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NATIONAL RESEARCH CORPORATION
D/B/A NRC Health
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held May 29, 2019
To the Shareholders of
National Research Corporation:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of National Research
Corporation will be held on Wednesday, May 29, 2019, at 3:00 P.M., local time, at the Embassy Suites
hotel located at 1040 P Street, Lincoln, Nebraska 68508, for the following purposes:
1.
To elect one director to hold office until the 2022 annual meeting of shareholders
and until his successor is duly elected and qualified.
2.
To ratify the appointment of KPMG LLP as our independent registered public
accounting firm for 2019.
3.
To conduct an advisory vote to approve the compensation of our named
executive officers as disclosed in the accompanying proxy statement.
4.
To consider and act upon such other business as may properly come before the
meeting or any adjournment or postponement thereof.
The close of business on March 22, 2019, has been fixed as the record date for the determination
of shareholders entitled to notice of, and to vote at, the meeting and any adjournment or postponement
thereof.
A proxy for the meeting and a proxy statement are enclosed herewith.
By Order of the Board of Directors
NATIONAL RESEARCH CORPORATION
Kevin R. Karas
Secretary
Lincoln, Nebraska
April 9, 2019
Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting To Be
Held on May 29, 2019. The National Research Corporation proxy statement for the 2019 Annual
Meeting of Shareholders and the 2018 Annual Report to Shareholders are available at
www.proxyvote.com.
YOUR VOTE IS IMPORTANT NO MATTER HOW LARGE OR SMALL YOUR HOLDINGS
MAY BE. TO ASSURE YOUR REPRESENTATION AT THE MEETING, PLEASE DATE THE
ENCLOSED PROXY, WHICH IS SOLICITED BY THE BOARD OF DIRECTORS, SIGN
EXACTLY AS YOUR NAME APPEARS THEREON AND RETURN IMMEDIATELY.
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NATIONAL RESEARCH CORPORATION
D/B/A NRC Health
1245 Q Street
Lincoln, Nebraska 68508
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
To Be Held May 29, 2019
This proxy statement is being furnished to shareholders by the Board of Directors (the “Board”)
of National Research Corporation, doing business as NRC Health (the “Company”), beginning on or
about April 9, 2019, in connection with a solicitation of proxies by the Board for use at the Annual
Meeting of Shareholders to be held on Wednesday, May 29, 2019, at 3:00 P.M., local time, at the
Embassy Suites hotel located at 1040 P Street, Lincoln, Nebraska 68508, and all adjournments or
postponements thereof (the “Annual Meeting”) for the purposes set forth in the attached Notice of Annual
Meeting of Shareholders.
Execution of a proxy given in response to this solicitation will not affect a shareholder’s right to
attend the Annual Meeting and to vote in person. Presence at the Annual Meeting of a shareholder who
has signed a proxy does not in itself revoke a proxy. Any shareholder giving a proxy may revoke it at any
time before it is exercised by giving notice thereof to the Company in writing or in open meeting.
A proxy, in the enclosed form, which is properly executed, duly returned to the Company and not
revoked, will be voted in accordance with the instructions contained therein. The shares represented by
executed but unmarked proxies will be voted as follows:
• FOR the person nominated for election as a director referred to herein;
• FOR the ratification of the appointment of KPMG LLP as our independent registered public
accounting firm for 2019;
• FOR the advisory vote to approve the compensation of the individuals named in the
Summary Compensation Table set forth below in this proxy statement (such group of
individuals are sometimes referred to as our named executive officers); and
• On such other business or matters which may properly come before the Annual Meeting in
accordance with the best judgment of the persons named as proxies in the enclosed form of
proxy.
Other than the election of one director, the ratification of the appointment of KPMG LLP as our
independent registered public accounting firm for 2019 and the advisory vote to approve the
compensation of our named executive officers, the Board has no knowledge of any matters to be
presented for action by the shareholders at the Annual Meeting.
Only holders of record of the Company’s common stock, $0.001 par value per share (the
“Common Stock”), at the close of business on March 22, 2019 (the “Record Date”), are entitled to vote at
the Annual Meeting. On that date, the Company had outstanding and entitled to vote 24,864,391 shares
of Common Stock, each of which is entitled to one vote per share. The presence of a majority of the votes
entitled to be cast shall constitute a quorum for the purpose of transacting business at the Annual Meeting.
Abstentions and broker non-votes will be counted as present in determining whether there is a quorum.
1
ELECTION OF DIRECTORS
The Company’s By-Laws provide that the directors shall be divided into three classes, with
staggered terms of three years each. At the Annual Meeting, the shareholders will elect one director to
hold office until the 2022 annual meeting of shareholders and until his successor is duly elected and
qualified. Unless shareholders otherwise specify, the shares represented by the proxies received will be
voted in favor of the election as director of the person named as a nominee herein. The Board has no
reason to believe that the listed nominee will be unable or unwilling to serve as a director if
elected. However, in the event that such nominee should be unable to serve or for good cause will not
serve, the shares represented by proxies received will be voted for another nominee selected by the Board.
Such director will be elected by a plurality of the votes cast at the Annual Meeting (assuming a quorum is
present). Consequently, any shares not voted at the Annual Meeting, whether due to abstentions, broker
non-votes or otherwise, will have no impact on the election of the director. Votes will be tabulated by an
inspector of elections appointed by the Board.
The following sets forth certain information, as of March 22, 2019, about the Board’s nominee
for election at the Annual Meeting and each director of the Company whose term will continue after the
Annual Meeting.
Nominee for Election at the Annual Meeting
Term expiring at the 2022 Annual Meeting
Donald M. Berwick, 72, has served as a director of the Company since October 2015. Dr.
Berwick is the former President and Chief Executive Officer of the Institute for Healthcare Improvement,
which he co-founded and led for almost 20 years, and where he now serves as President Emeritus and
Senior Fellow. He is also currently a Lecturer in the Department of Health Care Policy at Harvard
Medical School. From July 2010 to December 2011, Dr. Berwick served as the Administrator of the
Centers for Medicare and Medicaid Services as an appointee of President Barack Obama. Dr. Berwick
previously served on the faculty of the Harvard Medical School and the Harvard School of Public Health
(from 1974 to 2010). He was also vice chair of the U.S. Preventive Services Task Force (from 1990 to
1995), the first “Independent Member” of the Board of Trustees of the American Hospital Association
(from 1996 to 1999) and the chair of the National Advisory Council of the Agency for Healthcare
Research and Quality (from 1995 to 1999). Dr. Berwick’s expertise as a professional, administrator,
lecturer and educator in the field of healthcare led to the conclusion that he should serve as a director of
the Company.
THE BOARD RECOMMENDS THE FOREGOING NOMINEE FOR ELECTION AS A
DIRECTOR AND URGES EACH SHAREHOLDER TO VOTE “FOR” SUCH NOMINEE.
SHARES OF THE COMPANY’S COMMON STOCK REPRESENTED BY EXECUTED BUT
UNMARKED PROXIES WILL BE VOTED “FOR” SUCH NOMINEE.
Directors Continuing in Office
Terms expiring at the 2020 Annual Meeting
JoAnn M. Martin, 64, has served as a director of the Company since June 2001. Ms. Martin was
elected President and Chief Executive Officer of Ameritas Life Insurance Corp., an insurance and
financial services company, in July 2005 and currently serves as Chair and Chief Executive Officer. From
April 2003 to July 2005, she served Ameritas Life Insurance Corp. as President and Chief Operating
Officer. Prior thereto, Ms. Martin served as Senior Vice President and Chief Financial Officer of
Ameritas for more than the last five years. In April 2009, Ms. Martin was elected Chief Executive Officer
of Ameritas Holding Company and Ameritas Mutual Holding Company (previously named UNIFI
2
Mutual Holding Company), where she had served as Executive Vice President and Chief Financial
Officer for more than the last five years, and currently serves as Chief Executive Officer of Ameritas
Mutual Holding Company. Ms. Martin has served as an officer of Ameritas and/or its affiliates since
1988. Ms. Martin also serves as a director of Ameritas Mutual Holding Company and/or its affiliates. Ms.
Martin’s financial background as a certified public accountant and as the former Chief Financial Officer
and current Chief Executive Officer of a mutual insurance holding company, as well as her past
leadership experiences as a director of the Omaha Branch of the Federal Reserve Bank of Kansas City
and other organizations, led to the conclusion that she should serve as a director of the Company.
Barbara J. Mowry, 71, has served as a director of the Company since May 2014. Ms. Mowry
founded, and is currently the Chief Executive Officer of, GoreCreek Advisors, a management consulting
firm. Prior to founding GoreCreek Advisors, Ms. Mowry served as Senior Vice President - Data
Integration of Oracle Corporation, an industry leading software, hardware and services company, from
January 2010 through March 2011, and as President and Chief Executive Officer of Silver Creek
Systems, Inc., a data quality solutions software company, from January 2003 to December 2009. Ms.
Mowry served as a director of Axion Health (from 2012 to 2014) and the Federal Reserve Bank of Kansas
City (from 2012 to 2014) where she was Chair of the Board from 2013 to 2014. Ms. Mowry also serves
as a director of IMA Financial Group (since May 2017), a privately held diversified financial services
company, and as a director of several not-for-profit organizations, including the Kauffman Foundation
(since 2013), the University of Minnesota Executive Committee, Carlson School of Management and the
Board of Overseers (since 2004) and the National Association of Corporate Directors Colorado Chapter
where she is a Leadership Fellow. Ms. Mowry previously served as a director of Gaiam, Inc. (from 1999
to 2013), Real Goods Solar, Inc. (from 2008 to 2013) and the Denver Branch of the Federal Reserve Bank
of Kansas City (from 2008 to 2011). Ms. Mowry’s financial background as a former President and Chief
Executive Officer of several companies, a former member of the audit and compensation committees of
the boards of directors of Gaiam, Inc. and Real Goods Solar, Inc. and as the current Chief Executive
Officer of GoreCreek Advisors, led to the conclusion that she should serve as a director of the Company.
Terms expiring at the 2021 Annual Meeting
Michael D. Hays, 64, has served as Chief Executive Officer and a director since he founded the
Company in 1981. He also served as President of the Company from 1981 to 2004 and from July 2008
to July 2011. Prior to founding the Company, Mr. Hays served for seven years as a Vice President and a
director of SRI Research Center, Inc. (n/k/a the Gallup Organization). Mr. Hays’ background as founder
of the Company, and his long and successful tenure as Chief Executive Officer and a director, led to the
conclusion that he should serve as a director of the Company.
John N. Nunnelly, 66, has served as a director of the Company since December 1997. Mr.
Nunnelly is a retired Group President from McKesson Corporation, a leader in pharmaceutical
distribution and healthcare information technology. During his 28-year career at McKesson, Mr.
Nunnelly served in a variety of other positions including, Vice President of Strategic Planning and
Business Development, Vice President and General Manager of the Amherst Product Group and Vice
President of Sales-Decision Support. These responsibilities included leading several business units,
including one with over $360 million in annual revenue. In addition, he was involved in managing a
number of mergers and acquisitions. Mr. Nunnelly also serves as an adjunct professor at the University
of Massachusetts, School of Nursing, advising students and faculty on matters pertaining to healthcare
information technology. These experiences and Mr. Nunnelly’s expertise as a professional and educator
in the field of healthcare information technology led to the conclusion that he should serve as a director of
the Company.
3
Independent Directors and Annual Meeting Attendance
CORPORATE GOVERNANCE
Of the five directors currently serving on the Board, the Board has determined that Donald M.
Berwick, JoAnn M. Martin, Barbara J. Mowry and John N. Nunnelly are “independent directors” as that
term is defined in the listing standards of The NASDAQ Stock Market.
Directors are expected to attend the Company’s annual meeting of shareholders each year. With
the exception of Mr. Berwick, each of the directors attended the Company’s 2018 annual meeting of
shareholders.
Currently, the Company does not have a chairman, and the Board does not have a policy on
whether the roles of chief executive officer and chairman should be separate. The Board has, however,
designated a lead director since 2007, with Ms. Martin serving as the lead director from 2007 until May
2012 and Mr. Nunnelly serving as the lead director since May 2012. The Board believes its current
leadership structure is appropriate at this time since it establishes the Company’s chief executive officer
as the primary executive leader with one vision and eliminates ambiguity as to who has primary
responsibility for the Company’s performance.
The lead director is an independent director who is appointed by the independent directors and
who works closely with the chief executive officer. In addition to serving as the principal liaison between
the independent directors and the chief executive officer in matters relating to the Board as a whole, the
primary responsibilities of the lead director are as follows:
Preside at all meetings of the Board at which the chief executive officer is not present,
including any executive sessions of the independent directors, and establish agendas for such
executive sessions in consultation with the other directors and the chief executive officer;
Advise the chief executive officer as to the quality, quantity, and timeliness of the flow of
information from management that is necessary for the independent directors to effectively
perform their duties;
Have the authority to call meetings of the independent directors as appropriate; and
Be available to act as the spokesperson for the Company if the chief executive officer is
unable to act as the spokesperson.
Committees
The Board held six meetings in 2018. All incumbent directors attended at least 75% of the
meetings of the Board and the committees on which they served during 2018.
The Board has a standing Audit Committee, Compensation and Talent Committee, Nominating
Committee and Strategic Planning Committee. Each of these committees has the responsibilities set forth
in formal written charters adopted by the Board. The Company makes available copies of each of these
charters free of charge on its website located at www.nrchealth.com. Other than the text of the charters,
the Company is not including the information contained on or available through its website as a part of, or
incorporating such information by reference into, this proxy statement.
The Audit Committee’s primary function is to assist the Board in fulfilling its oversight
responsibilities by overseeing the Company’s systems of internal controls regarding finance, accounting,
legal compliance and ethics that management and the Board have established; the Company’s accounting
and financial reporting processes; and the audits of the financial statements of the Company. The Audit
4
Committee presently consists of JoAnn M. Martin (Chairperson), Barbara J. Mowry and John N.
Nunnelly, each of whom meets the independence standards of The NASDAQ Stock Market and the
Securities and Exchange Commission for audit committee members. The Board has determined that
JoAnn M. Martin qualifies as an “audit committee financial expert,” as that term is defined by the
Securities and Exchange Commission, because she has the requisite attributes through, among other
things, education and experience as a president, chief financial officer and certified public accountant.
The Audit Committee held five meetings in 2018.
The Compensation and Talent Committee determines compensation programs for the Company’s
executive officers, reviews management’s recommendations as to the compensation to be paid to other
key personnel and administers the Company’s equity-based compensation plans. The Compensation and
Talent Committee presently consists of Barbara J. Mowry (Chairperson), JoAnn M. Martin and John N.
Nunnelly, each of whom meets the independence standards of The NASDAQ Stock Market and the
Securities and Exchange Commission for compensation committee members. The Compensation and
Talent Committee held four meetings in 2018. From time to time, with the last time being in 2015, the
Compensation and Talent Committee or management of the Company has engaged a nationally
recognized compensation consultant to assist the Company in its review of its compensation and benefits
programs, including the competitiveness of pay levels, executive compensation design issues, market
trends and technical considerations. The Compensation and Talent Committee, however, did not use this
information in setting the compensation of the Company’s executive officers in 2018.
The Nominating Committee presently consists of Donald M. Berwick (Chairperson), Barbara J.
Mowry and John N. Nunnelly, each of whom meets the independence standards of The NASDAQ Stock
Market for nominating committee members. The Nominating Committee’s primary functions are to: (1)
recommend persons to be selected by the Board as nominees for election as directors and (2) recommend
persons to be elected to fill any vacancies on the Board. The Nominating Committee did not hold any
meetings in 2018.
The Strategic Planning Committee assists the Board in reviewing and, as necessary, altering, the
Company’s strategic plan, reviewing industry trends and their effects, if any, on the Company and
assessing the Company’s products, services and offerings and the viability of such portfolio in meeting
the needs of the markets that the Company serves. John N. Nunnelly (Chairperson), Donald M. Berwick,
JoAnn M. Martin and Barbara J. Mowry are the current members of the Strategic Planning Committee.
The Strategic Planning Committee held one meeting in 2018.
Board Oversight of Risk
The full Board is responsible for the oversight of the Company’s operational and strategic risk
management process. The Board relies on its Audit Committee to address significant financial risk
exposures facing the Company and the steps management has taken to monitor, control and report such
exposures, with appropriate reporting of these risks to be made to the full Board. The Board relies on its
Compensation and Talent Committee to address significant risk exposures facing the Company with
respect to compensation, with appropriate reporting of these risks to be made to the full Board. The
Board’s role in the Company’s risk oversight has not affected the Board’s leadership structure.
Nominations of Directors
The Nominating Committee will consider persons recommended by shareholders to become
nominees for election as directors. Recommendations for consideration by the Nominating Committee
should be sent to the Secretary of the Company in writing together with appropriate biographical
information concerning each proposed nominee. The Company’s By-Laws also set forth certain
requirements for shareholders wishing to nominate director candidates directly for consideration by the
shareholders. With respect to an election of directors to be held at an annual meeting, a shareholder must,
5
among other things, give notice of intent to make such a nomination to the Secretary of the Company not
less than 60 days or more than 90 days prior to the second Wednesday in the month of April.
In identifying and evaluating nominees for director, the Nominating Committee seeks to ensure
that the Board possesses, in the aggregate, the strategic, managerial and financial skills and experience
necessary to fulfill its duties and to achieve its objectives, and seeks to ensure that the Board is comprised
of directors who have broad and diverse backgrounds, possessing knowledge in areas that are of
importance to the Company. The Nominating Committee looks at each nominee on a case-by-case basis
regardless of who recommended the nominee. In looking at the qualifications of each candidate to
determine if their election would further the goals described above, the Nominating Committee takes into
account all factors it considers appropriate, which may include strength of character, mature judgment,
career specialization, relevant technical skills or financial acumen, diversity of viewpoint and industry
knowledge. In addition, the Board and the Nominating Committee believe that the following specific
qualities and skills are necessary for all directors to possess:
A director must display high personal and professional ethics, integrity and values.
A director must have the ability to exercise sound business judgment.
A director must be accomplished in his or her respective field, with broad experience at the
administrative and/or policy-making level in business, government, education, technology or
public interest.
A director must have relevant expertise and experience, and be able to offer advice and
guidance based on that expertise and experience.
A director must be independent of any particular constituency, be able to represent all
shareholders of the Company and be committed to enhancing long-term shareholder value.
A director must have sufficient time available to devote to activities of the Board and to
enhance his or her knowledge of the Company’s business.
The Board also believes the following qualities or skills are necessary for one or more directors to
possess:
At least one independent director must have the requisite experience and expertise to be
designated as an “audit committee financial expert,” as defined by applicable rules of the
Securities and Exchange Commission, and have past employment experience in finance or
accounting, requisite professional certification in accounting, or any other comparable
experience or background which results in the member’s financial sophistication, as required
by the rules of NASDAQ.
One or more of the directors generally must be active or former executive officers of public
or private companies or leaders of major complex organizations, including commercial,
scientific, government, educational and other similar institutions.
As noted above, in identifying and evaluating nominees for director, the Nominating Committee
seeks to ensure that, among other things, the Board is comprised of directors who have broad and diverse
backgrounds, because the Board believes that directors should be selected so that the Board is a diverse
body. The Nominating Committee implements this policy by considering how potential directors’
backgrounds would contribute to the diversity of the Board. As part of its annual self-evaluation, the
Nominating Committee assesses the effectiveness of its efforts to attain diversity by considering whether
it has an appropriate process for identifying and selecting director candidates.
6
Transactions with Related Persons
Except as otherwise disclosed in this section, we had no related person transactions during 2018,
and none are currently proposed, in which we were a participant and in which any related person had a
direct or indirect material interest. Our Board has adopted written policies and procedures regarding
related person transactions. For purposes of these policies and procedures:
A “related person” means any of our directors, executive officers, nominees for director, any
holder of 5% or more of the common stock or any of their immediate family members; and
A “related person transaction” generally is a transaction (including any indebtedness or a
guarantee of indebtedness) in which we were or are to be a participant and the amount
involved exceeds $120,000, and in which a related person had or will have a direct or indirect
material interest.
Each of our executive officers, directors or nominees for director is required to disclose to the
Audit Committee certain information relating to related person transactions for review, approval or
ratification by the Audit Committee. Disclosure to the Audit Committee should occur before, if possible,
or as soon as practicable after the related person transaction is effected, but in any event as soon as
practicable after the executive officer, director or nominee for director becomes aware of the related
person transaction. The Audit Committee’s decision whether or not to approve or ratify a related person
transaction is to be made in light of the Audit Committee’s determination that consummation of the
transaction is not or was not contrary to our best interests. Any related person transaction must be
disclosed to the full Board.
Ms. Martin, a director of the Company, serves as Chair and Chief Executive Officer of Ameritas
Life Insurance Corp. In connection with the Company’s regular assessment of its insurance-based
associate benefits and the costs associated therewith, which is conducted by an independent insurance
broker, in 2007 the Company began purchasing dental insurance for certain of its associates from
Ameritas Life Insurance Corp. and, in 2009, the Company also began purchasing vision insurance for
certain of its associates from Ameritas Life Insurance Corp. The total value of these purchases, which
were conducted in arms’ length transactions and approved by the Audit Committee pursuant to our related
person transaction policies and procedures, were $200,365 in 2018.
During 2017, the Company acquired a cost method investment in convertible preferred stock of
PracticingExcellence.com, Inc., a privately-held Delaware corporation (“PX”). Prior to the investment,
the Company entered into an agreement with PX, under which the Company acts as a reseller of PX
services (the “PX reseller agreement”). The total revenue earned from the PX reseller agreement was
$439,000 in 2018. These transactions were conducted at arms’ length and approved by the Audit
Committee pursuant to our related person transaction policies and procedures.
Communications with the Board of Directors
Shareholders may communicate with the Board by writing to NRC Health, Board of Directors
(or, at the shareholder’s option, to a specific director), c/o Kevin R. Karas, Secretary, 1245 Q Street,
Lincoln, Nebraska 68508. The Secretary will ensure that the communication is delivered to the Board or
the specified director, as the case may be.
7
2018 DIRECTOR COMPENSATION
Directors who are executive officers of the Company receive no compensation for service as
members of either the Board or committees thereof. Directors who are not executive officers of the
Company receive an annual fixed fee of $75,000 for the lead director and $50,000 for each other director.
Directors are also reimbursed for out-of-pocket expenses associated with attending meetings of the Board
and committees thereof. Ms. Martin served as the Company’s lead director from 2007 to May 2012, and
Mr. Nunnelly has served as the Company’s lead director since May 2012.
Pursuant to the National Research Corporation 2004 Non-Employee Director Stock Plan, as
amended (the “Director Plan”), each director who is not an associate (i.e., employee) of the Company also
receives an annual grant of an option to purchase shares of our Common Stock on the date of each Annual
Meeting of Shareholders. For the period from January 1, 2018 to December 31, 2018, each director who
was not an associate of the Company received a grant of options to purchase shares of our Common Stock
with a target grant date fair value of $100,000, computed in accordance with Financial Accounting
Standards Board Accounting Standards Codification Topic 718, Compensation-Stock Compensation
(“FASB ASC Topic 718”), or successor rule, on the date of the Company’s 2018 annual meeting of
shareholders. The options were granted with an exercise price equal to the fair market value of our
common stock on the date of grant, and are scheduled to vest the day immediately preceding the Annual
Meeting.
The following table sets forth information regarding the compensation received by each of the
Company’s directors during 2018:
Name
Donald M. Berwick
JoAnn M. Martin
Barbara J. Mowry
John N. Nunnelly
Fees Earned or
Paid in Cash
Option Awards(1)
Total
$ 50,000
$ 50,000
$ 50,000
$ 75,000
$ 100,015
$ 100,015
$ 100,015
$ 100,015
$ 150,015
$ 150,015
$ 150,015
$ 175,015
1 Represents the aggregate grant date fair value of option awards granted during the year, computed in accordance with
FASB ASC Topic 718. See Note 11 to the Company’s Consolidated Financial Statements included in its Annual
Report on Form 10-K for the years ended December 31, 2018, December 31, 2017, and December 31, 2016, for a
discussion of assumptions made in the valuation of share-based compensation. As of December 31, 2018, the
outstanding option awards for each director were as follows: Dr. Berwick – 46,440 options; Ms. Martin – 262,440
options; Ms. Mowry – 190,440 options; and Mr. Nunnelly – 48,462 options.
8
REPORT OF THE AUDIT COMMITTEE
In accordance with its written charter, the Audit Committee’s primary function is to assist the
Board in fulfilling its oversight responsibilities by overseeing the Company’s systems of internal controls
regarding finance, accounting, legal compliance and ethics that management and the Board have
established; the Company’s accounting and financial reporting processes; and the audits of the financial
statements of the Company.
In fulfilling its responsibilities, the Audit Committee has reviewed and discussed the audited
financial statements contained in the 2018 Annual Report on Form 10-K with the Company’s
management and independent registered public accounting firm. Management is responsible for the
financial statements and the reporting process, including the system of internal controls. The independent
registered public accounting firm is responsible for expressing an opinion on the audited financial
statements in conformity with U.S. generally accepted accounting principles and on the Company’s
internal control over financial reporting.
The Audit Committee discussed with the independent registered public accounting firm matters
required to be discussed under the applicable requirements of the Public Company Accounting Oversight
Board regarding communications with audit committees. In addition, the Company’s independent
registered public accounting firm provided to the Audit Committee the written disclosures and the letter
required by applicable requirements of the Public Company Accounting Oversight Board regarding the
independent registered public accounting firm’s communications with the Audit Committee concerning
independence, and the Audit Committee discussed with the independent registered public accounting firm
the firm’s independence. The Audit Committee pre-approves all audit and permissible non-audit services
provided by the independent registered public accounting firm. The Audit Committee has considered
whether the provision of the services relating to the Audit-Related Fees, Tax Fees and All Other Fees set
forth in “Miscellaneous – Independent Registered Public Accounting Firm” was compatible with
maintaining the independence of the independent registered public accounting firm and determined that
such services did not adversely affect the independence of the firm.
In reliance on the reviews and discussions referred to above, the Audit Committee recommended
to the Board (and the Board has approved) that the audited financial statements be included in the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, for filing with the
Securities and Exchange Commission.
This report shall not be deemed incorporated by reference by any general statement incorporating
by reference this proxy statement into any filing under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, and shall not otherwise be deemed filed under such Acts.
AUDIT COMMITTEE
JoAnn M. Martin, Chairperson
Barbara J. Mowry
John N. Nunnelly
9
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial ownership of Common
Stock as of the Record Date (i.e., March 22, 2019) by: (1) each director and director nominee; (2) each of
the executive officers named in the Summary Compensation Table; (3) all of the directors, director
nominees and executive officers as a group; and (4) each person or entity known to the Company to be
the beneficial owner of more than 5% of the Common Stock. Except as otherwise indicated in the
footnotes, each of the holders listed below has sole voting and investment power over the shares
beneficially owned. As of the Record Date, there were 24,864,391 shares of Common Stock outstanding.
Name of Beneficial Owner
Shares
%
Shares Beneficially Owned
Directors and Executive Officers (1)
Michael D. Hays ..............................................................................................
Steven D. Jackson ...........................................................................................
Kevin R. Karas ................................................................................................
Donald M. Berwick .........................................................................................
JoAnn M. Martin .............................................................................................
Barbara J. Mowry ............................................................................................
John N. Nunnelly ............................................................................................
225,194 (2)(4)
105,476 (4)
65,841 (4)(3)
36,000 (4)
470,455(4)
186,902 (4)
64,916 (4)
All directors, nominees and executive
officers as a group (seven persons) .............................................................
1,154,784(4)
*
*
*
*
1.9%
*
*
4.5%
Other Holders
Amandla MK Trust and Patrick E. Beans, as the Special Holdings Direction
Advisor under this Trust (5) ..........................................................................
7,378,645
29.7%
The K/I/E Trust Under Agreement dated 10/24/18 and Patrick E. Beans, as
the Special Holdings Direction Advisor under this Trust (6).........................
5,037,053
20.3%
Kayne Anderson Rudnick Investment Management
LLC (7)..........................................................................................................
3,154,040
12.7%
_______________________
* Denotes less than 1%.
(1)
(2)
(3)
(4)
(5)
The address of all directors and officers is 1245 Q Street, Lincoln, Nebraska 68508.
Includes 139,095 shares of Common Stock held by Mr. Hays’ wife. Mr. Hays disclaims beneficial ownership of the shares held by his wife.
Includes 10,016 shares of Common Stock pledged as security.
Includes shares of Common Stock that may be purchased under stock options which are currently exercisable or exercisable within 60 days
of March 22, 2019, as follows: Dr. Berwick, 36,000 shares; Mr. Hays, 73,017 shares; Mr. Jackson, 0 shares; Mr. Karas, 51,825 shares;
Ms. Martin, 252,000 shares; Mr. Nunnelly, 38,022 shares; Ms. Mowry, 180,000 shares; and all directors, nominees and executive officers as
a group, 630,864 shares.
The trustee of this Trust is The Bryn Mawr Trust Company of Delaware and its address is 20 Montchanin Road, Suite 100, Greenville,
Delaware 19807. The address of the Special Holdings Direction Advisor for this Trust is 709 Pier 2, Lincoln, Nebraska 68528.
The trustee of this Trust is Bessemer Trust Company of Delaware, N.A. and its address is 1007 N. Orange Street, Suite 1450, Wilmington,
Delaware 19801. The address of the Special Holdings Direction Advisor for this Trust is 709 Pier 2, Lincoln, Nebraska 68528.
(7) The number of shares owned set forth above in the table is as of or about December 31, 2018 as reported by Kayne Anderson Rudnick
Investment Management LLC in its amended Schedule 13G filed with the Securities and Exchange Commission. The address for this
shareholder is 1800 Avenue of the Stars, 2nd Floor, Los Angeles, California 90067. This shareholder reports sole voting and dispositive
power with respect 757,730 of these shares and shared voting and dispositive power with respect to 2,396,760 of these shares.
(6)
10
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors, executive
officers and any owner of greater than 10% of the Company’s Common Stock to file reports with the
Securities and Exchange Commission concerning their ownership of the Company’s Common Stock.
Based solely upon information provided to the Company by individual directors and executive officers,
the Company believes that, during the fiscal year ended December 31, 2018, all of its directors and
executive officers and owners of greater than 10% of the Company’s Common Stock complied with the
Section 16(a) filing requirements, except that (i) a Form 4 for each of Mr. Berwick, Ms. Martin, Ms.
Mowry and Mr. Nunnelly (each reporting a grant of an option to purchase shares of Common Stock on
the date of the 2018 annual meeting of shareholders pursuant to the National Research Corporation 2004
Non-Employee Director Stock Plan, as amended) and (ii) six Form 4s for Mr. Berwick (each reporting
stock sales) were not timely filed.
11
RATIFICATION OF THE APPOINTMENT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Audit Committee has appointed KPMG LLP to serve as our independent registered public
accounting firm for the year ending December 31, 2019.
We are asking our shareholders to ratify the appointment of KPMG LLP as our independent
registered public accounting firm. Although ratification is not required, our Board is submitting the
appointment of KPMG LLP to our shareholders for ratification because we value our shareholders’ views
on our independent auditors and as a matter of good corporate practice. In the event that our shareholders
fail to ratify the appointment, the Audit Committee will consider it as a direction to consider the
appointment of a different firm. Even if the appointment is ratified, the Audit Committee in its discretion
may select a different independent auditor at any time if it determines that such a change would be in the
best interests of the Company and our shareholders.
Representatives of KPMG LLP are expected to be present at the Annual Meeting with the
opportunity to make a statement if they so desire. Such representatives are also expected to be available
to respond to appropriate questions.
Assuming a quorum is present at the Annual Meeting, the number of votes cast for the ratification
of the Audit Committee’s appointment of KPMG LLP as our independent registered public accounting
firm for the year ending December 31, 2019 must exceed the number of votes cast against it. Abstentions
and broker non-votes will be counted as present in determining whether there is a quorum; however, they
will not constitute a vote “for” or “against” ratification and will be disregarded in the calculation of votes
cast. A broker non-vote occurs when a broker submits a proxy card with respect to shares that the broker
holds on behalf of another person but declines to vote on a particular matter, either because the broker
elects not to exercise its discretionary authority to vote on the matter or does not have authority to vote on
the matter.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” RATIFICATION OF
THE APPOINTMENT OF KPMG LLP AS OUR INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM. SHARES OF THE COMPANY’S COMMON STOCK REPRESENTED
BY EXECUTED BUT UNMARKED PROXIES WILL BE VOTED “FOR” RATIFICATION OF
THE APPOINTMENT OF KPMG LLP AS OUR INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
12
COMPENSATION DISCUSSION AND ANALYSIS
The following discussion and analysis relates to the compensation of the individuals named in the
Summary Compensation Table, a group we refer to as our “named executive officers.” In this discussion,
the terms “we,” “our,” “us” or similar terms refer to the Company.
Overview of Executive Compensation Philosophy
We recognize the importance of maintaining sound principles for the development and
administration of our executive compensation and benefit programs. Specifically, we design our
executive compensation and benefit programs to advance the following core principles:
Market Driven. We strive to compensate our executive officers at levels to ensure that we
continue to attract and retain a highly competent, committed management team.
Align with Shareholders. We seek to align the interests, perspectives and decision-making of
our executive officers with the interests of our shareholders.
Performance Based. We link our executive officers’ compensation, particularly annual cash
bonuses, to established Company financial performance goals and individual performance
goals.
We believe that a focus on these principles will benefit us and, ultimately, our shareholders in the
long term by ensuring that we can attract and retain highly-qualified executive officers who are
committed to our long-term success.
Role of the Compensation and Talent Committee
The Board appoints the Compensation and Talent Committee (the “Committee”), which consists
entirely of directors who are “non-employee directors” for purposes of the Securities Exchange Act of
1934. The following individuals are members of the Committee:
Barbara J. Mowry (Chairperson)
JoAnn M. Martin
John N. Nunnelly
The Committee is responsible for discharging the Board’s responsibilities with respect to all
significant aspects of our compensation policies, programs and plans, and accordingly the Committee
determines compensation programs for our executive officers or recommends such programs to the full
Board for approval. The Committee also reviews management’s recommendations as to the
compensation to be paid to other key personnel and administers our equity-based compensation plans.
Periodically, the Committee reviews and determines our compensation and benefit programs, with the
objective of ensuring the executive compensation and benefits programs are consistent with our
compensation philosophy. From time to time, the Committee or management has engaged a nationally
recognized compensation consultant to conduct a benchmarking study of executive compensation levels
and practices. This market information has, in the past, been used to help inform and shape decisions, but
was (and is) neither the only nor the determinative factor in making compensation decisions.
At the time our Committee recommended, and our Board approved, our named executive
officers’ 2018 compensation, our most recent review of our compensation and benefit programs was in
late 2015, when our Committee engaged Aon Hewitt to review our programs before determining
compensation for 2016.
13
In determining compensation levels for our named executive officers in 2018, our Committee did
not engage Aon Hewitt or any other compensation consultant to provide advice concerning executive
officer compensation.
One objective of the Committee in setting compensation for our executive officers, other than our
Chief Executive Officer, is to establish base salary at a level that will attract and retain highly-qualified
individuals. The Committee’s considerations in setting our Chief Executive Officer’s base salary are
described below. For our executive officers other than our Chief Executive Officer, we also consider
individual performance, level of responsibility, skills and experience, and internal comparisons among
executive officers in determining base salary levels.
The Committee administers our annual cash incentive program and long-term equity incentive
plans and approves all awards made under the program and plans. For annual and long-term incentives,
the Committee considers internal comparisons and other existing compensation awards or arrangements
in making compensation decisions and recommendations. In its decision-making process, the Committee
receives and considers the recommendations of our Chief Executive Officer as to executive compensation
programs for all of the other officers. In its decision-making process for the long-term incentives for our
executive officers, the Committee considers relevant factors, including our performance and relative
shareholder return and the awards given to the executive officer in past years. The Committee makes its
decisions regarding general program adjustments to future base salaries, annual incentives and long-term
incentives concurrently with its assessment of the executive officers’ performance. Adjustments
generally become effective in January of each year.
In fulfilling its objectives as described above, the Committee took the following steps in
determining 2018 compensation levels for our named executive officers:
Reviewed the performance of our Chief Executive Officer and determined his total
compensation;
Reviewed the performance of our other executive officers and other key associates (i.e.,
employees) with assistance from our Chief Executive Officer; and
Determined total compensation for our named executive officers based on recommendations
by our Chief Executive Officer (as to the other officers) and the Committee’s review of the
Company’s and the individual officer’s performance.
2018 Say on Pay Vote
In May 2018 (after the 2018 executive compensation actions described in this Compensation
Discussion and Analysis had taken place), we held our annual advisory shareholder vote on the
compensation of our named executive officers at our annual shareholders’ meeting, and, consistent with
the recommendation of the Board, our shareholders approved our executive compensation, with more
than 99% of votes cast in favor. Consistent with this strong vote of shareholder approval, we have not
undertaken any material changes to our executive compensation programs.
Total Compensation
We intend to continue our strategy of compensating our executive officers through programs that
emphasize performance-based incentive compensation in the form of cash and equity-based awards. To
that end, we have structured total executive compensation to ensure that there is an appropriate balance
between a focus on our long-term versus short-term performance. We believe that the total compensation
paid or awarded to the executive officers during 2018 was consistent with our financial performance and
the individual performance of each of our executive officers. We also believe that this total compensation
was reasonable in its totality and is consistent with our compensation philosophies described above.
14
CEO Compensation
The Committee reviews annually the salary and total compensation levels of Michael D. Hays,
our Chief Executive Officer. While Mr. Hays’ salary and overall compensation are significantly below
the median level paid to chief executive officers of comparable companies, he requested that his base
salary and targeted overall compensation remain unchanged. The Committee has not proposed an
increase in his salary or overall compensation since 2005.
Elements of Compensation
Base Salary
The objective of the Committee is to establish base salary, when aligned with performance
incentives, to continue to attract and retain the best talent (with the exception of Mr. Hays’ salary as noted
above). We have historically attempted to minimize base salary increases in order to limit our exposure if
we do not meet our objectives for financial growth under our incentive compensation program.
Consistent with this practice, the Committee left Mr. Hays’, Mr. Karas’ and Mr. Jackson’s base salaries
unchanged from 2016. In the case of Mr. Hays, the decision was based on his request, described above,
that his salary not be increased. In the case of Mr. Karas and Mr. Jackson, the decision was based on
Company performance and the belief that that Mr. Karas’ and Mr. Jackson’s salaries were at an
appropriate level to retain their talent.
Base salaries paid to Messrs. Hays, Karas and Jackson represented the following percentages of
their total compensation (as calculated for purposes of the Summary Compensation Table).
Base Salary as a Percentage
of Total Compensation
Michael D. Hays
44%
Kevin R. Karas
44%
Steven D. Jackson
44%
Annual Cash Incentive
Our executive officers are eligible for annual cash incentive awards under our incentive
compensation program. Please note that, while we may refer to annual cash incentive awards as bonuses
in this discussion, the award amounts are reported in the Summary Compensation Table under the column
titled “Non-Equity Incentive Plan Compensation” pursuant to the Securities and Exchange Commission’s
regulations.
We intend for our incentive compensation program to provide an incentive to meet and exceed
our financial goals, and to promote a superior level of performance. Within the overall context of our pay
philosophy and culture, the program:
Provides total cash compensation to attract and retain key executive talent;
Aligns pay with organizational performance;
Focuses executive attention on key business metrics; and
Provides a significant incentive for achieving and exceeding performance goals.
15
Under our incentive compensation program, the Committee establishes performance measures for
our named executive officers at the beginning of each year. For 2018, the Committee used our overall
revenue and net income as performance measures because the Committee believes these are key measures
of our ability to deliver value to our shareholders for which our named executive officers have primary
responsibility. The Committee weighted the two performance measures equally in determining bonus
payouts. The Committee structured the incentive compensation program so that our named executive
officers would receive a bonus based on the percentage of growth in overall revenue and net income in
2018 over 2017, starting from “dollar one” of such growth. Consistent with past years, the Committee
structured the incentive compensation program for our named executive officers to require performance
representing growth in revenue or net income for any payout to be received.
The Committee structured the incentive compensation program to permit payouts to be earned for
any growth in revenue and net income because it believed that providing an incentive to achieve growth
in these measures would provide an effective incentive to the executive officers in 2018. The Committee
determined that the bonuses under the incentive compensation program would be equal to the following
(subject to a maximum of 200% of base salary): the product of the executive officer’s base salary (i)
multiplied by the sum of the percentage year over year increase, if any, in overall revenue plus the
percentage year over year increase, if any, in overall net income (ii) multiplied by 2.5.
In determining the potential bonus amounts for our named executive officers described above, the
Committee concluded that that payouts determined by these formulas were likely to produce results
consistent with our past practice of setting annual target payouts at 50% of base salary, and would
continue to provide competitive compensation consistent with our goals for annual incentive awards.
The following table shows amounts actually earned by our named executive officers for 2018,
along with the percentages of their total compensation (as calculated for purposes of the Summary
Compensation Table) that these amounts represent.
Name
Michael D. Hays
Kevin R. Karas
Steven D. Jackson
2018 Actual Bonus
Percentage of
Total Compensation
2018 Actual
Bonus Amount
36%
36%
36%
$ 104,468
$ 233,700
$ 246,000
Long-Term Equity Incentive
The general purpose of our current equity-based plans is to promote the achievement of our long-
range strategic goals and enhance shareholder value. The Committee may from time to time approve
discretionary awards, however, we generally grant equity-based awards in the following circumstances:
• Annual Awards. To provide an additional performance incentive for our executive officers and
other key management personnel, our executive compensation package generally includes annual
grants of stock options. Prior to 2018, in each year following our 2013 recapitalization pursuant
to which we established two classes of common stock (class A common stock and class B
common stock), we granted options to purchase both class A common stock and class B common
stock. For 2018, in light of the then-proposed 2018 Recapitalization, which would eliminate all
of our class B common stock, we granted options based only on our class A common stock.
16
• New Hire or Promotion Awards. We also award restricted stock grants to newly hired or
promoted executive officers during their first year of participation in our equity incentive
program to provide greater alignment between the officers’ interests and those of our
shareholders, and to assist in retention.
Options to purchase shares of common stock are typically granted with a per-share exercise price
of 100% of the fair market value of each share of common stock subject to the option on the date of grant.
The value of the option will be dependent on the future market value of the common stock, which we
believe helps to align the economic interests of our key management personnel with the interests of our
shareholders. To encourage our key management personnel to continue in employment with us, when we
grant restricted stock under the 2006 Equity Incentive Plan to executive officers, we generally impose a 5-
year restriction period on the grant.
In determining equity incentive awards for 2018, the Committee concluded that setting annual
equity awards for our named executive officers at a grant date target fair value of approximately 50% of
their respective then-current base salaries would provide competitive compensation consistent with our
goals for equity awards. The Committee generally grants stock options effective on a date in the first
week of January. Accordingly, effective January 3, 2018, the Committee granted options to each of our
named executive officers. In light of the then-proposed 2018 Recapitalization, which would eliminate all
of our class B common stock, the Committee granted options based only on our class A common stock.
To determine the number of option shares with a grant date target fair value approximately equal to 50%
of an executive officer’s base salary, the Committee divided 50% of the current base salary by the most
recent class A stock closing price to determine the number of shares that equal 50% of the current base
salary. The number of shares were then multiplied by a factor of three to determine the number of option
shares to be granted. The number of options granted to our named executive officers is shown in the
Grants of Plan-Based Awards Table.
For 2018, no performance-based awards were granted to our named executive officers. Our
Committee may, however, consider in the future conditioning awards on the achievement of various
performance goals, including return on equity, shareholder value added, earnings from operations, net
earnings, net earnings per share, market price of our common stock and/or total shareholder return.
Other Benefits
To assist our associates in preparing financially for retirement, we maintain a 401(k) plan for all
associates over 21 years of age, including our executive officers. Pursuant to the 401(k) plan, we match
25% of the first 6% of compensation contributed by our associates up to allowable Internal Revenue
Service limitations. We also maintain group life, health, dental and vision insurance programs for all of
our salaried associates, and our named executive officers are eligible to participate in these programs on
the same basis as all other eligible associates.
Agreements with Officers
We do not have employment, retention, severance, change of control or similar agreements with
any of our executive officers. While we enter into award agreements with our executive officers and
other participants under our long-term equity award plans, these agreements and plans do not provide for
acceleration of vesting or other benefits upon a change of control or termination.
17
2018 SUMMARY COMPENSATION TABLE
Set forth below is information regarding compensation earned by or paid or awarded to the
following executive officers: Michael D. Hays, our Chief Executive Officer; Kevin R. Karas, our Senior
Vice President Finance, Chief Financial Officer, Treasurer and Secretary; and Steven D. Jackson, our
President. We had no other executive officers, as defined in Rule 3b-7 of the Securities Exchange Act of
1934, whose total compensation exceeded $100,000 during 2018. The identification of such named
executive officers is determined based on the individual’s total compensation for 2018, as reported below
in the Summary Compensation Table, other than amounts reported as above-market earnings on deferred
compensation and the actuarial increase in pension benefit accruals.
The following table sets forth for our named executive officers with respect to 2018, 2017, and
2016: (1) the dollar value of base salary earned during the year; (2) the aggregate grant date fair value of
stock and option awards granted during the year, computed in accordance with Financial Accounting
Standards Board Accounting Standards Codification Topic 718, Compensation-Stock Compensation
(“FASB ASC Topic 718”); (3) the dollar value of earnings for services pursuant to awards granted during
the year under non-equity incentive plans; (4) all other compensation for the year; and (5) the dollar value
of total compensation for the year.
Name and
Principal Position
Michael D. Hays
Chief Executive Officer
Kevin R. Karas
Senior Vice President
Finance, Chief
Financial Officer,
Treasurer and
Secretary
Steven D. Jackson
President
Year Salary ($)
2018
2017
2016
2018
2017
2016
$ 127,400
$ 127,400
$ 127,400
$ 285,000
$ 285,000
$ 283,640
2018
2017
2016
$ 300,000
$ 300,000
$ 300,000
Bonus
($)
Stock
Awards
($)
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
Option
Awards
($)(1)
$ 53,332
$ 42,000
$ 44,261
$ 119,307
$ 93,995
$ 99,018
Non-Equity
Incentive Plan
Compensation
($)
All Other
Compensation
($)(2)
$104,468
$ 61,534
$ 74,656
$ 233,700
$ 137,655
$ 167,010
$ 4,267
$ 4,831
$ 2,079
$ 6,604
$ 5,724
$ 4,727
Total ($)
$ 289,467
$ 235,765
$ 248,396
$ 644,611
$ 522,334
$ 554,395
$ 125,582
$ 98,899
$104,229
$ 246,000
$ 144,900
$ 175,800
$ 5,025
$ 4,800
$ 400,838
$ 676,607
$ 548,599
$ 980,867
(1)
(2)
Represents the aggregate grant date fair value of the option awards granted during the year, computed in accordance with FASB ASC Topic
718. See Note 11 to the Company’s Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended
December 31, 2018 for a discussion of assumptions made in the valuation of share-based compensation.
Represents, for each of our named executive officers, the amount of our 401(k) matching contributions; for Messrs. Hays and Karas, the
amount of our health saving account matching contributions; and for Messrs. Karas and Jackson, the amount of our technology allowance
18
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21
OPTION EXERCISES AND STOCK VESTED IN 2018
Option Awards
Stock Awards
Number of
Shares
Acquired
on Exercise
(#)
21,633(2)
9,019(3)
17,654(3)
6,524 (3)
Value
Realized on
Exercise
($)(1)
$ 631,900
$ 205,626
$ 392,827
$ 105,674
Number of
Shares
Acquired on
Vesting
(#)
--
--
--
--
Value Realized on
Vesting
($)
--
--
--
--
Name
Michael D. Hays
Kevin R. Karas
Steven D. Jackson
(1)
(2)
(3)
Amounts represent the product of the number of shares acquired on exercise multiplied by the excess of the
closing market price per share on the date of exercise over the exercise price per share.
Shares of class A common stock (or common stock following the 2018 Recapitalization).
Shares of class B common stock.
Risk Assessment of Compensation Policies and Practices
The Board relies on the Committee to address risk exposures facing the Company with respect to
compensation, with appropriate reporting of these risks to be made to the full Board. The Committee, as
part of its periodic review of compensation and benefit programs, assesses the potential risks arising from
the Company’s compensation policies and practices and considers safeguards against incentives to take
excessive risks. Based on its most recent review, the Committee has concluded that the risks arising from
the Company’s compensation policies and practices for its associates are not reasonably likely to have a
material adverse effect on the Company.
COMPENSATION COMMITTEE REPORT
The Committee has reviewed and discussed the preceding Compensation Discussion and
Analysis with management and, based on such review and discussion, has recommended to the Board of
Directors that the Compensation Discussion and Analysis be included in the Company’s proxy statement.
Barbara J. Mowry, Chairperson
JoAnn M. Martin
John N. Nunnelly
22
ADVISORY VOTE ON EXECUTIVE COMPENSATION
This proposal provides our shareholders with the opportunity to cast a vote either for or against a
non-binding, advisory resolution to approve the compensation of our named executive officers as
disclosed in the Compensation Discussion and Analysis section and the accompanying compensation
tables and narrative discussion in this proxy statement. We are required to hold this vote by Section 14A
of the Securities Exchange Act of 1934. As discussed in the Compensation Discussion and Analysis
above, beginning on page 13, we have designed our executive compensation and benefit programs for our
executive officers, including our named executive officers, to advance the following core principles:
Market Driven. We strive to compensate our executive officers at levels to ensure that we
continue to attract and retain a highly competent, committed management team.
Align with Shareholders. We seek to align the interests, perspectives and decision-making of
our executive officers with the interests of our shareholders.
Performance Based. We link our executive officers’ compensation, particularly annual cash
bonuses, to established Company financial performance goals and individual performance
goals.
We believe that a focus on these principles will benefit us and, ultimately, our shareholders in the
long term by ensuring that we can attract and retain highly-qualified executive officers who are
committed to our long-term success.
The Board invites you to review carefully the Compensation Discussion and Analysis beginning
on page 13 and the tabular and other disclosures on compensation beginning on page 18, and cast an
advisory vote either for or against the following resolution:
“Resolved, that shareholders approve, on an advisory basis, the compensation of the Company’s
named executive officers as disclosed in the Compensation Discussion and Analysis section and
the compensation tables and narrative discussion contained in this Proxy Statement.”
While the vote does not bind the Board to any particular action, the Board values the input of our
shareholders, and will take into account the outcome of this vote in considering future compensation
arrangements.
Assuming a quorum is present at the Annual Meeting, the number of votes cast for the non-
binding resolution to approve the Company’s executive compensation program must exceed the number
of votes cast against it. Abstentions and broker non-votes will be counted as present in determining
whether there is a quorum; however, they will not constitute a vote “for” or “against” the non-binding
resolution and will be disregarded in the calculation of votes cast. A broker non-vote occurs when a
broker submits a proxy card with respect to shares that the broker holds on behalf of another person but
declines to vote on a particular matter, either because the broker elects not to exercise its discretionary
authority to vote on the matter or does not have authority to vote on the matter.
Based on the outcome of the advisory vote on the frequency of shareholder votes on executive
compensation at our 2017 annual shareholders meeting, the Company will ask its shareholders to consider
an advisory vote on the compensation of our named executive officers every year until otherwise
determined by a vote of our shareholders pursuant to applicable Securities and Exchange Commission
rules. The next advisory vote on the compensation of our named executive officers will occur at the 2020
annual meeting of shareholders.
23
THE BOARD RECOMMENDS A VOTE “FOR” APPROVAL OF THE COMPENSATION OF
OUR NAMED EXECUTIVE OFFICERS AS DISCLOSED IN THIS PROXY STATEMENT.
SHARES OF THE COMPANY’S COMMON STOCK REPRESENTED BY EXECUTED BUT
UNMARKED PROXIES WILL BE VOTED “FOR” APPROVAL OF THE COMPENSATION OF
OUR NAMED EXECUTIVE OFFICERS AS DISCLOSED IN THIS PROXY STATEMENT.
CEO PAY RATIO
As required by Item 402(u) of Regulation S-K promulgated under the Securities Exchange Act of
1934, we are providing the following information about the ratio of the median annual total compensation
of our associates (i.e., employees) and the annual total compensation of Michael D. Hays, our Chief
Executive Officer. For the year ended December 31, 2018:
the median of the annual total compensation of all associates of the Company was reasonably
estimated to be $61,485; and
the annual total compensation of Mr. Hays was $289,467.
Based on this information, the ratio of the annual total compensation of our Chief Executive
Officer to the median of the annual total compensation of all other associates is estimated to
be 4.71 to 1.
For purposes of this disclosure, as permitted by SEC regulations, we used the same median
associate as in our 2018 proxy statement because there was no change in our associate population or
associate compensation arrangements during 2018 that we reasonably believed would result in a
significant change to our pay ratio disclosure. We identified that median associate by examining total
cash compensation (i.e., base wages plus cash bonuses and/or commissions) for 2017 of all individuals
employed by us on December 1, 2017 (other than Mr. Hays), whether full-time, part-time or on a seasonal
basis. We annualized total cash compensation for all permanent associates who were hired after January
1, 2017, as permitted by the rules of the Securities and Exchange Commission. To calculate total cash
compensation for any associate paid in currency other than U.S. dollars, we then applied the applicable
foreign currency exchange rate in effect on December 1, 2017 to convert such associate’s total cash
compensation into U.S. dollars.
To calculate the 2018 annual total compensation of our median associate for purposes of this
disclosure, we added together all of the elements of our median associate’s compensation for 2018 in the
same way that we calculate the annual total compensation of our named executive officers in the
Summary Compensation Table. To calculate Mr. Hays’ annual total compensation, we used the amount
reported in the “Total” column of our 2018 Summary Compensation Table. To calculate our ratio, we
divided Mr. Hays’ annual total compensation by the annual total compensation of our median associate.
24
Independent Registered Public Accounting Firm
MISCELLANEOUS
KPMG LLP acted as the independent registered public accounting firm for the Company in 2018.
The Audit Committee is solely responsible for the selection, retention, oversight and, when appropriate,
termination of the Company’s independent registered public accounting firm.
The fees to KPMG LLP for the fiscal years ended December 31, 2018, and 2017 were as follows:
2018
2017
Audit Fees(1)
Audit-Related Fees(2)
Tax Fees(3)
All Other Fees
Total
___________________
(1) Audit of annual financial statements, review of financial statements included in Form 10-Q and other services normally provided
$498,548
101,941
90,567
--
$691,056
$416,115
101,299
122,500
25,000
$664,914
in connection with statutory and regulatory filings, including out-of-pocket expenses.
Information security audit services, including out-of-pocket expenses.
(2)
(3) Tax consultations and tax return preparation including out-of-pocket expenses.
The Audit Committee has established pre-approval policies and procedures with respect to audit
and permitted non-audit services to be provided by its independent registered public accounting firm.
Pursuant to these policies and procedures, the Audit Committee may form, and delegate authority to,
subcommittees consisting of one or more members when appropriate to grant such pre-approvals,
provided that decisions of such subcommittee to grant pre-approvals are presented to the full Audit
Committee at its next scheduled meeting. The Audit Committee’s pre-approval policies do not permit the
delegation of the Audit Committee’s responsibilities to management. In 2018, the Audit Committee pre-
approved all services provided by our independent registered public accounting firm, and no fees to the
independent registered public accounting firm were approved pursuant to the de minimis exception under
the Securities and Exchange Commission’s rules.
Expenses
The cost of soliciting proxies will be borne by the Company. In addition to soliciting proxies by
mail, proxies may be solicited personally and by telephone by certain officers and regular associates of
the Company. Such individuals will not be paid any additional compensation for such solicitation. The
Company will reimburse brokers and other nominees for their reasonable expenses in communicating
with the persons for whom they hold Common Stock.
25
Multiple Shareholders Sharing the Same Address
Pursuant to the rules of the Securities and Exchange Commission, services that deliver the
Company’s communications to shareholders that hold their stock through a bank, broker or other holder
of record may deliver to multiple shareholders sharing the same address a single copy of the Company’s
annual report to shareholders and proxy statement, unless the Company has received contrary instructions
from one or more of the shareholders. Upon written or oral request, the Company will promptly deliver a
separate copy of the annual report to shareholders and/or proxy statement to any shareholder at a shared
address to which a single copy of each document was delivered. For future deliveries of annual reports to
shareholders and/or proxy statements, shareholders may also request that we deliver multiple copies at a
shared address to which a single copy of each document was delivered. Shareholders sharing an address
who are currently receiving multiple copies of the annual report to shareholders and/or proxy statement
may also request delivery of a single copy. Shareholders may notify the Company of their requests by
calling or writing Kevin R. Karas, Secretary, NRC Health, at (402) 475-2525 or 1245 Q Street, Lincoln,
Nebraska 68508.
Shareholder Proposals
Proposals that shareholders of the Company intend to present at and have included in the
Company’s proxy statement for the 2020 annual meeting pursuant to Rule 14a-8 under the Securities
Exchange Act of 1934, as amended (“Rule 14a-8”), must be received by the Company by the close of
business on December 11, 2019. In addition, a shareholder who otherwise intends to present business at
the 2020 annual meeting (including nominating persons for election as directors) must comply with the
requirements set forth in the Company’s By-Laws. Among other things, to bring business before an
annual meeting, a shareholder must give written notice thereof, complying with the By-Laws, to the
Secretary of the Company not less than 60 days and not more than 90 days prior to the second Wednesday
in the month of April (subject to certain exceptions if the annual meeting is advanced or delayed a certain
number of days). Under the By-Laws, if the Company does not receive notice of a shareholder proposal
submitted otherwise than pursuant to Rule 14a-8 (i.e., proposals shareholders intend to present at the 2020
annual meeting but do not intend to include in the Company’s proxy statement for such meeting) prior to
February 8, 2020, then the notice will be considered untimely and the Company will not be required to
present such proposal at the 2020 annual meeting. If the Board chooses to present such proposal at the
2020 annual meeting, then the persons named in proxies solicited by the Board for the 2020 annual
meeting may exercise discretionary voting power with respect to such proposal.
By Order of the Board of Directors
NATIONAL RESEARCH CORPORATION
Kevin R. Karas
Secretary
April 9, 2019
26
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
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: 001-35929
National Research Corporation
(Exact name of registrant as specified in its charter)
Wisconsin
(State or other jurisdiction of incorporation or organization)
47-0634000
(I.R.S. Employer Identification No.)
1245 Q Street
Lincoln, Nebraska
(Address of principal executive offices)
Registrant’s telephone number, including area code: (402) 475-2525
Securities registered pursuant to Section 12(b) of the Act:
68508
(Zip code)
Title of Class
Common Stock, $.001 par value
Name of Each Exchange on Which Registered
The NASDAQ Stock Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 every Interactive Data File required to be submitted 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 such
files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting
company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☐
☐
Accelerated filer
Smaller reporting company
Emerging growth company
☒
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(s) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes ☐ No ☒
Aggregate market value of the common stock held by non-affiliates of the registrant at June 29, 2018: $415,536,664.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Common Stock, $0.001 par value, outstanding as of February 28, 2019: 24,846,500 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2019 Annual Meeting of Shareholders are incorporated by reference into Part III.
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business ...............................................................................................................................................................
Risk Factors .........................................................................................................................................................
Unresolved Staff Comments ................................................................................................................................
Properties .............................................................................................................................................................
Legal Proceedings................................................................................................................................................
Mine Safety Disclosures ......................................................................................................................................
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities .............................................................................................................................................................
Selected Financial Data .......................................................................................................................................
Item 6.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations ...............................
Item 7A. Quantitative and Qualitative Disclosure About Market Risk...............................................................................
Financial Statements and Supplementary Data ....................................................................................................
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..............................
Item 9.
Controls and Procedures ......................................................................................................................................
Item 9A.
Other Information ................................................................................................................................................
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance ...................................................................................
Executive Compensation .....................................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.............
Certain Relationships and Related Transactions, and Director Independence .....................................................
Principal Accountant Fees and Services ..............................................................................................................
Exhibits ................................................................................................................................................................
Item 15.
Item 16.
Form 10-K Summary ...........................................................................................................................................
Signatures .................................................................................................................................................................................
PART IV
Page
1
7
11
11
11
11
12
14
15
23
24
51
51
51
53
53
53
54
54
55
56
58
i
Item 1.
Business
Special Note Regarding Forward-Looking Statements
PART I
Certain matters discussed in this Annual Report on Form 10-K 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, doing business as NRC Health
(“NRC Health,” 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 and retention of key clients;
● The Company’s ability to compete in its markets, which are highly competitive with new market entrants, 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 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 for failures or deficiencies in the Company’s information technology platform;
● The possibility that the Company could be subject to security breaches or computer viruses; and
● The factors set forth under the caption “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.
Shareholders, potential investors and other readers are urged to consider these and other factors in evaluating the forward-looking
statements, and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements
included are only made as of the date of this Annual Report on Form 10-K and the Company undertakes no obligation to publicly
update such forward-looking statements to reflect subsequent events or circumstances, except as required by the federal securities
laws.
General
The Company is a leading provider of analytics and insights that facilitate measurement and improvement of the patient and
employee experience while also increasing patient engagement and customer loyalty for healthcare organizations. The Company’s
solutions enable its clients to understand the voice of the customer with greater clarity, immediacy and depth. NRC Health’s
heritage, proprietary methods, and holistic approach enable our partners to better understand the people they care for and design
experiences that inspire loyalty and trust, while also facilitating regulatory compliance and the shift to population-based health
management. The Company’s ability to measure what matters most and systematically capture, analyze and deliver insights based
on self-reported information from patients, families and consumers is critical in today’s healthcare market. NRC Health believes
that access to and analysis of its extensive consumer-driven information is becoming more valuable as healthcare providers
increasingly need to more deeply understand and engage the people they serve to build customer loyalty.
NRC Health’s expertise includes the efficient capture, transmittal, benchmarking, analysis and interpretation of critical data
elements from millions of healthcare consumers. Using its digital Voice of the Customer platform, the Company’s clients gain
insights into what people think and feel about their organizations in real-time, allowing them to build on their strengths and
resolve service issues with greater speed and personalization. The Company also provides legacy experience-based solutions and
shared intelligence from industry thought leaders and the nation’s largest member network focused on healthcare governance and
strategy to member boards and executives.
1
The Company’s portfolio of subscription-based solutions provides actionable information and analysis to healthcare organizations
across a range of mission-critical, constituent-related elements, including patient experience, service recovery, care transitions,
health risk assessments, employee engagement, reputation management and brand loyalty. NRC Health partners with clients
across the continuum of healthcare services. The Company’s clients include integrated health systems, post-acute providers and
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 integrated service model.
NRC Health has achieved a market leadership position through its more than 37 years of industry innovation and experience, as
well as its long-term, recurring revenue relationships (solutions that are used or required by a client each year) with many of the
healthcare industry’s largest organizations. Since its founding in 1981, the Company has focused on meeting the evolving
information needs of the healthcare industry through internal product development, as well as select acquisitions. The Company is
a Wisconsin corporation headquartered in Lincoln, Nebraska.
Industry and Market Opportunity
According to the Centers for Medicare and Medicaid Services (“CMS”), health expenditures in the United States were
approximately $3.5 trillion in 2017, or $10,739 per person. In total, health spending accounted for 17.9% of the nation’s Gross
Domestic Product in 2017. Addressing this growing expenditure burden continues to be a major policy priority at both federal and
state levels. In addition, increased co-pays and deductibles in healthcare plans have focused even more consumer attention on
health spending and affordability. In the public sector, Medicare provides health coverage for individuals aged 65 and older, while
Medicaid provides coverage for low income families and other individuals in need. Both programs are administered by the CMS.
With the aging of the U.S. population, Medicare enrollment has increased significantly. In addition, longer life spans and greater
prevalence of chronic illnesses among both the Medicare and Medicaid populations have placed tremendous demands on the
health care system.
An increasing percentage of Medicare reimbursement and reimbursement from commercial payers will be determined under value
payment models, based on factors such as patient readmission rates and provider adherence to certain quality-related protocols. At
the same time, many hospitals and other providers are creating new models of care delivery to improve patient experience, reduce
cost and provide better clinical outcomes. These new models are based on sharing financial risk and managing the health and
behaviors of large populations of patients and consumers. This transformation towards value-based payment models and increased
engagement of healthcare consumers is resulting in a greater need for existing healthcare providers to deliver more customer-
centric healthcare. At the same time, organizations that have successfully developed effective customer service models and brand
loyalty in other industry verticals are entering the healthcare services market.
NRC Health believes that its current portfolio of solutions is uniquely aligned to address these healthcare market trends and
related business opportunity. The Company provides tools and solutions to capture, interpret and improve the Consumer
Assessment of Healthcare Providers and Systems ("CAHPS") data required by CMS as well as real time feedback that enables
clients to better understand what matters most to people at key moments in their relationship with a health organization. NRC
Health’s solutions enable its clients to both satisfy patient survey compliance requirements and design experiences to build loyalty
and improve the wellbeing of the people and communities they care for.
NRC Health’s Solutions
NRC Health’s portfolio of solutions represent a unique set of capabilities that individually and collectively provide value to its
clients. The solutions are offered at an enterprise level through the Voice of the Customer platform, The Governance Institute, and
legacy Experience solutions.
Voice of the Customer Platform Solutions
The Voice of the Customer (“VoC”) platform represents a portfolio of solutions that collectively provide a comprehensive set of
capabilities that enable healthcare providers to collect, measure and analyze data collected across the patient journey to understand
the preferences, experiences and needs of the people they serve. The digital platform consists of three primary solution categories
which can be implemented both collectively as an enterprise solution or individually to meet specific needs within the
organization. The primary solution categories include Market Insights solutions, Transparency solutions, and certain Experience
solutions.
NRC Health’s Market Insights Solutions – NRC Health’s Market Insights solutions are subscription-based services that allow for
improved tracking of awareness, perception, and consistency of healthcare brands; real-time assessment of competitive
differentiators; and enhanced segmentation tools to evaluate the needs, wants, and behaviors of communities through real-time
competitive assessments and enhanced segmentation tools. NRC Health’s Market Insights is the largest U.S. healthcare consumer
database of its kind, measuring the opinions and behaviors of more than 292,000 healthcare consumers in the top 300 markets
across the country annually. NRC Health’s Market Insights is a syndicated survey that provides clients with an independent third-
party source of information that is used to understand consumer perception and preferences and optimize marketing strategies.
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NRC Health’s Market Insights solutions provide clients with on-demand tools to measure brand value and build brand equity in
their markets, evaluate and optimize advertising efficacy and consumer recall, and tailor research to obtain the real time voice of
customer feedback to support branding and loyalty initiatives. The Company’s Market Insights solutions were historically
marketed under the Healthcare Market Guide and Ticker brands.
NRC Health’s Experience Solutions – NRC Health’s Experience solutions are provided on a subscription basis via a cross-
continuum VoC platform that collects and measures data and then delivers business intelligence that the Company’s clients utilize
to improve patient experience, engagement and loyalty. Patient experience data can also be collected on a periodic basis using
CAHPS compliant mail and telephone survey methods for regulatory compliance purposes and to monitor and measure
improvement in CAHPS survey scores. CAHPS survey data can be collected and measured as an integrated service within the
VoC platform or independently as a legacy service offering. NRC Health’s Experience solutions provide hospitals and healthcare
providers the ability to receive and take action on customer and employee feedback across all care settings in real-time.
Experience solutions include patient and resident experience, workforce engagement, health risk assessments, transitions, and
improvement tools, which are provided through the Experience, Transitions and National Research Canada Corporation operating
segments. These solutions enable clients to comply with regulatory requirements and to improve their reimbursement under value-
based purchasing models. More importantly, NRC Health’s Experience solutions provide quantitative and qualitative real-time
feedback, improvement plans, and coaching tools to enable clients to improve the experiences of patients, residents, physicians
and staff. By illuminating the complete care journey in real time, the Company’s clients are able to ensure each individual
receives the care, respect, and experience he or she deserves. Developing a longitudinal profile of what healthcare customers want
and need allows for organizational improvement, increased clinician and staff engagement, loyal relationships and personal well-
being. These solutions have previously been marketed under NRC Picker, My InnerView (“MIV”), Customer-Connect LLC
(doing business as Connect), and NRC Canada.
NRC Health’s Health Risk Assessment solutions (formerly Payer solutions) enable the Company’s clients to understand the health
risks associated with populations of patients, analyze and address readmission risks, and efficiently reach out to patients to impact
their behaviors outside of the healthcare provider settings. These health risk assessment solutions enable clients to effectively
segment populations and manage care for those who are most at-risk, engage individuals, increase preventative care and manage
wellness programs to improve patient experience and outcomes.
NRC Health’s Transitions solutions are provided to healthcare organizations on a subscription basis to drive effective
communication between healthcare providers and patients in the critical 24-72 hours post discharge using a discharge call
program. Through preference-based communications and real-time alerts, these solutions enable organizations to identify and
manage high-risk patients to reduce readmissions, increase patient satisfaction and support safe care transitions. Tracking,
trending and benchmarking tools isolate the key areas for process improvement allowing organizations to implement changes and
reduce future readmissions. NRC Health’s Transitions solutions were previously provided by Connect. Connect was formed in
June 2013 to develop and provide patient outreach and discharge call solutions. NRC Health originally had a 49% ownership
interest in Connect but by March 2016 had acquired all of the remaining interest and subsequently dissolved Customer-Connect
LLC in June 2016.
NRC Health’s Transparency Solutions – NRC Health’s Transparency solutions allow healthcare organizations to share a picture
of their organization and ensure that timely and relevant content informs better consumer decision-making. NRC Health’s Star
Ratings solution (formerly Reputation) enables clients to publish a five-star rating metric and verified patient feedback derived
from actual patient survey data to complement their online physician information. Sharing this feedback not only results in better-
informed consumer decision-making but also has the ability to drive new patient acquisition and grow online physician reputation.
NRC Health’s reputation monitoring solution alerts clients to ratings and reviews on third-party websites and provides workflows
for response and service recovery. These solutions raise physician awareness of survey results and provide access to improvement
resources and educational development opportunities designed to improve the way care is delivered.
The Governance Institute
NRC Health’s Governance solutions, branded as The Governance Institute (“TGI”), serves not-for-profit hospital and health
system boards of directors, executives, and physician leadership. TGI’s subscription-based, value-driven membership services are
provided through national conferences, publications, advisory services, and an on-line portal designed to improve the
effectiveness of hospital and healthcare systems by continually strengthening their board governance, strategic planning, medical
leadership, management performance, and transparency positioning. TGI also conducts research studies and tracks industry trends
showcasing emerging healthcare trends and best practice solutions of healthcare boards across the country. TGI thought leadership
helps its client board members and executives inform and guide their organization’s strategic priorities in alignment with the
rapidly changing healthcare market.
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NRC Health’s Competitive Strengths
The Company believes that its competitive strengths include the following:
A leading provider of patient experience solutions for healthcare providers, payers and other healthcare organizations. The
Company’s history is based on capturing the voice of the consumer in healthcare markets. The Company’s solutions build on the
“Eight Dimensions of Patient-Centered Care,” a philosophy developed by noted patient advocate Harvey Picker, who believed
patients’ experiences are integral to quality healthcare. This foundation has been enhanced through the digital VoC platform
offering that provides the delivery of data and insights on a real time basis.
Premier client portfolio across the care continuum. NRC Health’s client portfolio encompasses leading healthcare organizations
across the healthcare continuum, from acute care hospitals and post-acute providers to healthcare payers. The Company’s client
base is diverse, with its top ten clients representing approximately 17% of total revenue for the year ended December 31, 2018 and
no single client representing more than 4% of the Company’s revenue.
Highly scalable and visible revenue model. The Company’s solutions are offered to healthcare providers, payers and other
healthcare organizations primarily through subscription-based service agreements. The solutions NRC Health provides are also
recurring in nature, which enables an ongoing relationship with its clients. This combination of subscription-based revenue, a base
of ongoing client renewals and automated platforms creates a highly visible and scalable revenue model for the Company.
Comprehensive portfolio of solutions. NRC Health offers a portfolio of solutions that provide insights across the patient journey,
which is unique in the healthcare industry, enabling its clients to initially establish an enterprise relationship utilizing the entire
portfolio or begin with an individual solution and increase the scope of services over time, increasing overall contract value.
Exclusive focus on healthcare. The Company focuses exclusively on healthcare and serving the unique needs of healthcare
organizations across the continuum, which NRC Health believes gives it a distinct competitive advantage compared to other
survey and analytics software providers. The Company’s platform includes features and capabilities built specifically for
healthcare providers, including a library of performance improvement content which can be tailored to the provider based on their
specific customer feedback profile.
Experienced senior management team led by NRC Health’s founder. NRC Health’s senior management team has extensive
industry and leadership experience. Michael D. Hays, the Company’s Chief Executive Officer, founded NRC Health in 1981.
Prior to launching the Company, Mr. Hays served as Vice President and as a Director of SRI Research Center, Inc. (now known
as the Gallup Organization). The Chief Financial Officer, Kevin Karas, CPA, has extensive financial experience having served as
CFO at two previous companies, along with healthcare experience at Rehab Designs of America, Inc. and NovaCare, Inc. Steven
D. Jackson, the Company’s President, served as Chief Strategy Officer for Vocera Communications, and he also served as Chief
Operating Officer for ExperiaHealth.
Competition
The healthcare information and market research services industry is highly competitive. The Company has traditionally competed
with healthcare organizations’ internal marketing, market research, and/or quality improvement departments which create their
own performance measurement tools, and with relatively small specialty research firms which provide survey-based healthcare
market research and/or performance assessment. The Company’s primary competitors among such specialty firms include Press
Ganey, which has significantly higher annual revenue than the Company, and several other organizations that NRC Health
believes have less annual revenue than the Company. The Company, to a certain degree, currently competes with, and anticipates
that in the future it may increasingly compete with, (1) market research firms and technology solutions which provide survey-
based, general market research or voice of the customer feedback capabilities and (2) firms which provide services or products
that complement healthcare performance assessments such as healthcare software or information systems. Although only a few of
these competitors have offered specific services that compete directly with the Company’s solutions, many of these competitors
have substantially greater financial, information gathering, and marketing resources than the Company and could decide to
increase their resource commitments to the Company’s market. There are relatively few barriers to entry into the Company’s
market, and the Company expects increased competition in its market which could adversely affect the Company’s operating
results through pricing pressure, increased marketing expenditures, and market share losses, among other factors. There can be no
assurance that the Company will continue to compete successfully against existing or new competitors.
The Company believes the primary competitive factors within its market include quality of service, timeliness of delivery, unique
service capabilities, credibility of provider, industry experience, and price. NRC Health believes that its industry leadership
position, exclusive focus on the healthcare industry, cross-continuum presence, comprehensive portfolio of solutions and
relationships with leading healthcare payers and providers position the Company to compete in this market.
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Growth Strategy
NRC Health believes that the value proposition of its current solutions, combined with the favorable alignment of its solutions
with emerging market demand, positions the Company to benefit from multiple growth opportunities. The Company believes that
it can accelerate its growth through (1) increasing scope of services and sales of its existing solutions to its existing clients (or
cross-selling), (2) winning additional new clients through market share growth in existing market segments, (3) developing and
introducing new solutions to new and existing clients, and (4) pursuing acquisitions of, or investments in, firms providing
products, solutions or technologies which complement those of the Company.
Increasing contract value with existing clients. Approximately 24% of the Company’s existing clients purchase more than one of
its solutions. NRC Health’s sales organization actively identifies and pursues cross-sell opportunities for clients to add additional
solutions in order to accelerate the growth of the Company. Organic contract value growth is also realized by the increased scope
of solution adoption as the size of client organizations increase from market expansion and consolidation.
Adding new clients. NRC Health believes that there is an opportunity to add new clients across all existing market segments. The
Company’s sales organization is actively identifying and engaging new client prospects with a focus on demonstrating the
economic value derived from adopting the portfolio of solutions in alignment with the prospect’s strategic objectives.
Adding new solutions. The need for effective solutions in the market segments that NRC Health serves is evolving to align with
emerging healthcare consumerism trends. The evolving market creates an opportunity for the Company to introduce new solutions
that leverage and extend its existing core competencies. The Company believes that there is an opportunity to drive sales growth
with both existing and new clients, across all of the market segments that it serves, through the introduction of new solutions.
Pursue strategic acquisitions and investments. The Company has historically complemented its organic growth with strategic
acquisitions, having completed seven such transactions over the past seventeen years. These transactions have added new
capabilities and access to market segments that are adjacent and complementary to the Company’s existing solutions and market
segments. NRC Health believes that additional strategic acquisition and/or investment opportunities exist for the Company to
complement its organic growth by further expanding its service capabilities, technology offerings and end markets.
Sales and Marketing
The Company generates the majority of its revenue from the renewal of subscription-based client service agreements,
supplemented by sales of additional solutions to existing clients and the addition of new clients. NRC Health sales activities are
carried out by a direct sales organization staffed with professional, trained sales associates.
NRC Health engages in marketing activities that enhance the Company’s brand visibility in the marketplace, generate demand for
its solutions and engage existing clients. Strategic campaigns and programs focus on (1) ensuring coverage of prospective clients
via targeted advertising and account-based campaigns, (2) elevating client value evidence and success stories to an executive level
profile, (3) engaging key stakeholders with content, programming and events and (4) amplifying thought leadership through
public and media relations programs that include earning placement in national media and trade publications, securing podium
presentations at key industry events and winning awards on behalf of the Company and its executives.
Clients
NRC Health partners with clients across the continuum of healthcare services. The Company’s clients include integrated health
systems, post-acute providers and payer organizations. The Company’s ten largest clients accounted for 17%, 19%, and 17% of
the Company’s total revenue in 2018, 2017 and 2016, respectively. Approximately 4%, 4% and 5% of the Company’s revenue
was derived from foreign customers in 2018, 2017, and 2016, respectively.
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Intellectual Property and Other Proprietary Rights
The Company’s success depends in part upon its data collection processes, research methods, data analysis techniques and internal
systems, and procedures that it has developed specifically to serve clients in the healthcare industry. The Company has no patents.
Consequently, it relies on a combination of copyright and trade secret laws and associate nondisclosure agreements to protect its
systems, survey instruments and procedures. There can be no assurance that the steps taken by the Company to protect its rights
will be adequate to prevent misappropriation of such rights or that third parties will not independently develop functionally
equivalent or superior systems or procedures. The Company believes that its systems and procedures and other proprietary rights
do not infringe upon the proprietary rights of third parties. There can be no assurance, however, that third parties will not assert
infringement claims against the Company in the future or that any such claims will not result in protracted and costly litigation,
regardless of the merits of such claims or whether the Company is ultimately successful in defending against such claims.
Associates
As of December 31, 2018, the Company employed a total of 434 persons on a full-time basis. In addition, as of such date, the
Company had 25 part-time associates primarily in its survey operations, representing approximately 13 full-time equivalent
associates. None of the Company’s associates are represented by a collective bargaining unit. The Company considers its
relationship with its associates to be good.
Executive Officers of the Company
The following table sets forth certain information as of February 1, 2019, regarding the executive officers of the Company:
Name
Age
Position
Michael D. Hays
Steven D. Jackson
Kevin R. Karas
64
43
61
Chief Executive Officer
President
Senior Vice President Finance, Chief Financial Officer, Treasurer and Secretary
Michael D. Hays has served as Chief Executive Officer and a director since he founded the Company in 1981. He also served as
President of the Company from 1981 to 2004 and from July 2008 to July 2011. Prior to founding the Company, Mr. Hays served
for seven years as a Vice President and a director of SRI Research Center, Inc. (n/k/a the Gallup Organization).
Steven D. Jackson has served as President of the Company since October 2015. He served as Group President from October 2014
until September 2015, during which time he oversaw the Company’s Market Insights, Transparency, and Predictive Analytics
business units. Prior to joining the Company, Mr. Jackson served as Chief Strategy Officer for Vocera Communications where he
was employed from 2007 to 2014. He also served as Chief Operating Officer for ExperiaHealth, a subsidiary of Vocera. Earlier in
his career, Mr. Jackson held positions of increasing responsibility at The Advisory Board Company, Neoforma, and Stockamp &
Associates.
Kevin R. Karas has served as Chief Financial Officer, Treasurer and Secretary of the Company since September 2011, and as
Senior Vice President Finance since he joined the Company in December 2010. From 2005 to 2010, he served as Vice President
of Finance for Lifetouch Portrait Studios, Inc., a national retail photography company. Mr. Karas also previously served as Chief
Financial Officer at CARSTAR, Inc., an automobile collision repair franchise business, from 2000 to 2005, Chief Financial
Officer at Rehab Designs of America, Inc., a provider of orthotic and prosthetic services, from 1993 to 2000, and as a regional
Vice President of Finance and Vice President of Operations at Novacare, Inc., a provider of physical rehabilitation services, from
1988 to 1993. He began his career as a Certified Public Accountant at Ernst & Young.
Executive officers of the Company are elected by and serve at the discretion of the Company’s Board of Directors. There are no
family relationships between any directors or executive officers of NRC Health.
Available Information
More information regarding NRC Health is available on the Company's website at www.nrchealth.com. NRC Health is not
including the information contained on or available through its website as part of, or incorporating such information by reference
into, this Annual Report on Form 10-K. The Company's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and any amendments to those reports are made available to the public at no charge through a link appearing
on the Company's website. NRC Health provides access to such materials through its website as soon as reasonably practicable
after electronically filing such material with, or furnishing it to, the Securities and Exchange Commission. Reports and
amendments posted on the Company’s website do not include access to exhibits and supplemental schedules electronically filed
with the reports or amendments.
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Item 1A. Risk Factors
You should carefully consider each of the risks described below, together with all of the other information contained in this
Annual Report on Form 10-K, before making an investment decision with respect to our securities. If any of the following risks
develop into actual events, our business, financial condition or results of operations could be materially and adversely affected and
you may lose all or part of your investment.
We depend on contract renewals, including retention of key clients, for a large share of our revenue and our operating
results could be adversely affected.
We expect that a substantial portion of our revenue for the foreseeable future will continue to be derived from renewable service
contracts. Substantially all contracts are renewable annually at the option of our clients, although contracts with clients under unit-
based arrangements generally have no minimum purchase commitments. Client contracts are generally cancelable on short notice
without penalty, however we are entitled to payment for services through the cancellation date. To the extent that clients fail to
renew or defer their renewals, we anticipate our results may be materially adversely affected. We rely on a limited number of key
clients for a substantial portion of our revenue. The Company’s ten largest clients accounted for 17%, 19%, and 17% of the
Company’s total revenue in 2018, 2017, and 2016, respectively. Our ability to secure renewals depends on, among other things,
our ability to gather and analyze performance data in a consistent, high-quality, and timely fashion. In addition, the service needs
of our clients are affected by accreditation requirements, enrollment in managed care plans, the level of use of satisfaction
measures in healthcare organizations’ overall management and compensation programs, the size of operating budgets, clients’
operating performance, industry and economic conditions, and changes in management or ownership. As these factors are beyond
our control, we cannot ensure that we will be able to maintain our renewal rates. Any material decline in renewal rates from
existing levels would have an adverse effect on our revenue and a corresponding effect on our operating and net income.
Our operating results may fluctuate and this may cause our stock price to decline.
Our overall operating results may fluctuate as a result of a variety of factors, including the size and timing of orders from clients,
client demand for our services (which, in turn, is affected by factors such as accreditation requirements, enrollment in managed
care plans, operating budgets and clients’ operating performance), the hiring and training of additional staff, expense increases,
and industry and general economic conditions. Because a significant portion of our overhead is fixed in the short-term,
particularly some costs associated with owning and occupying our building and full-time personnel expenses, our results of
operations may be materially adversely affected in any particular period if revenue falls below our expectations. These factors,
among others, make it possible that in some future period our operating results may be below the expectations of securities
analysts and investors which would have a material adverse effect on the market price of our common stock.
We operate in a highly competitive market and could experience increased price pressure and expenses as a result.
The healthcare information and market research services industry is highly competitive. We have traditionally competed with
healthcare organizations’ internal marketing, market research and/or quality improvement departments that create their own
performance measurement tools, and with relatively small specialty research firms that provide survey-based healthcare market
research and/or performance assessment. The Company’s primary competitors among such specialty firms include Press Ganey,
which we believe has significantly higher annual revenue than us, and three or four other firms that we believe have lower annual
revenue than us. To a certain degree, we currently compete with, and anticipate that in the future we may increasingly compete
with, (1) market research firms and technology solutions which provide survey-based, general market research or Voice of the
Customer Feedback capabilities and (2) firms which provide services or products that complement healthcare performance
assessments, such as healthcare software or information systems. Although only a few of these competitors have offered specific
services that compete directly with our services, many of these competitors have substantially greater financial, information
gathering, and marketing resources than the Company and could decide to increase their resource commitments to our market.
There are relatively few barriers to entry into the Company’s market, and we expect increased competition in our market which
could adversely affect our operating results through pricing pressure, increased marketing expenditures, and market share losses,
among other factors. There can be no assurance that the Company will continue to compete successfully against existing or new
competitors.
Because our clients are concentrated in the healthcare industry, our revenue and operating results may be adversely
affected by changes in regulations, a business downturn or consolidation with respect to the healthcare industry.
Substantially all of our revenue is derived from clients in the healthcare industry. As a result, our business, financial condition and
results of operations are influenced by conditions affecting this industry, including changing political, economic, competitive and
regulatory influences that may affect the procurement practices and operation of healthcare providers and payers. Future
legislative changes, including additional provisions to control healthcare costs, improve healthcare quality and expand access to
health insurance, could result in lower reimbursement rates and otherwise change the environment in which providers and payers
operate. In addition, large private purchasers of healthcare services are placing increasing cost pressure on providers. Healthcare
providers may react to these cost pressures and other uncertainties by curtailing or deferring purchases, including purchases of our
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services. Moreover, there has been consolidation of companies in the healthcare industry, a trend which we believe will continue
to grow. Consolidation in this industry, including the potential acquisition of certain of our clients, could adversely affect
aggregate client budgets for our services or could result in the termination of a client’s relationship with us. The impact of these
developments on the healthcare industry is difficult to predict and could have an adverse effect on our revenue and a
corresponding effect on our operating and net income.
We rely on third parties whose actions could have a material adverse effect on our business.
We outsource certain operations and engage third parties to perform work needed to fulfill our client services. For example, we
use vendors to perform certain printing, mailing, information transmittal and other services related to our survey operations. If any
of these vendors cease to operate or fail to adequately perform the contracted services and alternative resources and processes are
not utilized in a timely manner, our business could be adversely affected. The loss of any of our key vendors could impair our
ability to perform our client services and result in lower revenues and income. It would also be time-consuming and expensive to
replace, either directly or through other vendors, the services performed by these vendors, which could adversely impact revenues,
expenses and net income. Furthermore, our ability to monitor and direct our vendors’ activities is limited. If their actions and
business practices violate policies, regulations or procedures otherwise considered illegal, we could be subject to reputational
damage or litigation which would adversely affect our business.
We face several risks relating to our ability to collect the data on which our business relies.
Our ability to provide timely and accurate performance measurement and improvement services to our clients depends on our
ability to collect large quantities of high-quality data through surveys and interviews. If our mail survey operations are disrupted
and we are unable to mail our surveys in a timely manner, then our revenue and net income could be negatively impacted. If
receptivity to our survey and interview methods by respondents declines, or, for some other reason, their willingness to complete
and return surveys declines, or if we, for any reason, cannot rely on the integrity of the data we receive, then our revenue could be
adversely affected with a corresponding effect on our operating and net income. We also rely on third-party panels of pre-
recruited consumer households to produce NRC Health’s Market Insights in a timely manner. If we are not able to continue to use
these panels, or the time period in which we use these panels is altered and we cannot find alternative panels on a timely, cost-
competitive basis, we could face an increase in our costs or an inability to effectively produce NRC Health’s Market Insights. In
either case, our operating and net income could be negatively affected.
Our principal shareholders effectively control the Company.
A majority of the Company’s common stock and voting power was historically owned and/or held by Michael D. Hays, our Chief
Executive Officer. However, over the years Mr. Hays, for estate planning purposes, gifted and/or transferred almost all of his
directly owned shares to two trusts for the benefit of his family, The K/I/E Trust under agreement dated October 24, 2018 and the
Amandla MK Trust (collectively the “Trusts”).
As of February 25, 2019, approximately 50.06% of the outstanding common stock was owned by the Trusts. As a result, the
Trusts have the power to indirectly control decisions such as whether to issue additional shares or declare and pay dividends and
can control matters requiring shareholder approval, including the election of directors and the approval of significant corporate
matters such as change of control transactions. The effects of such influence could be to delay or prevent a change of control of
the Company unless the terms are approved by the Trusts.
The market price of our common stock may be volatile and shareholders may be unable to resell shares at or above the
price at which the shares were acquired.
The market price of stock can be highly volatile. As a result, the market price and trading volume of our common stock may also
be highly volatile, and investors in our common stock may experience a decrease in the value of their shares, including decreases
that are in response to factors beyond our control, including, but not limited to:
● Variations in our financial performance and that of similar companies;
● Regulatory and other developments that may impact the demand for our services;
● Reaction to our press releases, public announcements and filings with the Securities and Exchange Commission;
● Client, market and industry perception of our services and performance;
● Actions of our competitors;
● Changes in earnings estimates or recommendations by analysts who follow our stock;
● Loss of key personnel;
●
● Changes in accounting principles; and
● Variations in general market, economic and political conditions or financial markets.
Investor or management team sales of our stock;
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Any of these factors, among others, may result in changes in the trading volume and/or market price of our common stock.
Following periods of volatility in the market price of a company’s securities, shareholders have often filed securities class-action
lawsuits. Our involvement in a class-action lawsuit would result in substantial legal fees and divert our senior management’s
attention from operating our business, which could harm our business and net income.
Our business and operating results could be adversely affected if we are unable to attract or retain key managers and
other personnel.
Our future performance may depend, to a significant extent, upon the efforts and ability of our key personnel who have expertise
in gathering, interpreting and marketing survey-based performance information for healthcare markets. Although client
relationships are managed at many levels within our company, the loss of the services of Michael D. Hays, our Chief Executive
Officer, or one or more of our other senior managers, could have a material adverse effect, at least in the short to medium term, on
most significant aspects of our business, including strategic planning, product development, and sales and customer relations. Our
success will also depend on our ability to hire, train and retain skilled personnel in all areas of our business. Currently, we do not
have employment agreements with our officers or our other key personnel. Competition for qualified personnel in our industry is
intense, and many of the companies that compete with us for qualified personnel have substantially greater financial and other
resources than us. Furthermore, we expect competition for qualified personnel to become more intense as competition in our
industry increases. We cannot assure you that we will be able to recruit, retain and motivate a sufficient number of qualified
personnel to compete successfully.
If intellectual property and other proprietary information technology were copied or independently developed by our
competitors, our operating results could be negatively affected.
Our success depends in part upon our data collection process, research methods, data analysis techniques, and internal systems
and procedures that we have developed specifically to serve clients in the healthcare industry. We have no patents. Consequently,
we rely on a combination of copyright, trade secret laws and associate nondisclosure agreements to protect our systems, survey
instruments and procedures. We cannot assure you that the steps we have taken to protect our rights will be adequate to prevent
misappropriation of such rights, or that third parties will not independently develop functionally equivalent or superior systems or
procedures. We believe that our systems and procedures and other proprietary rights do not infringe upon the proprietary rights of
third parties. We cannot assure you, however, that third parties will not assert infringement claims against us in the future, or that
any such claims will not result in protracted and costly litigation, regardless of the merits of such claims, or whether we are
ultimately successful in defending against such claims.
Failures or deficiencies in our information technology platform could negatively impact our operating results.
Our ability to provide client service is dependent, to a significant extent, upon the technology that we develop internally.
Investment in the enhancement of existing and development of new information technology processes is costly and affects our
ability to successfully serve our clients. The failure or deficiency of the technology we develop could negatively impact the
willingness or ability for our clients to use our services and our ability to perform our services. Our failure to anticipate clients’
expectation and needs, adapt to emerging technological trends, or design efficient and effective information technology platforms,
could result in lower utilization, loss of customers, damage to customer relationships, reduced revenue and profits, refunds to
customers and damage to our reputation. Although we have procedures to monitor the efficacy of our information technology
platforms, the procedures may not prevent failures or deficiencies in the information technology platforms we develop, we may
not adapt quickly enough and may incur significant costs and delays that could harm our business.
Our business and operating results could be adversely affected if we experience business interruptions or failure of our
information technology and communication systems.
Our ability to provide timely and accurate performance measurement and improvement services to our clients depends on the
efficient and uninterrupted operation of our information technology and communication systems, and those of our external service
providers. Our systems and those of our external service providers, could be exposed to damage or interruption from fire, natural
disasters, energy loss, telecommunication failure, security breach and computer viruses. An operational failure or outage in our
information technology and communication systems or those of our external service providers, could result in loss of customers,
damage to customer relationships, reduced revenue and profits, refunds of customer charges and damage our reputation and may
result in additional expense to repair or replace damaged equipment and recover data loss resulting from the interruption.
Although we have taken steps to prevent system failures and have back-up systems and procedures to prevent or reduce
disruptions, such steps may not prevent an interruption of services and our disaster recovery planning may not account for all
contingencies. Additionally, our insurance may not adequately compensate us for all losses or failures that may occur. Any one of
the above situations could have a material adverse effect on our business, financial condition, results of operations and reputation.
9
Security breaches or computer viruses could harm our business.
In connection with our client services, we receive, process, store and transmit sensitive business information electronically over
the internet. Computer viruses could spread throughout our systems and disrupt operations and service delivery. Unauthorized
access to our computer systems or databases could result in the theft or publication of confidential information or the deletion or
modification of records or could otherwise cause interruption in our operations. We cannot be certain that the technology
protecting our networks and information will successfully prevent computer viruses, data thefts, release of confidential
information or security breaches. A compromise in our data security systems that results in inappropriate disclosure of our
associates', customers' or vendors' confidential information, could harm our reputation and expose us to regulatory action and
claims. Changes in privacy and information security laws and standards may require we incur significant expense to ensure
compliance due to increased technology investment and operational procedures. An inability to prevent security breaches or
computer viruses or failure to comply with privacy and information security laws could result in litigation and regulatory risk, loss
of customers, damage to customer relationships, reduced revenue and profits, refunds of customer charges and damage our
reputation, which could adversely affect our business, financial condition, results of operations and reputation.
Reputational harm could have a material adverse effect on our business, financial condition and results of operations.
Our ability to maintain a good reputation is critical to selling our services. Our reputation could be adversely impacted by any of
the following (whether or not valid): the failure to maintain high ethical and social standards; the failure to perform our client
services in a timely manner; violations of laws and regulations; and the failure to maintain an effective system of internal controls
or to provide accurate and timely financial information. Damage to our reputation or loss of our clients’ confidence in our services
for any of these, or any other reasons, could adversely impact our business, revenues, financial condition, and results of
operations, as well as require additional resources to rebuild our reputation.
Our operations are subject to laws and regulations that impose significant compliance costs and create reputational and
legal risk.
Due to the nature of the services we offer, we are subject to significant commercial, trade and privacy regulations. We cannot
predict the nature, scope or effect of future regulatory requirements to which our operations might be subject or the manner in
which existing laws might be administered or interpreted, which could have a material and negative impact on our business and
our results of operation. For example, recent years have seen an increase in the development or enforcement of legislation related
to healthcare reform, privacy, trade compliance and anti-corruption. Additionally, some of the services we provide include
information our clients need to fulfill regulatory reporting requirements. If our services result in errors or omissions in our clients’
regulatory reporting, we may be subject to loss of clients, reputational harm or litigation, each potentially adversely impacting our
business. Furthermore, although we maintain a variety of internal policies and controls designed to educate, discourage, prevent
and detect violations of such laws, we cannot guarantee that such actions will be effective or sufficient or that individual
employees will not engage in inappropriate behavior in breach of our policies. Such conduct, or even an allegation of
misbehavior, could result in material adverse reputational harm, costly investigations, severe criminal or civil sanctions, or could
disrupt our business, and could negatively affect our results of operations or financial condition.
Failure to comply with public company regulations could adversely impact our profitability.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, the Sarbanes-Oxley
Act of 2002, the Dodd-Frank Act Wall Street Reform and Consumer Protection Act, the listing requirements of NASDAQ and
other applicable securities rules and regulations. Additionally, laws, regulations and standards relating to corporate governance
and public disclosure are subject to varying interpretations and continue to develop and change. If we misinterpret or fail to
comply with these rules and regulations, our legal and financial compliance costs and net income may be adversely affected.
Our growth strategy includes future acquisitions and/or investments which involve inherent risk.
In order to expand services or technologies to existing clients and increase our client base, we have historically, and may in the
future, make strategic business acquisitions and/or investments that we believe complement our business. Acquisitions have
inherent risks which may have material adverse effects on our business, financial condition, or results of operations, including,
among other things: (1) failure to successfully integrate the purchased operations, technologies, products or services and maintain
uniform standard controls, policies and procedures; (2) substantial unanticipated integration costs; (3) loss of key associates
including those of the acquired business; (4) diversion of management’s attention from other operations; (5) failure to retain the
customers of the acquired business; (6) failure to achieve any projected synergies and performance targets; (7) additional debt
and/or assumption of known or unknown liabilities; (8) dilutive issuances of equity securities; and (9) a write-off of goodwill,
software development costs, client lists, other intangibles and amortization of expenses. If we fail to successfully complete
acquisitions or integrate acquired businesses, we may not achieve projected results and there may be a material adverse effect on
our business, financial condition and results of operations.
10
Item 1B. Unresolved Staff Comments
The Company has no unresolved staff comments to report pursuant to this item.
Item 2.
Properties
The Company’s headquarters is located in an owned office building in Lincoln, Nebraska, of which 62,000 square feet are used
for the Company’s operations. This facility houses all the capabilities necessary for NRC Health’s survey programming, printing
and distribution, data processing, analysis and report generation, marketing, and corporate administration. The Company’s credit
facilities are secured by this property and other assets of the Company.
The Company is leasing 4,000 square feet of office space in Markham, Ontario, 3,900 square feet of office space in San Diego,
California, 4,300 square feet of office space in Seattle, Washington, 6,200 square feet of office space in Atlanta, Georgia and 200
square feet of office space in Nashville, Tennessee.
Item 3.
Legal Proceedings
From time to time, the Company is involved in certain claims and litigation arising in the normal course of business. Management
assesses the probability of loss for such contingencies and recognizes a liability when a loss is probable and estimable. For
additional information, see Note 1, under the heading “Contingencies,” to the Company’s consolidated financial statements.
Item 4.
Mine Safety Disclosures
Not applicable.
11
PART II
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
In May 2013, the Company consummated a 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. Following the May 2013 recapitalization, the Company’s class A common stock and the
Company’s class B common stock were traded on the NASDAQ Global Market under the symbols “NRCIA” and “NRCIB,”
respectively.
On April 16, 2018, the shareholders of the Company approved, among other things, an amendment to the Company’s Amended
and Restated Articles of Incorporation (the "Articles") to effect a recapitalization (the “Recapitalization”) pursuant to which each
share of the Company’s then-existing class B common stock was exchanged for one share of the Company’s then-existing class A
common stock plus $19.59 in cash, without interest. On April 17, 2018, the Company filed an amendment to its Articles effecting
the Recapitalization and then a further amendment and restatement of the Company’s Articles which resulted in the elimination of
the Company’s class B common stock and the reclassification of the Company’s class A common stock as a share of Common
Stock, par value $0.001 per share (“Common Stock”). The Company issued 3,617,615 shares of Common Stock and paid $72.4
million in exchange for all class B shares outstanding and to settle outstanding share based awards for class B common stock. The
Common Stock continues to trade on the NASDAQ Global Market under the revised symbol “NRC.”
Cash dividends in the aggregate amount of $29.7 million were declared in 2018 with $12.6 million paid in 2018 and the remaining
$17.1 million paid in January 2019. Cash dividends in the aggregate amount of $16.9 million were declared in 2017 with $12.7
million paid in 2017 and the remaining $4.2 million paid in January 2018. The payment and amount of future dividends, if any, is
at the discretion of the Company’s Board of Directors and will depend on the Company’s future earnings, financial condition,
general business conditions, alternative uses of the Company’s earnings and other factors.
On February 15, 2019, there were approximately 16 shareholders of record and approximately 5,289 beneficial owners of
common stock.
In February 2006 and subsequently amended in May 2013, the Board of Directors of the Company authorized the repurchase of
2,250,000 shares of class A common stock and 375,000 shares of class B common stock in the open market or in privately
negotiated transactions. In connection with the Recapitalization in April 2018, the Board of Directors further amended the stock
repurchase program to eliminate the repurchase of the former class B common stock. 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. No Common Stock was repurchased during the three-month period ended December 31, 2018. The
remaining shares of Common Stock that may be purchased under that authorization are 280,491.
12
The following graph compares the cumulative 5-year total return provided shareholders on the Company’s common stock relative
to the cumulative total returns of the NASDAQ Composite Index and the Russell 2000 Index. An investment of $100 (with
reinvestment of all dividends) is assumed to have been made in our common stock and in each of the indexes on December 31,
2013, and its relative performance is tracked through December 31, 2018.
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
12/13
12/14
12/15
12/16
12/17
12/18
National Research Corporation – Formerly Class B
100.00 104.68 116.04 142.80 201.77
--
National Research Corporation – Common Stock
(formerly Class A)
100.00 74.65 89.11 107.87 214.79 226.30
NASDAQ Composite
100.00 114.62 122.81 133.19 172.11 165.84
Russell 2000
100.00 104.89 100.26 121.63 139.44 124.09
13
Item 6.
Selected Financial Data
The selected statement of income data for the years ended December 31, 2018, 2017 and 2016, and the selected balance sheet data
at December 31, 2018 and 2017, are derived from, and are qualified by reference to, the audited consolidated financial statements
of the Company included elsewhere in this Annual Report on Form 10-K. The selected statement of income data for the year
ended December 31, 2015 and 2014, and the balance sheet data at December 31, 2016, 2015 and 2014, are derived from audited
consolidated financial statements not included herein. The Company acquired Digital Assent, LLC on October 28, 2014 and
disposed of selected assets and liabilities related to the clinical workflow product of its Predictive Analytics operating segment on
December 21, 2015. The acquisition and disposal did not have a significant impact on the Company’s financial results.
2018(1)(2)
Year Ended December 31,
2016
(In thousands, except per share data)
2015
2017
2014
Statement of Income Data:
Revenue
Operating expenses:
Direct
Selling, general and administrative
Depreciation and amortization
Total operating expenses
Operating income
Other income (expense)
Income before income taxes
Provision for income taxes
Net income
Earnings per share common stock:
Basic Earnings per share:
Common Stock (formerly Class A)
Class B
Diluted Earnings per share:
Common Stock (formerly Class A)
Class B
Weighted average share and share equivalents
outstanding:
Common Stock (formerly Class A) – basic
Class B – basic
Common Stock (formerly Class A) – diluted
Class B – diluted
Balance Sheet Data:
Working capital surplus (deficiency)
Total assets
Total debt and capital lease obligations, net of
unamortized debt issuance costs
Total shareholders’ equity
Cash dividends declared per share:
Common stock (formerly class A)
Class B common stock
$ 119,686 $ 117,559 $ 109,384 $ 102,343 $
98,837
47,577
31,371
5,463
84,411
35,275
(566 )
34,709
4,662
30,047 $
49,068
29,686
4,586
83,340
34,219
64
34,283
11,340
22,943 $
45,577
28,385
4,225
78,187
31,197
159
31,356
10,838
20,518 $
44,610
27,177
4,109
75,896
26,447
913
27,360
9,750
17,610 $
41,719
25,018
3,804
70,541
28,296
(204 )
28,092
9,936
18,156
1.08 $
1.31 $
0.54 $
3.26 $
0.49 $
2.93 $
0.42 $
2.52 $
1.04 $
1.27 $
0.52 $
3.18 $
0.48 $
2.88 $
0.41 $
2.49 $
0.44
2.62
0.43
2.57
23,562
3,527
24,448
3,628
20,770
3,514
21,627
3,603
20,713
3,505
21,037
3,560
20,741
3,478
20,981
3,522
20,764
3,473
21,076
3,536
$
$
$
$
$
2018(1)(2)
2017
2016
(In thousands, except per share data)
2015
2014
(18,699 ) $
25,262
$
108,032 127,316 120,624 128,049 129,510
15,551 $
19,949 $
10,890 $
39,029
19,083
1,225
90,041
3,732
82,806
5,917
74,222
8,386
87,748
$
1.13
.60 $
.40
2.40 $
.34
2.04 $
.62
3.72 $
.06
.36
(1) On January 1, 2018, the Company adopted Accounting Standards Update 2014-09, Revenue- Revenue from
Contracts with Customers and all related amendments using the modified retrospective method for all incomplete
contracts as of the date of adoption. See Notes 1 and 2 to the Company’s consolidated financial statements.
(2) As described in Note 2 to the Company’s consolidated financial statements, the Company completed the
Recapitalization in April 2018 which settled all then-existing outstanding class B share-based awards, resulting in the
elimination of the class B common stock and reclassified class A common stock to Common Stock.
14
Item 7.
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 measurement and improvement of the patient and
employee experience while also increasing patient engagement and customer loyalty for healthcare organizations. The Company’s
solutions enable its clients to understand the voice of the customer with greater clarity, immediacy and depth. NRC Health’s
heritage, proprietary methods, and holistic approach enable our partners to better understand the people they care for and design
experiences that inspire loyalty and trust, while also facilitating regulatory compliance and the shift to population-based health
management. The Company’s ability to measure what matters most and systematically capture, analyze and deliver insights based
on self-reported information from patients, families and consumers is critical in today’s healthcare market. NRC Health believes
that access to and analysis of its extensive consumer-driven information is becoming more valuable as healthcare providers
increasingly need to more deeply understand and engage the people they serve to build customer loyalty.
The Company’s portfolio of subscription-based solutions provides actionable information and analysis to healthcare organizations
across a range of mission-critical, constituent-related elements, including patient experience, service recovery, care transitions,
health risk assessments, employee engagement, reputation management, and brand loyalty. NRC Health partners with clients
across the continuum of healthcare services. The Company’s clients include integrated health systems, post-acute providers and
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 integrated service model.
Critical Accounting Policies and Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported
therein. The most significant of these areas involving difficult or complex judgments made by management with respect to the
preparation of the Company’s consolidated financial statements for 2018 include:
●
●
●
Revenue recognition;
Valuation of goodwill and identifiable intangible assets; and
Income taxes.
Revenue Recognition
The Company derives a majority of its revenue from annually renewable subscription-based service agreements with its
customers. See Notes 1 and 3 to the Company’s consolidated financial statements for a description of the Company’s revenue
recognition policies.
The Company’s revenue arrangements with a client may include combinations of more than one service offering which may be
executed at the same time, or within close proximity of one another. The Company combines contracts with the same customer
into a single contract for accounting purposes when the contract is entered into at or near the same time and the contracts are
negotiated as a single performance obligation. For contracts that contain more than one separately identifiable performance
obligation, the total transaction price is allocated to the identified performance obligations based upon the relative stand-alone
selling prices of the performance obligations. The stand-alone selling prices are based on an observable price for services sold to
other comparable customers, when available, or an estimated selling price using a cost-plus margin or residual approach. The
Company estimates the total contract consideration it expects to receive for variable arrangements based on the most likely
amount it expects to earn from the arrangement based on the expected quantities. The Company only includes some or a portion
of variable consideration in the transaction price when it is probable that a significant reversal in the amount of cumulative
revenue recognized will not occur. The Company considers the sensitivity of the estimate, its relationship and experience with the
client and variable services being performed, the range of possible revenue amounts and the magnitude of the variable
consideration to the overall arrangement.
The Company’s fixed, non-subscription arrangements typically require the Company to perform an unspecified amount of
services for a fixed price during a fixed period of time. Revenues are recognized over time based upon the costs incurred to date in
relation to the total estimated contract costs. In determining cost estimates, management uses historical and forecasted cost
information which is based on estimated volumes, external and internal costs and other factors necessary in estimating the total
costs over the term of the contract. Changes in estimates are accounted for using a cumulative catch up adjustment which could
impact the amount and timing of revenue for any period.
If management made different judgments and estimates, then the amount and timing of revenue for any period could differ from
the reported revenue.
15
Valuation of Goodwill and Identifiable Intangible Assets
Intangible assets include customer relationships, trade names, technology, non-compete agreements and goodwill. Intangible
assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values and
reviewed for impairment with other long-lived assets in the related asset group whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. The Company reviews intangible assets with indefinite
lives for impairment annually as of October 1 and whenever events or changes in circumstances indicate that the carrying value of
an asset may not be recoverable.
When performing the impairment assessment, the Company will first assess qualitative factors to determine whether it is
necessary to recalculate the fair value of the intangible assets with indefinite lives. If the Company believes, as a result of the
qualitative assessment, that it is more likely than not that the fair value of the indefinite-lived intangibles is less than their carrying
amount, the Company calculates the fair value using a market or income approach. If the carrying value of intangible assets with
indefinite lives exceeds their fair value, then the intangible assets are written-down to their fair values. The Company did not
recognize any impairments related to indefinite-lived intangibles during 2018, 2017 or 2016.
Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that
are not individually identified and separately recognized. All of the Company’s goodwill is allocated to its reporting units, which
are the same as its six operating segments: Experience, The Governance Institute, Market Insights, Transparency, National
Research Corporation Canada and Transitions. Goodwill is reviewed for impairment at least annually, as of October 1, and
whenever events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable.
The Company reviews for goodwill impairment by first assessing qualitative factors to determine whether any impairment may
exist. If the Company believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of a
reporting unit is less than its carrying amount, a quantitative analysis will be performed, and the fair value of the reporting unit is
compared with its carrying value (including goodwill). If the fair value of the reporting unit exceeds its carrying value, no
impairment exists. If the fair value of the reporting unit is less than its carrying value, then goodwill is written down by this
difference. The Company performed a qualitative analysis as of October 1, 2018 and determined the fair value of each reporting
unit likely significantly exceeded its carrying value. No impairments were recorded during the years ended December 31, 2018,
2017 or 2016.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under that method, deferred income tax assets
and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases using enacted tax rates. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation
allowances, if any, are established when necessary to reduce deferred tax assets to the amount that is more likely than not to be
realized. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being
sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized.
Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Management
judgment is required to determine the provision for income taxes and to determine whether deferred income taxes will be realized
in full or in part. Such judgments include, but are not limited to, the likelihood we would realize the benefits of net operating loss
carryforwards, the adequacy of valuation allowances, the election to capitalize or expense costs incurred, and the probability of
outcomes of uncertain tax positions. It is possible that the various taxing authorities could challenge those judgments or positions
and reach conclusions that would cause us to incur tax liabilities in excess of, or realize benefits less than, those currently
recorded. In addition, changes in the geographical mix or estimated amount of annual pretax income could impact our overall
effective tax rate.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cut and
Jobs Act (the “Tax Act”). The Tax Act made broad and complex changes to the U.S. tax code that affected 2017, including, but
not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the
transition of U.S international taxation from a worldwide tax system to a territorial system, a one-time transition tax on the
mandatory deemed repatriation of foreign earnings and accelerated depreciation that will allow for full expensing of qualified
property.
16
In accordance with Staff Accounting Bulletin No. 118 (“SAB 118”), the Company made reasonable estimates and recorded a
provisional net tax benefit of $1.9 million as of December 31, 2017 related to the following elements of the Tax Act:
● Reduction in the U.S. Federal Corporate Tax Rate: The Tax Act reduced the corporate tax rate to 21%, effective
January 1, 2018. Recorded a decrease related to deferred tax assets and liabilities with a corresponding net
adjustment to deferred income tax benefit for the year ended December 31, 2017.
● Availability of 100% bonus depreciation on assets placed in service after September 27, 2017.
● Certain stock compensation plans potentially subject to limitations as to deductibility.
The above items were final as of December 31, 2018, and no material adjustments were made to the provisional amounts recorded
as of December 31, 2017. Under the Tax Act, the Company was also subject to a one-time mandatory deemed repatriation tax on
accumulated non-U.S. earnings. The estimates booked as of December 31, 2017 have been finalized and no material adjustments
were made to the financials.
Results of Operations
The following table and graphs set forth, for the periods indicated, selected financial information derived from the Company’s
consolidated financial statements, including amounts expressed as a percentage of total revenue and the percentage change in such
items versus the prior comparable period (please note that all columns may not add up to 100% due to rounding). The trends
illustrated in the following table and graphs may not necessarily be indicative of future results. The discussion that follows the
information should be read in conjunction with the Company’s consolidated financial statements.
Percentage of Total Revenue
Year Ended December 31,
2018
2017
2016
Percentage
Increase (Decrease)
2018 over
2017
2017 over
2016
Revenue
Operating expenses:
Direct
Selling, general and administrative
Depreciation and amortization
Total operating expenses
Operating income
100.0 %
100.0 %
100.0 %
1.8 %
39.7
26.2
4.6
70.5
29.5 %
41.7
25.3
3.9
70.9
29.1 %
41.7
25.9
3.9
71.5
28.5 %
(3.0 )
5.7
19.1
1.3
3.1 %
7.5 %
7.7
4.6
8.5
6.6
9.7 %
Year Ended December 31, 2018, Compared to Year Ended December 31, 2017
Revenue. Revenue in 2018 increased 1.8% to $119.7 million, compared to $117.6 million in 2017, which was due to new
customer sales and increases in sales to the existing client base. The Company’s solutions within the VoC platform in 2018
accounted for 49.6% of total revenue compared to 33.9% in 2017. The remaining revenue consists of legacy Experience and
Governance Solutions. Clients with agreements for multiple solutions represented 24% of our client base at the end of 2018, up
from 22% at the end of 2017.
17
Direct expenses. Direct expenses decreased 3.0% to $47.6 million in 2018, compared to $49.1 million in 2017. This was due to a
decrease in variable expenses of $2.2 million partially offset by an increase in fixed expenses of $689,000. Variable expenses
decreased mainly due to less postage, printing and paper costs due to lower volumes and changes in survey methodologies. Fixed
expenses increased primarily as a result of increased salary and benefit costs in the customer service and information technology
areas. Direct expenses decreased as a percentage of revenue to 39.7% in 2018 from 41.7% for the same period in 2017 as
expenses decreased by 3.0% while revenue for the same period increased by 1.8%.
Selling, general and administrative expenses. Selling, general and administrative expenses increased 5.7% to $31.4 million in
2018 compared to $29.7 million in 2017 primarily due to increased software and platform hosting expenses of $1.8 million, higher
salary and benefit costs of $685,000, including acceleration of share-based compensation expense from the vesting of restricted
stock and settlement of stock options associated with the Recapitalization of $331,000, and increased contracted services of
$529,000. These were offset by decreased legal and accounting expenses primarily associated with the Recapitalization of
$516,000, lower recruiting expenses of $568,000 and a reduction in marketing expense of $239,000. Selling, general, and
administrative expenses increased as a percentage of revenue to 26.2% in 2018, from 25.3% for the same period in 2017 as
expenses increased by 5.7% while revenue increased by 1.8% during the same period.
Depreciation and amortization. Depreciation and amortization expenses increased 19.1% to $5.5 million in 2018 compared to
$4.6 million in 2017 due to increased amortization from additional computer software investments. Depreciation and amortization
expenses as a percentage of revenue increased to 4.6% in 2018, from 3.9% for the same period in 2017.
Other income (expense). Other income (expense) decreased to other expense of $566,000 in 2018, compared to other income of
$64,000 in 2017 primarily due to increased interest expense, partially offset by other income. Interest expense increased to $1.5
million due to interest related to the new term loan originated in April 2018. Other income increased to $885,000 primarily due to
revaluation on intercompany transactions due to changes in the foreign exchange rate.
Provision for income taxes. Provision for income taxes was $4.7 million (13.4% effective tax rate) in 2018, compared to $11.3
million (33.1% effective tax rate) in 2017. The effective tax rate was lower in 2018 mainly due to income tax benefits from the
Recapitalization, due to accelerated vesting of restricted stock and settlement of options of $1.1 million, and the reduction in the
corporate tax rate from 35% to 21% as a result of the Tax Act. In addition, the Company had increased tax benefits of $1.6 million
related to the vesting and exercise of stock awards, net of certain excess compensation limits, a tax depreciation method change
election for software development costs creating an income tax benefit of $308,000 and decreased non-deductible Recapitalization
expenses of $361,000. This was partially offset by decreased tax expense of $1.1 million in 2017 due to Tax Act related
adjustments. See Note 9 to the Company’s consolidated financial statements for more details on tax adjustments related to the Tax
Act.
Year Ended December 31, 2017, Compared to Year Ended December 31, 2016
Revenue. Revenue in 2017 increased 7.5% to $117.6 million, compared to $109.4 million in 2016, which was driven primarily by
a combination of continued gains in market share and vertical growth in our existing client base. Revenue from subscription-based
agreements comprised 89.3% of the total revenue in 2017, compared to 88.0 % of total revenue in 2016.
Direct expenses. Direct expenses increased 7.7% to $49.1 million in 2017, compared to $45.6 million in 2016. This was due to an
increase in variable expenses of $555,000 and fixed expenses of $2.9 million. Variable expense increased mainly due to increased
costs to support the larger revenue and higher contracted voice recognition technology, phone costs, and labor costs, partially
offset by decreased postage, printing and paper costs due to a reduction in postage fees and changes in survey methodologies.
Conference expenses also decreased over the same period in 2016. Fixed expenses increased primarily as a result of increased
salary and benefit costs in the customer service area, partially offset by decreased contracted service costs. Direct expenses
remained the same as a percentage of revenue at 41.7% in 2017 and 2016 as expenses increased by 7.7% while revenue for the
same period increased by 7.5%.
Selling, general and administrative expenses. Selling, general and administrative expenses increased 4.6% to $29.7 million in
2017 compared to $28.4 million in 2016, primarily due to expenses associated with the Proposed Recapitalization of $1.4 million,
higher computer supplies and software license fees of $513,000, and higher recruiting fees of $412,000, partially offset by lower
salary and benefit costs of $308,000, lower travel costs of $234,000, lower development and training costs of $205,000, $177,000
reduction for shelf registration fees expensed in 2016, and lower marketing expenses of $162,000. Selling, general, and
administrative expenses decreased as a percentage of revenue to 25.3% in 2017, from 25.9% in 2016 as expenses increased by
4.6% while revenue increased by 7.5% during the same period.
Depreciation and amortization. Depreciation and amortization expenses increased 8.5% to $4.6 million in 2017 compared to $4.2
million in 2016 due to increased depreciation and amortization of $405,000 primarily from additional computer software
investments, partially offset by decreased amortization of $45,000 as a result of certain intangibles becoming fully amortized.
Depreciation and amortization expenses as a percentage of revenue remained the same at 3.9% in 2017 and 2016.
18
Other income (expense). Other income (expense) decreased to $64,000 in 2017 compared to $159,000 in 2016. In December
2016, an additional gain of $223,000 was recorded due to receipt of funds placed in escrow at the time of the sale of selected
assets and liabilities related to the clinical workflow product of the Company’s former Predictive Analytics operating segment.
This was partially offset by lower interest expense on the term loan in 2017.
Provision for income taxes. Provision for income taxes was $11.3 million (33.1% effective tax rate) in 2017, compared to $10.8
million (34.6% effective tax rate) in 2016. The effective tax rate for the year ended December 31, 2017 decreased primarily due to
the net benefit of approximately $1.9 million associated with remeasuring deferred tax assets and liabilities to the new lower
federal rate, partially offset by a one-time mandatory deemed repatriation tax under the Tax Act. In addition, as a result of the Tax
Act, the Company determined that it would no longer indefinitely reinvest the earnings of its Canadian subsidiary and recorded
the withholding tax of $706,000 associated with this planned repatriation. The 2017 effective tax rate was also impacted by a
benefit of $609,000 related to the vesting and exercise of stock awards, net of certain excess compensation limits, $504,000 of tax
expense due to non-deductible recapitalization expenses and increases in the estimated state tax rates. Pursuant to the guidance in
SAB 118, the Company’s estimate of impacts of the Tax Act were provisional and were subject to adjustment during 2018 based
upon further analysis and interpretation of the Tax Act. See Note 9 to the Company’s consolidated financial statements for more
details on tax adjustments related to the Tax Act.
Inflation and Changing Prices
Inflation and changing prices have not had a material impact on revenue or net income in the last three years.
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 declared a special dividend in the fourth quarter of 2018 of $0.50 per share. The special
dividend, in addition to the declared quarterly dividend, totaled $17.1 million, which was paid in January 2019. The dividends
were paid from cash on hand and $8.5 million in borrowings on our line of credit.
As of December 31, 2018, our principal sources of liquidity included $13.0 million of cash and cash equivalents, up to $15
million of unused borrowings under our line of credit and up to $15 million on our delayed draw term note. Of this cash, $2.0
million was held in Canada. The delayed draw term note can only be used to fund permitted future business acquisitions or
repurchasing the Company’s Common Stock.
Working Capital
The Company had a working capital deficit of $18.7 million and a working capital surplus of $19.9 million on December 31, 2018
and 2017, respectively.
The change was primarily due to a decrease in cash and cash equivalents of $21.7 million, $2.6 million increase in current portion
of notes payable mainly due to the Recapitalization (See Note 2 to the Company’s consolidated financial statements), an increase
in dividends payable of $12.9 million and a $2.8 million decrease in trade accounts receivable. These were partially offset by
decreases in accrued wages, bonus and profit sharing of $799,000 and deferred revenue of $634,000. Dividends payable increased
due to a special dividend in addition to a quarterly dividend declaration that was paid in January 2019. Trade accounts receivable
decreased due to the timing of billings and collections on new and renewal contracts. Accrued wages decreased mainly due to a
payroll tax accrual from the vesting of non-vested stock award at the 2017 year-end. The Company’s working capital is
significantly impacted by its large deferred revenue balances which will vary based on the timing and frequency of billings on
annual agreements. The deferred revenue balances as of December 31, 2018 and December 31, 2017, were $16.2 million and
$16.9 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 services before they have been completed. Billed amounts are recorded as billings in excess of revenue earned,
or deferred revenue, on the Company’s consolidated financial statements, and are recognized as income when earned. In addition,
when work is performed in advance of billing, the Company records this work as revenue earned in excess of billings, or unbilled
revenue. Substantially all deferred revenue and all unbilled revenue will be earned and billed respectively, within 12 months of the
respective period ends.
19
Cash Flow Analysis
A summary of operating, investing, and financing activities are shown in the following table:
2018
For the Year Ended December 31,
2017
(In thousands)
2016
Provided by operating activities
Used in investing activities
Used in financing activities
Effect of exchange rate changes on cash
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at end of period
Cash Flows from Operating Activities
$
$
39,848 $
(5,971 )
(54,497 )
(1,122 )
(21,742 )
12,991 $
28,091 $
(6,118 )
(21,116 )
855
1,712
34,733 $
26,843
(3,750 )
(32,502 )
285
(9,124 )
33,021
Cash flows from operating activities consist of net income adjusted for non-cash items including depreciation and amortization,
deferred taxes, share-based compensation and related taxes, gain on sale from operating segment and the effect of working capital
changes.
Net cash provided by operating activities was $39.8 million for the year ended December 31, 2018, which included net income of
$30.0 million, plus non-cash charges (benefits) for deferred tax expense, depreciation and amortization, reserve for uncertain tax
positions, loss on disposal of property and equipment and non-cash stock compensation totaling $8.4 million. Changes in working
capital increased cash flows from operating activities by $1.5 million, primarily from increases in income taxes payable and
decreases in accounts receivables, which fluctuate due to the timing of income tax payments and the timing and frequency of
billings on new and renewal contracts, respectively. These increases to cash flows were partially offset by an increase in prepaid
expenses and other current assets and decreases due to the timing of payments on accounts payable, accrued expenses, wages,
bonus and profit sharing, deferred contract costs and deferred revenue.
Net cash provided by operating activities was $28.1 million for the year ended December 31, 2017, which included net income of
$22.9 million, plus non-cash charges (benefits) for deferred tax expense, depreciation and amortization, reserve for uncertain tax
positions, loss on disposal of property and equipment and non-cash stock compensation totaling $6.0 million. Changes in working
capital decreased cash flows from operating activities by $806,000, primarily from increases in prepaid expenses, income taxes
recoverable and accounts receivables, which fluctuate due to the timing and frequency of billings on new and renewal contracts.
These decreases to cash flows were partially offset by the timing of payments on accounts payable, accrued expenses, wages,
bonus and profit sharing, and increases in deferred revenue.
Net cash provided by operating activities was $26.8 million for the year ended December 31, 2016, which included net income of
$20.5 million, plus non-cash charges (benefits) for deferred tax expense, depreciation and amortization, reserve for uncertain tax
positions, gain on sale of operating segment, loss on disposal of property and equipment and non-cash stock compensation
totaling $6.8 million. Changes in working capital decreased cash flows from operating activities by $499,000, primarily due to the
timing of payments on accounts payable and increases in prepaid expenses, accounts receivables, and unbilled revenue, which
fluctuate due to the timing and frequency of billings on new and renewal contracts. These decreases to cash flows were partially
offset by decreases in income taxes recoverable, and timing of payments related to accrued expenses, wages, bonus and profit
sharing and deferred revenue.
Cash Flows from Investing Activities
Net cash of $6.0 million was used for investing activities in the year ended December 31, 2018 for purchases of property and
equipment.
Net cash of $6.1 million was used for investing activities in the year ended December 31, 2017. Purchases of property and
equipment totaled $4.6 million. In addition, the Company used $1.3 million of cash to acquire a strategic investment in
convertible preferred stock of PracticingExcellence.com, a privately-held Delaware corporation, which is carried at cost and
included in other non-current assets.
Net cash of $3.8 million was used for investing activities in the year ended December 31, 2016. Purchases of property and
equipment totaled $4.0 million. The Company received $223,000 in cash from funds put in escrow at the time of the December
21, 2015 sale of selected assets and liabilities related to the clinical workflow product of the former Predictive Analytics operating
segment.
20
Cash Flows from Financing Activities
Net cash used in financing activities was $54.5 million in the year ended December 31, 2018. Cash was used for the
Recapitalization of $72.4 million (see Note 2 to the Company’s consolidated financial statements), to repay borrowings under the
term notes totaling $3.1 million, to repay borrowings on the line of credit of $2.5 million, to pay loan origination fees on the new
credit agreement of $187,000 and for capital lease obligations of $156,000. Cash was also used to pay $16.9 million of dividends
on our common stock, and to pay payroll tax withholdings related to share-based compensation of $1.9 million. Cash was
provided from proceeds of the new term loan of $40 million and the new line of credit of $2.5 million.
Net cash used in financing activities was $21.1 million in the year ended December 31, 2017. Cash was used to repay borrowings
under the term note totaling $2.5 million and for capital lease obligations of $108,000. Cash was used to pay $16.9 million of
dividends, and to pay payroll tax withholdings related to share-based compensation of $1.7 million.
Net cash used in financing activities was $32.5 million in the year ended December 31, 2016. Cash was used to repay borrowings
under the term note totaling $2.2 million and for capital lease obligations of $95,000. Cash was used to pay $28.6 million of
dividends, purchase non-controlling interests in Connect totaling $2.0 million, and to pay payroll tax withholdings related to
share-based compensation of $204,000. These were partially offset by the cash provided from the proceeds from the exercise of
stock options of $548,000.
Capital Expenditures
Capital expenditures for the year ended December 31, 2018 were $6.0 million. These expenditures consisted mainly of computer
equipment and software. The Company expects similar capital expenditure purchases in 2019 consisting primarily of computer
equipment and software and other equipment, to be funded through cash generated from operations.
Debt and Equity
The balance on the Company’s former term note with US Bank was paid in full in March 2018.
On April 18, 2018, in connection with the Recapitalization, the Company entered into a credit agreement (the “Credit
Agreement”) with First National Bank of Omaha (“FNB”) providing for (i) a $15,000,000 revolving credit facility (the “Line of
Credit”), (ii) a $40,000,000 term loan (the “Term Loan”) and (iii) a $15,000,000 delayed draw-dawn term facility (the “Delayed
Draw Term Loan” and, together with the Line of Credit and the Term Loan, the “Credit Facilities”). The Company used the Term
Loan to fund, in part, the cash portion paid to holders of the Company’s then-existing class B common stock in connection with
the Recapitalization and the accompanying exchange of outstanding equity awards tied to the class B common stock, as well as
for the costs of the Recapitalization. The Delayed Draw Term Loan may be used to fund any permitted future business
acquisitions or repurchasing of the Company’s Common Stock and the Line of Credit will be used to fund ongoing working
capital needs and other general corporate purposes.
The Term Loan is payable in monthly installments of $462,988 through April 2020 and $526,362 thereafter, with a balloon
payment due at maturity in April 2023. The Term Loan bears interest at a fixed rate of 5%.
Borrowings under the Line of Credit and the Delayed Draw Term Loan, if any, bear interest at a floating rate equal to the 30 day
London Interbank Offered Rate (“LIBOR”) plus 225 basis points (4.60% at December 31, 2018). Interest on the Line of Credit
accrues and is payable monthly. Principal amounts outstanding under the Line of Credit are due and payable in full at maturity, in
April 2021. As of December 31, 2018, the Line of Credit did not have a balance. There were no borrowings on the line of credit
for the three-month period ended December 31, 2018. The weighted average borrowings on the Line of Credit for year ended
December 31, 2018 was $324,000. The weighted average interest on borrowings on the Line of Credit for the year ended
December 31, 2018 was 4.25%.
In the event that the Delayed Draw Term Loan is used, interest-only payments will be due through the calendar year in which the
Delayed Draw Term Loan is drawn upon. After that, amortization will occur at the then current Term Loan rate and schedule with
principal and accrued interest amounts outstanding under the Delayed Draw Term Loan due and payable monthly during the term
of the Delayed Draw Term Loan, which expires on April 18, 2023. There have been no borrowings on the Delayed Draw Term
Loan since origination.
The Company paid a one-time fee equal to 0.25% of the amount borrowed under the Term Loan at the closing of the Credit
Facilities. The Company is also obligated to pay ongoing unused commitment fees quarterly in arrears pursuant to the Line of
Credit and the Delayed Draw Term Loan facility at a rate of 0.20% per annum based on the actual daily unused portions of the
Line of Credit and the Delayed Draw Term Loan facility, respectively.
21
All obligations under the Credit Facilities are to be guaranteed by each of the Company’s direct and indirect wholly owned
domestic subsidiaries, if any, and, to the extent required by the Credit Agreement, direct and indirect wholly owned foreign
subsidiaries (each, a “guarantor”).
The Credit Facilities are secured, subject to permitted liens and other agreed upon exceptions, by a first-priority lien on and
perfected security interest in substantially all of the Company’s and the guarantors’ present and future assets (including, without
limitation, fee-owned real property, and limited, in the case of the equity interests of foreign subsidiaries, to 65% of the
outstanding equity interests of such subsidiaries).
The Credit Agreement contains customary representations, warranties, affirmative and negative covenants (including financial
covenants) and events of default. The negative covenants include, among other things, restrictions regarding the incurrence of
indebtedness and liens, repurchases of the Company’s Common Stock and acquisitions, subject in each case to certain exceptions.
The Credit Agreement also contains certain financial covenants with respect to minimum fixed charge coverage ratio and
maximum cash flow leverage ratio. Pursuant to the Credit Agreement, the Company is required to maintain a minimum fixed
charge coverage ratio of 1.10x for all testing periods throughout the terms of the Credit Facilities. The Company is also required
to maintain a cash flow leverage ratio of 3.00x or less for all testing periods throughout the terms of the Credit Facilities. As of
December 31, 2018, the Company was in compliance with its financial covenants.
The Company has capital leases for computer equipment, office equipment, printing and inserting equipment. The balance of the
capital leases as of December 31, 2018 was $880,000.
The Company incurred expenses related to the Recapitalization of approximately $721,000 and $1.4 million in the year ended
December 31, 2018 and 2017, respectively, which were included in selling and administrative expenses.
Contractual Obligations
The Company had contractual obligations to make payments in the following amounts in the future as of December 31, 2018:
Contractual Obligations(1)
(In thousands)
Operating leases
Capital leases
Uncertain tax positions(2)
Long-term debt
Total
Total
Payments
Less than
One Year
One to
Three Years
Three to
Five Years
After
Five Years
$
$
2,978 $
966
--
44,393
48,337 $
882 $
258
--
5,556
6,696 $
1,236 $
455
--
12,379
14,070 $
535 $
253
--
26,458
27,246 $
325
--
--
--
325
(1) Amounts are inclusive of interest payments, where applicable.
(2) We have $560,000 in liabilities associated with uncertain tax positions. We are unable to reasonably estimate the expected
cash settlement dates of these uncertain tax positions with the taxing authorities.
The Company generally does not make unconditional, non-cancelable purchase commitments. The Company enters into purchase
orders in the normal course of business, but these purchase obligations do not exceed one year.
Stock Repurchase Program
The Board of Directors of the Company authorized the repurchase of up to 2,250,000 then-existing class A shares and 375,000
then-existing 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. In connection with the
Recapitalization in April 2018, the Board of Directors further amended the stock repurchase program to eliminate the repurchase
of the former class B common stock. As of December 31, 2018, the remaining number of shares of Common Stock that could be
purchased under this authorization was 280,491 shares.
Off-Balance Sheet Obligations
The Company has no significant off-balance sheet obligations other than the operating lease commitments disclosed in “Liquidity
and Capital Resources.”
Recent Accounting Pronouncements
See Note 1 to the Company’s consolidated financial statements for a description of recently issued accounting pronouncements.
22
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The Company’s primary market risk exposure is changes in foreign currency exchange rates and interest rates.
The Company’s Canadian subsidiary uses as its functional currency the local currency of the country in which it operates. It
translates its assets and liabilities into U.S. dollars at the exchange rate in effect at the balance sheet date. It translates its revenue
and expenses at the average exchange rate during the period. The Company includes translation gains and losses in accumulated
other comprehensive income (loss), a component of shareholders’ equity. Foreign currency translation gains (losses) were ($1.3
million), $991,000, and 369,000 in 2018, 2017 and 2016, respectively. Gains and losses related to transactions denominated in a
currency other than the functional currency of the countries in which the Company operates and short-term intercompany accounts
are included in other income (expense) in the consolidated statements of income and amounted to $893,000, $63,000 and $5,000
in 2018, 2017 and 2016, respectively. The increase is primarily the result of exchange rate changes applied to an intercompany
loan from our Canadian subsidiary. A portion of our cash in our Canadian subsidiary is denominated in foreign currencies, where
fluctuations in exchange rates will impact our cash balances in U.S. dollar terms. A sensitivity analysis assuming a hypothetical
10% change in the value of the U.S. dollar would impact our reported cash balance by approximately $271,000. We have not
entered into any foreign currency hedging transactions. We do not purchase or hold any derivative financial instruments for the
purpose of speculation or arbitrage.
We are exposed to interest rate risk with both our fixed-rate term debt and variable rate revolving line of credit facility. Interest
rate changes for borrowings under our fixed-rate term debt would impact the fair value of such debt, but do not impact earnings or
cash flow. At December 31, 2018, our fixed-rate term debt totaled $38.0 million. Based on a sensitivity analysis, a one percent
change in market interest rates as of December 31, 2018, would impact the estimated fair value of our fixed-rate debt outstanding
at December 31, 2018 by approximately $1.2 million.
Borrowings under our Line of Credit and Delayed Draw Term Loan, if any, bear interest at a floating rate equal to the 30-day
London Interbank Offered Rate plus 225 basis points. Borrowings under the Line of Credit and Delayed Draw Term Note may not
exceed $15.0 million and $15.0 million, respectively. There were no borrowings outstanding under the Line of Credit at
December 31, 2018. There were no borrowings outstanding under the Delayed Draw Term Note at December 31, 2018, or at any
time during 2018. A sensitivity analysis assuming a hypothetical 10% movement in interest rates applied to the average daily
borrowings and the maximum borrowings available under the Line of Credit indicated that such a movement would not have a
material impact on our consolidated financial position, results of operations or cash flows.
LIBOR is currently expected to be phased out in 2021. We are required to pay interest on borrowings under our Line of Credit and
Delayed Draw Term Loan at floating rates based on LIBOR. Future debt that we may incur may also require that we pay interest
based upon LIBOR. Under the terms of our Credit Agreement with FNB, if LIBOR becomes unavailable during the term of the
agreement, FNB may, in its reasonable discretion and in a manner consistent with market practice, designate a substitute index.
We currently expect that the determination of interest under our Credit Agreement would be revised as to provide for an interest
rate that approximates the existing interest rate as calculated in accordance with LIBOR. Despite our current expectations, we
cannot be sure that if LIBOR is phased out or transitioned, the changes to the determination of interest under our agreements
would approximate the current calculation in accordance with LIBOR. We do not know what standard, if any, will replace LIBOR
if it is phased out or transitioned.
23
Item 8.
Financial Statements and Supplementary Data
Quarterly Financial Data (Unaudited)
The following table sets forth selected financial information for each of the eight quarters in the two-year period ended December
31, 2018. This unaudited information has been prepared by the Company on the same basis as the consolidated financial
statements and includes all normal recurring adjustments necessary to present fairly this information when read in conjunction
with the Company’s audited consolidated financial statements and the notes thereto.
Revenue
Direct expenses
Selling, general and administrative
expenses
Depreciation and amortization
Operating income
Other income (expense)
Provision for income taxes
Net income
Earnings per share of common
stock:
Basic earnings per share
Class A
Class B
Dilutive earnings per share
Class A
Class B
Weighted average shares
outstanding – basic
Class A
Class B
Weighted average shares
outstanding - diluted
Class A
Class B
(In thousands, except per share data)
Quarter Ended
Dec. 31,
2018
Sept 30,
2018
June 30,
2018
Mar. 31,
2018
Dec. 31,
2017
Sept 30,
2017
June 30,
2017
Mar. 31,
2017
$ 30,639 $ 30,013 $ 28,017 $ 31,017 $ 29,897 $ 28,951 $ 28,435 $ 30,276
11,892 11,780 10,996 12,909 12,362 12,267 11,939 12,500
7,885 7,679 7,940 7,867 7,665 8,430 6,905 6,686
1,467 1,388 1,325 1,283 1,209 1,132 1,139 1,106
9,395 9,166 7,756 8,958 8,661 7,122 8,452 9,984
(4 )
9
(783 )
1,739 1,391
(129 ) 1,661 2,142 3,020 2,719 3,459
$ 7,801 $ 6,992 $ 7,948 $ 7,306 $ 6,517 $ 4,153 $ 5,752 $ 6,521
145
51
19
63
(2 )
$
$
$
$
0.32 $
- $
0.28 $
- $
0.29 $
0.27 $
0.17 $
1.04 $
0.15 $
0.93 $
0.10 $
0.59 $
0.14 $
0.82 $
0.15
0.93
0.30 $
- $
0.27 $
- $
0.28 $
0.26 $
0.17 $
1.01 $
0.15 $
0.90 $
0.09 $
0.57 $
0.13 $
0.80 $
0.15
0.91
24,684 24,671 23,957 20,884 20,802 20,788 20,752 20,737
- 3,527 3,527 3,515 3,514 3,514 3,513
-
25,534 25,526 24,846 21,837 21,843 21,740 21,525 21,245
- 3,620 3,630 3,625 3,620 3,591 3,576
-
24
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
National Research Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of National Research Corporation and subsidiary (the
“Company”) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income,
shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes
(collectively, the consolidated financial statements.) In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and
its cash flows for each of the years in the three-year period ended December 31, 2018, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated March 8, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting.
Change in Accounting
As discussed in Note 1 to the consolidated financial statements, the Company changed its method for accounting for revenue from
contracts with customers in 2018 due to the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with
Customers, as amended.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 1997.
Lincoln, Nebraska
March 8, 2019
25
NATIONAL RESEARCH CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
Current assets:
Assets
Cash and cash equivalents
Trade accounts receivable, less allowance for doubtful accounts of $175 and $200,
$
12,991 $
34,733
2018
2017
respectively
Prepaid expenses
Income taxes receivable
Other current assets
Total current assets
Net property and equipment
Intangible assets, net
Goodwill
Deferred contract costs, net
Other
Total assets
Current liabilities:
Liabilities and Shareholders’ Equity
Current portion of notes payable, net of unamortized debt issuance costs
Accounts payable
Accrued wages, bonus and profit sharing
Accrued expenses
Current portion of capital lease obligations
Income taxes payable
Dividends payable
Deferred revenue
Total current liabilities
Notes payable, net of current portion and unamortized debt issuance costs
Deferred income taxes
Other long term liabilities
Total liabilities
Shareholders’ equity:
Preferred stock, $0.01 par value, authorized 2,000,000 shares, none issued
Common stock (formerly Class A), $0.001 par value; authorized 60,000,000 shares,
issued 29,917,667 in 2018 and 25,835,230 in 2017, outstanding 24,800,796 in 2018
and 20,936,703 in 2017
Class B Common stock, $0.001 par value; 4,319,256 issued and 3,535,238 outstanding
in 2017
Additional paid-in capital
Retained earnings (accumulated deficit)
Accumulated other comprehensive loss, foreign currency translation adjustment
Treasury stock, at cost; 5,116,871 Common (formerly Class A) shares in 2018 and
4,898,527 in 2017 and 784,018 Class B shares in 2017
Total shareholders’ equity
11,922
2,925
348
224
28,410
14,153
2,102
57,831
3,484
2,052
14,806
2,310
375
35
52,259
12,359
2,764
58,021
--
1,913
$
108,032 $
127,316
$
3,667 $
613
5,798
2,834
204
636
17,113
16,244
47,109
34,176
6,276
1,388
88,949
--
30
--
157,312
(106,339 )
(2,916 )
(29,004 )
19,083
1,067
593
6,597
2,882
71
--
4,222
16,878
32,310
-
4,030
935
37,275
--
26
4
51,025
77,574
(1,635 )
(36,953 )
90,041
Total liabilities and shareholders’ equity
$
108,032 $
127,316
See accompanying notes to consolidated financial statements.
26
NATIONAL RESEARCH CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
2018
2017
2016
$
119,686 $
117,559 $
109,384
Revenue
Operating expenses:
Direct, exclusive of depreciation and amortization
Selling, general and administrative, exclusive of depreciation and
amortization
Depreciation and amortization
Total operating expenses
47,577
49,068
45,577
31,371
5,463
84,411
29,686
4,586
83,340
28,385
4,225
78,187
Operating income
35,275
34,219
31,197
Other income (expense):
Interest income
Interest expense
Other, net
Total other income (expense)
Income before income taxes
62
(1,513 )
885
(566 )
96
(82 )
50
64
47
(190 )
302
159
34,709
34,283
31,356
Provision for income taxes
4,662
11,340
10,838
Net income
$
30,047 $
22,943 $
20,518
Earnings per share of common stock:
Basic earnings per share:
Common (formerly Class A)
Class B
Diluted earnings per share:
Common (formerly Class A)
Class B
Weighted average shares and share equivalents outstanding
Common (formerly Class A) - basic
Class B - basic
Common (formerly Class A) - diluted
Class B - diluted
See accompanying notes to consolidated financial statements.
$
$
$
$
1.08 $
1.31 $
1.04 $
1.27 $
0.54 $
3.26 $
0.52 $
3.18 $
23,562
3,527
24,448
3,628
20,770
3,514
21,627
3,603
0.49
2.93
0.48
2.88
20,713
3,505
21,037
3,560
27
NATIONAL RESEARCH CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Net income
Other comprehensive income (loss):
Cumulative translation adjustment
Other comprehensive income (loss)
Comprehensive income
See accompanying notes to consolidated financial statements.
2018
2017
2016
30,047 $
22,943 $
20,518
(1,281) $
(1,281) $
991 $
991 $
369
369
28,766 $
23,934 $
20,887
$
$
$
$
28
NATIONAL RESEARCH CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands except share and per share amounts)
Common
Stock A
(formerly
Class A)
Class B
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Total
$
26 $
4 $
44,103 $
65,313 $
(2,995 ) $
(32,229 ) $
74,222
--
--
--
--
--
(601 )
(601 )
Balances at December 31, 2015
Purchase of 21,047 shares of class A and
7,681 shares of class B treasury stock
Issuance of 52,383 class A common shares
and 35,534 class B shares for the exercise
of stock options
Issuance of restricted common shares, net of
(forfeitures) (11,565 class A and 1,928
class B)
Non-cash stock compensation expense
Dividends declared of $0.34 and $2.04 per A
and B common share, respectively
Acquisition of non-controlling interest
Other comprehensive income, foreign
currency translation adjustment
Net income
Balances at December 31, 2016
Purchase of 132,836 shares of class A and
15,074 shares of class B treasury stock
Issuance of 197,784 class A common shares
and 13,600 class B shares for the exercise
of stock options
Issuance of restricted common shares, net of
(forfeitures) (19,314 class A and 3,219
class B)
Non-cash stock compensation expense
Dividends declared of $0.40 and $2.40 per A
and B common share, respectively
Other comprehensive income, foreign
currency translation adjustment
Net income
Balances at December 31, 2017
Purchase of 218,344 shares of class A and
3,677 shares of class B treasury stock
Issuance of 468,318 class A common shares
and 9,296 class B common shares for the
exercise of stock options
$
$
Issuance of restricted common shares, net of
(forfeitures) ((3,496) class A shares)
Non-cash stock compensation expense
Settlement of class B restricted common
shares and stock options in connection
with Recapitalization for cash of $3,271
and 90,369 class A common shares
Settlement of class B common shares in
connection with Recapitalization
(3,527,246 class B common shares
exchanged for $69,099 cash and 3,527,246
class A common shares)
Retirement of class B common shares in
connection with Recapitalization
(retirement of 4,328,552 class B common
shares)
Dividends declared of $1.13 and $0.60 per A
and B common share, respectively
Cumulative effect adjustment for adoption of
ASC 606, net of income tax
Other comprehensive income, foreign
currency translation adjustment
Net income
Balances at December 31, 2018
$
--
--
945
--
--
--
945
--
--
--
--
--
--
26 $
--
--
--
--
--
--
--
4 $
--
--
1,929
--
--
--
(252 )
(14,324 )
--
--
--
--
--
--
--
--
1,929
--
--
(14,324 )
(252 )
--
--
46,725 $
--
20,518
71,507 $
369
--
(2,626 ) $
--
--
(32,830 ) $
369
20,518
82,806
--
--
--
(4,123 )
(4,123 )
--
--
2,455
--
--
--
2,455
--
--
--
--
--
26 $
--
--
--
--
--
--
--
--
--
4 $
--
--
--
--
--
1,845
--
--
--
(16,876 )
--
--
--
--
--
--
1,845
--
(16,876 )
--
--
51,025 $
--
22,943
77,574 $
991
--
(1,635 ) $
--
--
(36,953 ) $
991
22,943
90,041
--
--
--
(7,950 )
(7,950 )
6,098
--
1,514
--
--
--
--
--
--
--
6,098
--
--
--
1,514
-
--
(2,548 )
--
--
(723 )
(3,271 )
4
--
118,335
--
--
(187,438 )
(69,099 )
--
--
--
--
--
30 $
(4 )
(17,112 )
(186,944 )
--
204,060
--
--
--
--
--
-- $
--
(29,751 )
--
2,735
--
--
--
(29,751 )
--
2,735
--
--
--
30,047
157,312 $ (106,339 ) $
(1,281 )
--
(2,916 ) $
--
--
(29,004 ) $
(1,281 )
30,047
19,083
See accompanying notes to consolidated financial statements.
29
NATIONAL RESEARCH CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
2018
2017
2016
30,047 $
22,943 $
20,518
Cash flows from operating activities:
Net income
$
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Deferred income taxes
Liability for uncertain tax positions
Loss on disposal of property and equipment
Gain on sale of operating segment
Non-cash share-based compensation expense
Change in assets and liabilities, net of effect of acquisition and disposal:
Trade accounts receivable
Prepaid expenses and other current assets
Deferred contract costs, net
Accounts payable
Accrued expenses, wages, bonus and profit sharing
Income taxes receivable and payable
Deferred revenue
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property and equipment
Purchase of equity investment
Purchase of intangible content license
Net proceeds from sale of operating segment
Net cash used in investing activities
Cash flows from financing activities:
Payments related to Recapitalization
Proceeds from issuance of note payable
Borrowings on line of credit
Payments on line of credit
Payments on notes payable
Payment of debt issuance costs
Payments on capital lease obligations
Cash paid for non-controlling interest
Proceeds from exercise of stock options
Payment of employee payroll tax withholdings on share-based awards exercised
Payment of dividends on common stock
Net cash used in financing activities
Effect of exchange rate changes on cash
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of cash paid for:
Interest expense, net of $0, $0, and $10 capitalized, respectively
Income taxes
Supplemental disclosure of non-cash investing and financing activities:
Common stock (formerly class A) issued in the Recapitalization in exchange for
then-existing class B shares and options.
Capital lease obligations originated for property and equipment
Stock tendered to the Company for cashless exercise of stock options in
connection with equity incentive plans
5,463
1,476
(288 )
186
--
1,514
2,767
(833 )
(113 )
(39 )
(566 )
686
(452 )
39,848
(5.971 )
--
--
--
(5,971 )
(72,370 )
40,000
2,500
(2,500 )
(3,071 )
(187 )
(157 )
--
--
(1,853 )
(16,859 )
(54,497 )
(1,122 )
(21,742 )
4,586
(684 )
181
26
--
1,845
(2,340 )
(565 )
--
12
1,759
(1,023 )
1,351
28,091
(4,568 )
(1,300 )
(250 )
--
(6,118 )
--
--
--
--
(2,473 )
--
(108 )
--
--
(1,668 )
(16,867 )
(21,116 )
855
1,712
34,733
33,021
12,991 $
34,733 $
1,282 $
2,635 $
76 $
12,827 $
121,371 $
879 $
-- $
74 $
6,098 $
2,455 $
$
$
$
$
$
$
4,225
798
73
22
(223 )
1,929
(1,137 )
(535 )
--
(15 )
440
105
643
26,843
(3,973 )
--
--
223
(3,750 )
--
--
--
--
(2,199 )
--
(95 )
(2,000 )
548
(204 )
(28,552 )
(32,502 )
285
(9,124 )
42,145
33,021
192
9,963
--
109
397
See accompanying notes to consolidated financial statements.
30
NATIONAL RESEARCH CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
Summary of Significant Accounting Policies
Description of Business and Basis of Presentation
National Research Corporation, doing business as NRC Health (“NRC Health,” the “Company,” “we,” “our,” “us” or similar
terms), is a leading provider of analytics and insights that facilitate measurement and improvement of the patient and employee
experience while also increasing patient engagement and customer loyalty for healthcare organizations in the United States and
Canada. NRC Health’s portfolio of solutions represent a unique set of capabilities that individually and collectively provide value
to its clients. The solutions are offered at an enterprise level through the Voice of the Customer platform (“VoC”), The
Governance Institute, and legacy Experience solutions.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, National Research
Corporation Canada. All significant intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Translation of Foreign Currencies
The Company’s Canadian subsidiary uses as its functional currency the local currency of the country in which it operates. It
translates its assets and liabilities into U.S. dollars at the exchange rate in effect at the balance sheet date. It translates its revenue
and expenses at the average exchange rate during the period. The Company includes translation gains and losses in accumulated
other comprehensive income (loss), a component of shareholders’ equity. Gains and losses related to transactions denominated in
a currency other than the functional currency of the country in which the Company operates and short-term intercompany
accounts are included in other income (expense) in the consolidated statements of income.
Revenue Recognition
On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with
Customers and all related amendments (“ASC 606” or “new revenue standard”) using the modified retrospective method for all
incomplete contracts as of the date of adoption. The Company applied the practical expedient to reflect the total of all contract
modifications occurring before January 1, 2018 in the transaction price and performance obligations at transition rather than
accounting for each modification separately. Results for reporting periods beginning on or after January 1, 2018 are presented
under ASC 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect
for the prior period. As discussed in more detail below and under “Deferred Contract Costs”, the largest impact of implementing
the new revenue standard was the deferral and amortization of direct and incremental costs of obtaining contracts. In addition,
there were other revisions to revenue recognition primarily related to performance obligation determinations and estimating
variable consideration. The Company recorded a transition adjustment of approximately $2.7 million, net of $814,000 of tax, to
the opening balance of retained earnings.
The Company derives a majority of its revenues from its annually renewable subscription-based service agreements with its
customers, which include performance measurement and improvement services, healthcare analytics and governance education
services. Such agreements are generally cancelable on short or no notice without penalty. See Note 3 for further information about
the Company's contracts with customers. Under ASC 606, the Company accounts for revenue using the following steps:
Identify the contract, or contracts, with a customer
Identify the performance obligations in the contract
●
●
● Determine the transaction price
● Allocate the transaction price to the identified performance obligations
● Recognize revenue when, or as, the Company satisfies the performance obligations.
31
The Company’s revenue arrangements with a client may include combinations of more than one service offering which may be
executed at the same time, or within close proximity of one another. The Company combines contracts with the same customer
into a single contract for accounting purposes when the contract is entered into at or near the same time and the contracts are
negotiated together. For contracts that contain more than one separately identifiable performance obligation, the total transaction
price is allocated to the identified performance obligations based upon the relative stand-alone selling prices of the performance
obligations. The stand-alone selling prices are based on an observable price for services sold to other comparable customers, when
available, or an estimated selling price using a cost-plus margin or residual approach. The Company estimates the amount of total
contract consideration it expects to receive for variable arrangements based on the most likely amount it expects to earn from the
arrangement based on the expected quantities of services it expects to provide and the contractual pricing based on those
quantities. The Company only includes some or a portion of variable consideration in the transaction price when it is probable that
a significant reversal in the amount of cumulative revenue recognized will not occur. The Company considers the sensitivity of
the estimate, its relationship and experience with the client and variable services being performed, the range of possible revenue
amounts and the magnitude of the variable consideration to the overall arrangement. Prior to 2018, revenue allocated to an
element was limited to revenue that was not subject to refund or otherwise represented contingent revenue. The Company’s
revenue arrangements do not contain any significant financing element due to the contract terms and the timing between when
consideration is received and when the service is provided.
The Company’s arrangements with customers consist principally of four different types of arrangements: 1) subscription-based
service agreements; 2) one-time specified services performed at a single point in time; 3) fixed, non-subscription service
agreements; and 4) unit-priced service agreements.
Subscription-based services - Services that are provided under subscription-based service agreements are usually for a twelve
month period and represent a single promise to stand ready to provide reporting, tools and services throughout the subscription
period as requested by the customer. These agreements are renewable at the option of the customer at the completion of the initial
contract term for an agreed upon price increase each year. These agreements represent a series of distinct monthly services that are
substantially the same, with the same pattern of transfer to the customer as the customer receives and consumes the benefits
throughout the contract period. Accordingly, subscription services are recognized ratably over the subscription period.
Subscription services are typically billed annually in advance but may also be billed on a quarterly and monthly basis.
One-time services – These agreements typically require the Company to perform a specific one-time service in a particular month.
The Company is entitled to fixed payment upon completion of the service. Under these arrangements, the Company recognizes
revenue at the point in time the service is completed by the Company and accepted by the customer.
Fixed, non-subscription services – These arrangements typically require the Company to perform an unspecified amount
of services for a fixed price during a fixed period of time. Revenues are recognized over time based upon the costs incurred to
date in relation to the total estimated contract costs. In determining cost estimates, management uses historical and forecasted cost
information which is based on estimated volumes, external and internal costs and other factors necessary in estimating the total
costs over the term of the contract. Changes in estimates are accounted for using a cumulative catch up adjustment which could
impact the amount and timing of revenue for any period. Prior to 2018, these arrangements were recognized under the
proportional performance method based on cost inputs, output measures or key milestones such as survey set-up, survey mailings,
survey returns and reporting.
Unit-price services – These arrangements typically require the Company to perform certain services on a periodic basis as
requested by the customer for a per-unit amount which is typically billed in the month following the performance of the service.
Revenue under these arrangements is recognized over the time the services are performed at the per-unit amount.
The Company recognizes contract assets or unbilled receivables related to revenue recognized for services completed but not
invoiced to the clients. Unbilled receivables are classified as receivables when the Company has an unconditional right to contract
consideration. A contract liability is recognized as deferred revenue when we invoice clients in advance of performing the related
services under the terms of a contract. Deferred revenue is recognized as revenue when we have satisfied the related performance
obligation.
32
The following tables summarize the impact the adoption of ASC 606 had on the Company’s consolidated financial statements (in
thousands, except per share data):
Consolidated balance sheet:
Accounts receivable, net
Other current assets
All other current assets
Total current assets
Deferred contract costs
All other noncurrent assets
Total assets
Deferred revenue
Other current liabilities
Total current liabilities
Deferred income taxes
Other long term liabilities
Total liabilities
Retained earnings
Accumulated other comprehensive income
Other stockholders’ equity
Total stockholders’ equity
Total liabilities and stockholders’ equity
Consolidated statement of income:
As reported
December 31,
2018
Adjustments
Balances without
Adoption of ASC
606
$
$
$
$
11,922 $
224
16,264
28,410
3,484
76,138
108,032 $
16,244 $
30,865
47,109
6,276
35,564
88,949
(106,339 )
(2,916 )
128,338
19,083
108,032 $
5 $
(53 )
94
46
(3,484 )
--
(3,438 ) $
327 $
--
327
(871 )
--
(544 )
(2,888 )
(6 )
--
(2,894 )
(3,438 ) $
11,927
171
16,358
28,456
--
76,138
104,594
16,571
30,865
47,436
5,405
35,564
88,405
(109,227 )
(2,922 )
128,338
16,189
104,594
Year ended December 31, 2018
As reported
Adjustments
Balances Without
Adoption of ASC
606
Revenue
$
119,686 $
(191 ) $
119,495
Direct expenses
Selling, general and administrative
Depreciation and amortization
Total operating expenses
Operating income
Other income (expense)
Income before income taxes
Provision (benefit) for income taxes
Net income
Earnings per share of common stock:
Basic earnings per share:
Common (formerly Class A)
Class B
Diluted earnings per share:
Common (formerly Class A)
Class B
47,577
31,371
5,463
84,411
35,275
(566 )
34,709
4,662
30,047 $
1.08 $
1.31
1.04 $
1.27
(82 )
101
--
19
(210 )
--
(210 )
(57 )
(153 ) $
(0.01 ) $
--
(0.01 ) $
0.01
47,495
31,472
5,463
84,430
35,065
(566 )
34,499
4,605
29,894
1.07
1.31
1.03
1.28
$
$
$
Consolidated statement of comprehensive income:
Year ended December 31, 2018
Net Income
Cumulative translation adjustment
Comprehensive Income
As reported
$
30,047 $
(1,281 )
28,766 $
Adjustments
Balances Without
Adoption of ASC
606
(153 ) $
(6 )
(159 ) $
29,894
(1,287 )
28,607
$
33
Consolidated statement of cash flows:
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization
Deferred income taxes
Reserve for uncertain tax positions
Non-cash share-based compensation expense
Loss on disposal of property and equipment
Change in assets and liabilities:
Trade accounts receivable and unbilled revenue
Prepaid expenses and other current assets
Deferred contract costs
Accounts payable
Accrued expenses, wages, bonus and profit sharing
Income taxes receivable and payable
Deferred revenue
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
Effect of exchange rate changes on cash
Change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
$
Deferred Contract Costs
Year ended December 31, 2018
As reported
Adjustments
Balances Without
adoption of ASC
606
$
30,047 $
(153 ) $
29,894
5,463
1,476
(288 )
1,514
186
2,767
(833 )
(113 )
(39 )
(566 )
686
(452 )
39,848
(5,971 )
(54,497 )
(1,122 )
(21,742 )
34,733
12,991
--
(57 )
--
--
--
122
(115 )
113
--
--
--
90
--
--
--
--
--
--
-- $
5,463
1,419
(288 )
1,514
186
2,889
(948 )
--
(39 )
(566 )
686
(362 )
39,848
(5,971 )
(54,497 )
(1,122 )
(21,742 )
34,733
12,991
Deferred contract costs, net is stated at gross deferred costs less accumulated amortization. Beginning January 1, 2018, with the
adoption of the new revenue standard, the Company defers commissions and incentives, including payroll taxes, if they are
incremental and recoverable costs of obtaining a renewable customer contract. Deferred contract costs are amortized over the
estimated term of the contract, including renewals, which generally ranges from three to five years. The contract term was
estimated by considering factors such as historical customer attrition rates and product life. The amortization period is adjusted for
significant changes in the estimated remaining term of a contract. An impairment of deferred contract costs is recognized when
the unamortized balance of deferred contract costs exceeds the remaining amount of consideration the Company expects to
receive less than the expected future costs directly related to providing those services. The Company deferred incremental costs
of obtaining a contract of $2.6 million in the year ended December 31, 2018. Total amortization was $2.5 million for the year
ended December 31, 2018. Amortization of deferred contract costs included in direct expenses and selling, general and
administrative expenses was $83,000 and $2.3 million for the year ended December 31, 2018, respectively. Additional expense
included in selling, general and administrative expenses for impairment of costs capitalized due to lost clients was $51,000 for the
year ended December 31, 2018. The Company has elected the practical expedient to expense contract costs when incurred for any
nonrenewable contracts with a term of one year or less. Prior to 2018, all commissions and incentives were expensed as incurred.
The Company recorded a transition adjustment on January 1, 2018 as an increase to retained earnings of $2.6 million, net of
$776,000 of tax, to reflect $3.4 million of commissions and incentives related to contracts that began prior to 2018, net of
accumulated amortization.
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount. The allowance for doubtful accounts is the Company’s best
estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the
allowance based on the Company’s historical write-off experience and current economic conditions. The Company reviews the
allowance for doubtful accounts monthly. Account balances are charged off against the allowance after all means of collection
have been exhausted and the potential for recovery is considered remote.
34
The following table provides the activity in the allowance for doubtful accounts for the years ended December 31, 2018, 2017 and
2016:
Year Ended December 31, 2016
Year Ended December 31, 2017
Year Ended December 31, 2018
Property and Equipment
Balance at
Beginning
of Year
Bad Debt
Expense
Write-offs,
net of
Recoveries
Balance
at End
of Year
$
$
$
173 $
169 $
200 $
218 $
249 $
80 $
222 $
218 $
105 $
169
200
175
Property and equipment is stated at cost. Major expenditures to purchase property or to substantially increase useful lives of
property are capitalized. Maintenance, repairs and minor renewals are expensed as incurred. When assets are retired or otherwise
disposed of, their costs and related accumulated depreciation are removed from the accounts and resulting gains or losses are
included in income.
The Company capitalizes certain costs incurred in connection with obtaining or developing internal-use software, including
payroll and payroll-related costs for employees who are directly associated with the internal-use software projects and external
direct costs of materials and services. Capitalization of such costs ceases when the project is substantially complete and ready for
its intended purpose. Costs incurred during the preliminary project and post-implementation stages, as well as software
maintenance and training costs are expensed as incurred. The Company capitalized approximately $4.0 million and $3.0 million
of costs incurred for the development of internal-use software for the years ended December 31, 2018 and 2017, respectively.
The Company provides for depreciation and amortization of property and equipment using annual rates which are sufficient to
amortize the cost of depreciable assets over their estimated useful lives. The Company uses the straight-line method of
depreciation and amortization over estimated useful lives of three to ten years for furniture and equipment, three to five years for
computer equipment, one to five years for capitalized software, and seven to forty years for the Company’s office building and
related improvements.
Leases are categorized as operating or capital at the inception of the lease. Assets under capital lease obligations are reported at
the lower of fair value or the present value of the aggregate future minimum lease payments at the beginning of the lease term.
The Company depreciates capital lease assets without transfer-of-ownership or bargain-purchase-options using the straight-line
method over the lease terms, excluding any lease renewals, unless the lease renewals are reasonably assured. Capital lease assets
with transfer-of-ownership or bargain-purchase-options are depreciated using the straight-line method over the assets’ estimated
useful lives.
Impairment of Long-Lived Assets and Amortizing Intangible Assets
Long-lived assets, such as property and equipment and purchased intangible assets subject to depreciation or amortization, are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first
compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value
of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the
extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including
discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. No
impairments were recorded during the years ended December 31, 2018, 2017, or 2016.
Among others, management believes the following circumstances are important indicators of potential impairment of such assets
and as a result may trigger an impairment review:
●
●
●
●
●
Significant underperformance in comparison to historical or projected operating results;
Significant changes in the manner or use of acquired assets or the Company’s overall strategy;
Significant negative trends in the Company’s industry or the overall economy;
A significant decline in the market price for the Company’s common stock for a sustained period; and
The Company’s market capitalization falling below the book value of the Company’s net assets.
35
Goodwill and Intangible Assets
Intangible assets include customer relationships, trade names, technology, non-compete agreements and goodwill. Intangible
assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values and
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be
recoverable. The Company reviews intangible assets with indefinite lives for impairment annually as of October 1 and whenever
events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.
When performing the impairment assessment, the Company will first assess qualitative factors to determine whether it is
necessary to recalculate the fair value of the intangible assets with indefinite lives. If the Company believes, as a result of the
qualitative assessment, that it is more likely than not that the fair value of the indefinite-lived intangibles is less than their carrying
amount, the Company calculates the fair value using a market or income approach. If the carrying value of intangible assets with
indefinite lives exceeds their fair value, then the intangible assets are written-down to their fair values. The Company did not
recognize any impairments related to indefinite-lived intangibles during 2018, 2017 or 2016.
Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that
are not individually identified and separately recognized. All of the Company’s goodwill is allocated to its reporting units, which
are the same as its operating segments. Goodwill is reviewed for impairment at least annually, as of October 1, and whenever
events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable.
The Company reviews for goodwill impairment by first assessing qualitative factors to determine whether any impairment may
exist. If the Company believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of a
reporting unit is less than its carrying amount, a quantitative analysis will be performed, and the fair value of the reporting unit is
compared with its carrying value (including goodwill). If the fair value of the reporting unit exceeds its carrying value, then
goodwill is written down by this difference. The Company performed a qualitative analysis as of October 1, 2018 and determined
the fair value of each reporting unit likely significantly exceeded its carrying value. No impairments were recorded during the
years ended December 31, 2018, 2017 or 2016.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under that method, deferred income tax assets
and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax basis using enacted tax rates. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation
allowances, if any, are established when necessary to reduce deferred tax assets to the amount that is more likely than not to be
realized. The Company uses the deferral method of accounting for its investment tax credits related to state tax incentives. During
the years ended December 31, 2018, 2017 and 2016, the Company recorded income tax benefits relating to these tax credits of $0,
$4,000, and $77,000, respectively. Interest and penalties related to income taxes are included in income taxes in the Statement of
Income.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained.
Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in
recognition or measurement are reflected in the period in which the change in judgment occurs.
Share-Based Compensation
All of the Company’s existing stock option awards and non-vested stock awards have been determined to be equity-classified
awards. The compensation expense on share-based payments is recognized based on the grant-date fair value of those awards. The
Company recognizes the excess tax benefits and tax deficiencies in the income statement when options are exercised. Amounts
recognized in the financial statements with respect to these plans:
Amounts charged against income, before income tax benefit
Amount of related income tax benefit
Net (benefit) expense to net income
$
$
1,514 $
(3,566 )
(2,052 ) $
1,845 $
(2,310 )
(465 ) $
1,929
(1,164 )
765
2018
2017
(In thousands)
2016
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash
equivalents were $1.8 million and $34.5 million as of December 31, 2018, and 2017, respectively, consisting primarily of money
36
market accounts, Eurodollar deposits and funds invested in commercial paper. At certain times, cash equivalent balances may
exceed federally insured limits.
Fair Value Measurements
The Company’s valuation techniques are based on maximizing observable inputs and minimizing the use of unobservable inputs
when measuring fair value. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs
reflect the Company’s market assumptions. The inputs are then classified into the following hierarchy: (1) Level 1 Inputs—quoted
prices in active markets for identical assets and liabilities; (2) Level 2 Inputs—observable market-based inputs other than Level 1
inputs, such as quoted prices for similar assets or liabilities in active markets, quoted prices for similar or identical assets or
liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data; (3)
Level 3 Inputs—unobservable inputs.
Commercial paper and Eurodollar deposits are included in cash equivalents and are valued at amortized cost, which approximates
fair value due to its short-term nature. Eurodollar deposits are United States dollars deposited in a foreign bank branch of a United
States bank and have daily liquidity. Both of these are included as a Level 2 measurement in the table below.
The following details the Company’s financial assets within the fair value hierarchy at December 31, 2018 and 2017:
As of December 31, 2018
Money Market Funds
Total Cash Equivalents
As of December 31, 2017
Money Market Funds
Commercial Paper
Eurodollar Deposits
Total Cash Equivalents
Level 1
Level 2
Level 3
Total
(In thousands)
$
$
$
$
1,848 $
1,848 $
-- $
-- $
-- $
-- $
1,848
1,848
13,971 $
--
--
13,971 $
-- $
10,490
10,017
20,507 $
-- $
--
--
-- $
13,971
10,490
10,017
34,478
There were no transfers between levels during the years ended December 31, 2018 and 2017.
The Company's long-term debt described in Note 10 is recorded at historical cost. The fair value of long-term debt is classified in
Level 2 of the fair value hierarchy and was estimated based primarily on estimated current rates available for debt of the same
remaining duration and adjusted for nonperformance and credit.
The following are the carrying amount and estimated fair values of long-term debt:
Total carrying amount of long-term debt
Estimated fair value of long-term debt
December 31,
2018
December 31,
2017
$
$
(In thousands)
37,966 $
38,257 $
1,067
1,066
The carrying amounts of accounts receivable, accounts payable, and accrued expenses approximate their fair value. All non-
financial assets that are not recognized or disclosed at fair value in the financial statements on a recurring basis, which includes
property and equipment, goodwill, intangibles and cost method investments, are measured at fair value in certain circumstances
(for example, when there is evidence of impairment). As of December 31, 2018 and 2017, there was no indication of impairment
related to these assets.
Contingencies
From time to time, the Company is involved in certain claims and litigation arising in the normal course of business. Management
assesses the probability of loss for such contingencies and recognizes a liability when a loss is probable and estimable. Legal fees,
net of estimated insurance recoveries, are expensed as incurred.
37
Since the September 2017 announcement of the original proposed recapitalization plan (“Original Transaction”) (see Note 2),
three purported class action and/or derivative complaints have been filed in state or federal courts by three individuals claiming to
be shareholders of the Company. All of the complaints name as defendants the Company and the individual directors of the
Company. Two of these lawsuits were filed in the United States District Court for the District of Nebraska— a putative class
action lawsuit captioned Gennaro v. National Research Corporation, et al., which was filed on November 15, 2017, and a
putative class and derivative action lawsuit captioned Gerson v. Hays, et al., which was filed on November 16, 2017. These
lawsuits were consolidated by order of the federal court under the caption In re National Research Corporation Shareholder
Litigation. A third lawsuit was filed in the Circuit Court for Milwaukee County, Wisconsin—a putative class action lawsuit
captioned Apfel v. Hays, et al., which was filed on December 1, 2017. The allegations in all of the lawsuits were very similar. The
plaintiffs alleged, among other things, that the defendants breached their fiduciary duties in connection with the allegedly unfair
proposed transaction, at an allegedly unfair price, conducted in an allegedly unfair and conflicted process and in alleged violation
of Wisconsin law and the Company’s Articles of Incorporation. The plaintiffs in these lawsuits sought, among other things, an
injunction enjoining the defendants from consummating the Original Transaction, damages, equitable relief and an award of
attorneys’ fees and costs of litigation. After the announcement of a revised proposed recapitalization plan (the “Recapitalization”),
the plaintiffs abandoned their efforts to enjoin the transaction. However, the plaintiffs in In re National Research Corporation
Shareholder Litigation in Nebraska filed an Amended Complaint on March 23, 2018 seeking damages for alleged breach of
fiduciary duties in connection with the Original Transaction and alleged omission of material facts in the proxy statement relating
to the Recapitalization. The plaintiffs in the Apfel case in Wisconsin filed an amended complaint on April 4, 2018 seeking
damages for alleged breach of fiduciary duties in connection with the Original Transaction and the Recapitalization. The
Company and its directors moved to dismiss both lawsuits, and those motions were granted in September and October 2018 by the
respective courts. The plaintiffs did not appeal the judgments dismissing these lawsuits and, therefore, both lawsuits are now
concluded.
Earnings Per Share
Prior to the Recapitalization, net income per share of the Company’s former class A common stock and former class B common
stock was computed using the two-class method. Basic net income per share was 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 was 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 were the same for the holders of the
Company’s former class A common stock and former class B common stock. Other than share distributions and liquidation rights,
the amount of any dividend or other distribution payable on each share of former class A common stock was equal to one-sixth
(1/6th) of the amount of any such dividend or other distribution payable on each share of former class B common stock. As a
result, the undistributed earnings for each period were allocated based on the contractual participation rights of the former class A
and former class B common stock as if the earnings for the year had been distributed.
As described in Note 2, the Company completed a Recapitalization in April 2018 which settled all then-existing outstanding class
B share-based awards, resulting in the elimination of the class B common stock and reclassified class A common stock to
Common Stock. The Recapitalization was effective on April 17, 2018. Therefore, income was allocated between the former class
A and class B stock using the two-class method through April 16, 2018, and fully allocated to the Common Stock (formerly class
A) following the Recapitalization.
The Company had 93,346, 104,647 and 546,910 options of Common Stock (former class A shares) for the years ended December
31, 2018, 2017 and 2016, respectively and 1,858 and 83,440 options of former class B shares for the years ended December 31,
2017 and 2016, respectively which have been excluded from the diluted net income per share computation because their inclusion
would be anti-dilutive.
38
2018
2017
2016
Common
Stock
(formerly
Class A)
Class B
Common
Stock
Common
Stock
(formerly
Class A)
Class B
Common
Stock
Common
Stock
(formerly
Class A)
Class B
Common
Stock
(In thousands, except per share data)
$
25,423 $
4,624 $
11,388 $
11,555 $
10,178 $
10,341
(82 )
(18 )
(88 )
(87 )
(88 )
(88 )
$
25,341 $
4,606 $
11,300 $
11,468 $
10,090 $
10,253
23,562
1.08 $
3,527
1.31 $
20,770
0.54 $
3,514
3.26 $
20,713
0.49 $
3,505
2.93
$
Numerator for net income per
share - basic:
Net income
Allocation of distributed and
undistributed income to
unvested restricted stock
shareholders
Net income attributable to
common shareholders
Denominator for net income per
share - basic:
Weighted average common
shares outstanding - basic
Net income per share - basic
Numerator for net income per
share - diluted:
Net income attributable to
common shareholders for basic
computation
$
Denominator for net income per
share - diluted:
Weighted average common shares
outstanding - basic
Weighted average effect of dilutive
securities – stock options:
Denominator for diluted earnings
per share – adjusted weighted
average shares
Net income per share - diluted
$
25,341 $
4,606 $
11,300 $
11,468 $
10,090 $
10,253
23,562
3,527
20,770
3,514
20,713
3,505
886
101
857
89
324
55
24,448
1.04 $
3,628
1.27 $
21,627
0.52 $
3,603
3.18 $
21,037
0.48 $
3,560
2.88
Recent Accounting Pronouncements Not Yet Adopted
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842) which
supersedes existing lease guidance. Among other things, this ASU requires lessees to recognize a lease liability and a right-to-use
asset for all leases, including operating leases, with a term greater than twelve months on its balance sheet. Leases will be
classified as financing or operating which will drive the expense recognition pattern. For lessees, the income statement
presentation and expense recognition pattern for financing and operating leases is similar to the current model for capital and
operating leases, respectively. This ASU is effective in fiscal years beginning after December 15, 2018, with early adoption
permitted, requires a modified retrospective transition method, and permits the use of an optional transition method to record the
cumulative effect adjustment to the opening balance sheet in the period of adoption rather than in the earliest comparative period
presented, which also provides that financial information and disclosures are only updated beginning with the date of initial
application. The Company will adopt the standard as of January 1, 2019 and plans to use the optional transition method and the
package of practical expedients, which eliminates the reassessment of past leases, classification and initial direct costs. The
Company is not electing to adopt the hindsight practical expedient and will therefore maintain the lease terms determined prior to
adopting Topic 842. The Company is in the process of finalizing the calculations using a lease accounting software tool and
reviewing and updating its controls and processes for the new standard. Adoption of the standard is expected to result in an initial
total right of use asset and corresponding lease liability in a range of $2.3 to $3.0 million for operating leases and will not have a
significant impact on the consolidated statements of income.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments. This ASU will require the measurement of all expected credit losses for financial assets, including trade
receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.
The guidance is effective for annual reporting periods beginning after December 15, 2019 and interim periods within those fiscal
years. The Company believes its adoption will not significantly impact the Company’s results of operations and financial
position.
39
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal Use Software (Subtopic 350-40). This
ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract
with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting
arrangements that include an internal use software license). The guidance is effective for annual reporting periods beginning after
December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently
evaluating the impact that this guidance will have upon the Company’s results of operations and financial position and has not yet
determined whether early adoption will be elected.
(2) Recapitalization
On April 16, 2018, the shareholders of the Company approved, among other things, an amendment to the Company’s Amended
and Restated Articles of Incorporation (the “Articles”) to effect the Recapitalization pursuant to which each share of the
Company’s then-existing class B common stock was exchanged for one share of the Company’s then-existing Class A common
stock plus $19.59 in cash, without interest. On April 17, 2018, the Company filed an amendment to its Articles effecting the
Recapitalization and then a further amendment and restatement of the Company’s Articles which resulted in the elimination of the
Company’s class B common stock and the reclassification of the Company’s class A common stock as a share of Common Stock,
par value $0.001 per share (“Common Stock”). The Company issued 3,617,615 shares of Common Stock and paid $72.4 million
in exchange for all class B shares outstanding and to settle outstanding share-based awards for class B common stock. The
transactions were recorded based on the cash paid and the fair value of the Common Stock issued. The Common Stock continues
to trade on the NASDAQ Global Market under the revised symbol “NRC.”
In connection with the Recapitalization, on April 18, 2018, the Company entered into a credit agreement with First National Bank
of Omaha, a national banking association (“FNB”), as described in Note 10.
(3) Contracts with Customers
The following table disaggregates revenue for the year ended December 31, 2018 based on timing of revenue recognition (In
thousands):
Subscription services recognized ratably over time
Services recognized at a point in time
Fixed, non-subscription recognized over time
Unit price services recognized over time
Total revenue
$
$
2018
104,777
4,775
3,163
6,971
119,686
The Company’s solutions within the digital VoC platform in 2018 accounted for 49.6% of total revenue compared to 33.9% in
2017. The remaining revenue consists of legacy Experience and Governance Solutions.
The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers
(In thousands):
Accounts receivables
Contract assets included in other current assets
Deferred Revenue
(1) Represents the December 31, 2017 balance adjusted for the ASC 606 transition adjustments.
$
$
$
11,922 $
53 $
(16,244 ) $
14,674
74
(16,642 )
December 31, 2018
Balance at 1/1/2018
as adjusted (1)
40
Significant changes in contract assets and contract liabilities during 2018 are as follows (in thousands):
2018
Contract Assets Deferred Revenue
Increase (Decrease)
Revenue recognized that was included in deferred revenue at beginning of year due to
completion of services
$
Increases due to invoicing of client, net of amounts recognized as revenue
Decreases due to completion of services (or portion of services) and transferred to
accounts receivable
Change due to cumulative catch-up adjustments arising from changes in expected
contract consideration
Decreases due to impairment
Increases due to revenue recognized in the period with additional performance
obligations before invoicing
- $
-
(74 )
-
53
(16,372 )
16,119
-
(145 )
-
-
The Company has elected to apply the practical expedient to not disclose the value of unsatisfied performance obligations for
contracts with an original expected length of one year or less. Total remaining contract revenue for contracts with original
duration of greater than one year expected to be recognized in the future related to performance obligations that are unsatisfied at
December 31, 2018 approximated $976,000, of which $881,000 and $95,000 are expected to be recognized during 2019 and 2020,
respectively.
(4) Equity Investments
The Company makes equity investments to promote business and strategic objectives. For investments that do not have a readily
determinable fair value, the Company applies either cost or equity method of accounting depending on the nature of its investment
and its ability to exercise significant influence. Investments are periodically analyzed to determine whether or not there are any
indicators of impairment and written down to fair value if the investment has incurred an other than temporary impairment. It is
not practicable for the Company to estimate fair value at each reporting date due to the cost and complexity of the calculations for
this non-public entity. During 2017, the Company acquired a $1.3 million investment in convertible preferred stock of
PracticingExcellence.com, Inc., a privately-held Delaware corporation (“PX”), which is included in non-current assets and is
carried at cost less impairment, plus or minus changes resulting from observable price changes in orderly transactions for the
identical or a similar investment of the same issuer, if any. The Company has a seat on PX's board of directors and the Company's
investment, which is not considered to be in-substance common stock, represents approximately 15.7% of the issued and
outstanding equity interests in PX.
(5) Divestitures
On December 21, 2015, the Company completed the sale of selected assets and liabilities related to the clinical workflow product
of the Predictive Analytics operating segment, for a net cash amount of approximately $1.6 million. In connection with the
closing of the transaction, $300,000 was placed in escrow to cover certain indemnification claims for one year following the
transaction pursuant to the purchase agreement. Due to the uncertainty related to the settlement of the claims, escrowed amounts
were recognized when the contingency was removed and the cash was released from escrow rather than at the time of sale. The
Company received $223,000 of the escrow funds in December 2016 upon final resolution of the claims and recorded an additional
gain on the sale from these funds.
(6) Connect
Customer-Connect LLC 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. At inception, NRC Health had a 49%
ownership interest in Connect. NG Customer-Connect, LLC held a 25% interest, and the remaining 26% was held by Illuminate
Health, LLC. Profits and losses were allocated under the hypothetical liquidation at book value approach.
41
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. As a result, as of December 31, 2015, the Company owned
approximately 89% of Connect and Illuminate Health, LLC owned 11%. Under the amended operating agreement, NRC Health
had the option to acquire additional equity units from Illuminate Health when new annual recurring contract value reached
targeted levels. On March 7, 2016, the Company elected to exercise its first option to acquire one-third of the outstanding non-
controlling interest for $1.0 million. Subsequently, on March 28, 2016, NRC Health and Illuminate Health reached an agreement
whereby NRC Health acquired the remaining interest held by Illuminate Health for $1.0 million. Following these transactions,
Customer-Connect LLC was a wholly owned subsidiary of NRC Health. All of Connect’s previous net income (losses) had been
attributable to NRC Health. Since the Company previously consolidated Connect, the transactions to acquire additional ownership
interests in Connect were accounted for as equity transactions, resulting in a reduction to additional paid-in capital of $252,000
and $2.8 million in 2016 and 2015, respectively. The acquisition of the remaining interest resulted in differences between the
book and tax basis of Connect’s assets. As a result, the Company recorded deferred tax assets of $1.7 million, with a
corresponding increase to additional paid-in capital during 2016. On June 30, 2016, Customer-Connect LLC was dissolved.
(7) Property and Equipment
At December 31, 2018, and 2017, property and equipment consisted of the following:
Furniture and equipment
Computer equipment
Computer software
Building
Leaseholds
Land
Property and equipment at cost
Less accumulated depreciation and amortization
Net property and equipment
2018
2017
(In thousands)
5,321 $
2,900
26,694
9,349
41
425
44,730
30,577
14,153 $
5,064
2,721
22,569
9,386
41
425
40,206
27,847
12,359
$
$
Depreciation and amortization expense related to property and equipment, including assets under capital lease, for the years ended
December 31, 2018, 2017, and 2016 was $4.8 million, $4.0 million, and $3.6 million, respectively.
Property and equipment included the following amounts under capital lease:
Furniture and equipment
Computer Equipment
Computer Software
Property and equipment under capital lease, gross
Less accumulated amortization
Net assets under capital lease
(8) Goodwill and Intangible Assets
Goodwill and intangible assets consisted of the following at December 31, 2018:
2018
2017
(In thousands)
1,062 $
487
224
1,773
839
934 $
843
-
-
843
684
159
$
$
Goodwill
Non-amortizing intangible assets:
Indefinite trade name
Amortizing intangible assets:
Customer related
Technology
Trade names
Total amortizing intangible assets
Total intangible assets other than goodwill
Useful Life
(In years)
Gross
Accumulated
Amortization
(In thousands)
Net
$
57,831
$
57,831
5 - 15
7
5 - 10
1,191
9,327
1,360
1,572
12,259
13,450 $
$
1,191
316
595
--
911
2,102
9,011
765
1,572
11,348
11,348 $
42
Goodwill and intangible assets consisted of the following at December 31, 2017:
Goodwill
Non-amortizing intangible assets:
Indefinite trade name
Amortizing intangible assets:
Customer related
Technology
Trade names
Total amortizing intangible assets
Total intangible assets other than goodwill
Useful Life
(In years)
Gross
Accumulated
Amortization
(In thousands)
Net
$
58,021
$ 58,021
5 - 15
7
5 - 10
1,191
9,347
1,360
1,572
12,279
13,470 $
$
1,191
736
837
--
1,573
2,764
8,611
523
1,572
10,706
10,706 $
The following represents a summary of changes in the Company’s carrying amount of goodwill for the years ended December 31,
2018, and 2017 (in thousands):
Balance as of December 31, 2016
Foreign currency translation
Balance as of December 31, 2017
Foreign currency translation
Balance as of December 31, 2018
$
$
$
57,861
160
58,021
(190 )
57,831
Aggregate amortization expense for customer related intangibles, trade names, technology and non-competes for the years ended
December 31, 2018, 2017 and 2016 was $662,000, $610,000, and $654,000, respectively. Estimated amortization expense for
future years is: 2019—$374,000; 2020—$318,000; 2021—$180,000; 2022—$39,000.
(9)
Income Taxes
For the years ended December 31, 2018, 2017, and 2016, income before income taxes consists of the following:
U.S. Operations
Foreign Operations
Income before income taxes
Income tax expense consisted of the following components:
Federal:
Current
Deferred
Total
Foreign:
Current
Deferred
Total
State:
Current
Deferred
Total
Total
2018
2017
(In thousands)
2016
32,056 $
2,653
34,709 $
32,750 $
1,533
34,283 $
29,848
1,508
31,356
2018
2017
(In thousands)
2016
2,144 $
1,328
3,472 $
10,947 $
(1,596 )
9,351 $
8,930
847
9,777
882 $
(178 )
704 $
204 $
282
486 $
387 $
704
1,091 $
837 $
61
898 $
409
(18 )
391
634
36
670
4,662 $
11,340 $
10,838
$
$
$
$
$
$
$
$
$
43
Federal Tax Reform
On December 22, 2017, the Tax Cut and Jobs Act (the “Tax Act”) was enacted which, among other changes, reduced the U.S.
federal corporate tax rate from 35% to 21% effective January 1, 2018. The Tax Act made broad and complex changes to the U.S.
tax code. Based on the information available, and the current interpretation of the Tax Act, the Company was able to make a
reasonable estimate as of December 31, 2017, and recorded a provisional net tax benefit related to the remeasurement of the
deferred tax assets and liabilities due to the reduction in the U.S. federal corporate tax rate, offset by the one-time mandatory
deemed repatriation tax, payable over eight years. In accordance with Staff Accounting Bulletin No. 118, the Company made
reasonable estimates and recorded a provisional net tax benefit of $1.9 million as of December 31, 2017 related to the following
elements of the Tax Act:
● Reduction in the U.S. Federal Corporate Tax Rate: The Tax Act reduced the corporate tax rate to 21%, effective January
1, 2018. Recorded a decrease related to deferred tax assets and liabilities with a corresponding net adjustment to deferred
income tax benefit for the year ended December 31, 2017.
● Availability of 100% bonus depreciation on assets placed in service after September 27, 2017.
● Certain stock compensation plans potentially subject to limitations as to deductibility.
The above items were final as of December 31, 2018, and no material adjustments were made to the provisional amounts recorded
as of December 31, 2017. Under the Tax Act, the Company was also subject to a one-time mandatory deemed repatriation tax on
accumulated non-U.S. earnings. The estimates booked as of December 31, 2017 have been finalized and no material adjustments
were made to the financials.
In addition, as a result of the Tax Act, the Company determined that it would no longer indefinitely reinvest the earnings of its
Canadian subsidiary and recorded the withholding tax of $706,000 associated with this planned repatriation in December 2017. In
December 2018, the Canadian subsidiary declared a deemed dividend for $3 million to the Company. Withholding tax of
$150,000 was paid in 2018.
The Tax Act subjects a U.S. corporation to tax on its Global Intangible Low Taxed Income (“GILTI”). Due to the complexity of
the new GILTI tax rules, the Company is continuing to evaluate this provision of the Tax Act. Under Generally Accepted
Accounting Principles, the Company can make an accounting policy election to either treat taxes due on the GILTI inclusion as a
current period expense or factor such amounts into the measurement of deferred taxes. The Company elected the current period
expense method and has not reflected any corresponding deferred tax assets and liabilities associated with the GILTI tax in the
table of deferred tax assets and liabilities. GILTI tax has been recorded as current period expense of $40,000 in 2018.
The difference between the Company’s income tax expense as reported in the accompanying consolidated financial statements
and the income tax expense that would be calculated applying the U.S. federal income tax rate of 21% for 2018 and 35% for 2017
and 2016 on pretax income was as follows:
Expected federal income taxes
Foreign tax rate differential
State income taxes, net of federal benefit and state tax credits
Federal tax credits
Uncertain tax positions
Nondeductible expenses related to recapitalization
Share based compensation
Compensation limit for covered employees
Impact of 2017 Tax Act
Tax depreciation method change
Valuation allowance
Withholding tax on repatriation of foreign earnings
GILTI
Other
Total
$
$
2018
2017
(In thousands)
2016
7,285 $
146
376
(150 )
90
151
(3,041 )
--
--
(308 )
--
--
40
73
4,662 $
11,999 $
(131 )
608
(130 )
151
504
(1,564 )
955
(2,415 )
--
535
706
--
122
11,340 $
10,975
(129 )
436
(165 )
6
--
(441 )
--
--
--
--
--
--
156
10,838
44
Deferred tax assets and liabilities at December 31, 2018 and 2017, were comprised of the following:
Deferred tax assets:
Allowance for doubtful accounts
Accrued expenses
Share based compensation
Accrued bonuses
Foreign tax credit from repatriation
Other
Gross deferred tax assets
Less valuation allowance
Deferred tax assets
Deferred tax liabilities:
Prepaid expenses
Deferred contract costs
Property and equipment
Intangible assets
Repatriation withholding
Deferred tax liabilities
Net deferred tax liabilities
2018
2017
(In thousands)
41 $
424
1,264
198
535
46
2,508
(535 )
1,973
95
786
1,944
4,919
505
8,249
(6,276 ) $
46
416
1,457
113
535
166
2,733
(535 )
2,198
169
--
856
4,497
706
6,228
(4,030 )
$
$
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion, or
all, of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences become deductible. The Company considers
projected future taxable income, carry-back opportunities, and tax planning strategies in making this assessment. Based upon the
level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are
deductible, the Company believes it is more likely than not that it will realize the benefits of these deductible differences
excluding the foreign tax credit carryforward.
The Company had an unrecognized tax benefit at December 31, 2018 and 2017, of $554,000 and $843,000, respectively,
excluding interest of $6,000 and $5,000 at December 31, 2018 and 2017, respectively. Of these amounts, $482,000 and $620,000
at December 31, 2018 and 2017, respectively, represents the net unrecognized tax benefits that, if recognized, would favorably
impact the effective income tax rate. The change in the unrecognized tax benefits for 2018 and 2017 is as follows:
Balance of unrecognized tax benefits at December 31, 2016
Additions based on tax positions of prior years
Additions based on tax positions related to the current year
Balance of unrecognized tax benefits at December 31, 2017
Reductions due to lapse of applicable statute of limitations
Reductions due to tax positions of prior years
Reductions due to settlement with taxing authorities
Additions based on tax positions related to the current year
Balance of unrecognized tax benefits at December 31, 2018
(In thousands)
662
(7 )
188
843
(35 )
(66 )
(300 )
112
554
$
$
$
The Company files a U.S. federal income tax return, various state jurisdictions returns and a Canada federal and provincial
income tax return. All years prior to 2015 are now closed for US federal income tax and for years prior to 2015 for state income
tax returns, and no exposure items exist for these years. The Company completed a United States federal tax examination for the
tax year ended December 31, 2013 in the first quarter of 2016. The 2014 to 2018 Canada federal and provincial income tax returns
remain open to examination.
45
(10) Notes Payable
The Company’s long-term debt consists of the following:
Term Loans
Less: current portion
Less: unamortized debt issuance costs
Notes payable, net of current portion
2018
2017
(In thousands)
37,996 $
(3,667 )
(153 )
34,176 $
1,067
(1,067 )
--
--
$
$
The balance on the Company’s former term note with US Bank was paid in full in March 2018.
On April 18, 2018, in connection with the Recapitalization, the Company entered into a credit agreement (the “Credit
Agreement”) with FNB providing for (i) a $15,000,000 revolving credit facility (the “Line of Credit”), (ii) a $40,000,000 term
loan (the “Term Loan”) and (iii) a $15,000,000 delayed draw-dawn term facility (the “Delayed Draw Term Loan” and, together
with the Line of Credit and the Term Loan, the “Credit Facilities”). The Company used the Term Loan to fund, in part, the cash
portion paid to holders of the Company’s then-existing class B common stock in connection with the Recapitalization and the
accompanying exchange of outstanding share-based awards tied to the class B common stock, as well as for the costs of the
Recapitalization. The Delayed Draw Term Loan may be used to fund any permitted future business acquisitions or repurchasing
of the Company’s Common Stock and the Line of Credit will be used to fund ongoing working capital needs and other general
corporate purposes, including to pay the fees and expenses incurred in connection with the Recapitalization and the Credit
Agreement.
The Term Loan is payable in monthly installments of $462,988 through April 2020 and $526,362 thereafter, with a balloon
payment due at maturity in April 2023. The Term Loan bears interest at a fixed rate of 5%.
Borrowings under the Line of Credit and the Delayed Draw Term Loan, if any, bear interest at a floating rate equal to the 30-day
London Interbank Offered Rate plus 225 basis points (4.60% at December 31, 2018). Interest on the Line of Credit accrues and is
payable monthly. Principal amounts outstanding under the Line of Credit are due and payable in full at maturity, in April 2021. As
of December 31, 2018, the Line of Credit did not have a balance. There were no borrowings on the Line of Credit for the three-
month period ended December 31, 2018. The weighted average interest rate on borrowings on the Line of Credit for the year
ended December 31, 2018 was 4.25%. In January 2019, the Company borrowed $8.5 million on the Line of Credit. There have
been no borrowings on the Delayed Draw Term Loan since origination.
The Company paid a one-time fee equal to 0.25% of the amount borrowed under the Term Loan at the closing of the Credit
Facilities. The Company is also obligated to pay ongoing unused commitment fees quarterly in arrears pursuant to the Line of
Credit and the Delayed Draw Term Loan facility at a rate of 0.20% per annum based on the actual daily unused portions of the
Line of Credit and the Delayed Draw Term Loan facility, respectively.
The Credit Agreement is collateralized by substantially all of the Company’s assets and contains customary representations,
warranties, affirmative and negative covenants (including financial covenants) and events of default. The negative covenants
include, among other things, restrictions regarding the incurrence of indebtedness and liens, repurchases of the Company’s
Common Stock and acquisitions, subject in each case to certain exceptions. The Credit Agreement also contains certain financial
covenants with respect to a minimum fixed charge coverage ratio of 1.10x and a maximum cash flow leverage ratio of 3.00x or
less. As of December 31, 2018, the Company was in compliance with its financial covenants.
Scheduled maturities of notes payable at December 31, 2018 are as follows:
2019
2020
2021
2022
2023
$
3,715
4,418
4,916
5,171
19,776
46
(11) 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 accounts for forfeitures as they occur. As described in Note 2, the Company completed a
Recapitalization in April 2018 which, among other things, settled all then-existing outstanding class B share-based awards and
resulted in the elimination of the class B common stock. As a result, the Company accelerated vesting of all outstanding class B
share based awards, resulting in accelerated share-based compensation of $331,000 in the year ended December 31, 2018. All
outstanding class B share-based awards were then settled for the same stock to cash proportion of the class B common stock
described in Note 2, less the exercise price, if any, which approximated the awards’ intrinsic values.
The Company’s 2001 Equity Incentive Plan provided 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 shares of the Company's former
class A common stock and 300,000 shares of the Company's former class B common stock. Stock options granted could have
been 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. Due to the expiration of the 2001 Equity Incentive Plan, at
December 31, 2015, there were no shares of stock available for future grants.
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 shares of the Company’s Common Stock and, prior to the
Recapitalization, 500,000 shares of the Company’s former class B 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. Beginning in 2018, on the date
of each annual meeting of shareholders of the Company, options to purchase shares of Common Stock equal to an aggregate grant
date fair value of $100,000 are granted to each non-employee director that is elected or retained as a director at each such meeting.
Prior to 2018, on the date of each annual meeting of shareholders of the Company, options to purchase 36,000 shares of the
Company’s former class A common stock and 6,000 shares of the Company’s former class B common stock were granted to
directors that were elected or retained as a director at such meeting. Stock options vest approximately one year following the date
of grant and option terms are generally ten years following the date of grant, or three years in the case of termination of the
outside director’s service. At December 31, 2018, there were 879,240 shares of Common Stock available for issuance pursuant to
future grants under the 2004 Director Plan. The Company has accounted for grants of 2,120,760 Common Stock under the 2004
Director Plan using the date of grant as the measurement date for financial accounting purposes.
The Company’s 2006 Equity Incentive Plan (the “2006 Equity Incentive Plan”), as amended, 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 shares of Common Stock and, prior to the Recapitalization, 300,000 shares of the Company’s former class
B 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. At December 31, 2018, there were
815,828 shares of Common Stock available for issuance pursuant to future grants under the 2006 Equity Incentive Plan. The
Company has accounted for grants of 984,172 Common Stock and restricted stock under the 2006 Equity Incentive Plan using the
date of grant as the measurement date for financial accounting purposes.
During 2018, the Company granted options to purchase 116,276 shares of Common Stock. The Company granted options to
purchase 299,917 shares of the Company’s former class A common stock and 49,986 shares of the Company’s former class B
common stock during 2017. During 2016, the Company granted options to purchase 315,620 shares of the Company’s former
class A common stock and 52,603 shares of the Company’s former class B common stock. Options to purchase shares of common
stock are typically granted with exercise prices equal to the fair value of the common stock on the date of grant. The Company
does, in certain limited situations, grant options with exercise prices that exceed the fair value of the common shares on the date of
grant. The fair value of stock options granted was estimated using a Black-Scholes valuation model with the following weighted
average assumptions:
Expected dividend yield at date of grant
Expected stock price volatility
Risk-free interest rate
Expected life of options (in years)
2018
Common
Stock
(former
Class A)
2017
2016
Common
Stock
(former
Class A)
Former Class
B Common
Stock
Common
Stock
(former
Class A)
Former Class
B Common
Stock
2.59 %
32.47 %
2.51 %
7.28
2.62 %
32.45 %
2.18 %
6.80
8.06 %
26.75 %
2.18 %
6.80
2.99 %
32.74 %
1.69 %
6.86
7.29 %
29.41 %
1.69 %
6.86
The risk-free interest rate assumptions were based on the U.S. Treasury yield curve in effect at the time of the grant. The expected
volatility was based on historical monthly price changes of the Company’s stock based on the expected life of the options at the
47
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 2001 and 2006 Equity Incentive Plans and the 2004 Director Plan
for the year ended December 31, 2018:
Common Stock (former Class A)
Outstanding at December 31, 2017
Granted
Exercised
Forfeited
Outstanding at December 31, 2018
Exercisable at December 31, 2018
Former Class B Common Stock
Outstanding at December 31, 2017
Granted
Exercised/Settled in Recapitalization
Forfeited
Outstanding at December 31, 2018
Exercisable at December 31, 2018
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Terms (Years)
Aggregate
Intrinsic
Value
(In thousands)
13.88
36.12
12.67
26.18
15.99
13.76
31.78
--
31.78
--
--
--
$
10,621
4.91 $
3.83 $
30,421
23,923
-- $
5,937
-- $
-- $
--
--
Number of
Options
1,746,634 $
116,276 $
(468,318 ) $
(21,383 ) $
1,373,209 $
981,069 $
276,716 $
-- $
(276,716 ) $
-- $
-- $
-- $
The following table summarizes information related to stock options for the years ended December 31, 2018, 2017 and 2016:
2018
Common
Stock (former
Class A)
2017
2016
Common
Stock (former
Class A)
Former Class
B Common
Stock
Common
Stock (former
Class A)
Former Class
B Common
Stock
Weighted average grant date fair value of
stock options granted
Intrinsic value of stock options exercised (in
thousands)
Intrinsic value of stock options vested (in
thousands)
$
$
$
10.02 $
5.83 $
3.66 $
3.62 $
3.90
10,621 $
2,681 $
202 $
459 $
2,719 $
5,258 $
787 $
1,627 $
632
535
As of December 31, 2018, the total unrecognized compensation cost related to non-vested stock option awards was approximately
$1.2 million which was expected to be recognized over a weighted average period of 2.87 years.
Cash received from stock options exercised for the years ended December 31, 2016 was $548,000. There was no cash received
from stock options exercised for the year ended December 31, 2018 or 2017. The Company recognized $1.1 million, $1.2 million
and $964,000 of non-cash compensation for the years ended December 31, 2018, 2017, and 2016, respectively, related to options,
which is included in selling, general and administrative expenses. The actual tax benefit realized for the tax deduction from stock
options exercised was $3.8 million, $1.1 million and $398,000 for the years ended December 31, 2018, 2017 and 2016,
respectively.
During 2018 and 2016, the Company granted 6,793 and 20,578 non-vested shares of Common Stock and during 2016 granted
3,430 non-vested shares of former class B common stock, respectively, under the 2006 Equity Incentive Plan. No shares were
granted during the year ended December 31, 2017. As of December 31, 2018, the Company had 78,171 non-vested shares of
Common Stock outstanding under the 2006 Equity Incentive Plan. These shares vest over five years following the date of grant
and holders thereof are entitled to receive dividends from the date of grant, whether or not vested. The fair value of the awards is
calculated as the fair market value of the shares on the date of grant. The Company recognized $428,000, $629,000 and $966,000
of non-cash compensation for the years ended December 31, 2018, 2017, and 2016, respectively, related to this non-vested stock,
which is included in selling, general and administrative expenses. The actual tax benefit realized for the tax deduction from
vesting of restricted stock was $168,000, $1.3 million and $161,000 for the years ended December 31, 2018, 2017 and 2016,
respectively.
48
The following table summarizes information regarding non-vested stock granted to associates under the 2006 Equity Incentive
Plans for the year ended December 31, 2018:
Common Stock
(formerly Class
A) Weighted
Average Grant
Date Fair Value
Per Share
Former Class B
Common Stock
Weighted
Average Grant
Date Fair Value
Per Share
Former Class B
Common Stock
Outstanding
Common Stock
(formerly Class A)
Outstanding
81,667 $
6,793 $
-- $
(10,289 ) $
78,171 $
13.80
36.80
--
15.23
15.61
13,611 $
-- $
(13,611 ) $
-- $
-- $
36.65
--
36.65
--
--
Outstanding at December 31, 2017
Granted
Vested
Forfeited
Outstanding at December 31, 2018
As of December 31, 2018, the total unrecognized compensation cost related to non-vested stock awards was approximately
$471,000 and is expected to be recognized over a weighted average period of 2.56 years.
(12) Leases
The Company leases printing equipment in the United States, and office space in Canada, California, Georgia, Washington, and
Tennessee. The Company also leased additional office space in Nebraska through June 2016. The Company recorded rent expense
in connection with its operating leases of $779,000, $869,000 and $920,000 in 2018, 2017, and 2016, respectively. The Company
also has capital leases for production, mailing and computer equipment.
Payments under non-cancelable operating leases and capital leases at December 31, 2018 for the next five years are:
Year Ending December 31,
Capital Leases
Operating Leases
2019
2020
2021
2022
2023
Total minimum lease payments
Less: Amount representing interest
Present value of minimum lease payments
Less: Current maturities
Capital lease obligations, net of current portion
(13) Related Party
$
$
(In thousands)
258 $
241
214
168
85
966
86
880
204
676
882
672
564
273
262
A director of the Company also 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 $200,000, $248,000 and $232,000 in 2018, 2017 and 2016 respectively.
Mr. Hays, the Chief Executive Officer and director of the Company, is an owner of 14% of the equity interest of Nebraska Global
Investment Company LLC (“Nebraska Global”). The Company, directly or indirectly through its former subsidiary Customer-
Connect LLC, purchased certain services from Nebraska Global, primarily consisting of software development services. The total
value of these purchases were $12,500 and $488,000 in 2017 and 2016, respectively.
Mr. Hays personally incurred approximately $538,000 of fees and expenses in connection with exploring strategic alternatives for
the Company, including the Recapitalization (see Note 2), for which the Company reimbursed Mr. Hays in 2017. These fees and
expenses were attributable to the evaluation of alternatives and the sourcing and negotiating of financing for the alternatives, all of
which would have been borne directly by the Company if they had not been advanced by Mr. Hays.
49
During 2017, the Company acquired a cost method investment in convertible preferred stock of PX (see Note 4). Also in 2017, the
Company paid $250,000 to acquire certain perpetual content licenses from PX for content the Company includes in certain of its
subscription services. The Company also has an agreement with PX which commenced in 2016 under which the Company acts as
a reseller of PX services and receives a portion of the revenues. The total revenue earned from the PX reseller agreement in the
years ended December 31, 2018, 2017 and 2016 was $439,000, $633,000 and $28,000, respectively.
(14) Associate Benefits
The Company sponsors a qualified 401(k) plan covering substantially all associates with no eligibility service requirement. Under
the 401(k) plan, the Company matches 25.0% of the first 6.0% of compensation contributed by each associate. Employer
contributions, which are discretionary, vest to participants at a rate of 20% per year. The Company contributed $396,000,
$350,000 and $291,000 in 2018, 2017 and 2016, respectively, as a matching percentage of associate 401(k) contributions.
(15) Segment Information
The Company’s six operating segments are aggregated into one reporting segment because they have similar economic
characteristics and meet the other aggregation criteria from the FASB guidance on segment disclosure. The six operating
segments are Experience, The Governance Institute, Market Insights, Transparency, National Research Corporation Canada and
Transitions, which offer a portfolio of solutions that address specific needs around market insight, experience, transparency and
governance for healthcare providers, payers and other healthcare organizations.
The table below presents entity-wide information regarding the Company’s revenue and assets by geographic area:
Revenue:
United States
Canada
Total
Long-lived assets:
United States
Canada
Total
Total assets:
United States
Canada
Total
2018
2017
(In thousands)
2016
$
$
$
$
$
$
115,451 $
4,235
119,686 $
77,330 $
2,291
79,621 $
91,080 $
16,952
108,032 $
112,885 $
4,674
117,559 $
72,562 $
2,495
75,057 $
110,785 $
16,531
127,316 $
104,445
4,939
109,384
71,192
2,367
73,559
106,288
14,336
120,624
50
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), the Company’s management
evaluated, with the participation of the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, the
effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and
15d-15(e) under the Exchange Act) as of December 31, 2018. Based upon their evaluation of these disclosure controls and
procedures, the Chief Executive Officer and the Chief Financial Officer concluded that the disclosure controls and procedures
were effective as of December 31, 2018.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as
defined in Rule 13a-15(f) of the Exchange Act). The Company’s internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, however, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies of procedures may deteriorate.
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of the Company’s internal control over financial reporting using the framework in Internal Control –
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Based on such evaluation, the Company’s management concluded that the Company’s internal control over financial reporting
was effective as of December 31, 2018.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2018, has been audited by
KPMG LLP, an independent registered public accounting firm, as stated in their report, a copy of which is included in this Annual
Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended December
31, 2018, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial
reporting.
Item 9B. Other Information
The Company has no other information to report pursuant to this item.
51
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
National Research Corporation:
Opinion on Internal Control Over Financial Reporting
We have audited National Research Corporation and subsidiary’s (the “Company”) internal control over financial reporting as of
December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control –
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated
statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period
ended December 31, 2018, and the related notes (collectively, the consolidated financial statements), and our report dated March
8, 2019 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report
on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Lincoln, Nebraska
March 8, 2019
52
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this Item with respect to directors and Section 16 compliance is included under the captions “Election
of Directors,” “Corporate Governance – Committees” and “Section 16(a) Beneficial Ownership Reporting Compliance,”
respectively, in the Company’s definitive Proxy Statement for its 2019 Annual Meeting of Shareholders (“Proxy Statement”) and
is hereby incorporated herein by reference. Information with respect to the executive officers of the Company appears in Item 1 of
this Annual Report on Form 10-K. The information required by this Item with respect to audit committees and audit committee
financial experts is included under the caption “Corporate Governance” in the Proxy Statement and is incorporated herein by
reference.
The Company has adopted a Code of Business Conduct and Ethics that applies to all of the Company’s associates, including the
Company’s Chief Executive Officer and Chief Financial Officer and other persons performing similar functions. The Company
has posted a copy of the Code of Business Conduct and Ethics on its website at www.nrchealth.com, and such Code of Business
Conduct and Ethics is available, in print, without charge, to any shareholder who requests it from the Company’s Secretary. The
Company intends to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding amendments to, or waivers from,
the Code of Business Conduct and Ethics by posting such information on its website at www.nrchealth.com. The Company is not
including the information contained on its website as part of, or incorporating it by reference into, this report.
Item 11. Executive Compensation
The information required by this Item is included under the captions “Compensation Discussion and Analysis,” “2018 Summary
Compensation Table,” “Grants of Plan-Based Awards in 2018,” “Outstanding Equity Awards at December 31, 2018,” “2018
Director Compensation,” “Compensation Committee Report,” “Corporate Governance-Transactions with Related Persons” and
“CEO Pay Ratio” in the Proxy Statement and is hereby incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The information required by this Item with respect to security ownership of certain beneficial owners and management is included
under the caption “Principal Shareholders” in the Proxy Statement and is hereby incorporated by reference.
The following table sets forth information with respect to compensation plans under which equity securities of the Company are
authorized for issuance as of December 31, 2018.
Number of
securities
to be issued upon
the exercise of
outstanding
options, warrants
and rights
Weighted-average
exercise price of
outstanding
options, warrants
and rights
Number of
securities
remaining
available
for future issuance
under equity
compensation
plans (excluding
securities reflected
in the first
column)
1,373,209 $
--
1,373,209 $
15.99
--
15.99
1,695,068 (2)
--
1,695,068
Plan Category Common Shares (formerly Class A shares)
Equity compensation plans approved by security holders (1)
Equity compensation plans not approved by security holders
Total
(1)
Includes the Company’s 2006 Equity Incentive Plan, 2004 Director Plan, and the 2001 Equity Incentive Plan.
(2) Under the 2006 Equity Incentive Plan, the Company had authority to award up to 331,086 additional shares of restricted
Common Stock (formerly class A common stock) provided that the total of such shares awarded may not exceed the total
number of shares remaining available for issuance under the 2006 Equity Incentive Plan, which totaled 815,828 shares of
Common Stock (formerly class A common stock) as of December 31, 2018. The Director Plan provides for granting
options for 3,000,000 shares of Common Stock (formerly class A common stock). Option awards through December 31,
2018 totaled 2,120,760 shares of Common Stock (formerly class A common stock). No future awards are available under
the 2001 Equity Incentive Plan due to its expiration.
53
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is included under the caption “Corporate Governance” in the Proxy Statement and is hereby
incorporated by reference.
Item 14. Principal Accountant Fees and Services
The information required by this Item is included under the caption “Miscellaneous — Independent Registered Public Accounting
Firm” in the Proxy Statement and is hereby incorporated by reference.
54
Item 15.
Exhibits, Financial Statement Schedules
PART IV
1.
2.
3.
Consolidated financial statements. The consolidated financial statements listed in the accompanying index to the
consolidated financial statements are filed as part of this Annual Report on Form 10-K.
Financial statement schedules. All financial statement schedules have been omitted because they are not applicable or the
required information is included in the consolidated financial statements and the related notes thereto.
Exhibits. The exhibits listed in the exhibit index below are filed as part of this Annual Report on Form 10-K.
EXHIBIT INDEX
Exhibit
Number
(3.1)
(3.2)
(4)
(10.1)*
(10.2)*
(10.3)*
(10.4)*
(10.5)*
(10.6)*
(10.7)*
Exhibit Description
Amended and Restated Articles of Incorporation of National Research Corporation, effective as of 5:01 pm, CT, on
April 17, 2018 [Incorporated by reference to Exhibit 3.3 to National Research Corporation’s Current Report on
Form 8-K dated April 16, 2018 and filed on April 20, 2018 (File No. 001-35929)]
By-Laws of National Research Corporation, as amended to date [Incorporated by reference to Exhibit (3.2) to
National Research Corporation’s Current Report on Form 8-K dated October 26, 2015 and filed on October 28,
2015 (File No. 001-35929)]
Credit Agreement, dated April 18, 2018, between National Research Corporation and First National Bank of Omaha
[Incorporated by reference to Exhibit 10 to National Research Corporation’s Current Report on Form 8-K dated
April 16, 2018 and filed on April 20, 2018 (File No. 001-35929)].
National Research Corporation 2001 Equity Incentive Plan [Incorporated by reference to Appendix A to National
Research Corporation’s Proxy Statement for the 2002 Annual Meeting of Shareholders filed on April 3, 2002 (File
No. 001-35929)]
National Research Corporation 2006 Equity Incentive Plan, as amended [Incorporated by reference to Exhibit (4.3)
to National Research Corporation’s Registration Statement on Form S-8 (Registration No. 333-226715) filed on
August 9, 2018]
National Research Corporation 2004 Non-Employee Director Stock Plan, as amended [Incorporated by reference to
Appendix A to National Research Corporation’s Proxy Statement for the 2018 Annual Meeting of Shareholders
filed on April 27, 2018 (File No. 001-35929)]
Form of Nonqualified Stock Option Agreement (for new associates) used in connection with the 2001 Equity
Incentive Plan [Incorporated by reference to Exhibit 4.4 to National Research Corporation’s Registration Statement
on Form S-8 (Registration No. 333-120530) filed on November 16, 2004]
Form of Nonqualified Stock Option Agreement (for officers) used in connection with the 2001 Equity Incentive
Plan [Incorporated by reference to Exhibit 4.5 to National Research Corporation’s Registration Statement on Form
S-8 (Registration No. 333-120530) filed on November 16, 2004]
Form of Restricted Stock Agreement for executive officers used in connection with the 2001 Equity Incentive Plan
[Incorporated by reference to Exhibit 10.2 to National Research Corporation’s Current Report on Form 8-K dated
March 19, 2005 and filed on March 23, 2005 (File No. 001-35929)]
Form of Restricted Stock Agreement (one year vesting) used in connection with the 2001 Equity Incentive Plan
[Incorporated by reference to Exhibit 4.6 to National Research Corporation’s Registration Statement on Form S-8
(Registration No. 333-120530) filed on November 16, 2004]
55
Exhibit
Number
(10.8)*
(10.9)*
(10.10)*
(21)
(23)
Exhibit Description
Form of Restricted Stock Agreement (five year vesting) used in connection with the 2001 Equity Incentive Plan
[Incorporated by reference to Exhibit 4.7 to National Research Corporation’s Registration Statement on Form S-8
(Registration No. 333-120530) filed on November 16, 2004]
Form of Nonqualified Stock Option Agreement used in connection with the 2006 Equity Incentive Plan
[Incorporated by reference to Exhibit (10.14) to National Research Corporation’s Annual Report on Form 10-K for
the year ended December 31, 2006 and filed on April 2, 2007 (File No. 001-35929)]
Form of Restricted Stock Agreement used in connection with the 2006 Equity Incentive Plan [Incorporated by
reference to Exhibit (10.15) to National Research Corporation’s Annual Report on Form 10-K for the year ended
December 31, 2006 and filed on April 2, 2007 (File No. 001-35929)]
Subsidiary of National Research Corporation
Consent of Independent Registered Public Accounting Firm
(31.1)
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(31.2)
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(32)
(99)
(101)**
Certification of Periodic Financial Report by the Chief Executive Officer and Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Proxy Statement for the 2019 Annual Meeting of Shareholders [To be filed with the Securities and Exchange
Commission under Regulation 14A within 120 days after December 31, 2018; except to the extent specifically
incorporated by reference, the Proxy Statement for the 2019 Annual Meeting of Shareholders shall not be deemed to
be filed with the Securities and Exchange Commission as part of this Annual Report on Form 10-K]
Financial statements from the Annual Report on Form 10-K of National Research Corporation for the year ended
December 31, 2018, formatted in eXtensible Business Reporting Language (XBRL): (i) the Consolidated Balance
Sheets, (ii) the Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv)
Consolidated Statements of Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, (vi) the Notes to
the Consolidated Financial Statements, and (vii) document and entity information.
* A management contract or compensatory plan or arrangement.
** 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.
Item 16.
Form 10-K Summary
None.
56
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page in this
Form 10-K
Report of Independent Registered Public Accounting Firm ............................................................................................
25
Consolidated Balance Sheets as of December 31, 2018 and 2017 ..................................................................................
Consolidated Statements of Income for the Three Years Ended December 31, 2018 .....................................................
Consolidated Statements of Comprehensive Income for the Three Years Ended December 31, 2018 ...........................
Consolidated Statements of Shareholders’ Equity for the Three Years Ended December 31, 2018 ...............................
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2018 ..............................................
Notes to Consolidated Financial Statements ...................................................................................................................
26
27
28
29
30
31
All other financial statement schedules are omitted since the required information is not present or is not present in amounts
sufficient to require submission of the schedules, or because the information required is included in the consolidated financial
statements and notes thereto.
57
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 8th day of March 2019.
SIGNATURES
NATIONAL RESEARCH CORPORATION
/s/ Michael D. Hays
By:
Michael D. Hays
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Chief Executive Officer and Director
(Principal Executive Officer)
Date
March 8, 2019
/s/ Michael D. Hays
Michael D. Hays
/s/ Kevin R. Karas
Kevin R. Karas
/s/ Donald M. Berwick
Donald M. Berwick
/s/ JoAnn M. Martin
JoAnn M. Martin
/s/ Barbara J. Mowry
Barbara J. Mowry
/s/ John N. Nunnelly
John N. Nunnelly
Senior Vice President Finance, Chief Financial
Officer, Treasurer and Secretary (Principal
Financial and Accounting Officer)
March 8, 2019
March 8, 2019
March 8, 2019
March 8, 2019
March 8, 2019
Director
Director
Director
Director
58
Subsidiary of National Research Corp.
National Research Corporation’s subsidiary as of December 31, 2018 is listed below:
Subsidiary
Jurisdiction of organization
National Research Corporation Canada
Ontario
Exhibit 21
Consent of Independent Registered Public Accounting Firm
Exhibit 23
The Board of Directors
National Research Corporation:
We consent to the incorporation by reference in the registration statements (File Nos. 333-120530, 333-137763, 333-137769, 333-
173097, 333-189139, 333-189140, 333-189141, 333-209934, and 333-226715) on Forms S-8 and (File Nos. 333-120529 and 333-
211190) on Forms S-3 of National Research Corporation of our reports dated March 8, 2019, with respect to the consolidated
balance sheets of National Research Corporation and subsidiary as of December 31, 2018 and 2017, and the related consolidated
statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period
ended December 31, 2018, and the related notes (collectively, the consolidated financial statements), and the effectiveness of
internal control over financial reporting as of December 31, 2018, which reports appear in the December 31, 2018 annual report
on Form 10-K of National Research Corporation.
Our report dated March 8, 2019, refers to a change in the Company’s method for accounting for revenue from contracts with
customers in 2018 due to the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, as
amended.
/s/ KPMG LLP
Lincoln, Nebraska
March 8, 2019
Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934
I, Michael D. Hays, certify that:
1.
I have reviewed this Annual Report on Form 10-K of National Research Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiary, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 8, 2019
/s/ Michael D. Hays
Michael D. Hays
Chief Executive Officer
Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934
I, Kevin R. Karas, certify that:
1.
I have reviewed this Annual Report on Form 10-K of National Research Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiary, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 8, 2019
/s/ Kevin R. Karas
Kevin R. Karas
Chief Financial Officer
Exhibit 32
Certification Pursuant to 18 U.S.C. Section 1350
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the accompanying Annual Report on Form 10-K of National Research Corporation (the “Company”) for the
year ended December 31, 2018 (the “Report”), I, Michael D. Hays, Chief Executive Officer of the Company, and I, Kevin R.
Karas, Chief Financial Officer, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, based on my knowledge, that:
1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
/s/ Michael D. Hays
Michael D. Hays
Chief Executive Officer
/s/ Kevin R. Karas
Kevin R. Karas
Chief Financial Officer
Date: March 8, 2019
A signed original of this written statement required by Section 906 has been provided to National Research Corporation and will be
retained by National Research Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
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