UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2014

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 of	(I.R.S. Employer
incorporation or organization)	Identification No.)

  

1245 Q Street, Lincoln, Nebraska         68508

(Address of principal executive offices) (Zip Code)

 

                          (402) 475-2525                             

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ☒  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).

Yes  ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company ☐

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.)

Yes ☐    No  ☒ 

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

 

Class A Common Stock, $.001 par value, outstanding as July 31, 2014: 20,808,304 shares

Class B Common Stock, $.001 par value, outstanding as of July 31, 2014: 3,480,217 shares

 

 

NATIONAL RESEARCH CORPORATION

 

FORM 10-Q INDEX

 

For the Quarter Ended June 30, 2014

 

			Page No.
PART I.	FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets	4
		Condensed Consolidated Statements of Income	5
		Condensed Consolidated Statements of Comprehensive Income	6
		Condensed Consolidated Statements of Cash Flows	7
		Notes to Condensed Consolidated Financial Statements	8-15
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16-21
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
	Item 4.	Controls and Procedures		21
PART II.	OTHER INFORMATION
	Item 1A.	Risk Factors	22
	Item 2.	Unregistered Sales of Equity Securities and  Use of Proceeds	22
	Item 6.	Exhibits	22
	Signatures		23
	Exhibit Index		24

  

 

Special Note Regarding Forward-Looking Statements

 

Certain matters discussed in this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements can generally be identified as such because the context of the statement includes phrases such as National Research Corporation (“NRC” or the “Company”) “believes,” “expects,” or other words of similar import. Similarly, statements that describe the Company’s future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which could cause actual results or outcomes to differ materially from those currently anticipated. Factors that could affect actual results or outcomes include, without limitation, the following factors:

 

●

The possibility of non-renewal of the Company’s client service contracts;

 

●

The Company’s ability to compete in its markets, which are highly competitive, and the possibility of increased price pressure and expenses;

 

●

The effects of an economic downturn;

 

●

The impact of consolidation in the healthcare industry;

 

●

The impact of federal healthcare reform legislation or other regulatory changes;

 

●

The Company’s ability to retain its limited number of key clients;

 

●

The Company’s ability to attract and retain key managers and other personnel;

 

●

The possibility that the Company’s intellectual property and other proprietary information technology could be copied or independently developed by its competitors;

 

●

Regulatory developments; and

 

●

The factors set forth under the caption “Risk Factors” in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as such section may be updated by Part II, Item 1A of the Company’s subsequently filed Quarterly Reports on Form 10-Q (including this Report).

 

Shareholders, potential investors and other readers are urged to consider these and other factors in evaluating the forward-looking statements, and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included are only made as of the date of this Quarterly Report on Form 10-Q and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

 

 

PART I – Financial Information

ITEM 1.   Financial Statements

 

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts and par value, unaudited)

		June 30, 2014				December 31, 2013
Assets
Current assets:
Cash and cash equivalents		$	31,539			$	22,092
Trade accounts receivable, less allowance for doubtful accounts of $193 and $183 in 2014 and 2013, respectively			11,450				11,043
Unbilled revenue			1,722				1,282
Prepaid expenses			1,778				1,310
Income tax receivable			612				357
Deferred income taxes			27				53
Other current assets			347				429
Total current assets			47,475				36,566
Property and equipment, net			12,179				11,898
Intangible assets, net			4,419				4,840
Goodwill			57,599				57,593
Other			196				191
Total assets		$	121,868			$	111,088
Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of notes payable		$	2,291			$	2,256
Accounts payable			923				654
Accrued wages, bonus and profit sharing			3,187				4,319
Accrued expenses			2,542				2,462
Current portion of capital lease obligations			174				114
Income taxes payable			108				92
Deferred revenue			16,062				13,885
Total current liabilities			25,287				23,782
Notes payable, net of current portion			6,912				8,068
Deferred income taxes			6,997				6,939
Deferred revenue			163				243
Other long term liabilities			431				301
Total liabilities			39,790				39,333
Shareholders’ equity:
Preferred stock, $0.01 par value; authorized 2,000,000 shares, none issued			--				--
Class A Common stock, $0.001 par value; authorized 60,000,000 shares, issued 25,372,186 in 2014 and 25,285,029 in 2013, outstanding 20,808,304 in 2014 and 20,768,784 in 2013			25				25
Class B Common stock, $0.001 par value; authorized 80,000,000 shares, issued 4,234,643 in 2014 and 4,220,117 in 2013, outstanding 3,480,217 in 2014 and 3,467,410 in 2013			4				4
Additional paid-in capital			43,859				42,192
Retained earnings			67,547				58,042
Accumulated other comprehensive income			359				302
Treasury stock, at cost; 4,563,882 Class A shares, 754,426 Class B shares in 2014 and 4,516,245 Class A shares, 752,707 Class B shares in 2013			(29,716	)			(28,810	)
Total shareholders’ equity			82,078				71,755
Total liabilities and shareholders’ equity		$	121,868			$	111,088

 

See accompanying notes to condensed consolidated financial statements 

 

 

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except for per share amounts, unaudited)

 

 

		Three months ended June 30,								Six months ended June 30,
		2014				2013				2014				2013
Revenue		$	24,001			$	22,354			$	50,031			$	47,260
Operating expenses:
Direct			10,773				9,498				21,102				19,744
Selling, general and administrative			5,984				6,391				12,349				12,884
Depreciation and amortization			926				931				1,861				1,882
Total operating expenses			17,683				16,820				35,312				34,510
Operating income			6,318				5,534				14,719				12,750
Other income (expense):
Interest income			19				12				36				31
Interest expense			(78	)			(101	)			(160	)			(217	)
Other, net			7				18				14				32
Total other expense			(52	)			(71	)			(110	)			(154	)
Income before income taxes			6,266				5,463				14,609				12,596
Provision for income taxes			2,215				2,029				5,104				4,692
Net income		$	4,051			$	3,434			$	9,505			$	7,904
Earnings Per Share of Common Stock:
Basic Earnings Per Share:
Class A		$	0.10			$	0.08			$	0.23			$	0.19
Class B		$	0.58			$	0.50			$	1.37			$	1.15
Diluted Earnings Per Share:
Class A		$	0.10			$	0.08			$	0.22			$	0.19
Class B		$	0.57			$	0.49			$	1.34			$	1.12
Dividends Per Share of Common Stock:
Class A		$	--			$	--			$	--			$	0.05
Class B		$	--			$	--			$	--			$	0.31
Weighted average shares and share equivalents outstanding:
Class A - basic			20,771				20,672				20,757				20,671
Class B - basic			3,474				3,445				3,472				3,445
Class A - diluted			21,073				21,085				21,098				21,074
Class B - diluted			3,539				3,516				3,540				3,513

 

 

 

See accompanying notes to condensed consolidated financial statements

 

 

 NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, unaudited)

 

 

 

		Three months ended June 30,								Six months ended June 30,
		2014				2013				2014				2013
Net income		$	4,051			$	3,434			$	9,505			$	7,904
Other comprehensive income (loss):
Foreign currency translation adjustment		$	462			$	(384	)		$	57			$	(619	)
Other comprehensive income (loss)		$	462			$	(384	)		$	57			$	(619	)
Comprehensive Income		$	4,513			$	3,050			$	9,562			$	7,285

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

 

 

		Six months ended June 30,
		2014				2013
Cash flows from operating activities:
Net income		$	9,505			$	7,904
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			1,861				1,882
Deferred income taxes			11				52
Non-cash share-based compensation expense			130				457
Tax benefit from exercise of stock options			73				56
Loss on disposal of property and equipment			1				1
Net changes in assets and liabilities:
Trade accounts receivable			(400	)			(2,548	)
Unbilled revenue			(438	)			(856	)
Prepaid expenses and other			(362	)			(519	)
Accounts payable			301				800
Accrued expenses, wages, bonuses and profit sharing			(1,162	)			(1,297	)
Income taxes receivable and payable			(239	)			(94	)
Deferred revenue			2,093				131
Net cash provided by operating activities			11,374				5,969
Cash flows from investing activities:
Purchases of property and equipment			(1,425	)			(966	)
Net cash used in investing activities			(1,425	)			(966	)
Cash flows from financing activities:
Payments on notes payable			(1,120	)			(830	)
Payments on capital lease obligations			(59	)			(54	)
Proceeds from exercise of stock options			408				375
Common stock withheld from vested restricted shares for payroll tax withholdings			(309	)			(55	)
Excess tax benefit from share-based compensation			531				575
Payment of dividends on common stock			--				(2,142	)
Net cash used in financing activities			(549	)			(2,131	)
Effect of exchange rate changes on cash			47				(356	)
Increase in cash and cash equivalents			9,447				2,516
Cash and cash equivalents at beginning of period			22,092				8,286
Cash and cash equivalents at end of period		$	31,539			$	10,802
Supplemental disclosure of cash paid for:
Interest, net of capitalized amounts		$	149			$	172
Income taxes		$	4,842			$	3,917
Supplemental disclosure of non-cash investing and financing activities:
Assets purchased under capital lease		$	248			$	2

 

See accompanying notes to condensed consolidated financial statements. 

 

 

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

1.	BASIS OF CONSOLIDATION AND PRESENTATION

 

The Company is a leading provider of analytics and insights that facilitate revenue growth, patient, employee and customer retention and patient engagement for healthcare providers, payers and other healthcare organizations in the United States and Canada.

 

The Company has two operating segments that are aggregated into one reporting segment because they have similar economic characteristics and meet the other aggregation criteria from the Financial Accounting Standards Board (“FASB”) guidance on segment disclosure.  The two operating segments, organized by geographic area, are National Research Corporation (United States) and National Research Corporation Canada, which each offer a portfolio of solutions to address specific market needs around growth, retention, engagement and thought leadership for healthcare organizations. 

 

The condensed consolidated balance sheet of the Company at December 31, 2013, was derived from the Company’s audited consolidated balance sheet as of that date. All other financial statements contained herein are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) the Company considers necessary for a fair presentation of financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States. Certain reclassifications have been made to the 2013 financial statement information to conform to the 2014 financial statement presentation. There was no impact on the previously reported net income and earnings per share information.

 

Information and footnote disclosures included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto that are included in the Company’s Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission (the “SEC”) on March 4, 2014.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

The condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiary, National Research Corporation Canada, and the accounts of a variable interest entity, Customer-Connect LLC (“Connect”) for which NRC has been deemed the primary beneficiary. All significant intercompany transactions and balances have been eliminated.

 

The functional currency of the Company’s foreign subsidiary, National Research Corporation Canada, is the subsidiary’s local currency. The Company translates the assets and liabilities of its foreign subsidiary at the period-end rate of exchange and its foreign subsidiary’s income statement balances at the average rate prevailing during the period. The Company records the resulting translation adjustment in accumulated other comprehensive income, a component of shareholders’ equity. Since the undistributed earnings of the Company’s foreign subsidiary are considered to be indefinitely reinvested, no taxes were provided for on currency translation adjustments arising from converting the investment denominated in a foreign currency to U.S. dollars. Gains and losses related to transactions denominated in a currency other than the subsidiary’s local currency and short-term intercompany accounts are included in other income (expense) in the condensed consolidated statements of income.

 

  

Recapitalization

 

In May 2013, the Company consummated a recapitalization (the “May 2013 Recapitalization”) pursuant to which the Company established two classes of common stock (class A common stock and class B common stock), issued a dividend of three shares of class A common stock for each share of the Company’s then existing common stock and reclassified each then existing share of common stock as one-half of one share of class B common stock.

 

Fair Value Measurements

 

The Company’s valuation techniques are based on maximizing observable inputs and minimizing the use of unobservable inputs when measuring fair value. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect the Company’s market assumptions. The inputs are then classified into the following hierarchy: (1) Level 1 Inputs—quoted prices in active markets for identical assets and liabilities; (2) Level 2 Inputs—observable market-based inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities in active markets, quoted prices for similar or identical assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data; and (3) Level 3 Inputs—unobservable inputs.

 

The following details the Company’s financial assets and liabilities within the fair value hierarchy at June 30, 2014, and December 31, 2013:

 

Fair Values Measured on a Recurring Basis

 

		Level 1				Level 2				Level 3				Total
		(In thousands)
As of June 30, 2014
Money Market Funds		$	8,147			$	--			$	--			$	8,147
Commercial Paper			22,525				--				--				22,525
Total		$	30,672			$	--			$	--			$	30,672
As of December 31, 2013
Money Market Funds		$	7,266			$	--			$	--			$	7,266
Commercial Paper			13,976				--				--				13,976
Total		$	21,242			$	--			$	--			$	21,242

 

The Company’s long-term debt is recorded at historical cost. The following are the carrying amounts and estimated fair values, based primarily on estimated current rates available for debt of the same remaining duration and adjusted for nonperformance and credit risk:

 

		June 30, 2014				December 31, 2013
		(In thousands)
Total carrying amounts of long-term debt		$	9,203			$	10,324
Estimated fair value of long-term debt		$	9,110			$	10,156

 

The Company estimated the fair value of its long-term, fixed-rate debt using a Level 2 discounted cash flow analysis based on current borrowing rates for debt with similar maturities.

 

 

The Company believes that the carrying amounts of trade accounts receivable, accounts payable and accrued expenses approximate their fair value due to the short maturity of those instruments. All non-financial assets that are not recognized or disclosed at fair value in the financial statements on a recurring basis, which includes goodwill and non-financial long-lived assets, are measured at fair value in certain circumstances (for example, when there is evidence of impairment). As of June 30, 2014, and December 31, 2013, there was no indication of impairment related to the Company’s non-financial assets.

 

2.	VARIABLE INTEREST ENTITY

 

Connect was formed in June 2013 to develop and commercialize the Connect programs. Connect programs provide healthcare organizations the technology to engage patients through real-time identification and management of individual patient needs, preferences, risks, and experiences.  The platform ensures that organizations have access to a longitudinal view of the patient to more effectively manage patient engagement across the continuum of care. NRC has a 49% ownership interest in Connect. NG Customer-Connect, LLC holds 25% interest, and the remaining 26% is held by Illuminate Health, LLC. NRC has agreed to lease certain employees to Connect. In return for a fee, Connect will service the Company’s discharge call program clients. NRC will make capital contributions of up to $2.5 million on an as-needed basis as determined by the Board of Directors of Connect. Profits and losses are allocated under the hypothetical liquidation at book value approach.

 

NRC is deemed the primary beneficiary of Connect. An entity is considered the primary beneficiary of a variable interest entity if it has both the power to direct the activities of the variable interest entity that most significantly impact the variable interest entity’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the variable interest entity. Connect is thinly capitalized and relies on NRC advances and reimbursements to fund its operations. Together, NRC and NRC associates hold a majority of the voting rights on Connect’s board of directors and has the ability to direct the majority of Connect’s operations.

 

NRC has a future obligation to purchase the other equity units in Connect when certain targeted events have been achieved. If, at any time, there is at least $12.5 million of annual recurring contract value, including the NRC contracts being serviced, and the members have approved a financial statement showing a pro forma minimum 35% EBITDA margin for revenue on a going-forward basis, then within 90 days thereafter NRC is required to purchase from the other members, and the other members shall be required to sell to NRC, all of their equity units not owned by NRC. As of June 30, 2014, the price at which NG Customer Connect, LLC and Illuminate Health LLC had the obligation to sell their equity units to NRC was $0.

 

The Company’s condensed consolidated financial statements reflect Connect’s net operating losses of $389,000 and $720,000 for the three and six-month periods ended June 30, 2014, respectively, and $80,000 for both the three and six-month periods ended June 30, 2013.

 

3.	INCOME TAXES

 

The Company’s effective tax rate decreased to 35.3% for the three-month period ended June 30, 2014, compared to 37.1% for the same period in 2013. The effective tax rate for the six-month period ended June 30, 2014, decreased to 34.9% compared to 37.2% for the same period in 2013. This decrease was primarily due to a decrease in projected state tax rates due to legislative changes, as well as non-deductible fees associated with the May 2013 Recapitalization that were incurred during 2013.

 

 

The unrecognized tax benefit as of June 30, 2014, was $188,000, excluding interest of $6,000 and no penalties. The full unrecognized tax benefits, if recognized, would favorably impact the effective income tax rate. The Company believes it is reasonably possible that the total amount of unrecognized tax benefits will stay consistent during the next 12 months due to any growth in unrecognized tax benefits being offset by the expiration of the U.S. federal statute of limitations associated with certain other tax positions. The Company accrues interest and penalties related to uncertain tax position in the statements of income as income tax expense.

 

4.	NOTES PAYABLE

 

The Company had two term notes, which were used to partially finance acquisitions in 2008 and 2010. Borrowings under the term notes bore interest at an annual rate of 3.79%. On May 9, 2013, the Company refinanced these two existing term notes and combined them into one term note. The new term note is payable in 60 monthly installments of $212,468. Borrowings under the new term note bear interest at an annual rate of 3.12%. The outstanding balance of the term note at June 30, 2014 was $9.2 million.

 

The Company also has a revolving credit note that was renewed in June 2014 to extend the term to June 30, 2015. The maximum aggregate amount available under the revolving credit note is $6.5 million, subject to a borrowing base equal to 75.0% of the Company’s eligible accounts receivable. Borrowings under the revolving credit note bear interest at a variable annual rate, with three rate options at the discretion of management as follows: (1) 2.5% plus the daily reset one-month London Interbank Offered Rate (“LIBOR”) or (2) 2.2% plus the one-, two- or three- month LIBOR rate, or (3) the bank’s one-, two, three, six, or twelve month Money Market Loan Rate. As of June 30, 2014 the revolving credit note did not have a balance. According to the borrowing base requirements, the Company had the capacity to borrow $6.5 million as of June 30, 2014.

 

The term note and revolving credit note are secured by certain of the Company’s assets, including the Company’s land, building, trade accounts receivable and intangible assets. The term note and revolving credit note contain 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 June 30, 2014, the Company was in compliance with its financial covenants.

 

5.	SHARE-BASED COMPENSATION

 

The Company measures and recognizes compensation expense for all share-based payments 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.

 

The Company’s 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 1,800,000 class A and 300,000 class B shares of the Company’s common stock. Stock options granted may be either nonqualified or incentive stock options. Stock 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.   

 

The Company’s 2004 Non-Employee Director Stock Plan (the “2004 Director Plan”) is a nonqualified plan that provides for the granting of options with respect to 1,650,000 class A and 275,000 class B shares of the Company’s common stock. The 2004 Director Plan provides for grants of nonqualified stock 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 36,000 class A shares and 6,000 class B shares of the Company’s common stock are granted to directors that are re-elected or retained as a director at such meeting. Stock 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.

 

 

The Company’s 2006 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 1,800,000 class A and 300,000 class B shares of the Company’s common stock. 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 following the date of grant.

 

The Company granted options to purchase 204,166 shares of the Company’s class A common stock and 32,217 shares of the class B common stock during the six-month period ended June 30, 2014. The Company granted options to purchase 232,344 shares of class A common stock and 38,718 shares of class B common stock during the six-month period ended June 30, 2013. 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:

 

2014 Class A

2014 Class B

2013 Pre-May 2013 Recapitalization

Expected dividend yield at date of grant

1.47 to 1.97%

4.03 to 4.87%

2.26 to 3.46%

Expected stock price volatility

27.52 to 32.03%

30.13 to 32.65%

30.34 to 30.51%

Risk-free interest rate

1.63 to 2.37%

1.63 to 2.37%

0.55 to 1.07%

Expected life of options (in years)

5 to 7

5 to 7

4 to 6

 

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 common 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 six months ended June 30, 2014:

 

			Number of Options				Weighted Average Exercise Price				Weighted Average Remaining Contractual Terms (Years)				Aggregate Intrinsic Value (In thousands)
Class A
Outstanding at December 31, 2013				1,444,845			$	10.21
Granted				204,166			$	15.41
Exercised				(110,625	)		$	6.60							$	1,268
Forfeited				(183,896	)		$	12.40
Outstanding at June 30, 2014				1,354,490			$	10.99				6.72			$	4,765
Exercisable at June 30, 2014				817,383			$	10.58				5.95			$	3,204
Class B
Outstanding at December 31, 2013				234,802			$	20.76
Granted				32,217			$	43.24
Exercised				(18,437	)		$	14.93							$	400
Forfeited				(30,117	)		$	23.82
Outstanding at June 30, 2014				218,465			$	24.14				6.76			$	3,414
Exercisable at June 30, 2014				130,229			$	21.44				6.00			$	2,301

  

 

The following table summarizes information regarding non-vested stock granted to associates under the 2006 Equity Incentive Plan for the six months ended June 30, 2014:

 

 

 

		Class A Shares  Outstanding				Class A Weighted Average  Grant Date Fair Value  Per Share				Class B Shares Outstanding				Class B Weighted  Average Grant Date Fair Value  Per Share
Outstanding at December 31, 2013			60,609			$	5.77				10,101			$	34.65
Granted			--				--				--				--
Vested			--				--				--				--
Forfeited			(23,468)			$	6.39				(3,911)			$	38.35
Outstanding at June 30, 2014			37,141			$	5.39				6,190			$	32.31

 

As of June 30, 2014, the total unrecognized compensation cost related to non-vested stock awards was approximately $120,000 and is expected to be recognized over a weighted average period of 1.50 years.

 

6.	GOODWILL AND OTHER INTANGIBLE ASSETS

 

The following represents a summary of changes in the Company’s carrying amount of goodwill for the six months ended June 30, 2014:

 

		(In thousands)
Balance as of December 31, 2013		$	57,593
Foreign currency translation			6
Balance as of June 30, 2014		$	57,599

 

Intangible assets consisted of the following:

 

		June 30, 2014				December 31, 2013
		(In thousands)
Non-amortizing other intangible assets:
Trade name		$	1,191			$	1,191
Amortizing other intangible assets:
Customer related intangibles			10,499				10,499
Non-compete agreements			430				430
Trade name			1,902				1,902
Total other intangible assets			14,022				14,022
Accumulated amortization			(9,603	)			(9,182	)
Other intangible assets, net		$	4,419			$	4,840

 

7.	PROPERTY AND EQUIPMENT

 

		June 30, 2014				December 31, 2013
		(In thousands)
Property and equipment		$	34,035			$	32,331
Accumulated depreciation			(21,856	)			(20,433	)
Property and equipment, net		$	12,179			$	11,898

 

 

8.	EARNINGS PER SHARE

 

Net income per share of class A common stock and class B common stock is computed using the two-class method. Basic net income per share is computed by allocating undistributed earnings to common shares and using the weighted-average number of common shares outstanding during the period.

 

Diluted net income per share is computed using the weighted-average number of common shares and, if dilutive, the potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options and vesting of restricted stock. The dilutive effect of outstanding stock options is reflected in diluted earnings per share by application of the treasury stock method.

 

The liquidation rights and the rights upon the consummation of an extraordinary transaction are the same for the holders of class A common stock and class B common stock. Other than share distributions and liquidation rights, the amount of any dividend or other distribution payable on each share of class A common stock will be equal to one-sixth (1/6^th) of the amount of any such dividend or other distribution payable on each share of class B common stock. As a result, the undistributed earnings for each year are allocated based on the contractual participation rights of the class A and class B common stock as if the earnings for the year had been distributed.

 

The Company excluded 329,427 and 172,212 shares of class A common stock options for the three-month periods ended June 30, 2014 and 2013, respectively, and 17,802 and 12,106 shares of class B common stock options for the three-month period ended June 30, 2014 and 2013, respectively, from the diluted net income per share computation because the exercise or grant price exceeded the fair market value of the common stock on such date.

 

		For the Three Months Ended June 30, 2014								For the Three Months Ended June 30, 2013
		Class A Common Stock				Class B Common Stock				Class A Common Stock				Class B Common Stock
		(In thousands, except per share data)
Numerator for net income per share - basic:
Allocation of distributed earnings		$	--			$	--			$	--			$	--
Allocation of undistributed earnings			2,022				2,029				1,717				1,717
Net income attributable to common shareholders		$	2,022			$	2,029			$	1,717			$	1,717
Denominator for net income per share - basic:
Weighted average common shares outstanding - basic			20,771				3,474				20,672				3,445
Net income per share - basic		$	0.10			$	0.58			$	0.08			$	0.50
Numerator for net income per share - diluted:
Net income attributable to common shareholders for basic computation		$	2,022			$	2,029			$	1,717			$	1,717
Denominator for net income per share - diluted:
Weighted average common shares outstanding - basic			20,771				3,474				20,672				3,445
Weighted average effect of dilutive securities:
Stock options			278				61				379				65
Restricted stock			24				4				34				6
Weighted average common shares outstanding - diluted			21,073				3,539				21,085				3,516
Net income per share - diluted		$	0.10			$	0.57			$	0.08			$	0.49

  

 

The Company excluded 292,182 and 206,277 shares of class A common stock options for the six-month periods ended June 30, 2014 and 2013, respectively, and 10,762 and 26,036 shares of class B common stock options for the six-month period ended June 30, 2014 and 2013, respectively, from the diluted net income per share computation because the exercise or grant price exceeded the fair market value of the common stock on such date.

 

		For the Six Months Ended June 30, 2014								For the Six Months Ended June 30, 2013
		Class A Common Stock				Class B Common Stock				Class A Common Stock				Class B Common Stock
		(In thousands, except per share data)
Numerator for net income per share - basic:
Allocation of distributed earnings		$	--			$	--			$	1,071			$	1,071
Allocation of undistributed earnings			4,744				4,761				2,881				2,881
Net income attributable to common shareholders		$	4,744			$	4,761			$	3,952			$	3,952
Denominator for net income per share - basic:
Weighted average common shares outstanding - basic			20,757				3,472				20,671				3,445
Net income per share - basic		$	0.23			$	1.37			$	0.19			$	1.15
Numerator for net income per share - diluted:
Net income attributable to common shareholders for basic computation		$	4,744			$	4,761			$	3,952			$	3,952
Denominator for net income per share - diluted:
Weighted average common shares outstanding - basic			20,757				3,472				20,671				3,445
Weighted average effect of dilutive securities:
Stock options			310				63				369				62
Restricted stock			31				5				34				6
Weighted average common shares outstanding - diluted			21,098				3,540				21,074				3,513
Net income per share - diluted		$	0.22			$	1.34			$	0.19			$	1.12

 

 

9.	RELATED PARTY TRANSACTIONS

 

A board member of the Company serves as an officer of Ameritas Life Insurance Corp. (“Ameritas”). In connection with the Company’s regular assessment of its insurance-based associate benefits, which is conducted by an independent insurance broker and the costs associated therewith, the Company purchases dental and vision insurance for certain of its associates from Ameritas. The total value of these purchases was $53,000 and $52,000 for the three-month periods ended June 30, 2014 and 2013, respectively, and $104,000 and $108,000 for the six-month periods ended June 30, 2014 and 2013, respectively.   

 

Michael Hays, our Chief Executive Officer, is a director and owner of 14% of the equity interests of Nebraska Global Investment Company LLC. The Company purchased certain technology consulting and software development services from Nebraska Global Investment Company LLC. There were no purchases for the three-month periods ended June 30, 2014 and 2013, respectively, and there were no purchases for the six-month period ended June 30, 2014 and $57,000 in purchases for the same period of 2013.

 

10.	NEW ACCOUNTING PRONOUNCEMENT

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”).  ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The guidance is effective for the Company beginning January 1, 2017 and may be adopted using a full retrospective or a modified cumulative effect approach. Early adoption is not permitted. The Company is currently evaluating the potential impact of adopting this guidance and has not yet determined a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

 

  

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

The Company is a leading provider of analytics and insights that facilitate revenue growth, patient, employee and customer retention and patient engagement for healthcare providers, payers and other healthcare organizations. The Company’s solutions support the improvement of business and clinical outcomes, while facilitating regulatory compliance and the shift to population-based health management for its clients. The Company’s ability to systematically capture, analyze and deliver to its client’s self-reported information from patients, families and consumers is critical in today’s healthcare market. NRC believes that access to and analysis of its extensive consumer-driven information will become even more valuable in the future as healthcare providers increasingly need to more deeply understand and engage patients and consumers in an effort towards effective population-based health management.

 

The Company’s portfolio of subscription-based solutions provide actionable information and analysis to healthcare organizations and payers across a range of mission-critical, constituent-related elements, including patient experience and satisfaction, community population health risks, workforce engagement, community perceptions, and physician engagement. NRC partners with clients across the continuum of healthcare services. The Company’s clients range from acute care hospitals and post-acute providers, such as home health, long-term care and hospice, to numerous payer organizations. The Company believes this cross-continuum positioning is a unique and an increasingly important capability as evolving payment models drive healthcare providers and payers towards a more collaborative and interactive healthcare system.

 

Results of Operations

 

The following table sets forth for the periods indicated, select financial information derived from the Company’s condensed consolidated financial statements expressed as a percentage of total revenue. The trends illustrated may not necessarily be indicative of future results. The discussion that follows the table should be read in conjunction with the condensed consolidated financial statements.

 

		Three months ended								Six months ended
		June 30,								June 30,
		2014				2013				2014				2013
Revenue:			100.0	%			100.0	%			100.0	%			100.0	%
Operating expenses:
Direct			44.9				42.5				42.2				41.8
Selling, general and administrative			24.9				28.6				24.7				27.2
Depreciation and amortization			3.9				4.1				3.7				4.0
Total operating expenses			73.7				75.2				70.6				73.0
Operating income			26.3	%			24.8	%			29.4	%			27.0	%

 

 

Three Months Ended June 30, 2014, Compared to Three Months Ended June 30, 2013

 

Revenue.    Revenue for the three-month period ended June 30, 2014, increased 7.4% to $24.0 million, compared to $22.4 million in the three-month period ended June 30, 2013. The increase was due to new customer sales, as well as increases in sales to the existing client base.

 

Direct expenses.    Direct expenses increased 13.4% to $10.8 million for the three-month period ended June 30, 2014, compared to $9.5 million in the same period during 2013. This was due to increased variable costs of $1.3 million from postage and printing, contracted survey-related costs, internal labor costs, publications and conference expenses. Direct expenses increased as a percentage of revenue to 44.9% in the three-month period ended June 30, 2014, compared to 42.5% during the same period of 2013 as a result of higher mailing volumes on subscription agreements, as well as increased use of contracted survey-related services.

 

Selling, general and administrative expenses.    Selling, general and administrative expenses decreased 6.4% to $6.0 million for the three-month period ended June 30, 2014, compared to $6.4 million for the same period in 2013 due to a decrease in legal and accounting fees of $250,000 that were associated with the May 2013 Recapitalization, decreases in salary and benefit related costs due to attrition of $198,000, and decreased software license fees of $41,000 partially offset by increased bad debt expense and recruiting fees. Selling, general, and administrative expenses decreased as a percentage of revenue to 24.9% for the three-month period ended June 30, 2014, from 28.6% for the same period in 2013.

 

Depreciation and amortization.    Depreciation and amortization expenses decreased to $926,000 for the three-month period ended June 30, 2014, compared to $931,000 for the same period in 2013. Depreciation and amortization expenses as a percentage of revenue decreased to 3.9% for the three-month period ended June 30, 2014, from 4.1% during the same period in 2013.

 

Provision for income taxes.    Provision for income taxes was $2.2 million (35.3% effective tax rate) for the three-month period ended June 30, 2014, compared to $2.0 million (37.1% effective tax rate) for the same period in 2013. The effective tax rate for the three-month period ended June 30, 2014, is lower than the rate in the same period of 2013 mainly due to lower projected state tax rates due to legislative changes, as well as non-deductible fees associated with the May 2013 Recapitalization that were incurred during 2013.

 

Six Months Ended June 30, 2014, Compared to Six Months Ended June 30, 2013

 

Revenue.    Revenue for the six-month period ended June 30, 2014, increased 5.9% to $50.0 million, compared to $47.3 million in the six-month period ended June 30, 2013. The increase was due to new customer sales, as well as increases in sales to the existing client base.

 

Direct expenses.    Direct expenses increased 6.9% to $21.1 million for the six-month period ended June 30, 2014, compared to $19.7 million in the same period during 2013. This was mainly due to increased variable costs of $1.2 million from postage and printing, contracted survey-related costs, internal labor costs, publications and conference expenses. Fixed expenses increased $137,000 due to increased vendor services in technology and survey related costs. Direct expenses increased as a percentage of revenue to 42.2% in the six-month period ended June 30, 2014, compared to 41.8% during the same period of 2013 as a result of higher mailing volumes on subscription agreements, as well as increased use of contracted survey-related services.

 

Selling, general and administrative expenses.    Selling, general and administrative expenses decreased 4.1% to $12.3 million for the six-month period ended June 30, 2014, compared to $12.9 million for the same period in 2013 mainly due to a decrease in legal and accounting fees of $518,000 that were associated with the May 2013 Recapitalization. In addition, non-cash share-based compensation expense, primarily associated with the forfeitures of certain stock options and restricted share awards, decreased by $327,000. These decreases were partially offset by increased marketing and product development costs, bad debt expense, recruiting fees and building/equipment lease expense. Selling, general, and administrative expenses decreased as a percentage of revenue to 24.7% for the six-month period ended June 30, 2014, from 27.2% for the same period in 2013.

 

 

Depreciation and amortization.    Depreciation and amortization expenses were $1.9 million for the six-month period ended June 30, 2014 and 2013. Depreciation and amortization expenses as a percentage of revenue decreased to 3.7% for the six-month period ended June 30, 2014, from 4.0% during the same period in 2013.

 

Provision for income taxes.    Provision for income taxes was $5.1 million (34.9% effective tax rate) for the six-month period ended June 30, 2014, compared to $4.7 million (37.2% effective tax rate) for the same period in 2013. The effective tax rate for the six-month period ended June 30, 2014, is lower than the rate in the same period of 2013 mainly due to lower projected state tax rates due to legislative changes, as well as non-deductible fees associated with the May 2013 Recapitalization that were incurred during 2013.

 

 

Liquidity and Capital Resources

 

The Company believes that its existing sources of liquidity, including cash and cash equivalents, borrowing availability, and operating cash flows will be sufficient to meet its projected capital and debt maturity needs and dividend policy for the foreseeable future.

 

The Company will make capital contributions up to $2.5 million on an as-needed basis as determined by the Board of Directors of Connect. As of June 30, 2014, the Company had contributed $2.1 million. Additionally, the Company has a future obligation to purchase the other equity units in Connect when certain targeted events have been achieved. If, at any time, Connect has at least $12.5 million of annual recurring contract value, including the NRC contracts being serviced, and the members have approved a financial statement showing a pro forma minimum 35% EBITDA margin for revenue on a going-forward basis, then within 90 days thereafter NRC is required to purchase from the other members, and the other members shall be required to sell to NRC, all of their equity units not owned by NRC. As of June 30, 2014, the price at which the other members had the obligation to sell their equity units to NRC was $0.

 

The Company had cash and cash equivalents of $31.5 million at June 30, 2014, of which $8.5 million was held in Canada. All of the amounts held in Canada are intended to be indefinitely reinvested in foreign operations. The amounts held outside of the U.S. are eligible for repatriation, but under current law, would be subject to U.S. federal income taxes, less applicable foreign tax credits. It is impractical to determine the additional income tax liability, if any, associated with such repatriation.

 

Working Capital

 

The Company had a working capital balance of $22.2 million as of June 30, 2014, compared to a working capital balance of $12.8 million as of December 31, 2013. The change was primarily due to increases in cash and cash equivalents of $9.4 million. The Company’s working capital is significantly impacted by its large deferred revenue balances. The deferred revenue balances as of June 30, 2014 and December 31, 2013 were $16.1 million and $13.9 million, respectively.

 

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 condensed 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 when the respective period ends.

 

 

Cash Flow Analysis

 

A summary of operating, investing, and financing activities is shown in the following table:

 

		Six Months Ended June 30,
		2014				2013
		(In thousands)
Provided by operating activities		$	11,374			$	5,969
Used in investing activities			(1,425	)			(966	)
Used in financing activities			(549	)			(2,131	)
Effect of exchange rate change on cash			47				(356	)
Net increase in cash and cash equivalents			9,447				2,516
Cash and cash equivalents at end of period		$	31,539			$	10,802

 

 

Cash Flows from Operating Activities

 

Cash flows from operating activities consist of net income adjusted for non-cash items including depreciation and amortization, gain or loss on sale of property and equipment, deferred taxes, share-based compensation and related taxes, and the effect of working capital changes.

 

Net cash provided by operating activities was $11.4 million for the six months ended June 30, 2014, which included net income of $9.5 million, plus non-cash charges (benefits) for deferred tax expense, depreciation and amortization, and non-cash stock compensation totaling $2.1 million. Changes in working capital reduced 2014 cash flows from operating activities by $207,000, primarily due to timing of billings and collections on new or renewal contracts, annual prepaid commitments, payments of annual bonuses, and increased income tax payments. These changes were partially offset by increasing cash flows from increases in deferred revenue due to timing of billing and revenue recognition on new or renewal contracts and timing on payment of vendor invoices.

 

Net cash provided by operating activities was $6.0 million for the six months ended June 30, 2013, which included net income of $7.9 million, plus non-cash charges (benefits) for deferred tax expense, depreciation and amortization, and non-cash stock compensation totaling $2.4 million. Changes in working capital reduced 2013 cash flows from operating activities by $4.4 million, primarily due to the timing of initial billings on new or renewal contracts, annual prepaid commitments, timing of income tax payments, and payments of annual bonuses. These changes were partially offset by increasing cash flows from timing in vendor payments.

 

Net cash provided by operating activities grew $5.4 million for the six months ended June 30, 2014 compared to the six months ended June 30, 2013. The increase is mainly due to growth in net income of $1.6 million, more timely payment of invoicing due to improved collections procedures increasing accounts receivable cash flows by $ 2.1 million, and growth in deferred revenue due to timing of billings with new or renewal clients of $2.0 million.

 

Cash Flows from Investing Activities

 

Net cash of $1.4 million and $966,000 was used for investing activities in the six months ended June 30, 2014 and 2013, respectively, for purchases of property and equipment.

 

  

Cash Flows from Financing Activities

 

Net cash used in financing activities was $549,000 in the six months ended June 30, 2014. Proceeds from the exercise of stock options and the excess tax benefit of share-based compensation provided cash of $408,000 and $531,000, respectively. Cash was used to pay payroll taxes on vested restricted shares of $309,000, capital lease obligations of $59,000 and to repay borrowings under the term note totaling $1.1 million.

 

Net cash used in financing activities was $2.1 million in the six months ended June 30, 2013. Proceeds from the exercise of stock options and the excess tax benefit of share-based compensation provided cash of $375,000 and $575,000, respectively. Cash was used to pay dividends of $2.1 million, payroll taxes on vested restricted shares of $55,000, capital lease obligations of $54,000 and to repay borrowings under the term notes totaling $830,000.

 

The effect of changes in foreign exchange rates increased cash and cash equivalents by $47,000 in the six months ended June 30, 2014 and decreased cash and cash equivalents by $356,000 for the six months ended June 30, 2013.

 

Capital Expenditures

 

Cash paid for capital expenditures was $1.4 million for the six-month period ended June 30, 2014. These expenditures consisted mainly of computer software, computer hardware, furniture and other equipment. The Company expects similar capital expenditure purchases for the remainder of 2014 consisting primarily of computer software and hardware and other equipment to be funded through cash generated from operations.

 

Debt and Equity

 

The Company had two term notes, which were used to partially finance acquisitions in 2008 and 2010. Borrowings under the term notes bore interest at an annual rate of 3.79%. The Company refinanced these two term notes on May 9, 2013, and combined them into one new term note. Borrowings under the new term note bear interest at an annual rate of 3.12%. The outstanding balance of the new term note at June 30, 2014, was $9.2 million. For additional information on the new term loan, see Note 4 above.

 

The Company also has a revolving credit note that was renewed in June 2014 to extend the term to June 30, 2015. This revolving credit note provides for the maximum aggregate borrowings of $6.5 million, subject to a borrowing base equal to 75.0% of the Company’s eligible accounts receivable. Borrowings under the revolving credit note bear interest at a variable annual rate, with three rate options at the discretion of management as follows: (1) 2.5% plus the daily reset one-month LIBOR rate, or (2) 2.2% plus the one-, two-, or three-month LIBOR rate, or (3) the bank’s one-, two-, three-, six- or twelve-month Money Market Loan Rate. As of June 30, 2014, the revolving credit note did not have a balance. According to the borrowing base requirements, the Company had the capacity to borrow $6.5 million as of June 30, 2014.

 

The term note and revolving credit note are secured by certain of the Company’s assets, including the Company’s land, building, trade accounts receivable and intangible assets. The term note and revolving credit note contain 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 June 30, 2014, the Company was in compliance with these restrictions and covenants.

 

The Company has capital leases for computer equipment, office equipment, and inserting equipment. The balance of the capital leases as of June 30, 2014 was $411,000. The Company entered into a new capital lease agreement for printing equipment in the quarter ended June 30, 2014, with an initial value of $248,000.

 

 

Shareholders’ equity increased $10.3 million to $82.1 million at June 30, 2014, from $71.8 million at December 31, 2013. The increase was primarily due to net income of $9.5 million and $1.7 million related to share-based compensation including options exercised, partially offset by share repurchases of $907,000 related to stock options exercised.

 

 

Contractual Obligations

 

The Company had contractual obligations to make payments in the following amounts in the future as of June 30, 2014:

 

Contractual Obligations(1)		Total Payments				Remainder of 2014				One to Three Years				Three to Five Years				After Five Years
(In thousands)
Operating leases		$	2,210			$	420			$	1,256			$	520			$	14
Capital leases			444				102				342				--				--
Purchase obligations			--				--				--				--				--
Uncertain tax positions(2)			194				--				--				--				--
Long-term debt			9,786				1,274				5,099				3,413				--
Total		$	12,634			$	1,796			$	6,697			$	3,933			$	14

 

⁽¹⁾ Amounts are inclusive of interest payments, where applicable.

⁽²⁾ We have $194,000 in liabilities associated with uncertain tax positions. We are unable to reasonably estimate the expected cash settlement dates of these uncertain tax positions with certain taxing authorities.

 

Stock Repurchase Program

 

The Board of Directors of the Company authorized the repurchase of 2,250,000 class A and 375,000 class B shares of common stock in the open market or in privately negotiated transactions under a stock repurchase program that was originally approved in February 2006 and subsequently amended in May 2013. As of June 30, 2014, the remaining number of common stock shares that could be purchased under this authorization was 418,749 class A shares and 69,791 class B shares. 

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

 

There are no material changes to the disclosures regarding the Company’s market risk exposures made in its Annual Report on Form 10-K for the year ended December 31, 2013.

 

ITEM 4.

Controls and Procedures

 

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report, and has concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective.

 

There have been no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that occurred during the quarter ended June 30, 2014, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II – Other Information

 

ITEM 1A.

Risk Factors

 

There have been no material changes to the risk factors relating to the Company set forth in Part I, Item 1A of its Annual Report on Form 10-K for the year ended December 31, 2013.

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

The Board of Directors of the Company authorized the repurchase of an additional 2,250,000 class A and 375,000 class B shares of Common Stock in the open market or in privately negotiated transactions under a stock repurchase program that was originally approved in February 2006 and subsequently amended in May 2013. Unless terminated earlier by resolution of the Company’s Board of Directors, the repurchase program will expire when the Company has repurchased all shares authorized for repurchase thereunder. As of July 31, 2014, 1,831,251 shares of class A common stock and 305,209 shares of class B common stock have been repurchased under that authorization. No stock was repurchased under the program during the six-month period ended June 30, 2014.

 

ITEM 6.

Exhibits

 

The exhibits listed in the accompanying index of exhibits are filed as part of this Quarterly Report on Form 10-Q.

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

	NATIONAL RESEARCH CORPORATION
Date: August 6, 2014	By:	/s/ Michael D. Hays
		Michael D. Hays
		Chief Executive Officer (Principal Executive Officer)
Date: August 6, 2014	By:	/s/ Kevin R. Karas
		Kevin R. Karas
		Senior Vice President Finance, Treasurer, Secretary and  Chief Financial Officer (Principal Financial and Accounting Officer)

  

 

NATIONAL RESEARCH CORPORATION

 

EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q

For the Quarterly Period ended June 30, 2014

 

Exhibit

 

 

(31.1)

Certification by the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934.

 

(31.2)

Certification by the Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934.

 

(32)	Written Statement of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

 

(101)*

Financial statements from the Quarterly Report on Form 10-Q of National Research Corporation for the quarter ended June 30, 2014, formatted in eXtensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Cash Flows, (v) the Notes to Condensed Consolidated Financial Statements, and (vi) document and entity information.

 

* In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

 

 

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