NATIONAL RESEARCH CORP - FORM 10-Q

Attached files

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EX-31.1 - EXHIBIT 31.1 - NATIONAL RESEARCH CORP	ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - NATIONAL RESEARCH CORP	ex31-2.htm
EX-32 - EXHIBIT 32 - NATIONAL RESEARCH CORP	ex32.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2015

[ ]	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 October 31, 2015: 20,801,172 shares

Class B Common Stock, $.001 par value, outstanding as of October 31, 2015: 3,502,344 shares

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NATIONAL RESEARCH CORPORATION

FORM 10-Q INDEX

For the Quarter Ended September 30, 2015

			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	8-16

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17-22

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23

	Item 4.	Controls and Procedures		23

PART II.	OTHER INFORMATION

	Item 1A.	Risk Factors	24

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24

	Item 6.	Exhibits	24

	Signatures		25

	Exhibit Index		26

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Special Note Regarding Forward-Looking Statements

Certain matters discussed in this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements can generally be identified as such because the context of the statement includes phrases such as National Research Corporation (“NRC,” the “Company,” “we,” “our,” “us,” or similar terms) “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;

●

The possibility that the Company could be subject to security breaches or computer viruses:

●

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, 2014, 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.

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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)

	September 30, 2015			December 31, 2014
Assets
Current assets:
Cash and cash equivalents	$	37,580		$	40,042
Trade accounts receivable, less allowance for doubtful accounts of $196 and $201 in 2015 and 2014, respectively		12,889			8,116
Unbilled revenue		1,108			1,169
Prepaid expenses		1,686			1,418
Income tax receivable		723			1,100
Deferred income taxes		453			349
Other current assets		287			994
Assets held-for-sale		1,341			--
Total current assets		56,067			53,188

Property and equipment, net		11,161			12,143
Intangible assets, net		3,969			5,456
Goodwill		57,867			58,489
Other		412			234
Total assets	$	129,476		$	129,510
Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of notes payable	$	2,383		$	2,328
Accounts payable		1,221			830
Accrued wages, bonus and profit sharing		4,730			4,365
Accrued expenses		5,149			5,047
Current portion of capital lease obligations		79			151
Income taxes payable		-			110
Deferred revenue		17,454			15,095
Liabilities held-for-sale		568			--
Total current liabilities		31,584			27,926

Notes payable, net of current portion		3,945			5,740
Deferred income taxes		6,811			7,432
Deferred revenue		24			123
Other long term liabilities		522			541
Total liabilities		42,886			41,762

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 25,538,056 in 2015 and 25,475,662 in 2014, outstanding 20,802,881in 2015 and 20,894,286 in 2014		26			25
Class B Common stock, $0.001 par value; authorized 80,000,000 shares, issued 4,262,287 in 2015 and 4,251,889 in 2014, outstanding 3,502,344 in 2015 and 3,494,865 in 2014		4			4
Additional paid-in capital		43,335			44,864
Retained earnings		77,826			73,686
Accumulated other comprehensive loss		(2,570	)		(773	)
Treasury stock, at cost; 4,735,175 Class A shares, 759,943 Class B shares in 2015 and 4,581,376 Class A shares, 757,024 Class B shares in 2014		(32,031	)		(30,058	)
Total shareholders’ equity		86,590			87,748
Total liabilities and shareholders’ equity	$	129,476		$	129,510

See accompanying notes to condensed consolidated financial statements

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NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014

Revenue	$	25,244		$	23,682		$	75,979		$	73,713

Operating expenses:
Direct		11,006			9,769			33,246			30,871
Selling, general and administrative		6,620			5,805			20,883			18,154
Depreciation and amortization		1,070			949			3,109			2,810
Total operating expenses		18,696			16,523			57,238			51,835

Operating income		6,548			7,159			18,741			21,878

Other income (expense):
Interest income		14			22			46			58
Interest expense		(52	)		(76	)		(172	)		(236	)
Other, net		(25	)		2			(22	)		16

Total other expense		(63	)		(52	)		(148	)		(162	)

Income before income taxes		6,485			7,107			18,593			21,716

Provision for income taxes		2,346			2,555			6,910			7,659


Net income	$	4,139		$	4,552		$	11,683		$	14,057

Earnings Per Share of Common Stock:
Basic Earnings Per Share:
Class A	$	0.10		$	0.11		$	0.28		$	0.34
Class B	$	0.59		$	0.66		$	1.67		$	2.03
Diluted Earnings Per Share:
Class A	$	0.10		$	0.11		$	0.28		$	0.33
Class B	$	0.59		$	0.64		$	1.65		$	1.99

Dividends Per Share of Common Stock:
Class A	$	0.06		$	--		$	0.18		$	--
Class B	$	0.36		$	--		$	1.08		$	--

Weighted average shares and share equivalents outstanding:
Class A - basic		20,726			20,771			20,769			20,761
Class B - basic		3,478			3,474			3,478			3,472
Class A - diluted		20,937			21,035			21,002			21,078
Class B - diluted		3,521			3,536			3,522			3,538

See accompanying notes to condensed consolidated financial statements

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NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014

Net income	$	4,139		$	4,552		$	11,683		$	14,057
Other comprehensive loss:
Foreign currency translation adjustment	$	(1,028	)	$	(590	)	$	(1,797	)	$	(533	)
Other comprehensive loss	$	(1,028	)	$	(590	)	$	(1,797	)	$	(533	)

Comprehensive Income	$	3,111		$	3,962		$	9,886		$	13,524

See accompanying notes to condensed consolidated financial statements.

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NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

	Nine months ended
	September 30,
	2015			2014
Cash flows from operating activities:
Net income	$	11,683		$	14,057
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		3,109			2,810
Deferred income taxes		(544	)		(81	)
Non-cash share-based compensation expense		925			398
Tax benefit from exercise of stock options		14			73
Loss on disposal of property and equipment		-			1
Reserve for uncertain tax positions		36			25
Write off of purchase option		657			-
Net changes in assets and liabilities:
Trade accounts receivable		(5,101	)		41
Unbilled revenue		35			144
Prepaid expenses		(279	)		(176	)
Accounts payable		247			(47	)
Accrued expenses, wages, bonuses and profit sharing		1,010			124
Income taxes receivable and payable		53			227
Deferred revenue		2,931			3,020
Net cash provided by operating activities		14,776			20,616

Cash flows from investing activities:
Purchases of property and equipment		(2,207	)		(2,100	)
Net cash used in investing activities		(2,207	)		(2,100	)

Cash flows from financing activities:
Payments on notes payable		(1,740	)		(1,686	)
Payments on capital lease obligations		(148	)		(117	)
Proceeds from exercise of stock options		--			408
Common stock withheld for payroll tax on share based compensation		(92	)		(308	)
Cash paid for non-controlling interest		(2,789	)		-
Excess tax benefit from share-based compensation		107			531
Purchase of treasury stock		(1,629	)		--
Payment of dividends on common stock		(7,545	)		--
Net cash used in financing activities		(13,836	)		(1,172	)

Effect of exchange rate changes on cash		(1,195	)		(373	)
(Decrease) increase in cash and cash equivalents		(2,462	)		16,971
Cash and cash equivalents at beginning of period		40,042			22,092
Cash and cash equivalents at end of period	$	37,580		$	39,063
Supplemental disclosure of cash paid for:
Interest, net of capitalized amounts	$	162		$	218
Income taxes	$	7,339		$	7,054
Supplemental disclosure of non-cash investing and financing activities:
Assets purchased under capital lease	$	20		$	248

See accompanying notes to condensed consolidated financial statements.

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NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.	BASIS OF CONSOLIDATION AND PRESENTATION

During the quarter ended March 31, 2015, the Company changed its operating segments from three to seven to reflect a change in corporate reporting structure to the Company’s Chief Executive Officer and chief operating decision maker. The Company’s seven operating segments 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 seven operating segments are Experience, The Governance Institute, Market Insights, Reputation, Predictive Analytics, National Research Corporation Canada and Customer-Connect LLC (“Connect”), each of which 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, 2014, was derived from the Company’s audited consolidated balance sheet as of that date. All other financial statements contained herein are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) the Company considers necessary for a fair presentation of financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States.

Information and footnote disclosures 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, 2014, filed with the Securities and Exchange Commission (the “SEC”) on March 4, 2015.

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 its majority-owned subsidiary, Connect. Prior to becoming a majority-owned subsidiary, the accounts of Connect, a variable interest entity for which NRC has been deemed the primary beneficiary, were included in the condensed consolidated financial statements of the Company. 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 loss, 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.

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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 September 30, 2015, and December 31, 2014:

Fair Values Measured on a Recurring Basis

	Level 1		Level 2		Level 3		Total
	(In thousands)
As of September 30, 2015
Money Market Funds	$	7,911	$	--	$	--	$	7,911
Commercial Paper		26,273		--		--		26,273
Total	$	34,184	$	--	$	--	$	34,184


As of December 31, 2014
Money Market Funds	$	9,442	$	--	$	--	$	9,442
Commercial Paper		29,686		--		--		29,686
Total	$	39,128	$	--	$	--	$	39,128

The Company’s long-term debt is recorded at historical cost. The following are the carrying amounts and estimated fair values, using a Level 2 discounted cash flow analysis based primarily on estimated current rates available for debt of the same remaining duration and adjusted for nonperformance and credit risk:

	September 30, 2015		December 31, 2014
	(In thousands)
Total carrying amounts of long-term debt	$	6,328	$	8,068
Estimated fair value of long-term debt	$	6,318	$	7,997

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. Other current assets were reduced by $657,000 in the first quarter of 2015 for the write-off of the purchase option of a potential acquisition. 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 September 30, 2015, and December 31, 2014, there was no indication of impairment related to the Company’s non-financial assets.

In connection with the January 1, 2015 revision to NRC’s operating segments, the composition of one reporting unit was divided and realigned to the new operating segments. Goodwill for this reporting unit was reassigned using the relative fair value approach. A goodwill impairment test was performed immediately before and after the reorganization of the reporting structure to determine whether the reorganization masked a goodwill impairment charge. The estimated fair value of each reporting unit was calculated using a discounted cash flow methodology. The discounted cash flows are based on the Company’s strategic plans and best estimates of revenue growth and operating profit by each reporting unit. This analysis requires the exercise of significant judgment, including the identification of reporting units and assumptions about appropriate discount rates, perpetual growth rates, and the amount and timing of expected future cash flows. The analysis concluded that the estimated fair value of each reporting unit sufficiently exceeded the carrying value and thus no further evaluation of impairment was necessary.

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CONNECT

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 had a 49% ownership interest in Connect. NG Customer-Connect, LLC held 25% interest, and the remaining 26% was held by Illuminate Health, LLC. NRC has agreed to lease certain employees to Connect. In return for a fee, Connect services the Company’s discharge call program clients. NRC has made capital contributions of $2.8 million to Connect, and will make additional capital contributions for up to $1.3 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.

In July 2015, the Company acquired all of NG Customer-Connect, LLC’s interest in Connect and a portion of Illuminate Health, LLC’s interest in Connect for combined consideration of $2.8 million. Since the Company previously consolidated Connect, the transaction was accounted for as an equity transaction, resulting in a reduction to additional paid in capital. Following the transaction, the Company owns approximately 89% of Connect and Illuminate Health, LLC owns 11% of Connect. Under the amended Connect operating agreement, NRC has a future obligation to acquire additional equity units from Illuminate Health when new annual recurring contract value reaches targeted levels. NRC will be required to acquire approximately one-third of Illuminate Health, LLC’s equity units when new annual recurring contract value reaches each of $7 million, $14 million, and $20 million.

3.	ASSETS HELD FOR SALE

The Company is in discussions with a third party to potentially sell selected assets and liabilities of the Predictive Analytics operating segment. The lack of operating results from this business due to its divestiture will not have a major effect on our operations and financial results, and, accordingly, has not been classified as a discontinued operation for any of the periods presented. The sale is subject to the parties entering a final definitive agreement. The assets and liabilities classified as held for sale reflected in our Condensed Consolidated Balance Sheet at September 30, 2015 are as follows (in thousands):

Prepaid Expenses	$	4
Property and equipment, net		341
Intangible assets, net		720
Goodwill		276
Total assets held-for-sale	$	1,341

Deferred revenue		568
Net assets held-for sale	$	773

4.	INCOME TAXES

The effective tax rate for the three-month period ended September 30, 2015 increased to 36.2% compared to 35.9% for the same period in 2014. The effective tax rate for the nine-month period ended September 30, 2015 increased to 37.2% compared to 35.3% for the same period in 2014. This increase was primarily due to a capital loss valuation allowance and higher projected state tax rates due to legislative changes and growth within the Company. The capital loss valuation was recorded due to the write-off of the purchase option of a potential acquisition that was not exercised on March 31, 2015. The option was extended until June 30, 2015 and terminated unexercised in June 2015. The Company is currently under a United States federal tax examination for the tax year ended December 31, 2013.

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The unrecognized tax benefit as of September 30, 2015, was $394,000, excluding interest of $9,000 and penalties of $7,000. Of this amount, $207,000 represents the net unrecognized tax benefits that, if recognized, would favorably impact the effective income tax rate. The remaining $187,000 at September 30, 2015 would have no impact on the effective tax rate, if recognized. The Company accrues interest and penalties related to uncertain tax position in the statements of income as income tax expense.

5.	NOTES PAYABLE

The Company’s term note is payable in 60 monthly installments of $212,468. Borrowings under the term note bears interest at an annual rate of 3.12%. The outstanding balance of the term note at September 30, 2015 was $6.3 million.

The Company also has a revolving credit note that was renewed in June 2015 to extend the term to June 30, 2016. 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 September 30, 2015 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 September 30, 2015.

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 September 30, 2015, the Company was in compliance with its financial covenants.

6.	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 unvested 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, as amended (the “2004 Director Plan”), is a nonqualified plan that provides for the granting of options with respect to 3,000,000 class A and 500,000 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.

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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 225,306 shares of the Company’s class A common stock and 37,551 shares of the class B common stock during the nine-month period ended September 30, 2015. The Company granted options to purchase 204,166 shares of class A common stock and 32,217 shares of class B common stock during the nine-month period ended September 30, 2014. 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 the stock options granted was estimated using a Black-Scholes valuation model with the following assumptions:

	2015								2014
	Class A				Class B				Class A				Class B
Expected dividend yield at date of grant		2.14	to	2.57%		5.29	to	5.72%		1.47	to	1.97%		4.03	to	4.87%
Expected stock price volatility		30.86	to	34.87%		29.96	to	33.94%		27.52	to	32.03%		30.13	to	32.65%
Risk-free interest rate		1.55	to	1.78%		1.55	to	1.78%		1.63	to	2.37%		1.63	to	2.37%
Expected life of options (in years)		5	to	7		5	to	7		5	to	7		5	to	7

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 nine months ended September 30, 2015:

	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Terms (Years)		Aggregate Intrinsic Value (In thousands)
Class A
Outstanding at December 31, 2014		1,324,520		$	11.07
Granted		225,306		$	13.83
Exercised		(25,983	)	$	6.30			$	179
Forfeited		(56,105	)	$	13.12
Outstanding at September 30, 2015		1,467,738		$	11.50		6.10	$	2,774
Exercisable at September 30, 2015		1,059,990		$	11.04		5.41	$	2,478

Class B
Outstanding at December 31, 2014		213,470		$	24.32
Granted		37,551		$	34.85
Exercised		(4,330	)	$	14.82			$	89
Forfeited		(9,018	)	$	27.61
Outstanding at September 30, 2015		237,673		$	26.04		6.16	$	2,047
Exercisable at September 30, 2015		170,663		$	24.94		5.47	$	1,703

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The following table summarizes information regarding unvested stock granted to associates under the 2006 Equity Incentive Plan for the nine months ended September 30, 2015:

	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, 2014		110,647		$	11.10		18,441		$	36.42
Granted		52,660		$	13.17		8,776		$	35.48
Vested		--			--		--			--
Forfeited		(16,249	)	$	5.39		(2,708	)	$	32.31
Outstanding at September 30, 2015		147,058		$	12.47		24,509		$	36.54

As of September 30, 2015, the total unrecognized compensation cost related to unvested stock awards was approximately $2.0 million and is expected to be recognized over a weighted average period of 3.23 years.

7.	GOODWILL AND OTHER INTANGIBLE ASSETS

The following represents a summary of changes in the Company’s carrying amount of goodwill for the nine months ended September 30, 2015:

	(In thousands)
Balance as of December 31, 2014	$	58,489
Assets held-for-sale		(276	)
Foreign currency translation		(346	)
Balance as of September 30, 2015	$	57,867

Intangible assets consisted of the following:

	September 30, 2015			December 31, 2014
	(In thousands)
Non-amortizing other intangible assets:
Trade name	$	1,191		$	1,191
Amortizing other intangible assets:
Technology and Customer related intangibles		10,441			11,966
Non-compete agreements		--			430
Trade name		1,572			1,902
Total other intangible assets		13,204			15,489
Accumulated amortization		(9,235	)		(10,033	)
Other intangible assets, net	$	3,969		$	5,456

During the three months ended September 30, 2015, goodwill of $0.3 million and intangible assets of $2.2 million, less accumulated amortization of $1.3 million, related to our Predictive Analytics operating segment were reclassified to assets held for sale as described in Note 3.

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8.	PROPERTY AND EQUIPMENT

	September 30, 2015			December 31, 2014
	(In thousands)
Property and equipment	$	34,278		$	34,732
Accumulated depreciation		(23,117	)		(22,589	)
Property and equipment, net	$	11,161		$	12,143

During the three months ended September 30, 2015, property and equipment of $1.9 million, less accumulated depreciation of $1.6 million, related to our Predictive Analytics operating segment were reclassified to assets held for sale as described in Note 3.

9.	EARNINGS PER SHARE

Net income per share of class A common stock and class B common stock is computed using the two-class method. Earnings per share under the two-class method treats unvested share-based payment awards with non-forfeitable rights to dividends as a separate class of securities. The Company’s unvested restricted stock grants are considered participating securities because the shares have the right to receive non-forfeitable dividends. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security by allocating earnings according to dividends declared and participating rights in undistributed earnings.

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, utilizing the two-class method for unvested restricted stock. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options. 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.

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	For the Three Months Ended September 30, 2015						For the Three Months Ended September 30, 2014
	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:
Net income	$	2,060		$	2,078		$	2,272	$	2,280
Allocation of distributed and undistributed income to unvested restricted stock shareholders		(14	)		(14	)		--		--
Net income attributable to common shareholders	$	2,046		$	2,064		$	2,272	$	2,280
Denominator for net income per share - basic:
Weighted average common shares outstanding - basic		20,726			3,478			20,771		3,474
Net income per share – basic	$	0.10		$	0.59		$	0.11	$	0.66
Numerator for net income per share - diluted:
Net income attributable to common shareholders for basic computation	$	2,046		$	2,064		$	2,272	$	2,280
Denominator for net income per share - diluted:
Weighted average common shares outstanding - basic		20,726			3,478			20,771		3,474
Weighted average effect of dilutive securities – stock options		211			43			264		62
Denominator for diluted earnings per share – adjusted weighted average shares		20,937			3,521			21,035		3,536
Net income per share – diluted	$	0.10		$	0.59		$	0.11	$	0.64

The Company excluded 736,350 and 546,614 shares of class A common stock options for the three-month periods ended September 30, 2015 and 2014, respectively, and 66,227 and 31,564 shares of class B common stock options for the three-month periods ended September 30, 2015 and 2014, 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 Nine Months Ended September 30, 2015						For the Nine Months Ended September 30, 2014
	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:
Net income	$	5,825		$	5,858		$	7,016	$	7,041
Allocation of distributed and undistributed income to unvested restricted stock shareholders		(41	)		(41	)		--		--
Net income attributable to common shareholders	$	5,784		$	5,817		$	7,016	$	7,041
Denominator for net income per share - basic:
Weighted average common shares outstanding - basic		20,769			3,478			20,761		3,472
Net income per share – basic	$	0.28		$	1.67		$	0.34	$	2.03
Numerator for net income per share - diluted:
Net income attributable to common shareholders for basic computation	$	5,784		$	5,817		$	7,016	$	7,041
Denominator for net income per share - diluted:
Weighted average common shares outstanding - basic		20,769			3,478			20,761		3,472
Weighted average effect of dilutive securities – stock options		233			44			317		66
Denominator for diluted earnings per share – adjusted weighted average shares		21,002			3,522			21,078		3,538
Net income per share – diluted	$	0.28		$	1.65		$	0.33	$	1.99

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The Company excluded 535,474 and 329,397 shares of class A common stock options for the nine-month periods ended September 30, 2015 and 2014, respectively, and 55,801 and 17,772 shares of class B common stock options for the nine-month periods ended September 30, 2015 and 2014, 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.

10.	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 $58,000 and $51,000 for the three-month periods and $169,000 and $155,000 for the nine-month periods ended September 30, 2015 and 2014, respectively.

11.	NEW ACCOUNTING PRONOUNCEMENTS

In April 2014, the FASB issued Accounting Standards Update 2014-8 (“ASU 2014-8”) “Reporting of Discontinued Operations and Disclosure of Disposals of Components of an Entity,” which narrows the definition of discontinued operations. Only disposals of components (or groups of components) of an entity that represent a strategic shift that has or will have a major effect on the entity’s operations are reported as discontinued operations under the new standard. The standard is effective prospectively for annual and interim reporting periods in fiscal years beginning after December 15, 2014. The Company adopted ASU 2014-8 on January 1, 2015. In accordance with ASU 2014-8, the potential sale of our Predictive Analytics operating segment has been classified as assets held for sale but does not qualify as a discontinued operation.

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 accounting principles generally accepted in the United States when it becomes effective. The updated accounting guidance is effective for annual and interim reporting periods in fiscal years beginning after December 15, 2016. However, in July 2015, the FASB approved a one year delay of the effective date to fiscal years beginning after December 15, 2017. The Company has the option to adopt as of the original effective date of December 15, 2016. An entity may choose to adopt this ASU either retrospectively or through a cumulative effect adjustment as of the start of the first period for which it applies the standard. The Company is currently in the process of evaluating the impact that this new guidance will have on its consolidated financial statements and our method of adoption.

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation—Amendments to the Consolidation Analysis (Topic 810)” (“ASU 2015-02”), which requires reporting entities to reevaluate whether certain legal entities should be consolidated under the revised consolidation model. This ASU modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs), eliminates the presumption that a general partner should consolidate a limited partnership, and affects the consolidation analysis of reporting entities that are involved with VIEs, especially those that have fee arrangements and related party relationships. This ASU is effective for fiscal years beginning after December 15, 2015, and for interim periods within those fiscal years. The Company is in the process of assessing the impact of the adoption of ASU 2015-02 on its consolidated financial statements.

In April 2015, the FASB issued Accounting Standards Update No. 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement” ("ASU 2015-05"). The amendments in this update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the update specifies that the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. The update further specifies that the customer should account for a cloud computing arrangement as a service contract if the arrangement does not include a software license. ASU 2015-05 will be effective for the Company in fiscal year 2016. The Company is currently assessing the impact of the adoption of ASU 2015-05 to its consolidated financial statements.

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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						Nine months ended
	September 30,						September 30,
	2015			2014			2015			2014

Revenue:		100.0	%		100.0	%		100.0	%		100.0	%

Operating expenses:
Direct		43.6			41.3			43.7			41.9
Selling, general and administrative		26.2			24.5			27.5			24.6
Depreciation and amortization		4.2			4.0			4.1			3.8
Total operating expenses		74.0			69.8			75.3			70.3

Operating income		26.0	%		30.2	%		24.7	%		29.7	%

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Three Months Ended September 30, 2015, Compared to Three Months Ended September 30, 2014

Revenue. Revenue for the three-month period ended September 30, 2015, increased 6.6% to $25.2 million, compared to $23.7 million in the three-month period ended September 30, 2014. The increase was due to new customer sales, as well as increases in sales to the existing client base.

Direct expenses. Direct expenses increased 12.7% to $11.0 million for the three-month period ended September 30, 2015, compared to $9.8 million in the same period during 2014. This was due to increased variable costs of $674,000, primarily from increased postage and printing of $380,000, contracted survey-related costs of $ 233,000, and conference expenses of $143,000, partially offset by a decrease in internal labor costs of $93,000. Fixed expenses increased by $563,000 as a result of increased salary and benefit costs from the acquisition in October 2014, and staffing additions in the customer service area. Direct expenses increased as a percentage of revenue to 43.6% in the three-month period ended September 30, 2015, compared to 41.3% during the same period of 2014 as expenses increased by 12.7% while revenue for the same period only increased by 6.6%.

Selling, general and administrative expenses. Selling, general and administrative expenses increased 14.0% to $6.6 million for the three-month period ended September 30, 2015, compared to $5.8 million for the same period in 2014, as a result of increased salary and benefit costs from the acquisition in 2014 and staffing additions in the sales area. Legal and accounting costs increased by $115,000 due to acquisition and divestiture activities and increased tax services due to the ongoing federal tax examination. Selling, general, and administrative expenses increased as a percentage of revenue to 26.2% for the three-month period ended September 30, 2015, from 24.5% for the same period in 2014 as expenses increased 14.0% while revenue for the same period only increased by 6.6%.

Depreciation and amortization. Depreciation and amortization expenses increased 12.8% to $1.1 million for the three-month period ended September 30, 2015, compared to $949,000 for the same period in 2014 due to increased customer relationship and technology intangible amortization from the acquisition in October 2014 and increased depreciation costs from computer software investments. Depreciation and amortization expenses as a percentage of revenue increased to 4.2% for the three-month period ended September 30, 2015, from 4.0% during the same period in 2014.

Provision for income taxes. Provision for income taxes was $2.3 million (36.2% effective tax rate) for the three-month period ended September 30, 2015, compared to $2.6 million (35.9% effective tax rate) for the same period in 2014. The effective tax rate for the three-month period ended September 30, 2015, is higher than the rate in the same period of 2014 mainly due to higher projected state taxes from legislative changes and growth within the Company.

Nine Months Ended September 30, 2015, Compared to Nine Months Ended September 30, 2014

Revenue. Revenue for the nine-month period ended September 30, 2015, increased 3.1% to $76.0 million, compared to $73.7 million in the nine-month period ended September 30, 2014. The increase was due to new customer sales, as well as increases in sales to the existing client base.

Direct expenses. Direct expenses increased 7.7% to $33.2 million for the nine-month period ended September 30, 2015, compared to $30.9 million in the same period during 2014. Variable expenses increased $655,000, primarily from increased postage and printing of $772,000, and contracted survey-related costs of $ 382,000, partially offset by a reduction in conference expenses of $203,000 (mainly due to two less conferences being held compared to the same period in 2014). Fixed expenses increased $1.7 million primarily due to increased salary and benefit costs from the acquisition in 2014 and staffing additions in the service area. Direct expenses increased as a percentage of revenue to 43.7% in the nine-month period ended September 30, 2015, compared to 41.9% during the same period of 2014 as expenses increased by 7.7% while revenue for the same period only increased by 3.1%.

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Selling, general and administrative expenses. Selling, general and administrative expenses increased 15.0% to $20.9 million for the nine-month period ended September 30, 2015, compared to $18.2 million for the same period in 2014, primarily due to the $657,000 write-off of the purchase option for a potential acquisition, increased salary and benefit costs of $1.3 million (mainly from the acquisition in 2014 and higher share based compensation expense from additional grants and fewer forfeitures in 2015), increased maintenance and repairs expense of $272,000 (primarily due to repairs to the Company’s headquarters building) and increased contracted service costs of $364,000. There were also smaller increases in legal and accounting fees, travel costs, software license and other technology related expenses, which were partially offset by reduced recruiting and bad debt expenses. Selling, general, and administrative expenses increased as a percentage of revenue to 27.5% for the nine-month period ended September 30, 2015, from 24.6% for the same period in 2014 as expenses increased by 15.0% while revenue only increased by 3.1% during the same period.

Depreciation and amortization. Depreciation and amortization expenses increased 10.6% to $3.1 million for the nine-month period ended September 30, 2015 compared to $2.8 million for the same period in 2014 due to increased customer relationship and technology intangible amortization from the acquisition in October 2014 and increased depreciation costs from computer software investments. Depreciation and amortization expenses as a percentage of revenue increased to 4.1% for the nine-month period ended September 30, 2015, from 3.8% during the same period in 2014.

Provision for income taxes. Provision for income taxes was $6.9 million (37.2% effective tax rate) for the nine-month period ended September 30, 2015, compared to $7.7 million (35.3% effective tax rate) for the same period in 2014. The effective tax rate for the nine-month period ended September 30, 2015, is higher than the rate in the same period of 2014 primarily from the recording of a capital loss valuation allowance due to termination on the option for a potential acquisition and slightly higher projected state tax rates.

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 has made capital contributions of $2.8 million to Connect through September 30, 2015 and will make additional capital contributions for up to $1.3 million on an as-needed basis as determined by the Board of Directors of Connect.

In July 2015, the Company acquired all of NG Customer-Connect, LLC’s interest in Connect and a portion of Illuminate Health, LLC’s interest in Connect for combined consideration of $2.8 million. In addition, the Connect operating agreement was amended. Under the revised agreement, NRC has a future obligation to acquire additional equity units from Illuminate Health when new annual recurring contract value reaches targeted levels. NRC will be required to acquire approximately one-third of Illuminate Health, LLC’s equity units when new annual recurring contract value reaches each of $7 million, $14 million, and $20 million. The purchase price for each one-third increment is $1 million.

The Company had cash and cash equivalents of $37.6 million at September 30, 2015, 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.

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Working Capital

The Company had a working capital balance of $24.5 million as of September 30, 2015, compared to a working capital balance of $25.3 million as of December 31, 2014. The change was primarily due to decreases in cash and cash equivalents of $2.5 million, prepaid expenses of $439,000, and income tax receivables of $377,000, and increases in deferred revenue of $2.4 million, accounts payable of $391,000, accrued wages, bonus and profit sharing of $365,000 and the reclassification of liabilities held for sale of $568,000. These were partially offset by an increase in trade accounts receivable of $4.8 million and the reclassification of assets held for sale of $1.3 million. Trade accounts receivable increased due to timing of billings and collections on new and renewal contracts. Accounts payable and income tax receivables increased due to timing of vendor and income tax payments, respectively, and accrued wages, bonus and profit sharing increased due to growth in wages and timing of timing of payments. The Company’s working capital is significantly impacted by its large deferred revenue balances. The current deferred revenue balances as of September 30, 2015 and December 31, 2014 were $17.5 million and $15.1 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 services 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:

	Nine Months Ended September 30,
	2015			2014
	(In thousands)
Provided by operating activities	$	14,776		$	20,616
Used in investing activities		(2,207	)		(2,100	)
Used in financing activities		(13,836	)		(1,172	)
Effect of exchange rate change on cash		(1,195	)		(373	)
Net increase/(decrease) in cash and cash equivalents		(2,462	)		16,971
Cash and cash equivalents at end of period	$	37,580		$	39,063

Cash Flows from Operating Activities

Cash flows from operating activities consist of net income adjusted for non-cash items such as 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 $14.8 million for the nine months ended September 30, 2015, which included net income of $11.7 million, plus non-cash charges (benefits) for deferred tax expense, depreciation and amortization, purchase option write-off, provision for uncertain tax positions and non-cash stock compensation totaling $4.2 million. Changes in working capital decreased 2015 cash flows from operating activities by $1.1 million, primarily due to increases in trade accounts receivable, net of increases in deferred revenue due to the timing of billing, collections and revenue recognition on new or renewal contracts.

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Net cash provided by operating activities was $20.6 million for the nine months ended September 30, 2014, which included net income of $14.1 million, plus non-cash charges (benefits) for deferred tax expense, depreciation and amortization, and non-cash stock compensation totaling $3.2 million. Changes in working capital increased 2014 cash flows from operating activities by $3.3 million, primarily due to increases in deferred revenue due to the timing of billing and revenue recognition on new or renewal contracts and the timing of income tax payments. These changes were partially offset by decreasing cash flows from prepaid commitments and the timing of vendor payments.

Net cash provided by operating activities decreased $5.8 million for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. The decrease was mainly due to a reduction in net income of $2.4 million and a $5.1 million increase in trade accounts receivables, partially offset by increases in accounts payable and accrued expenses and compensation.

Cash Flows from Investing Activities

Net cash of $2.2 million and $2.1 million was used for investing activities in the nine months ended September 30, 2015 and 2014, respectively, for purchases of property and equipment.

Cash Flows from Financing Activities

Net cash used in financing activities was $13.8 million in the nine months ended September 30, 2015. The excess tax benefit of share-based compensation provided cash of $107,000. Cash was used to pay payroll taxes on vested restricted shares of $92,000, to pay capital lease obligations of $148,000, to repay borrowings under the term note totaling $1.7 million, to pay dividends on common stock of $7.5 million, to pay $2.8 million for Connect interests and for the purchase of treasury stock of $1.6 million.

Net cash used in financing activities was $1.2 million in the nine months ended September 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 $308,000, capital lease obligations of $117,000 and to repay borrowings under the term note totaling $1.7 million.

The effect of changes in foreign exchange rates decreased cash and cash equivalents by $1.2 million in the nine months ended September 30, 2015 and decreased cash and cash equivalents by $373,000 for the nine months ended September 30, 2014.

Capital Expenditures

Cash paid for capital expenditures was $2.2 million for the nine-month period ended September 30, 2015. These expenditures consisted mainly of computer software. The Company expects similar capital expenditure purchases for the remainder of 2015 consisting primarily of computer software and hardware and other equipment to be funded through cash generated from operations.

Debt and Equity

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The Company also has a revolving credit note that was renewed in June 2015 to extend the term to June 30, 2016. 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 September 30, 2015, 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 September 30, 2015.

The Company has capital leases for computer equipment, office equipment, and inserting equipment. The balance of the capital leases as of September 30, 2015 was $191,000.

Shareholders’ equity decreased $1.2 million to $86.6 million at September 30, 2015, from $87.7 million at December 31, 2014. The decrease was primarily due dividends paid of $7.5 million, acquisition of Connect interest of $2.8 million, cash paid for share repurchases of $1.6 million and a cumulative translation adjustment of $1.8 million, partially offset by net income of $11.7 million, $925,000 of share-based compensation expense and $312,000 from options exercised.

Contractual Obligations

The Company had contractual obligations to make payments in the following amounts in the future as of September 30, 2015:

Contractual Obligations⁽¹⁾	Total Payments		Remainder of 2015		One to Three Years		Three to Five Years		After Five Years
(In thousands)
Operating leases	$	1,650	$	159	$	1,095	$	396	$	--
Capital leases		212		34		145		33		--
Purchase obligations		--		--		--		--		--
Uncertain tax positions⁽²⁾		--		--		--		--		--
Long-term debt		6,599		637		5,099		863		--
Total	$	8,461	$	830	$	6,339	$	1,292	$	--

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

⁽²⁾We have $403,000 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 September 30, 2015, the remaining number of common stock shares that could be purchased under this authorization was 282,200 class A shares and 69,491 class B shares.

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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, 2014.

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 September 30, 2015, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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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, 2014.

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 October 31, 2015, 1,969,509 shares of class A common stock and 305,509 shares of class B common stock have been repurchased under that authorization.

The table below summarizes repurchases of class A common stock for the three-month period ended September 30, 2015.

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs

Jul 1 – Jul 31, 2015		--		--		--		393,749
Aug 1 – Aug 31, 2015		100,156	$	11.44		100,156		293,593
Sep 1 – Sep 30, 2015		11,393	$	12.62		11,393		282,200

The table below summarizes repurchases of class B common stock for the three-month period ended September 30, 2015.

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs

Jul 1 – Jul 31, 2015		--		--		--		69,791
Aug 1 Aug 31, 2015		--		--		--		69,791
Sep 1 – Sep 30, 2015		300	$	32.78		300		69,491

ITEM 6. Exhibits

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

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SIGNATURES

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

		NATIONAL RESEARCH CORPORATION


Date: November 5, 2015	By:		/s/ Michael D. Hays
			Michael D. Hays
			Chief Executive Officer (Principal Executive Officer)



Date: November 5, 2015	By:		/s/ Kevin R. Karas
			Kevin R. Karas
			Senior Vice President Finance, Treasurer, Secretary and
			Chief Financial Officer (Principal Financial and Accounting Officer)

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NATIONAL RESEARCH CORPORATION

EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q

For the Quarterly Period ended September 30, 2015

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 September 30, 2015, 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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