
Total
|
|||||||||||||||||||
|
Balances
at December 31, 2006
|
8 | 21,820 | 26,488 | 359 | (11,924 | ) | 36,751 | |||||||||||||||||
|
Purchase
of 61,849 shares of treasury stock
|
— | — | — | — | (241 | ) | (241 | ) | ||||||||||||||||
|
Issuance
of 22,829 common shares for the exercise of stock options
|
— | 338 | — | — | — | 338 | ||||||||||||||||||
|
Tax
benefit from the exercise of options and vested restricted
stock
|
— | 111 | — | — | — | 111 | ||||||||||||||||||
|
Issuance
of 32,115 restricted common shares, net of 9,109 cancelled
|
— | — | — | — | — | — | ||||||||||||||||||
|
Non-cash
stock compensation expense
|
— | 1,240 | — | — | — | 1,240 | ||||||||||||||||||
|
Dividends
declared of $0.48 per common share
|
— | — | (3,324 | ) | — | — | (3,324 | ) | ||||||||||||||||
|
Comprehensive
income
|
||||||||||||||||||||||||
|
Change
in unrealized gain/(loss) on marketable securities, net of
tax
|
— | — | — | 4 | — | 4 | ||||||||||||||||||
|
Change
in cumulative translation adjustment
|
— | — | — | 568 | — | 568 | ||||||||||||||||||
|
Net
income
|
— | — | 6,839 | — | — | 6,839 | ||||||||||||||||||
|
Total
comprehensive income
|
7,411 | |||||||||||||||||||||||
|
Balances
at December 31, 2007
|
$ | 8 | $ | 23,509 | $ | 30,003 | $ | 931 | $ | (12,165 | ) | $ | 42,286, | |||||||||||
|
Purchase
of 395,558 shares of treasury stock
|
— | — | — | — | (10,133 | ) | (10,133 | ) | ||||||||||||||||
|
Issuance
of 144,614 common shares for the exercise of stock options
|
— | 1,856 | — | — | — | 1,856 | ||||||||||||||||||
|
Tax
benefit from the exercise of options and vested restricted
stock
|
— | 836 | — | — | — | 836 | ||||||||||||||||||
|
Cancellation
of 7,981 restricted common shares
|
— | — | — | — | — | — | ||||||||||||||||||
|
Non-cash
stock compensation expense
|
— | 1,016 | — | — | — | 1,016 | ||||||||||||||||||
|
Dividends
declared of $0.56 per common share
|
— | — | (3,771 | ) | — | — | (3,771 | ) | ||||||||||||||||
|
Comprehensive
income
|
||||||||||||||||||||||||
|
Change
in cumulative translation adjustment
|
— | — | — | (937 | ) | — | (937 | ) | ||||||||||||||||
|
Net
Income
|
7,445 | 7,445 | ||||||||||||||||||||||
|
Total
comprehensive income
|
— | — | — | — | — | 6,508 | ||||||||||||||||||
|
Balances
at December 31, 2008
|
$ | 8 | $ | 27,217 | $ | 33,677 | $ | (6 | ) | $ | (22,298 | ) | $ | 38,598 | ||||||||||
|
Purchase
of 3,528 shares of treasury stock
|
— | — | — | — | (84 | ) | (84 | ) | ||||||||||||||||
|
Issuance
of 2,023 common shares for the exercise of stock options
|
— | 18 | — | — | — | 18 | ||||||||||||||||||
|
Tax
benefit from the exercise of options and vested restricted
stock
|
— | 17 | — | — | — | 17 | ||||||||||||||||||
|
Cancellation
of 3,901 restricted common shares
|
— | — | — | — | — | — | ||||||||||||||||||
|
Non-cash
stock compensation expense
|
— | 619 | — | — | — | 619 | ||||||||||||||||||
|
Dividends
declared of $0.64 per common share
|
— | — | (4,263 | ) | — | — | (4,263 | ) | ||||||||||||||||
|
Comprehensive
income
|
||||||||||||||||||||||||
|
Change
in cumulative translation adjustment
|
— | — | — | 775 | — | 775 | ||||||||||||||||||
|
Net
income
|
8,491 | 8,491 | ||||||||||||||||||||||
|
Total
comprehensive income
|
— | — | — | — | — | 9,266 | ||||||||||||||||||
|
Balances
at December 31, 2009
|
$ | 8 | $ | 27,871 | $ | 37,905 | $ | 769 | $ | (22,382 | ) | $ | 44,171 | |||||||||||
See
accompanying notes to consolidated financial statements.
27
NATIONAL
RESEARCH CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(
In thousands
)
|
2009
|
2008
|
2007
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income
|
$ | 8,491 | $ | 7,445 | $ | 6,839 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
3,831 | 2,686 | 2,583 | |||||||||
|
Deferred
income taxes
|
1,733 | 430 | 117 | |||||||||
|
Loss
(gain) on sale of property and equipment
|
1 | — | (3 | ) | ||||||||
|
Tax
benefit from exercise of stock options
|
— | 156 | 31 | |||||||||
|
Non-cash
stock compensation expense
|
619 | 1,016 | 1,093 | |||||||||
|
Change
in assets and liabilities, net of effect of acquisitions:
|
||||||||||||
|
Trade
accounts receivable
|
1,396 | 637 | 616 | |||||||||
|
Unbilled
revenue
|
(315 | ) | 603 | 900 | ||||||||
|
Prepaid
expenses and other
|
(516 | ) | (155 | ) | 30 | |||||||
|
Accounts
payable
|
(278 | ) | (408 | ) | (73 | ) | ||||||
|
Accrued
expenses, wages, bonus and profit sharing
|
(73 | ) | 6 | 330 | ||||||||
|
Income
taxes payable and recoverable
|
(326 | ) | (249 | ) | 563 | |||||||
|
Deferred
revenue
|
(897 | ) | 3,008 | 1,540 | ||||||||
|
Net
cash provided by operating activities
|
13,666 | 15,175 | 14,566 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Purchases
of property and equipment
|
(2,909 | ) | (2,812 | ) | (1,956 | ) | ||||||
|
Acquisition,
net of cash acquired and earn-out on acquisition
|
(93 | ) | (12,551 | ) | — | |||||||
|
Purchases
of securities available-for-sale
|
— | — | (2,990 | ) | ||||||||
|
Proceeds
from the maturities of securities available-for-sale
|
— | 99 | 4,007 | |||||||||
|
Net
cash used in investing activities
|
(3,002 | ) | (15,264 | ) | (939 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Proceeds
from notes payable
|
4,916 | 18,564 | 375 | |||||||||
|
Payments
on notes payable
|
(10,152 | ) | (8,952 | ) | (8,474 | ) | ||||||
|
Proceeds
from exercise of stock options
|
18 | 731 | 338 | |||||||||
|
Tax
benefit on exercise of stock options and vested restricted
stock
|
17 | 680 | 80 | |||||||||
|
Purchase
of treasury stock
|
(84 | ) | (9,007 | ) | (241 | ) | ||||||
|
Payment
of dividends on common stock
|
(4,263 | ) | (3,771 | ) | (3,324 | ) | ||||||
|
Net
cash used in financing activities
|
(9,548 | ) | (1,755 | ) | (11,246 | ) | ||||||
|
Effect
of exchange rate changes on cash
|
287 | (402 | ) | 98 | ||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
1,403 | (2,246 | ) | 2,479 | ||||||||
|
Cash
and cash equivalents at beginning of period
|
1,109 | 3,355 | 876 | |||||||||
|
Cash
and cash equivalents at end of period
|
$ | 2,512 | $ | 1,109 | $ | 3,355 | ||||||
|
Supplemental
disclosure of cash paid for:
|
||||||||||||
|
Interest
expense
|
$ | 498 | $ | 122 | $ | 483 | ||||||
|
Income
taxes
|
$ | 2,999 | $ | 3,502 | $ | 3,457 | ||||||
Supplemental
disclosures of non-cash investing activities:
In
connection with the Company’s Equity Incentive plans, certain optionees tendered
to the Company previously owned shares to pay for the option strike
price. The total non-cash stock options exercised was $0, $1.1
million and $0 for the years ended December 31, 2009, 2008, and 2007,
respectively.
See
accompanying notes to consolidated financial statements.
28
NATIONAL RESEARCH CORPORATION AND
SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
(1)
|
Summary of Significant
Accounting Policies
|
Description
of Business and Basis of Presentation
National
Research Corporation (the “Company”) is a provider of ongoing survey-based
performance measurement, analysis, 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 on an unsecured credit basis. The Company’s
ten largest clients accounted for 14%, 24%, and 29% of the Company’s total
revenue in 2009, 2008, and 2007, respectively.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its
subsidiary. All significant intercompany transactions and balances
have been eliminated in consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
certain estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results
could differ from those estimates.
Translation
of Foreign Currencies
The
Company’s Canadian subsidiary uses as its functional currency the local currency
of the country in which it operates. It translates its assets and
liabilities into U.S. dollars at the exchange rate in effect at the balance
sheet date. It translates its revenue and expenses at the average
exchange rate during the period. The Company includes translation
gains and losses in accumulated other comprehensive income (loss), a component
of shareholders’ equity. Gains and losses related to transactions
denominated in a currency other than the functional currency of the countries in
which the Company operates and short-term intercompany accounts are included in
other income (expense) in the consolidated statements of income.
Revenue
Recognition
The
Company derives a majority of its operating revenue from its annually renewable
services, which include the performance tracking services, subscription-based
educational services and subscription-based and annual contracts of
Ticker. The Company provides interim and annual performance tracking
to its clients under annual client service contracts, although such contracts
are generally cancelable on short or no notice without penalty. The
Company provides subscription-based educational services to clients generally
under annual service contracts over a twelve-month period and publishes
healthcare market information for its clients through its Ticker on an annual or
monthly basis. The Company also derives revenue from its custom and
other research projects. Sales taxes collected from customers and
remitted to governmental authorities are accounted for on a net basis and,
therefore, are excluded from revenue in the consolidated statements of
income.
29
The
Company recognizes revenue from its performance tracking services and its custom
and other research projects using the proportional performance method of
accounting. These services typically include a series of surveys and
deliverable reports in which the timing and frequency vary by
contract. Progress on a contract can be tracked reliably, and
customers are obligated to pay as services are performed. The Company
recognizes revenue based on output measures or key milestones such as survey set
up, survey mailings, survey returns and reporting. The Company
measures its progress based on the level of completion of these output measures
and recognizes the revenue related to output measures. Losses
expected to be incurred, if any, on jobs in progress are charged to income as
soon as such losses are known. Revenue earned on contracts in
progress in excess of billings is classified as a current
asset. Amounts billed in excess of revenue earned are classified as a
current liability. Client projects are generally completed within a
twelve-month period.
The
Company recognizes subscription-based educational service revenue over the
period of time the service is provided. Generally, the subscription
periods are for twelve months and revenue is recognized equally over the
subscription period.
The
Company recognizes revenue on Ticker contracts upon delivery to the principal
customers. Revenue under some annual contracts which do not include
monthly updates is fully recognized upon delivery, typically in the third
quarter of the year. Starting in May 2008, the Company added
subscription-based services, the revenue from which is generally recognized on a
monthly basis over a twelve-month period. Until September 2008, the
Company deferred costs of preparing the survey data for Ticker and expensed
these at the time the annual contract revenue was recognized. These
costs are primarily incremental external direct costs solely related to
fulfilling the Company’s obligations under Ticker
contracts. Beginning in October 2008, these costs are expensed
monthly as incurred. The Company generates additional revenue from
incidental customers subsequent to the completion of each monthly
edition. Revenue and costs for these subsequent services are
recognized as the services are performed and completed.
Trade
Accounts Receivable
Trade
accounts receivable are recorded at the invoiced amount. The
allowance for doubtful accounts is the Company’s best estimate of the amount of
probable credit losses in the Company’s existing accounts
receivable. The Company determines the allowance based on specific
account analysis and on the Company’s historical write-off
experience. The Company reviews the allowance for doubtful accounts
monthly. Past due balances over 90 days and over a specified
amount are reviewed individually for collectability and provisions are made for
accounts not specifically reviewed. Account balances are charged off
against the allowance after all means of collection have been exhausted and the
potential for recovery is considered remote.
Property
and Equipment
Property
and equipment is stated at cost. Major expenditures to purchase
property or to substantially increase useful lives of property are
capitalized. Maintenance, repairs and minor renewals are expensed as
incurred. When assets are retired or otherwise disposed of, their
costs and related accumulated depreciation are removed from the accounts and
resulting gains or losses are included in income.
For costs
of software developed for internal use, the Company expenses computer software
costs as incurred in the preliminary project stage, which involves the
conceptual formulation, evaluation and selection of technology
alternatives. Costs incurred related to the design, coding,
installation and testing of software during the application project stage are
capitalized. Costs for training and application maintenance are
expensed as incurred. The Company has capitalized approximately
$450,000, $493,000 and $511,000, of internal and external costs incurred for the
development of internal use software for the years ended December 31, 2009, 2008
and 2007, respectively, with such costs classified as property and
equipment.
30
The
Company provides for depreciation and amortization of property and equipment
using annual rates which are sufficient to amortize the cost of depreciable
assets over their estimated useful lives. The Company uses the
straight-line method of depreciation and amortization over estimated useful
lives of five to ten years for furniture and equipment, three to five years for
computer equipment, three to five years for capitalized software, and ten to
forty years for the Company’s office building and related
improvements.
Impairment
of Long-Lived Assets
The
Company monitors events and changes in circumstances that may require the
Company to review the carrying value of its long-lived assets. The
Company assesses whether an impairment of assets held and used may have occurred
using undiscounted future operating cash flows. Impairments, if they
occur, are measured using the fair value of the assets. The
assessment of the recoverability of long-lived assets may be adversely impacted
if estimated future operating cash flows are not achieved.
The
Company assesses the impairment of long-lived assets whenever events or changes
in circumstances indicate that the carrying value of such assets may not be
recoverable. Among others, management believes the following
circumstances are important indicators of potential impairment of such assets
and as a result may trigger an impairment review:
|
|
·
|
Significant
underperformance in comparison to historical or projected operating
results;
|
|
|
·
|
Significant
changes in the manner or use of acquired assets or the Company’s overall
strategy;
|
|
|
·
|
Significant
negative trends in the Company’s industry or the overall
economy;
|
|
|
·
|
A
significant decline in the market price for the Company’s common stock for
a sustained period; and
|
|
|
·
|
The
Company’s market capitalization falling below the book value of the
Company’s net assets.
|
Goodwill
and Intangible Assets
Intangible
assets include customer relationships, trade names and
goodwill. Customer relationships are being amortized over periods of
five to fifteen years. One of the trade names is being amortized over
a period of ten years. The other trade name is indefinite
lived. Goodwill represents the difference between the purchase price
paid in acquisitions, using the purchase method of accounting, and the fair
value of the net assets acquired.
Goodwill
and intangible assets acquired in a purchase business combination and determined
to have an indefinite useful life are not amortized, but instead are tested for
impairment at least annually
.
Intangible
assets with estimable useful lives are amortized over their respective estimated
useful lives to their estimated residual values and reviewed for
impairment.
All of
the Company’s goodwill is allocated to five of its six reporting
units. As of December 31, 2009, the Company has goodwill of $39.9
million. As of October 1 of each year (or more frequently as changes
in circumstances indicate), the Company tests goodwill for impairment using
level 3 inputs as defined in the fair value hierarchy. Refer to Note
1, Fair Value Measurements, for the definition of the levels in the fair value
hierarchy. The inputs used to calculate the fair value included the
projected cash flows and a discount rate that the Company estimated would be
used by a market participant in valuing these assets. On these
evaluation dates, to the extent that the carrying value of the net assets of the
Company’s reporting units having goodwill is greater than the estimated fair
value, impairment charges will be determined and measured based on the estimated
fair value of goodwill as compared to its carrying value.
31
Income
Taxes
The
Company uses the asset and liability method of accounting for income
taxes. Under that method, deferred income tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis using enacted tax
rates. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment
date. Valuation allowances, if any, are established when necessary to
reduce deferred tax assets to the amount that is more likely than not to be
realized. The Company uses the deferral method of accounting for its
investment tax credits related to state tax incentives. During
the years ended December 31, 2009, 2008 and 2007, the Company recorded income
tax benefits relating to these tax credits of $189,000, $0, and $0.
The
Company recognizes the effect of income tax positions only if those positions
are more likely than not of being sustained. Recognized income tax
positions are measured at the largest amount that is greater than 50% likely of
being realized. Changes in recognition or measurement are reflected
in the period in which the change in judgment occurs.
The
Company had an unrecognized tax benefit at December 31, 2009 of $541,000,
excluding interest of $3,000 and no penalties. Of this amount $78,000
represents the net unrecognized tax benefits that, if recognized, would
favorably impact the effective income tax rate. The Company accrues
interest and penalties related to uncertain tax position in the statements of
income as income tax expense. The Company is not subject to tax
examinations for years prior to 2006 in the U.S. and 2005 in
Canada.
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.
Amounts
recognized in the financial statements with respect to these plans:
|
2009
|
2008
|
2007
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Amounts
charged against income, before income tax benefit
|
$ | 619 | $ | 1,016 | $ | 1,093 | ||||||
|
Amount
of related income tax benefit
|
238 | 391 | 421 | |||||||||
|
Total
net income impact
|
$ | 381 | $ | 625 | $ | 672 | ||||||
Cash
and Cash Equivalents
For
purposes of the statements of cash flows, the Company considers all highly
liquid investments with original maturities of three months or less to be cash
equivalents. Cash equivalents were $2.5 million consisting of U.S.
government notes of $1.6 million and money market funds of $930,000 as of
December 31, 2009, and $379,000 of money market funds as of December 31,
2008.
32
Fair
Value Measurements
The
Company’s valuation techniques are based on maximizing observable and
unobservable 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.
As of
December 31, 2009, those assets and liabilities that are measured at fair value
on a recurring basis consisted of the following:
|
Level 1
|
Level 2
|
Level 3
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Money
Market Funds
|
$ | 930 | $ | — | $ | — | ||||||
|
U.S.
government notes
|
— | 1,560 | — | |||||||||
|
Total
|
$ | 930 | $ | 1,560 | $ | — | ||||||
The
Company believes that the carrying amounts of its other financial instruments,
including cash, accounts payable and accrued expenses, approximate their fair
value due to the short-term maturities of these instruments. All
non-financial assets and liabilities 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 December 31, 2009, there was no indication of
impairment related to our non-financial assets and liabilities. Refer
to Note 1, Goodwill and Intangible Assets, for further description of the inputs
used to measure fair value of goodwill as part of our annual impairment
test.
Earnings
Per Share
Net
income per share has been calculated and presented for “basic” and “diluted” per
share data. Basic net income per share is computed by dividing net
income by the weighted average number of common shares
outstanding. Diluted income per share is computed by dividing net
income by the weighted average number of common shares adjusted for the dilutive
effects of options and restricted stock. At December 31, 2009, 2008
and 2007, the Company had 247,603, -0- and 48,000 options, respectively, which
have been excluded from the diluted net income per share computation because
their exercise price exceeds the fair market value.
The
weighted average shares outstanding were calculated as follows:
|
2009
|
2008
|
2007
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Common
stock
|
6,637 | 6,685 | 6,850 | |||||||||
|
Dilutive
effect of options
|
74 | 131 | 131 | |||||||||
|
Dilutive
effect of restricted stock
|
12 | 15 | 30 | |||||||||
|
Weighted
average shares used for dilutive per share information
|
6,723 | 6,831 | 7,011 | |||||||||
There are
no reconciling items between the Company’s reported net income and net income
used in the computation of basic and diluted income per share.
33
Comprehensive
Income
Comprehensive
income consists of net income and other comprehensive income
(loss). Other comprehensive income (loss) refers to revenue,
expenses, gains and losses that are not included in net income, but rather are
recorded directly in stockholder’s equity. For the years ended
December 31, 2009 and 2008 accumulated other comprehensive income
(loss) was $769,000 and ($6,000), respectively, consisting solely of
changes in the cumulative translation adjustment.
Segment
Information
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 within the authoritative guidance on disclosure about
enterprise segments. 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, best practice improvement
services, and a renewable syndicated service; Healthcare Market Guide (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
(TGI) 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
profession.
Adoption
of New Accounting Pronouncements
In June
2009, FASB issued the Accounting Standards Codification™ (“Codification”) as the
source of authoritative U.S. generally accepted accounting principles (“GAAP”)
recognized by FASB to be applied by nongovernmental entities. The
Codification supersedes all then-existing non-SEC accounting and reporting
standards. In accordance with the Codification, references to
accounting literature in this report are presented in plain
English. The Codification did not change GAAP, but reorganizes the
literature. The Codification is effective for financial statements
issued for interim and annual periods ending after September 15,
2009. The adoption of the Codification has not had an impact on the
consolidated financial statements.
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
December 31, 2009, management believes that adoption of this new guidance will
not have a material effect on the consolidated financial
statements.
34
|
(2)
|
Acquisitions
|
On
December 19, 2008, the Company acquired My InnerView, Inc. (“MIV”), a leading
provider of quality and performance improvement solutions to the senior care
profession. MIV offers resident, family and employee satisfaction
measurement and improvement products to the long term-care, assisted and
independent living markets in the United States. MIV works with over
8,000 senior care providers throughout the United States, housing what the
Company believes is the largest dataset of senior care satisfaction metrics in
the nation. The acquisition was completed in order to pursue the
Company’s strategy of expanding additional service offerings to the healthcare
industry in the United States and Canada. This acquisition gives the
Company a foundation upon which to expand in the senior care
profession. The consideration paid at closing for MIV included a
payment of $11.5 million in cash and $440,000 of direct expenses capitalized as
purchase price. The merger agreement under which the Company acquired
MIV provided for contingent earn-out payments over three years based on revenue
and operating income increases.
In
connection with the acquisition the Company recorded the following amounts as
its preliminary purchase price allocation, based on the estimated fair value of
the assets acquired and liabilities assumed at the date of
acquisition:
|
Fair Value
|
||||
|
(In thousands)
|
||||
|
Current
Assets
|
$ | 1,290 | ||
|
Property
and equipment
|
846 | |||
|
Customer
relationships
|
3,003 | |||
|
Goodwill
|
8,833 | |||
|
Other
Long Term Assets
|
581 | |||
|
Total
acquired assets
|
14,553 | |||
|
Less
total liabilities
|
2,613 | |||
|
Net
assets acquired
|
$ | 11,940 | ||
The
excess of purchase price over the fair value of net assets acquired resulted in
the Company recording $8.8 million of goodwill. The customer
relationships acquired intangible asset is being amortized over a useful life of
10 years. The amortization of customer relationships and goodwill is
non-deductible for tax purposes.
During
the year ended December 31, 2009, the Company adjusted the initial purchase
price allocation resulting in a net increase to goodwill of $240,000, which was
due to additional contingent consideration earned of $795,000, deferred tax
adjustments of $630,000, and allowance for doubtful accounts of
$75,000.
The
following unaudited pro forma information for the Company has been prepared as
if the acquisition of MIV had occurred on January 1, 2007. 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. The pro forma adjustments
include the impact of depreciation and amortization of property and equipment
and intangible assets acquired, interest expense on the acquisition debt, and
income tax benefits for tax effects of the foregoing adjustments to
depreciation, amortization and interest expense.
35
|
2008
|
2007
|
|||||||
|
(In thousands, except per share amounts)
(Unaudited)
|
||||||||
|
Revenue
|
$ | 58,008 | $ | 54,904 | ||||
|
Net
income
|
$ | 7,457 | $ | 6,586 | ||||
|
Earnings
per share - basic
|
$ | 1.12 | $ | 0.96 | ||||
|
Earnings
per share - diluted
|
$ | 1.09 | $ | 0.94 | ||||
|
(3)
|
Property and
Equipment
|
At
December 31, 2009 and 2008, property and equipment consisted of the
following:
|
2009
|
2008
|
|||||||
|
(In thousands)
|
||||||||
|
Furniture
and equipment
|
$ | 2,639 | $ | 2,536 | ||||
|
Computer
equipment and software
|
16,911 | 14,467 | ||||||
|
Building
|
9,130 | 9,108 | ||||||
|
Land
|
425 | 425 | ||||||
| 29,105 | 26,536 | |||||||
|
Less
accumulated depreciation and amortization
|
15,130 | 12,789 | ||||||
|
Net
property and equipment
|
$ | 13,975 | $ | 13,747 | ||||
|
(4)
|
Goodwill and
Intangible Assets
|
Goodwill
and intangible assets consisted of the following at December 31, 2009 and
2008:
|
2009
|
2008
|
|||||||
|
(In thousands)
|
||||||||
|
Goodwill
|
$ | 39,924 | $ | 39,276 | ||||
|
Non-amortizing
other intangible assets:
|
||||||||
|
Trade
name
|
1,191 | 1,191 | ||||||
|
Amortizing
other intangible assets:
|
||||||||
|
Customer
related intangibles
|
8,174 | 8,150 | ||||||
|
Trade
name
|
1,572 | 1,572 | ||||||
|
Total
other intangible assets,
|
10,937 | 10,913 | ||||||
|
Less
accumulated amortization
|
4,054 | 2,857 | ||||||
|
Other
intangible assets, net
|
$ | 6,883 | $ | 8,056 | ||||
36
The
following represents a summary of changes in the Company’s carrying amount of
goodwill for the years ended December 31, 2009, 2008, and 2007:
|
(In thousands)
|
||||
|
Balance
as of December 31, 2006
|
$ | 30,014 | ||
|
Smaller
World additional payment for contingent consideration
|
652 | |||
|
Foreign
currency translation
|
385 | |||
|
Balance
as of December 31, 2007
|
$ | 31,051 | ||
|
MIV
acquisition
|
8,833 | |||
|
Foreign
currency translation
|
(608 | ) | ||
|
Balance
as of December 31, 2008
|
$ | 39,276 | ||
|
Foreign
currency translation
|
408 | |||
|
MIV
deferred tax adjustments
|
(630 | ) | ||
|
MIV
allowance for doubtful accounts
|
75 | |||
|
MIV
contingent consideration earned
|
795 | |||
|
Balance
as of December 31, 2009
|
$ | 39,924 | ||
The
merger agreement under which the Company acquired MIV provided for contingent
earn-out payments over three years based on growth in revenue and
earnings. As of December 31, 2009, a contingent earn-out payment of
$795,000 was accrued, which was then paid in February 2010.
During
2007, an additional payment was made to Smaller World Communications for
contingent consideration in accordance with the purchase
agreement. The purchase agreement included two scheduled payments of
additional purchase price in 2006 and 2008 of $536,000 and $714,000
respectively, as a result of meeting certain revenue goals.
On April
1, 2008, approximately 10 customer contracts were purchased from SQ Strategies
for $249,000. The recording of this purchase increased customer
related intangibles by $260,000 and deferred revenues by $11,000.
Aggregate
amortization expense for customer related intangibles and trade names for the
year ended December 31, 2009, was $1.2 million. Estimated
amortization expense for the next five years is: 2010—$1.2 million; 2011—$1.1
million; 2012—$836,000; 2013—$572,000; 2014—$543,000; thereafter $1.5
million.
(5)
Income
Taxes
For the
years ended December 31, 2009, 2008, and 2007, income before income taxes
consists of the following:
|
2009
|
2008
|
2007
|
||||||||||
|
U.S.
Operations
|
$ | 11,497 | $ | 10,406 | $ | 9,664 | ||||||
|
Foreign
Operations
|
1,620 | 1,577 | 1,453 | |||||||||
| $ | 13,117 | $ | 11,983 | $ | 11,117 | |||||||
37
Income
tax expense consisted of the following components:
|
Current
|
Deferred
|
Total
|
||||||||||
|
2009
:
|
||||||||||||
|
Federal
|
$ | 2,433 | $ | 1,109 | $ | 3,542 | ||||||
|
Foreign
|
532 | 3 | 535 | |||||||||
|
State
|
(21 | ) | 570 | 549 | ||||||||
|
Total
|
$ | 2,944 | $ | 1,682 | $ | 4,626 | ||||||
|
2008
:
|
||||||||||||
|
Federal
|
$ | 2,963 | $ | 350 | $ | 3,313 | ||||||
|
Foreign
|
549 | (5 | ) | 544 | ||||||||
|
State
|
596 | 85 | 681 | |||||||||
|
Total
|
$ | 4,108 | $ | 430 | $ | 4,538 | ||||||
|
2007
:
|
||||||||||||
|
Federal
|
$ | 2,971 | $ | 65 | $ | 3,036 | ||||||
|
Foreign
|
588 | (21 | ) | 567 | ||||||||
|
State
|
603 | 72 | 675 | |||||||||
|
Total
|
$ | 4,162 | $ | 116 | $ | 4,278 | ||||||
The
difference between the Company’s income tax expense as reported in the
accompanying consolidated financial statements and the income tax expense that
would be calculated applying the U.S. federal income tax rate of 34% on
pretax income was as follows:
|
2009
|
2008
|
2007
|
||||||||||
|
Expected
federal income taxes
|
$ | 4,460 | $ | 4,074 | $ | 3,780 | ||||||
|
Foreign
tax rate differential
|
(16 | ) | (8 | ) | 31 | |||||||
|
State
income taxes, net of federal benefit and state tax credits
|
362 | 449 | 446 | |||||||||
|
Federal
tax credits
|
(183 | ) | (51 | ) | (51 | ) | ||||||
|
Uncertain
tax positions
|
27 | — | — | |||||||||
|
Valuation
allowance
|
18 | — | — | |||||||||
|
Other
|
(42 | ) | 74 | 73 | ||||||||
|
Total
|
$ | 4,626 | $ | 4,538 | $ | 4,278 | ||||||
38
Deferred
tax assets and liabilities at December 31, 2009 and 2008, were comprised of the
following:
|
2009
|
2008
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Allowance
for doubtful accounts
|
$ | 105 | $ | 93 | ||||
|
Accrued
expenses
|
248 | 231 | ||||||
|
Share
based compensation
|
1,034 | 892 | ||||||
|
Other
|
— | 83 | ||||||
|
Gross
deferred tax assets
|
1,387 | 1,299 | ||||||
|
Less
Valuation Allowance
|
(47 | ) | — | |||||
|
Deferred
tax assets
|
1,340 | 1,299 | ||||||
|
Deferred
tax liabilities:
|
||||||||
|
Prepaid
expenses
|
188 | 243 | ||||||
|
Property
and equipment
|
1,602 | 1,263 | ||||||
|
Intangible
assets
|
4,282 | 3,762 | ||||||
|
Other
|
296 | — | ||||||
|
Deferred
tax liabilities
|
6,368 | 5,268 | ||||||
|
Net
deferred tax liabilities
|
$ | (5,028 | ) | $ | (3,969 | ) | ||
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. The
net impact on income tax expense related to changes in the valuation allowance
for 2009 and 2008 were $18,000 and $0, respectively. The current year
change relates to increases to the valuation allowance for capital loss
carryforwards.
The
Company has capital loss carryforwards of $123,000 which will begin to expire in
2010. A total of $76,000 of the capital loss carryforwards relate to
the pre-acquisition periods of acquired companies. The Company has
provided a $47,000 valuation allowance against the tax benefit associated with
the capital loss carryforwards.
The
undistributed foreign earnings of the Company’s foreign subsidiary of
approximately $4.1 million are considered to be indefinitely
reinvested. Accordingly, no provision for U.S. federal and state
income taxes or foreign withholding taxes have been provided for such
undistributed earnings. It is impractical to determine the additional
income tax liability, if any, associated with the repatriation of undistributed
earnings.
Effective
January 1, 2007, the Company adopted guidance regarding accounting for
uncertainty in income taxes. This accounting standards adoption had
no impact on the Company. The unrecognized tax benefit at December
31, 2009 was $541,000, excluding interest of $3,000 and no
penalties. Of this amount $78,000 represents the net unrecognized tax
benefits that, if recognized, would favorably impact the effective income tax
rate.
The
Company accrues interest and penalties related to uncertain tax position in the
statements of income as income tax expense.
39
The
Company believes it is reasonably possible that the total amount of unrecognized
tax benefits will not decrease within the next 12 months.
The
change in the unrecognized tax benefits for 2009 is as follows. There
was no change in unrecognized tax benefits during 2008.
|
(In thousands)
|
||||
|
Balance
of unrecognized tax benefits at December 31, 2008
|
$ | — | ||
|
Increases
for tax positions established during prior
years
|
509 | |||
|
Increases
for tax positions established for the current period
|
32 | |||
|
Balance
of unrecognized tax benefits at December 31, 2009
|
$ | 541 | ||
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.
|
(6)
|
Notes
Payable
|
Notes
payable consisted of the following:
|
2009
|
2008
|
|||||||
|
(In
thousands)
|
||||||||
|
Note
payable to US Bank, interest 5.2% fixed rate, 35 scheduled principal and
interest payments of $97,000, final balloon payment of interest and
principal due December 31, 2011, secured by land, building, accounts
receivable and intangible assets.
|
7,659 | 9,000 | ||||||
|
Revolving
credit note with US Bank, subject to borrowing base of 75% of eligible
accounts receivable, matures July 31, 2010, maximum available $6.5
million
|
— | 3,850 | ||||||
|
Capital
leases
|
60 | 90 | ||||||
|
Other
debt
|
— | 15 | ||||||
|
Total
notes payable
|
7,719 | 12,955 | ||||||
|
Less
current portion
|
816 | 4,581 | ||||||
|
Note
payable, net of current portion
|
$ | 6,903 | $ | 8,374 | ||||
On May
26, 2006, the Company entered into a credit facility pursuant to which it
borrowed $9.0 million under a term note and $3.5 million under a revolving
credit note in order to partially finance the acquisition of TGI. The
term note was refinanced on February 25, 2008, for the remaining balance of the
term note of $1.6 million. The refinanced term note required payments
of principal and interest in 17 monthly installments of $93,000 beginning March
31, 2008, and ending August 31, 2009. Borrowings under the
refinanced term note bore interest at an annual rate of 5.14%. The
Company made additional payments and paid off the term note in October
2008.
The
maximum aggregate amount available under the revolving credit note was
originally $3.5 million, but an addendum to the revolving credit note dated
March 26, 2008, changed the revolving credit note 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
December 31, 2009, the revolving credit note did not have a
balance. According to borrowing base requirements, the Company had
the capacity to borrow $4.2 million as of December 31, 2009.
40
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. In
2009, the Company made principal payments, in addition to the monthly
installments, on the term loan totaling $650,000.
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 December 31, 2009, the Company was in compliance with
these restrictions and covenants.
Debt
acquired through the MIV acquisition included $90,000 in capital
leases. The capital leases are for production and mailing
equipment meeting capitalization requirements where the lease term exceeds more
than 75% of the estimated useful life. The equipment is being
depreciated over the lease term of 4.25 years ending in 2011.
The
aggregate maturities of the note payable for each of the five years subsequent
to December 31, 2009, are:
|
Total
Payments
|
2010
|
2011
|
2012
|
2013
|
2014
|
|||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||||||
|
Notes
payable
|
$ | 7,659 | $ | 783 | $ | 6,876 | $ | — | $ | — | $ | — | ||||||||||||
|
(7)
|
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 December 31, 2009, there were 78,417 shares available
for issuance pursuant to future grants under the 2001 Equity Incentive
Plan. The Company has accounted for grants of 521,583 options under
the 2001 Equity Incentive Plan using the date of grant as the measurement date
for financial accounting purposes.
41
The
National Research Corporation 2004 Director 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 was 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
December 31, 2009, 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 options terms are generally five to ten years
following the date of grant. At December 31, 2009, there were
427,057 shares available for issuance pursuant to future grants under the 2006
Equity Incentive Plan. The Company has accounted for grants of
172,943 options under the 2006 Equity Incentive Plan using the date of grant as
the measurement date for financial accounting purposes.
The
Company granted options to purchase 102,739, 118,475 and 131,382 shares of the
Company’s common stock during the years ended December 31, 2009, 2008 and 2007,
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:
|
2009
|
2008
|
2007
|
||||
|
Expected
dividend yield at date of grant
|
1.93-2.35%
|
1.87-2.11%
|
1.76-1.92%
|
|||
|
Expected
stock price volatility
|
24.2
to 30.2%
|
21.1-24.2%
|
22.7-29.9%
|
|||
|
Risk-free
interest rate
|
1.55%
to2.15%
|
3.18%
|
4.54-4.59%
|
|||
|
Expected
life of options (in years)
|
4.00
to 6.00
|
4.00
to 6.00
|
4.00
to
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. The Company considers groups of associates that have
similar historical exercise behavior separately for valuation
purposes.
The
following table summarizes stock option activity under the Company’s 2001 and
2006 Equity Incentive Plans and the 2004 Director Plan for the year ended
December 31, 2009:
42
|
Number of
Options
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Terms (Years)
|
Aggregate
Intrinsic
Value
(In
thousands)
|
|
||||||||||||
|
Outstanding
at beginning of period
|
492,431 | $ | 20.77 | — | — | |||||||||||
|
Granted
|
102,739 | $ | 27.91 | — | — | |||||||||||
|
Exercised
|
(2,023 | ) | $ | 8.69 | — | — | ||||||||||
|
Canceled/expired
|
(15,325 | ) | $ | 21.73 | — | — | ||||||||||
|
Outstanding
at end of period
|
577,822 | $ | 22.06 | 6.74 | $ | 1,221 | ||||||||||
|
Exercisable
at end of period
|
265,959 | $ | 20.26 | 5.78 | $ | 855 | ||||||||||
The
weighted average grant date fair value of stock options granted during the years
ended December 31, 2009, 2008 and 2007, was $5.72, $5.67 and $6.39,
respectively. The total intrinsic value of stock options exercised
during the years ended December 31, 2009, 2008 and 2007, was $28,000, $2.3
million and
$239,000,
respectively. As of December 31, 2009, the total unrecognized
compensation cost related to non-vested stock option awards was approximately
$810,000, which was expected to be recognized over a weighted average period of
2.64 years.
Cash
received from stock options exercised for the years ended December 31,
2009, 2008 and 2007, was $18,000, $1.9 million, and $338,000,
respectively. The actual tax benefit realized for the tax deduction
from stock options exercised was $11,000, $743,000 and $92,000, for the years
ended December 31, 2009, 2008 and 2007, respectively.
During
2009, 2008 and 2007, the Company granted -0-, -0- and 32,115 non-vested shares
of common stock under the 2001 Equity Incentive Plan. As of December
31, 2009, the Company had 21,956 non-vested shares of common stock outstanding
under the Plan. 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 or not vested. The fair value of the awards is
calculated as the fair market value of the shares on the date of
grant. The Company recognized $178,000, $220,000 and $437,000
of non-cash compensation for the years ended December 31, 2009, 2008 and 2007,
respectively, related to this non-vested stock.
The
following table summarizes information regarding non-vested stock granted to
associates under the 2001 Equity Incentive Plan for the year ended
December 31, 2009:
|
Shares
Outstanding
|
Weighted Average
Grant Date Fair
Value Per Share
|
|||||||
|
Outstanding
at beginning of period
|
36,502 | $ | 21.62 | |||||
|
Granted
|
— | — | ||||||
|
Vested
|
(10,645 | ) | $ | 23.49 | ||||
|
Forfeited
|
(3,901 | ) | $ | 16.15 | ||||
|
Outstanding
at end of period
|
21,956 | $ | 21.68 | |||||
As of
December 31, 2009, the total unrecognized compensation cost related to
non-vested stock awards was approximately $105,000 and is expected to be
recognized over a weighted average period of 1.73 years.
|
(8)
|
Leases
|
The
Company leases printing equipment and services in the United States, and office
space in Canada, Wisconsin and California. The Company has recorded
rent expense of $626,000, $607,000 and $475,000 in 2009, 2008 and 2007,
respectively. Minimum lease payments under non-cancelable operating
leases and capital leases are:
43
|
Minimum lease payments
|
Total
Payments
|
2010
|
2011
|
2012
|
2013
|
2014
|
||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||||||
|
Operating
leases
|
$ | 1,600 | $ | 524 | $ | 459 | $ | 432 | $ | 175 | $ | 10 | ||||||||||||
|
Capital
leases
|
65 | 37 | 28 | — | — | — | ||||||||||||||||||
|
Total
|
$ | 1,665 | $ | 561 | $ | 487 | $ | 432 | $ | 175 | $ | 10 | ||||||||||||
The
capital leases are for production and mailing equipment. Total
minimum lease payments remaining are $65,000, with $5,000 representing interest
as of December 31, 2009. The present value of the future minimum
lease payments are $60,000 less current maturities of
$33,000. Long-term obligations under capital leases total $27,000 as
of December 31, 2009.
|
(9)
|
Related
Party
|
A Board
member of the Company also serves as a director of the Picker
Institute. The Company advanced $300,000 in each of 2004 and 2003 to
the Picker Institute to fund designated research projects. The
advance was fully used by December 31, 2008. $171,000 and $175,000
was expensed on research work during 2008 and 2007, respectively.
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 $113,000, $79,000 and $65,000 in 2009, 2008
and 2007 respectively.
|
(10)
|
Associate
Benefits
|
The
Company sponsors a qualified 401(k) plan covering substantially all associates
with no eligibility service requirement. Under the 401(k) plan, the
Company matches 25% of the first 6% of compensation contributed by each
associate. Employer contributions, which are discretionary, vest to
participants at a rate of 20% per year. The Company contributed
$151,000, $151,000 and $127,000 in 2009, 2008 and 2007, respectively, as a
matching percentage of associate 401(k) contributions.
|
Item
9.
|
Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure
|
Not
applicable.
|
Item
9A.
|
Controls and
Procedures
|
In
accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the
“Exchange Act”), the Company’s management evaluated, with the participation of
the Company’s Chief Executive Officer and the Company’s Chief Financial Officer,
the effectiveness of the design and operation of the Company’s disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the
Exchange Act) as of December 31, 2009. Based upon their evaluation of
these disclosure controls and procedures, the Chief Executive Officer and the
Chief Financial Officer concluded that the disclosure controls and procedures
were effective as of December 31, 2009.
44
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rule 13a-15(f) of the
Exchange Act). The Company’s internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles. Because of its inherent limitations, however, internal
control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies of procedures may deteriorate.
The
Company’s management, with the participation of the Company’s Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of the
Company’s internal control over financial reporting using the framework in
Internal Control – Integrated
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on such evaluation, the Company’s
management concluded that the Company’s internal control over financial
reporting was effective as of December 31, 2009.
There was
no change in the Company’s internal control over financial reporting that
occurred during the quarter ended December 31, 2009, that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.
|
Item
9B.
|
Other
Information
|
The
Company has no other information to report pursuant to this
item.
45
|
Item
10.
|
Directors, Executive
Officers and Corporate
Governance
|
The
information required by this Item with respect to directors and Section 16
compliance is included under the captions “Election of Directors” and
“Section 16(a) Beneficial Ownership Reporting Compliance,” respectively, in
the Company’s definitive Proxy Statement for its 2010 Annual Meeting of
Shareholders (“Proxy Statement”) and is hereby incorporated herein by
reference. Information with respect to the executive officers of the
Company appears in Item 1 of this Annual Report on Form
10-K. The information required by this Item with respect to audit
committees and audit committee financial experts is included under the caption
“Corporate Governance” in the Proxy Statement and is incorporated herein by
reference.
The
Company has adopted a Code of Business Conduct and Ethics that applies to all of
the Company’s associates, including the Company’s Chief Executive Officer, Chief
Financial Officer, Controller and other persons performing similar
functions. The Company has posted a copy of the Code of Business
Conduct and Ethics on its website at
www.nationalresearch.com
. The
Company intends to satisfy the disclosure requirements under Item 5.05 of Form
8-K regarding amendments to, or waivers from, the Code of Business Conduct and
Ethics by posting such information on its website at
www.nationalresearch.com
. The
Company is not including the information contained on its website as part of, or
incorporating it by reference into, this report.
|
Item
11.
|
Executive
Compensation
|
The
information required by this Item is included under the captions “Compensation
Discussion and Analysis,” “2009 Summary Compensation Table,” “Grants of
Plan-Based Awards in 2009,” “Outstanding Equity Awards at December 31, 2009,”
“2009 Director Compensation” and “Compensation Committee Report” in the Proxy
Statement and is hereby incorporated herein by reference.
|
Item
12.
|
Security Ownership of
Certain Beneficial Owners and Management and Related
Shareholder
Matters
|
The
information required by this Item with respect to security ownership of certain
beneficial owners and management is included under the caption “Principal
Shareholders” in the Proxy Statement and is hereby incorporated by
reference.
The
following table sets forth information with respect to compensation plans under
which equity securities of the Company are authorized for issuance as of
December 31, 2009.
46
|
Plan Category
|
Number of securities
to be issued upon
the exercise of
outstanding options,
warrants and rights
|
Weighted-average
exercise price of
outstanding
options,
warrants and rights
|
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected
in the first column)
|
|||||||||
|
Equity
compensation plans approved by security holders
(1)
|
554,822 | $ | 21.80 | 505,474 |
(2)
|
|||||||
|
Equity
compensation plans not approved by security holders
|
23,000 | 27.23 | 277,000 |
(3)
|
||||||||
|
Total
|
577,822 | $ | 22.06 | 782,474 | ||||||||
|
(1)
|
Includes
the Company’s 2006 Equity Incentive Plan, 2004 Director Plan, and the 2001
Equity Incentive Plan.
|
|
(2)
|
As
of December 31, 2009, the Company had authority to award up to 161,854
additional shares of restricted Common Stock to participants under the
2001 Equity Incentive Plan, provided that the total of such shares awarded
may not exceed the total number of shares remaining available for issuance
under the 2001 Equity Incentive Plan, which totaled 78,417 as of December
31, 2009. Under the 2006 Equity Incentive Plan, the
Company had authority to award up to 167,885 additional shares of
restricted Common Stock to participants under the 2006 Equity Incentive
Plan, provided that the total of such shares awarded may not exceed the
total number of shares remaining available for issuance under the 2006
Equity Incentive Plan, which totaled 427,057 as of December 31,
2009.
|
|
(3)
|
As
of December 31, 2009, the Company had authority to award up to 277,000
additional shares of Common Stock to participants under the 2004 Directors
Plan, subject to approval by the Company’s shareholders at the 2010 annual
meeting of shareholders of the amendment to the plan adopted, on May 7,
2009 by the Board of Directors to increase the number of shares of common
stock authorized for issuance under the plan from 250,000 to 550,000
shares. The Board of Directors conditioned the amendment, on
the 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.
|
|
Item
13.
|
Certain Relationships
and Related Transactions, and Director
Independence
|
The
information required by this Item is included under the caption “Corporate
Governance—” in the Proxy Statement and is hereby incorporated by
reference.
|
Item
14.
|
Principal Accountant
Fees and Services
|
The
information required by this Item is included under the caption
“Miscellaneous—Independent Registered Public Accounting Firm” in the Proxy
Statement and is hereby incorporated by reference.
47
|
Item
15.
|
Exhibits, Financial
Statement Schedules
|
|
|
(a)
|
1.
|
Consolidated
financial statements - The consolidated financial statements listed in the
accompanying index to the consolidated financial statements and financial
statement schedule are filed as part of this Annual Report on Form
10-K.
|
|
2.
|
Financial
statement schedule - The financial statement schedule listed in the
accompanying index to the consolidated financial statements and financial
statement schedule is filed as part of this Annual Report on Form
10-K.
|
|
|
3.
|
Exhibits
- The exhibits listed in the accompanying exhibit index are filed as part
of this Annual Report on Form
10-K.
|
|
48
NATIONAL
RESEARCH CORPORATION AND SUBSIDIARY
SCHEDULE
II — VALUATION AND QUALIFYING ACCOUNTS
|
Balance at
Beginning
of Year
|
MIV
Acquisition
|
Bad Debt
Expense
|
Write-offs
Net of
Recoveries
|
Balance
at End
of Year
|
||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||
|
Allowance
for doubtful accounts:
|
||||||||||||||||||||
|
Year
Ended December 31, 2007
|
$ | 44 | $ | — | $ | 29 | $ | 3 | $ | 70 | ||||||||||
|
Year
Ended December 31, 2008
|
$ | 70 | $ | 69 | $ | 168 | $ | 66 | $ | 241 | ||||||||||
|
Year
Ended December 31, 2009
|
$ | 241 | $ | 75 | $ | 138 | $ | 175 | $ | 279 | ||||||||||
See
accompanying report of independent registered public accounting
firm.
49
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
AND
FINANCIAL STATEMENT SCHEDULE
|
Page
in this
|
||
|
Form
10-K
|
||
|
Report
of Independent Registered Public Accounting Firm
|
24
|
|
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
25
|
|
|
Consolidated
Statements of Income for the Three Years Ended December 31,
2009
|
26
|
|
|
Consolidated
Statements of Shareholders’ Equity and Comprehensive Income as of and for
the Three Years Ended December 31, 2009
|
27
|
|
|
Consolidated
Statements of Cash Flows for the Three Years Ended December 31,
2009
|
28
|
|
|
Notes
to Consolidated Financial Statements
|
29
|
|
|
Schedule
II — Valuation and Qualifying Accounts
|
49
|
All other
financial statement schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedules, or because the information required is included in the consolidated
financial statements and notes thereto.
50
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, on this 31st day of March
2010.
|
NATIONAL
RESEARCH CORPORATION
|
|
|
By
|
/s/ Michael D. Hays
|
|
Michael
D. Hays
|
|
|
President
and Chief Executive Officer
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/ Michael D. Hays
|
President,
Chief Executive Officer and Director
|
March
31, 2010
|
||
|
Michael
D. Hays
|
(Principal Executive Officer) | |||
|
/s/ Patrick E. Beans
|
Vice
President, Treasurer, Secretary, Chief
|
March
31, 2010
|
||
|
Patrick
E. Beans
|
Financial Officer and Director (Principal Financial and Accounting Officer) | |||
|
/s/ JoAnn M. Martin
|
Director
|
March
31, 2010
|
||
|
JoAnn
M. Martin
|
||||
|
/s/ John N. Nunnelly
|
Director
|
March
31, 2010
|
||
|
John
N. Nunnelly
|
||||
|
/s/ Paul C. Schorr III
|
Director
|
March
31, 2010
|
||
|
Paul
C. Schorr III
|
||||
|
/s/ Gail L. Warden
|
Director
|
March
31, 2010
|
||
|
Gail
L. Warden
|
51
EXHIBIT
INDEX
|
Exhibit
Number
|
Exhibit Description
|
|
|
(3.1)
|
Articles
of Incorporation of National Research Corporation, as amended to date
[Incorporated by reference to Exhibit (3.1) to National Research
Corporation’s Registration Statement on Form S-1 (Registration No.
333-33273)]
|
|
|
(3.2)
|
By-Laws
of National Research Corporation, as amended to date [Incorporated by
reference to Exhibit (3.2) to National Research Corporation’s Current
Report on Form 8-K dated May 8, 2009 (File No.
0-29466)]
|
|
|
(4.1)
|
Installment
or Single Payment Note, dated as of December 19, 2008, from National
Research Corporation to U.S. Bank National Association [Incorporated by
reference to Exhibit (4.1) to National Research Corporation’s Current
Report on Form 8-K dated December 19, 2008 (File No.
0-294660)]
|
|
|
(10.1)*
|
National
Research Corporation 2001 Equity Incentive Plan [Incorporated by reference
to National Research Corporation’s Proxy Statement for the 2002 Annual
Meeting of Shareholders, filed with the Securities and Exchange Commission
on April 3, 2002 (File No. 0-29466)]
|
|
|
(10.2)*
|
National
Research Corporation 2006 Equity Incentive Plan [Incorporated by reference
to National Research Corporation’s Proxy Statement for the 2006 Annual
Meeting of Shareholders, filed with the Securities and Exchange Commission
on April 3, 2006 (File No. 0-29466)]
|
|
|
(10.3)*
|
National
Research Corporation Director Stock Plan, as amended to date [Incorporated
by reference to Exhibit (10.2) to National Research Corporation’s Annual
Report on Form 10-K for the year ended December 31, 1997 (File No.
0-29466)]
|
|
|
(10.4)*
|
National
Research Corporation 2004 Director Stock Plan [Incorporated by reference
to National Research Corporation’s Proxy Statement for the 2005 Annual
Meeting of Shareholders, filed with the Securities and Exchange Commission
on April 4, 2005 (File No. 0-29466)]
|
|
|
(10.5)+
|
Contract,
dated January 23, 2002, between National Research Corporation and the
Department of Veterans Affairs [Incorporated by reference to Exhibit
(10.4) to National Research Corporation’s Annual Report on Form 10-K for
the year ended December 31, 2001 (File No. 0-29466)]
|
|
|
(10.6)*
|
Form
of Nonqualified Stock Option Agreement (for new associates) used in
connection with the 2001 Equity Incentive Plan [Incorporated by reference
to Exhibit 4.4 to National Research Corporation’s Registration Statement
on Form S-8 (Registration No. 333-120530)]
|
|
|
(10.7)*
|
Form
of Nonqualified Stock Option Agreement (for officers) used in connection
with the 2001 Equity Incentive Plan [Incorporated by reference to Exhibit
4.5 to National Research Corporation’s Registration Statement on Form S-8
(Registration No. 333-120530)]
|
|
|
(10.8)*
|
Form
of Restricted Stock Agreement for executive officers used in connection
with the 2001 Equity Incentive Plan [Incorporated by reference to Exhibit
10.2 to National Research Corporation’s Current Report on Form 8-K dated
March 19, 2005 (File No. 0-29466)]
|
|
|
(10.9)*
|
Form
of Restricted Stock Agreement (one year vesting) used in connection with
the 2001 Equity Incentive Plan [Incorporated by reference to Exhibit 4.6
to National Research Corporation’s Registration Statement on Form S-8
(Registration No.
333-120530)]
|
52
|
Exhibit
Number
|
Exhibit Description
|
|
|
(10.10)*
|
Form
of Restricted Stock Agreement (five year vesting) used in connection with
the 2001 Equity Incentive Plan [Incorporated by reference to Exhibit 4.7
to National Research Corporation’s Registration Statement on Form S-8
(Registration No. 333-120530)]
|
|
|
(10.11)*
|
Restricted
Stock Incentive Plan for Joseph W. Carmichael, as amended and
restated, under the 2001 Equity Incentive Plan [Incorporated by
reference to Exhibit 10.2 to National Research Corporation’s Current
Report on Form 8-K dated March 3, 2006 (File No.
0-29466)]
|
|
|
(10.12)*
|
Director’s
Compensation Summary [Incorporated by reference to Exhibit (10.1) to
National Research Corporation’s Annual Report on Form 10-Q for the quarter
ended March 31, 2007 (File No. 0-29466)]
|
|
|
(10.13)*
|
Form
of Nonqualified Stock Option Agreement used in connection with the 2006
Equity Incentive Plan [Incorporated by reference to Exhibit (10.14) to
National Research Corporation’s Annual Report on Form 10-K for
the year ended December 31, 2006 (File No. 0-29466)]
|
|
|
(10.14)*
|
Form
of Restricted Stock Agreement used in connection with the 2006 Equity
Incentive Plan [Incorporated by reference to Exhibit (10.15) to National
Research Corporation’s Annual Report on Form 10-K for the year ended
December 31, 2006 (File No. 0-29466)]
|
|
|
(10.15)
|
Merger
Agreement, dated as of November 26, 2008, by and among National Research
Corporation, NRC Acquisition, Inc., My Innerview, Inc., Neil L. Gulsvig
and Janice L. Gulsvig [Incorporated by reference to Exhibit (2.1) to
National Research Corporation’s Current Report on Form 8-K
dated November 26, 2008 (File No. 0-29466)]
|
|
|
(23.1)
|
Consent
of Independent Registered Public Accounting Firm
|
|
|
(31.1)
|
Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
(31.2)
|
Certification
of 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
|
|
|
(99.1)
|
Proxy
Statement for the 2010 Annual Meeting of Shareholders, to be filed within
120 days of December 31, 2009 [To be filed with the Securities
and Exchange Commission under Regulation 14A within 120 days after
December 31, 2009; except to the extent specifically incorporated by
reference, the Proxy Statement for the 2010 Annual Meeting of Shareholders
shall not be deemed to be filed with the Securities and Exchange
Commission as part of this Annual Report on Form
10-K]
|
|
*
|
A
management contract or compensatory plan or
arrangement.
|
|
+
|
Portions
of this exhibit have been redacted and are subject to a confidential
treatment request filed with the Secretary of the Securities and Exchange
Commission pursuant to Rule 24b-2 under the Securities Exchange Act of
1934, as amended. The redacted material was filed separately
with the Securities and Exchange
Commission.
|
53
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsPart IIItem 5. Market For The Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosure About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Shareholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits, Financial Statement Schedules