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NATIONAL RESEARCH CORPORATION
D/B/A NRC Health
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held May 18, 2020
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 Monday, May 18, 2020, at 12:30 P.M., Central Time, via the Internet at
www.virtualshareholdermeeting.com/nrc2020, for the following purposes:
1.
To elect one director to hold office until the 2023 annual meeting of shareholders
and until her successor is duly elected and qualified.
2.
To ratify the appointment of KPMG LLP as our independent registered public
accounting firm for 2020.
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 20, 2020, 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 7, 2020
Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting To Be
Held on May 18, 2020. The National Research Corporation proxy statement for the 2020 Annual
Meeting of Shareholders and the 2019 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 18, 2020
This proxy statement is being furnished to shareholders by the Board of Directors (the “Board”)
of National Research Corporation, doing business as NRC Health (“NRC Health,” the “Company,” “we,”
“our,” “us” or similar terms), beginning on or about April 7, 2020, in connection with a solicitation of
proxies by the Board for use at the Annual Meeting of Shareholders to be held on Monday, May 18, 2020,
at 12:30 P.M., Central Time, virtually via the Internet at www.virtualshareholdermeeting.com/nrc2020,
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
vote their shares during the Annual Meeting. Participation 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 us in writing or in open meeting. Instructions on
how to vote while participating in the Annual Meeting live via the Internet are posted at
www.virtualshareholdermeeting.com/nrc2020.
A proxy, in the enclosed form, which is properly executed, duly returned to us 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:
(cid:120) FOR the person nominated for election as a director referred to herein;
(cid:120) FOR the ratification of the appointment of KPMG LLP as our independent registered public
accounting firm for 2020;
(cid:120) 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
(cid:120) 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 2020 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 our common stock, $0.001 par value per share (the “Common Stock”),
at the close of business on March 20, 2020 (the “Record Date”), are entitled to vote at the Annual
Meeting. On that date, we had outstanding and entitled to vote 25,108,892 shares of Common Stock,
each of which is entitled to one vote per share. The presence at the Annual Meeting, via live webcast or
by proxy, of a majority of the votes entitled to be cast shall constitute a quorum for the purpose of
1
transacting business at the Annual Meeting. Abstentions and broker non-votes will be counted as present
in determining whether there is a quorum.
Information Regarding Participation in the Annual Meeting via the Internet
Due to the emerging public health impact of the coronavirus outbreak (COVID-19) and to support
the health and well-being of our associates and shareholders, we will be hosting the Annual Meeting live
via the Internet. You will not be able to attend the Annual Meeting in person. Any stockholder can listen
to and participate in the Annual Meeting live via the Internet at www.virtualshareholdermeeting.com/
nrc2020. The Annual Meeting webcast will begin promptly at 12:30 P.M., Central Time. We encourage
you to access the Annual Meeting webcast prior to the start time. Online check-in will begin, and
stockholders may begin submitting written questions, at 12:15 P.M., Central Time, and you should allow
ample time for the check-in procedures.
You will need the 16-digit control number included on your proxy card or voting instruction
form, or included in the e-mail to you if you received the proxy materials by e-mail, in order to be able to
vote your shares or submit questions during the Annual Meeting. Instructions on how to connect to the
Annual Meeting and participate via the Internet, including how to demonstrate proof of stock ownership,
are posted at www.virtualshareholdermeeting.com/nrc2020. If you do not have your 16-digit control
number, you will be able to access and listen to the Annual Meeting but you will not be able to vote your
shares or submit questions during the Annual Meeting. Our virtual meeting platform vendor will have
technicians ready to assist you with any technical difficulties you may have accessing the virtual meeting
or submitting questions. If you encounter any difficulties accessing the virtual meeting during the check-
in or meeting time, please call the technical support number that will be posted on the Virtual Shareholder
Meeting login page.
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ELECTION OF DIRECTORS
Our 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 2023 annual meeting of shareholders and until her 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 20, 2020, 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. Barbara J. Mowry’s term as director is expiring at the Annual Meeting and Ms. Mowry
is not standing for reelection.
Nominee for Election at the Annual Meeting
Term expiring at the 2023 Annual Meeting
JoAnn M. Martin, 65, has served as a director of the Company since June 2001. Ms. Martin is
the Vice Chair of the Board of Ameritas Mutual Holding Company, Ameritas Holding Company, and
Ameritas Life Insurance Company (“Ameritas”). Ms. Martin was elected President and Chief Executive
Officer of Ameritas, an insurance and financial services company, in July 2005 and served as Chair and
Chief Executive Officer until January 2020. From April 2003 to July 2005, she served Ameritas as
President and Chief Operating Officer. Prior to that role, Ms. Martin served as Senior Vice President and
Chief Financial Officer of Ameritas for more than the preceding five years. In April 2009, Ms. Martin
was elected Chief Executive Officer of Ameritas Holding Company and Ameritas Mutual Holding
Company (previously named UNIFI Mutual Holding Company), where she had served as Executive Vice
President and Chief Financial Officer for more than the preceding five years, and served as Chief
Executive Officer of Ameritas Mutual Holding Company until January 2020. Prior to her retirement from
the position of Chief Executive Officer in January 2020, Ms. Martin had served as an officer of Ameritas
and/or its affiliates since 1988. Ms. Martin has also served as a director of Nelnet, Inc. (NYSE: NNI), a
diversified educational services, technology solutions, telecommunications, and asset management
company, since March 2020. Ms. Martin’s financial background as a certified public accountant and as
the former Chief Financial Officer and 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.
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.
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Directors Continuing in Office
Terms expiring at the 2021 Annual Meeting
Michael D. Hays, 65, 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, 67, 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.
Term expiring at the 2022 Annual Meeting
Donald M. Berwick, 73, 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.
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 typically expected to attend our annual meeting of shareholders each year. For the
2020 Annual Meeting, such attendance will be through the Internet via live webcast. Each of the
directors attended our 2019 annual meeting of shareholders.
Currently, we do 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
4
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 our chief executive officer as the primary executive leader
with one vision and eliminates ambiguity as to who has primary responsibility for our 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:
(cid:20) 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;
(cid:20) 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;
(cid:20) Have the authority to call meetings of the independent directors as appropriate; and
(cid:20) 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 five meetings in 2019. All incumbent directors attended all of the meetings of the
Board and the committees on which they served during 2019.
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. We make available copies of each of these charters free
of charge on our website located at www.nrchealth.com/our-purpose/investor-relations/corporate-
governance/. Other than the text of the charters, we are not including the information contained on or
available through our 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 our systems of internal controls regarding finance, accounting, legal
compliance and ethics that management and the Board have established; our accounting and financial
reporting processes; and the audits of our financial statements. The Audit Committee presently consists
of JoAnn M. Martin (Chairperson), Barbara J. Mowry, John N. Nunnelly, and Donald M. Berwick, 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 2019.
The Compensation and Talent Committee determines compensation programs for our executive
officers, reviews management’s recommendations as to the compensation to be paid to other key
personnel and administers our equity-based compensation plans. The Compensation and Talent
Committee presently consists of Barbara J. Mowry (Chairperson), JoAnn M. Martin, John N. Nunnelly,
and Donald M. Berwick, each of whom meets the independence standards of The NASDAQ Stock
Market and the Securities and Exchange Commission for compensation committee members. The
5
Compensation and Talent Committee held three meetings in 2019. From time to time, with the last time
being in 2015, the Compensation and Talent Committee or our management has engaged a nationally
recognized compensation consultant to assist us in our review of our 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 our executive officers in 2019.
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 held one meeting in
2019.
The Strategic Planning Committee assists the Board in reviewing and, as necessary, altering, our
strategic plan, reviewing industry trends and their effects, if any, on us and assessing our products,
services and offerings and the viability of such portfolio in meeting the needs of the markets that we
serve. 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 2019.
Ms. Mowry’s term as director is expiring at the Annual Meeting and she is not standing for
reelection. Accordingly, Ms. Mowry will cease to serve on the abovementioned committees upon the
expiration of her term at the Annual Meeting.
Board Oversight of Risk
The full Board is responsible for the oversight of our operational and strategic risk management
process. The Board relies on its Audit Committee to address significant financial risk exposures facing us
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 us with respect to compensation, with appropriate
reporting of these risks to be made to the full Board. The Board’s role in our 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. Our 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, 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 the event, however,
that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days
from the second Wednesday in the month of April, in order to be timely notice by the shareholder must be
received not earlier than the 90th day prior to the date of such annual meeting and not later than the close
of business on the later of (i) the 60th day prior to such annual meeting and (ii) the 10th day following the
day on which public announcement of the date of such meeting is first made.
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
6
of directors who have broad and diverse backgrounds, possessing knowledge in areas that are of
importance to us. 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:
(cid:20) A director must display high personal and professional ethics, integrity and values.
(cid:20) A director must have the ability to exercise sound business judgment.
(cid:20) 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.
(cid:20) A director must have relevant expertise and experience, and be able to offer advice and
guidance based on that expertise and experience.
(cid:20) 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.
(cid:20) 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:
(cid:20) 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.
(cid:20) 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.
Compensation Committee Interlocks and Insider Participation
Ms. Mowry, Ms. Martin, Mr. Nunnelly, and Mr. Berwick served on the Compensation and Talent
Committee during 2019. None of such individuals were our officers or employees at any time during
2019 or as of the date of this Proxy Statement, nor was any such individual a former officer of the
Company. In 2019 we purchased dental and vision insurance for certain of our associates from Ameritas,
7
a company for whom Ms. Martin served as Chair and Chief Executive Officer during 2019, in arms’
length transactions for $241,500. See Transactions with Related Persons for additional information on
this transaction. Otherwise, in 2019, no member of our Compensation and Talent Committee had any
relationship or transaction with us that would require disclosure as a "related person transaction" under
Item 404 of Securities and Exchange Commission Regulation S-K in this Proxy Statement under the
section entitled Transactions with Related Persons.
During 2019, none of our executive officers served as a member of the board of directors or
compensation committee (or other board committee performing equivalent functions) of another entity,
one of whose executive officers served on our Compensation and Talent Committee. Additionally, during
2019, none of our executive officers served as a member of the compensation committee (or other board
committee performing equivalent functions) of another entity, one of whose executive officers served as a
member of our Board or Compensation and Talent Committee.
Transactions with Related Persons
Except as otherwise disclosed in this section, we had no related person transactions during 2019,
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:
(cid:20) 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
(cid:20) 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.
Until January 2020, Ms. Martin served as Chair and Chief Executive Officer of Ameritas and Ms.
Martin continues to serve on the board of directors of Ameritas and certain of its affiliated companies. In
connection with our regular assessment of our insurance-based associate benefits and the costs associated
therewith, which is conducted by an independent insurance broker, in 2007 we began purchasing dental
insurance for certain of our associates from Ameritas and, in 2009, we also began purchasing vision
insurance for certain of our associates from Ameritas. 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 $241,500 in 2019.
During 2017, we acquired a cost method investment in convertible preferred stock of
PracticingExcellence.com, Inc., a privately-held Delaware corporation (“PX”). Our President, Steve
Jackson, serves on the board of directors of PX pursuant to board appointment rights we obtained in
connection with our investment. Prior to the investment, we entered into an agreement with PX, under
which we act as a reseller of PX services (the “PX reseller agreement”). The total revenue earned from
8
the PX reseller agreement was $578,000 in 2019. 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.
Information About Our Executive Officers
Set forth below is certain information regarding our current executive officers (other than our
CEO, Mr. Hays, for whom information is set forth above under Directors Continuing in Office).
Steven D. Jackson, 44, has served as our President since October 2015. He served as Group
President from October 2014 until September 2015, during which time he oversaw our Market Insights,
Transparency, and Predictive Analytics business units. Prior to joining us, 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, 62, has served as our Chief Financial Officer, Treasurer and Secretary since
September 2011, and as Senior Vice President Finance since he joined us 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.
Our executive officers are elected by and serve at the discretion of the Board. There are no
family relationships between any of our directors or executive officers. There are no arrangements or
understandings between any of our executive officers and any other person pursuant to which any of our
executive officers was or is to be selected as an officer.
Employee, Officer and Director Hedging
We do not have practices or policies regarding the ability of employees (including officers) or
directors of the Company, or any of their designees, to purchase financial instruments, or otherwise
engage in transactions, that hedge or offset, or are designed to hedge or offset, any decrease in the market
value of our equity securities. Our officers and Named Executive Officers have not historically engaged
in any such hedging transactions and as of the Record Date none of our officers or Named Executive
Officers were party to any such hedging transactions.
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2019 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 our lead director from 2007 to May 2012, and Mr.
Nunnelly has served as our 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, 2019 to December 31, 2019, 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 our 2019 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 our
directors during 2019:
Name
Donald M. Berwick
JoAnn M. Martin
Barbara J. Mowry(2)
John N. Nunnelly
Fees Earned or
Paid in Cash
Option Awards(1)
Total
$ 50,000
$ 50,000
$ 50,000
$ 75,000
$ 99,996
$ 99,996
$ 99,996
$ 99,996
$ 149,996
$ 149,996
$ 149,996
$ 174,996
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 9 to our Consolidated Financial Statements included in our Annual Report on Form
10-K for the years ended December 31, 2019, December 31, 2018, and December 31, 2017, for a discussion of
assumptions made in the valuation of share-based compensation. As of December 31, 2019, the outstanding option
awards for each director were as follows: Dr. Berwick – 6,821 options; Ms. Martin – 269,261 options; Ms. Mowry –
150,821 options; and Mr. Nunnelly – 55,283 options.
2 Ms. Mowry’s term is expiring at the Annual Meeting and she is not standing for reelection.
10
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 2019 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, 2019, 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
Donald M. Berwick
11
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial ownership of Common
Stock as of the Record Date (i.e., March 20, 2020) 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 25,108,892 shares of Common Stock outstanding.
Name of Beneficial Owner
Shares
% (1)
Shares Beneficially Owned
Directors and Executive Officers (2)
Michael D. Hays ..............................................................................................
224,246 (3)(4)
Steven D. Jackson ...........................................................................................
84,696
Kevin R. Karas ................................................................................................
62,311 (4)(5)
Donald M. Berwick .........................................................................................
0
JoAnn M. Martin .............................................................................................
Barbara J. Mowry ............................................................................................
John N. Nunnelly ............................................................................................
465,479 (4)
150,902 (4)
75,356 (4)
All directors, nominees and executive
officers as a group (seven persons) .............................................................
1,062,990(4)
*
*
*
*
1.8%
*
*
4.2%
Other Holders
Amandla MK Trust and Patrick E. Beans, as the Special Holdings Direction
Advisor under this Trust (6) ..........................................................................
6,421,545
25.6%
The K/I/E Trust Under Agreement dated 10/24/18 and Patrick E. Beans, as
the Special Holdings Direction Advisor under this Trust (7).........................
4,755,013
19.0%
Kayne Anderson Rudnick Investment Management
LLC (8)..........................................................................................................
2,987,062
11.9%
_______________________
* Denotes less than 1%.
(1)
(2)
(3)
(4)
In accordance with applicable rules under the Securities Exchange Act of 1934, as amended, the number of shares indicated as beneficially
owned by a person includes shares of common stock and shares underlying options that are currently exercisable or will be exercisable
within 60 days of March 20, 2020. Shares of common stock underlying stock options that are currently exercisable or will be exercisable
within 60 days of March 20, 2020 are deemed to be outstanding for purposes of computing the percentage ownership of the person holding
such options, but are not deemed outstanding for purposes of computing the percentage ownership of any other person.
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 shares of Common Stock that may be purchased under stock options which are currently exercisable or exercisable within 60 days
of March 20, 2020, as follows: Mr. Hays, 56,550 shares; Mr. Karas, 44,735 shares; Ms. Martin, 190,440 shares; Mr. Nunnelly, 48,462
shares; Ms. Mowry, 144,000 shares; and all directors, nominees and executive officers as a group, 484,187 shares.
Includes 13,576 shares of Common Stock pledged as security.
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.
(8) The number of shares owned set forth above in the table is as of or about December 31, 2019 as reported by Kayne Anderson Rudnick
(5)
(6)
(7)
Investment Management LLC (“Kayne Anderson”) in its amended Schedule 13G filed with the Securities and Exchange Commission. The
address for Kayne Anderson is 1800 Avenue of the Stars, 2nd Floor, Los Angeles, California 90067. Kayne Anderson reports sole voting
and dispositive power with respect 576,424 of these shares and shared voting and dispositive power with respect to 2,410,638 of these
shares. The amended Schedule 13G further provides that the shares noted as beneficially owned by Kayne Anderson include: (i) 2,420,638
12
shares beneficially owned by Virtus Investment Advisers, Inc., One Financial Plaza, Hartford, Connecticut 06103, for which such person
has shared voting and dispositive power, and (ii) 2,359,518 shares beneficially owned by Virtus Equity Trust, on behalf of Virtus KAR
Small Cap Growth Fund, 101 Munson Street, Greenfield, Massachusetts 01301, for which such person has shared voting and dispositive
power.
DELINQUENT SECTION 16(A) REPORTS
Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers
and any owner of greater than 10% of our Common Stock to file reports with the Securities and Exchange
Commission concerning their ownership of our Common Stock. Based solely upon information provided
to us by individual directors and executive officers, we believe that, during the fiscal year ended
December 31, 2019, all of our directors and executive officers and owners of greater than 10% of our
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 2019 annual meeting of shareholders pursuant to the National
Research Corporation 2004 Non-Employee Director Stock Plan, as amended) and (ii) a Form 4 for The
K/I/E Trust Under Agreement 10/24/18 and Patrick E. Beans, as Special Holdings Direction Advisor
under the K/I/E Trust Under Agreement 10/24/18 (reporting a stock sale) were not timely filed.
13
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, 2020.
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 participate in the Annual Meeting via the live
webcast 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, 2020 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.
14
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
Key features of our compensation program include the following:
(cid:57) Conservative pay policy with total named executive officer and director
compensation positioned below the median
(cid:57) Direct link between pay and performance that aligns business strategies with
stockholder value creation
(cid:57) Annual say-on-pay votes
(cid:57) No tax gross-ups
(cid:57) No excessive perquisites for executives
(cid:57) No change of control or severance obligations to named executive officers,
including no accelerated vesting of equity awards upon a change of control
(cid:57) No re-pricing or back-dating of stock options or similar awards
(cid:57) Appropriate balance between short- and long-term compensation that discourages
short-term risk taking at the expense of long-term results
(cid:57) Five year vesting period for executive option grants
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:
(cid:20) Competitive Pay for Our Market. We strive to compensate our executive officers at levels to
ensure that we continue to attract and retain a highly competent, committed management
team. Our Midwest headquarters provides a low cost of living that allows us to provide
compensation that accomplishes this goal while keeping total compensation below that of
many similar companies.
(cid:20) Align with Shareholders. We seek to align the interests, perspectives and decision-making of
our executive officers with the interests of our shareholders.
(cid:20) Incentivize Performance. We link our executive officers’ compensation, particularly annual
cash bonuses, to our established financial 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:
(cid:20) Barbara J. Mowry (Chairperson)
(cid:20) JoAnn M. Martin
15
(cid:20) John N. Nunnelly
(cid:20) Donald M. Berwick
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’ 2019 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.
In determining compensation levels for our named executive officers in 2019, 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 2019 compensation levels for our named executive officers:
(cid:20) Considered the performance of our Chief Executive Officer and determined his total
compensation;
(cid:20) Considered the performance of our other executive officers and other key associates (i.e.,
employees) with assistance from our Chief Executive Officer; and
16
(cid:20) 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 consideration of
the Company’s and the individual officer’s performance.
2019 Say on Pay Vote
In May 2019 (after the 2019 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 2019 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.
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 executive
compensation expense 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 in 2019, maintaining the salary levels in place since 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 our 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).
17
Base Salary as a Percentage
of Total Compensation
Michael D. Hays
54%
Kevin R. Karas
55%
Steven D. Jackson
55%
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:
(cid:20) Provides total cash compensation to attract and retain key executive talent;
(cid:20) Aligns pay with organizational performance;
(cid:20) Focuses executive attention on key business metrics; and
(cid:20) Provides a significant incentive for achieving and exceeding performance goals.
Under our incentive compensation program, the Committee establishes performance measures for
our named executive officers at the beginning of each year. For 2019, 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
2019 over 2018, 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 2019. 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 their 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.
18
The following table shows amounts actually earned by our named executive officers for 2019,
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
2019 Actual Bonus
Percentage of
Total Compensation
2019 Actual
Bonus Amount
20%
20%
20%
$ 47,265
$ 105,735
$ 111,300
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:
(cid:120) 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 with respect to our common stock.
(cid:120) 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, pursuant to which the options do not become fully vested and
exercisable until the fifth anniversary of the grant date.
In determining equity incentive awards for 2019, 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, 2019, the Committee granted options to each of our
named executive officers. 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 Common 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 2019, no performance-based equity 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.
19
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.
20
2019 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 $100,000 during 2019. The identification of such named
executive officers is determined based on the individual’s total compensation for 2019, as reported below
in the Summary Compensation Table, other than amounts reported as above-market earnings on deferred
compensation and the actuarial increase in pension benefit accruals.
The following table sets forth for our named executive officers with respect to 2019, 2018, and
2017: (1) the dollar value of base salary earned during the year; (2) the aggregate grant date fair value of
stock and option awards granted during the year, computed in accordance with Financial Accounting
Standards Board Accounting Standards Codification Topic 718, Compensation-Stock Compensation
(“FASB ASC Topic 718”); (3) the dollar value of earnings for services pursuant to awards granted during
the year under non-equity incentive plans; (4) all other compensation for the year; and (5) the dollar value
of total compensation for the year.
Name and
Principal Position
Michael D. Hays
Chief Executive Officer
Kevin R. Karas
Senior Vice President
Finance, Chief
Financial Officer,
Treasurer and
Secretary
Steven D. Jackson
President
Option
Awards
($)(1)
$ 54,890
$ 53,332
$ 42,000
$ 122,782
$ 119,307
$ 93,995
Non-Equity
Incentive Plan
Compensation
($)
All Other
Compensation
($)(2)
$47,265
$104,468
$ 61,534
$105,735
$ 233,700
$ 137,655
$ 4,323
$ 4,267
$ 4,831
$ 6,529
$ 6,604
$ 5,724
Total ($)
$ 233,878
$ 289,467
$ 235,765
$ 520,046
$ 644,611
$ 522,334
Year Salary ($)
2019
2018
2017
2019
2018
2017
$ 127,400
$ 127,400
$ 127,400
$ 285,000
$ 285,000
$ 285,000
2019
2018
2017
$ 300,000
$ 300,000
$ 300,000
$ 129,239
$ 125,582
$ 98,899
$111,300
$ 246,000
$ 144,900
$ 5,100
$ 5,025
$ 4,800
$ 545,639
$ 676,607
$ 548,599
(1) 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 9 to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31,
2019 for a discussion of assumptions made in the valuation of share-based compensation.
(2) 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.
21
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2
OPTION EXERCISES AND STOCK VESTED IN 2019
Option Awards
Number of
Shares
Acquired
on Exercise
(#)(1)
Value
Realized on
Exercise
($)(2)
20,109
26,403
--
$ 602,265
$ 1,407,280
--
Name
Michael D. Hays
Kevin R. Karas
Steven D. Jackson
(1)
(2)
Shares of common stock.
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.
Risk Assessment of Compensation Policies and Practices
The Board relies on the Committee to address risk exposures facing us 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
our 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 our
compensation policies and practices for its associates are not reasonably likely to have a material adverse
effect on us.
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
Donald M. Berwick
25
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 15, we have designed our executive compensation and benefit programs for our
executive officers, including our named executive officers, to advance the following core principles:
(cid:20) Competitive Pay for Our Market. We strive to compensate our executive officers at levels to
ensure that we continue to attract and retain a highly competent, committed management
team. Our Midwest headquarters provides a low cost of living that allows us to provide
compensation that accomplishes this goal while keeping total compensation below that of
many similar companies.
(cid:20) Align with Shareholders. We seek to align the interests, perspectives and decision-making of
our executive officers with the interests of our shareholders.
(cid:20) Incentivize Performance. We link our executive officers’ compensation, particularly annual
cash bonuses, to our established financial 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 15 and the tabular and other disclosures on compensation beginning on page 21, 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 2021
annual meeting of shareholders.
26
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, 2019:
(cid:20) the median of the annual total compensation of all associates of the Company was reasonably
estimated to be $63,703; and
(cid:20) the annual total compensation of Mr. Hays was $233,878.
(cid:20) 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 3.67 to 1.
We identified that median associate by examining total cash compensation (i.e., base wages plus
cash bonuses and/or commissions) for 2019 of all individuals employed by us on December 1, 2019
(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, 2019, 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, 2019 to convert such associate’s total cash compensation into U.S. dollars.
To calculate the 2019 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 2019 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 2019 Summary Compensation Table. To calculate our ratio, we
divided Mr. Hays’ annual total compensation by the annual total compensation of our median associate.
27
Independent Registered Public Accounting Firm
MISCELLANEOUS
KPMG LLP acted as the independent registered public accounting firm for us in 2019. The Audit
Committee is solely responsible for the selection, retention, oversight and, when appropriate, termination
of our independent registered public accounting firm.
The fees to KPMG LLP for the fiscal years ended December 31, 2019 and 2018 were as follows:
2019
2018
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
$449,748
134,726
203,336
--
$787,810
$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. Of this amount, $68,834 related to tax return
preparation services and $134,502 related to tax consulting services.
The Audit Committee has established pre-approval policies and procedures with respect to audit
and permitted non-audit services to be provided by our 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 2019, 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. We
will reimburse brokers and other nominees for their reasonable expenses in communicating with the
persons for whom they hold Common Stock.
28
Multiple Shareholders Sharing the Same Address
Pursuant to the rules of the Securities and Exchange Commission, services that deliver our
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 our annual report to
shareholders and proxy statement, unless we have received contrary instructions from one or more of the
shareholders. Upon written or oral request, we 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 us 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 our shareholders intend to present at and have included in our proxy statement for
the 2021 annual meeting pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended
(“Rule 14a-8”), must be received by us by the close of business on December 8, 2020. In addition, a
shareholder who otherwise intends to present business at the 2021 annual meeting (including nominating
persons for election as directors) must comply with the requirements set forth in our 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. In the event, however, that the date of the
annual meeting is advanced by more than 30 days or delayed by more than 60 days from the second
Wednesday in the month of April, in order to be timely notice by the shareholder must be received not
earlier than the 90th day prior to the date of such annual meeting and not later than the close of business
on the later of (i) the 60th day prior to such annual meeting and (ii) the 10th day following the day on
which public announcement of the date of such meeting is first made. Under the By-Laws, if we do not
receive notice of a shareholder proposal submitted otherwise than pursuant to Rule 14a-8 (i.e., proposals
shareholders intend to present at the 2021 annual meeting but do not intend to include in our proxy
statement for such meeting) prior to February 14, 2021, then the notice will be considered untimely and
we will not be required to present such proposal at the 2021 annual meeting. If the Board chooses to
present such proposal at the 2021 annual meeting, then the persons named in proxies solicited by the
Board for the 2021 annual meeting may exercise discretionary voting power with respect to such
proposal.
By Order of the Board of Directors
NATIONAL RESEARCH CORPORATION
April 7, 2020
Kevin R. Karas
Secretary
29
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(cid:1409)
or
(cid:1407)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
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)
68508
(Zip code)
Registrant’s telephone number, including area code: (402) 475-2525
Securities registered pursuant to Section 12(b) of the Act:
Title of Class
Common Stock, $.001 par value
Trading Symbol
NRC
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 (cid:1407) No (cid:1409)
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 (cid:1407) No (cid:1409)
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 (cid:1409) No (cid:1407)
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 (cid:1409) No (cid:1407)
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
(cid:1407)
(cid:1407)
Accelerated filer
Smaller reporting company
Emerging growth company
(cid:1409)
(cid:1407)
(cid:1407)
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. (cid:1407)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes (cid:1407) No (cid:1409)
Aggregate market value of the common stock held by non-affiliates of the registrant at June 28, 2019: $566,163,144.
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, 2020: 25,027,889 shares
Portions of the Proxy Statement for the 2020 Annual Meeting of Shareholders are incorporated by reference into Part III.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
PART I
Item 1.
Business ................................................................................................................................................................
Item 1A. Risk Factors ..........................................................................................................................................................
Item 1B. Unresolved Staff Comments .................................................................................................................................
Properties ..............................................................................................................................................................
Item 2.
Legal Proceedings ................................................................................................................................................
Item 3.
Mine Safety Disclosures .......................................................................................................................................
Item 4.
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.
Item 9A. Controls and Procedures .......................................................................................................................................
Item 9B. Other Information .................................................................................................................................................
PART III
Item 10. Directors, Executive Officers and Corporate Governance ....................................................................................
Executive Compensation ......................................................................................................................................
Item 11.
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters .............
Item 12.
Certain Relationships and Related Transactions, and Director Independence ......................................................
Item 13.
Principal Accountant Fees and Services ...............................................................................................................
Item 14.
PART IV
Exhibits .................................................................................................................................................................
Item 15.
Form 10-K Summary ............................................................................................................................................
Item 16.
Signatures .................................................................................................................................................................................
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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 our future plans, objectives or goals are also forward-looking statements. In this Annual Report on Form 10-K,
statements regarding the future value and utility of, and market demand for, our service offerings, our ability to compete successfully
in the future, future opportunities for growth with respect to new and existing clients, future acquisition opportunities, future
consolidation in the healthcare industry, the future adequacy of our liquidity sources, future revenue sources, future capital
expenditures, and the future phase out of LIBOR and applicable replacement benchmark rates, among others, are 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:
(cid:404) The possibility of non-renewal of our client service contracts and retention of key clients;
(cid:404) Our ability to compete in our markets, which are highly competitive with new market entrants, and the possibility of
increased price pressure and expenses;
(cid:404) The effects of an economic downturn;
(cid:404) The impact of consolidation in the healthcare industry;
(cid:404) The impact of federal healthcare reform legislation or other regulatory changes;
(cid:404) Our ability to attract and retain key managers and other personnel;
(cid:404) The possibility that our intellectual property and other proprietary information technology could be copied or
independently developed by our competitors;
(cid:404) The possibility for failures or deficiencies in our information technology platform;
(cid:404) The possibility that we could be subject to security breaches or computer viruses; and
(cid:404) 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 we undertake no obligation to publicly update such
forward-looking statements to reflect subsequent events or circumstances, except as required by the federal securities laws.
General
We are 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. Our solutions enable our
clients to understand the voice of the customer with greater clarity, immediacy and depth. Our 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. Our 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. We believe that access to and analysis of our 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.
1
Our expertise includes the efficient capture, transmittal, benchmarking, analysis and interpretation of critical data elements from
millions of healthcare consumers. Using our digital Voice of the Customer platform, our 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. We also provide 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.
Our 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. We partner with clients across the continuum of
healthcare services. Our clients include integrated health systems, post-acute providers and payer organizations. We believe 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.
We have achieved a market leadership position through our more than 38 years of industry innovation and experience, as well as
our 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 our founding in 1981, we have focused on meeting the evolving information needs of the
healthcare industry through internal product development, as well as select acquisitions. We are 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 $3.6 trillion in 2018, or $11,172 per person. In total, health spending accounted for 17.7% of the nation’s Gross
Domestic Product in 2018. 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.
We believe that our current portfolio of solutions is uniquely aligned to address these healthcare market trends and related business
opportunity. We provide 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. Our solutions enable our 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.
Our Solutions
Our portfolio of solutions represent a unique set of capabilities that individually and collectively provide value to our 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
Our 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.
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Market Insights Solutions – Our 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. Market Insights is the largest U.S. healthcare consumer database of its kind, measuring the
opinions and behaviors of approximately 300,000 healthcare consumers in over the top 300 markets across the country annually.
Our 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. Our 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.
Our Market Insights solutions were historically marketed under the Healthcare Market Guide and Ticker brands.
Experience Solutions – Our 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 our 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.
Our 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, our 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, our 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 the NRC Picker, My InnerView (“MIV”), Customer-
Connect LLC (“Connect”), and NRC Canada brands.
Our Health Risk Assessment solutions (formerly Payer solutions) enable our 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.
Our 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. Our Transitions
solutions were previously provided by Connect.
Transparency Solutions – Our Transparency solutions allow healthcare organizations to share a picture of their organization and
ensure that timely and relevant content informs better consumer decision-making. Our 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. Our 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
Our 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 online 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 our client board
members and executives inform and guide their organization’s strategic priorities in alignment with the rapidly changing healthcare
market.
For additional information on our operating segments and our revenue and assets by geographic area, see Note 13, “Segment
Information,” to our consolidated financial statements.
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Our Competitive Strengths
We believe that our competitive strengths include the following:
A leading provider of patient experience solutions for healthcare providers, payers and other healthcare organizations. Our history
is based on capturing the voice of the consumer in healthcare markets. Our 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. Our client portfolio encompasses leading healthcare organizations across the
healthcare continuum, from acute care hospitals and post-acute providers to healthcare payers. Our client base is diverse, with our
top ten clients representing approximately 16% of total revenue for the year ended December 31, 2019 and no single client
representing more than 4% of our revenue.
Highly scalable and visible revenue model. Our solutions are offered to healthcare providers, payers and other healthcare
organizations primarily through subscription-based service agreements. The solutions we provide are also recurring in nature, which
enables an ongoing relationship with our clients. This combination of subscription-based revenue, a base of ongoing client renewals
and automated platforms creates a highly visible and scalable revenue model.
Comprehensive portfolio of solutions. We offer a portfolio of solutions that provide insights across the patient journey, which is
unique in the healthcare industry, enabling our 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. We focus exclusively on healthcare and serving the unique needs of healthcare organizations across
the continuum, which we believe gives us a distinct competitive advantage compared to other survey and analytics software
providers. Our 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 our founder. Our senior management team has extensive industry and leadership
experience. Michael D. Hays, our 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). Our 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, our 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. We have 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. Our primary competitors among such specialty firms include Press Ganey, which we
believe has significantly higher annual revenue than us, and several other organizations that we believe have less annual revenue
than us. We, to a certain degree, 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 that provide services or products that complement healthcare performance assessments such as
healthcare software or information systems.
We believe the primary competitive factors within our market include quality of service, timeliness of delivery, unique service
capabilities, credibility of provider, industry experience, and price. We believe that our 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 us to compete in this market.
Although only a few of these competitors have offered specific services that compete directly with our solutions, many of these
competitors have substantially greater financial, information gathering, and marketing resources than us and could decide to increase
their resource commitments to our market. There are relatively few barriers to entry into our market, and we expect increased
competition in our market which could adversely affect our operating results through pricing pressure, increased marketing
expenditures, and market share losses, among other factors. There can be no assurance that we will continue to compete successfully
against existing or new competitors.
4
Growth Strategy
We believe that the value proposition of our current solutions, combined with the favorable alignment of our solutions with emerging
market demand, positions us to benefit from multiple growth opportunities. We believe that we can accelerate our growth through
(1) increasing scope of services and sales of our existing solutions to our 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 ours.
Increasing contract value with existing clients. Approximately 27% of our existing clients purchase more than one of our solutions.
Our sales organization actively identifies and pursues cross-sell opportunities for clients to add additional solutions in order to
accelerate our growth. 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. We believe that there is an opportunity to add new clients across all existing market segments. Our 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 we serve is evolving to align with emerging
healthcare consumerism trends. The evolving market creates an opportunity for us to introduce new solutions that leverage and
extend our existing core competencies. We believe that there is an opportunity to drive sales growth with both existing and new
clients, across all of the market segments that we serve, through the introduction of new solutions.
Pursue strategic acquisitions and investments. We have historically complemented our organic growth with strategic acquisitions,
having completed seven such transactions over the past eighteen years. These transactions have added new capabilities and access
to market segments that are adjacent and complementary to our existing solutions and market segments. We believe that additional
strategic acquisition and/or investment opportunities will exist from time to time to complement our organic growth by further
expanding our service capabilities, technology offerings and end markets.
Sales and Marketing
We generate the majority of our 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. Our sales activities are carried out by a direct sales
organization staffed with professional, trained sales associates.
We engage in marketing activities that enhance our brand visibility in the marketplace, generate demand for our 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 us and our executives.
Clients
We partner with clients across the continuum of healthcare services. Our clients include integrated health systems, post-acute
providers and payer organizations. Our ten largest clients accounted for 16%, 17%, and 19% of our total revenue in 2019, 2018 and
2017, respectively. Approximately 3%, 4% and 4% of our revenue was derived from foreign customers in 2019, 2018, and 2017,
respectively.
5
Intellectual Property and Other Proprietary Rights
Our success depends in part upon our 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. We have no patents. Consequently, we
rely on a combination of copyright and trade secret laws and associate nondisclosure agreements to protect our systems, survey
instruments and procedures. There can be no assurance 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. There can be no assurance, 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.
Associates
As of December 31, 2019 we employed a total of 464 persons on a full-time basis. In addition, as of such date, we had 16 part-time
associates primarily in our survey operations, representing approximately 8 full-time equivalent associates. None of our associates
are represented by a collective bargaining unit. We consider our relationship with our associates to be good.
Information About Our Executive Officers
The following table sets forth certain information as of February 1, 2020, regarding our executive officers:
Name
Age
Position
Michael D. Hays
65
Chief Executive Officer
Steven D. Jackson
44
President
Kevin R. Karas
62
Senior Vice President Finance, Chief Financial Officer, Treasurer and Secretary
Michael D. Hays has served as our Chief Executive Officer and a director since he founded the Company in 1981. He also served
as our President 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 our President since October 2015. He served as Group President from October 2014 until September
2015, during which time he oversaw our Market Insights, Transparency, and Predictive Analytics business units. Prior to joining
us, 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 our Chief Financial Officer, Treasurer and Secretary since September 2011, and as Senior Vice
President Finance since he joined us 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.
Our executive officers are elected by and serve at the discretion of our Board of Directors. There are no family relationships between
any of our directors or executive officers.
Available Information
More information regarding NRC Health is available on our website at www.nrchealth.com. We are not including the information
contained on or available through our website as part of, or incorporating such information by reference into, this Annual Report on
Form 10-K. Our 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 our website. We provide
access to such materials through our 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 our website do not include access to
exhibits and supplemental schedules electronically filed with the reports or amendments.
6
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. Our ten largest clients accounted for 16%, 17%, and 19% of our total revenue in
2019, 2018, and 2017, 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. Our 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 that provide services or products that complement healthcare performance assessments, such as
healthcare software or information systems. Although only a few of these competitors have offered specific services that compete
directly with our services, many of these competitors have substantially greater financial, information gathering, and marketing
resources than us and could decide to increase their resource commitments to our market. There are relatively few barriers to entry
into our market, and we expect increased competition in our market which could adversely affect our operating results through
pricing pressure, increased marketing expenditures, and market share losses, among other factors. There can be no assurance that
we 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 services.
Moreover, there has been consolidation of companies in the healthcare industry, a trend which we believe will continue to grow.
7
Consolidation in this industry, including the potential acquisition of certain of our clients, could adversely affect aggregate client
budgets for our services, could result in client’s performing more marketing, market research and/or quality improvement functions
internally 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 for data collection and other services 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 our 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 our Market Insights. In either case, our operating and net income could
be negatively affected.
Our principal shareholders effectively control the Company.
A majority of our 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 27, 2020, approximately 44.7% of our outstanding common stock was owned by the Trusts and approximately
54.2% of our outstanding common stock was held by the Trusts and other entities owned or controlled by members of Mr. Hays’
family. As a result, the Trusts and these other entities 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 and these other entities.
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 and trading volume of our common stock has historically been and may continue to 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:
(cid:404) Variations in our financial performance and that of similar companies;
(cid:404) Regulatory and other developments that may impact the demand for our services;
(cid:404) Reaction to our press releases, public announcements and filings with the Securities and Exchange Commission;
(cid:404) Client, market and industry perception of our services and performance;
(cid:404) Actions of our competitors;
(cid:404) Changes in earnings estimates or recommendations by analysts who follow our stock;
(cid:404) Loss of key personnel;
(cid:404)
(cid:404) Changes in accounting principles; and
(cid:404) Variations in general market, economic and political conditions or financial markets.
Investor, management team or large stockholder sales of our stock;
8
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 our 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 to 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
If we sustain cyber-attacks or other privacy or data security incidents that result in security breaches that disrupt our
operations or result in the unintended dissemination of protected personal information or proprietary or confidential
information, we could suffer a loss of revenue and increased costs, exposure to significant liability, reputational harm and
other serious negative consequences.
In connection with our client services, we receive, process, store and transmit sensitive business information and, in certain
circumstances, personal medical information of our clients’ patients, electronically over the internet. We may become the target of
attempted cyber-attacks and other security threats and may be subject to breaches of the information technology systems we use.
Experienced computer programmers and hackers may be able to penetrate our security controls and access, misappropriate or
otherwise compromise protected personal information or proprietary or confidential information or that of third-parties, create
system disruptions or cause system shutdowns that could negatively affect our operations. They also may be able to develop and
deploy viruses, worms, ransomware, and other malicious software programs that attack our systems or otherwise exploit any security
vulnerabilities. Hardware, software, or applications we develop or procure from third parties may contain defects in design or
manufacture or other problems that could unexpectedly compromise information security.
We were the target of an external cyber-attack in February 2020 which resulted in a temporary suspension of our services to
clients. We will likely continue to be the target of other attempted cyber-attacks and security threats. Such cyber-attacks may subject
us to litigation and regulatory risk, civil and criminal penalties, additional costs and diversion of management attention due to
investigation, remediation efforts and engagement of third party consultants and legal counsel in connection with such incidents,
payment of “ransoms” to regain access to our systems and information, loss of clients, damage to client relationships, reduced
revenue and profits, refunds of client charges and damage to our reputation, any of which could have a material adverse effect on
our business, cash flows, financial condition and results of operations. While we have contingency plans and insurance coverage
for potential liabilities of this nature, they may not be sufficient to cover all claims and liabilities and in some cases are subject to
deductibles and layers of self-insured retention.
We cannot ensure that we will be able to identify, prevent or contain the effects of cyber-attacks or other cybersecurity risks that
bypass our security measures or disrupt our information technology systems or business. We have security technologies, processes
and procedures in place to protect against cybersecurity risks and security breaches. However, hardware, software or applications
we develop or procure from third parties may contain defects in design, manufacturer defects or other problems that could
unexpectedly compromise information security. In addition, because the techniques used to obtain unauthorized access, disable or
degrade service or sabotage systems change frequently, are becoming increasingly sophisticated, and may not immediately produce
signs of intrusion, we may be unable to anticipate these techniques, timely discover or counter them or implement adequate
preventative measures.
In addition, we use third-party technology, systems and services for a variety of reasons, including, without limitation, encryption
and authentication technology, employee email, content delivery to clients, back-office support, and other functions that in some
cases involve processing, storing and transmitting large amounts of data for our business. These third-party providers may also
experience security breaches or interruptions to their information technology hardware and software infrastructure and
communications systems that could adversely impact us.
Under the Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for
Economic and Clinical Health Act of 2009, or HITECH, implementing regulations promulgated by the U.S. Department of Health
and Human Services, or “HHS,” including what are referred to as the “Privacy Rule” and the “Security Rule” (collectively,
“HIPAA”), we face potential liability related to the privacy of health information we obtain. We are required through our contracts
with our clients and by HIPAA to protect the privacy and security of certain health information and to make certain disclosures to
our clients or to the public if this information is unlawfully accessed.
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. Noncompliance with any privacy or security laws and regulations,
including, without limitation, HIPPA, or any security breach, cyber-attack or cybersecurity breach, and any incident involving the
misappropriation, loss or other unauthorized disclosure or use of, or access to, sensitive or confidential information, whether by us
or by one of our third-party service providers, could require us to expend significant resources to continue to modify or enhance our
protective measures and to remediate any damage. In addition, this could negatively affect our operations, cause system disruptions,
damage our reputation, cause client losses and contract breaches, and could also result in regulatory enforcement actions, material
fines and penalties, litigation or other actions that could have a material adverse effect on our business, cash flows, financial
condition and results of operations. Even if cyber-attacks or other cybersecurity breaches do not result in noncompliance with
privacy or security laws, the perception that such noncompliance may have occurred by our clients or in the news media may have
an adverse impact on our stock price and could result in damage to our reputation or loss of clients, which could have a material
adverse effect on our business, cash flows, financial condition and results of operations.
10
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.
11
Item 1B. Unresolved Staff Comments
We have no unresolved staff comments to report pursuant to this item.
Item 2.
Properties
Our headquarters is located in an owned office building in Lincoln, Nebraska, of which 62,000 square feet are used for our
operations. This facility houses all the capabilities necessary for our survey programming, printing and distribution, data processing,
analysis and report generation, marketing, and corporate administration. Our credit facilities are secured by this property and our
other assets.
We are leasing 4,000 square feet of office space in Markham, Ontario, 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, we are 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. There were no
outstanding claims as of December 31, 2019. For additional information, see Note 1, under the heading “Commitments and
Contingencies,” to our consolidated financial statements.
Item 4. Mine Safety Disclosures
Not applicable.
12
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
In May 2013, we consummated a recapitalization pursuant to which we 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 our 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, our class A common stock and our class B common stock were traded on the NASDAQ
Global Market under the symbols “NRCIA” and “NRCIB,” respectively.
On April 16, 2018, our shareholders approved, among other things, an amendment to our Amended and Restated Articles of
Incorporation (the “Articles”) to effect a recapitalization (the “Recapitalization”) pursuant to which each share of our then-existing
class B common stock was exchanged for one share of the our then-existing Class A common stock plus $19.59 in cash, without
interest. On April 17, 2018, we filed an amendment to our Articles effecting the Recapitalization, followed by an amendment and
restatement of our Articles, which resulted in the elimination of our class B common stock and the reclassification of our class A
common stock as a share of Common Stock, par value $0.001 per share (“Common Stock”). We 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 $19.4 million were declared in 2019 with $14.2 million paid in 2019 and the remaining
$5.2 million paid in January 2020. 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. The payment and amount of future dividends, if any, is
at the discretion our Board of Directors and will depend on the our future earnings, financial condition, general business conditions,
alternative uses of our earnings and other factors.
On February 14, 2020, there were approximately 15 shareholders of record and approximately 6,201 beneficial owners of common
stock.
In February 2006 and subsequently amended in May 2013, our Board of Directors 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, our 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 our Board of Directors, the
repurchase program will expire when the we have repurchased all shares authorized for repurchase thereunder. No Common Stock
was repurchased during the three-month period ended December 31, 2019. The remaining shares of Common Stock that may be
purchased under that authorization are 280,491.
13
The following graph compares the cumulative 5-year total return provided shareholders on our 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, 2014, and our
relative performance is tracked through December 31, 2019.
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
12/14
12/15
12/16
12/17
12/18
12/19
National Research Corporation – Formerly Class B
100.00 110.85 136.77 193.65
--
--
National Research Corporation Common Stock –
Formerly Class A
100.00 119.36 144.49 287.71 303.13 531.90
NASDAQ Composite
100.00 106.96 116.45 150.96 146.67 200.49
Russell 2000
100.00 95.59 115.95 132.94 118.30 148.49
14
Item 6.
Selected Financial Data
The selected statement of income data for the years ended December 31, 2019, 2018 and 2017, and the selected balance sheet data
at December 31, 2019 and 2018, are derived from, and are qualified by reference to, our audited consolidated financial statements
included elsewhere in this Annual Report on Form 10-K. The selected statement of income data for the year ended December 31,
2016 and 2015, and the balance sheet data at December 31, 2017, 2016 and 2015, are derived from audited consolidated financial
statements not included herein. We disposed of selected assets and liabilities related to the clinical workflow product of our
Predictive Analytics operating segment on December 21, 2015. The acquisition and disposal did not have a significant impact on
our financial results.
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 finance 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
2019(2)(3)
2018(1)(2)
Year Ended December 31,
2016
2017
(In thousands, except per share data)
2015
$
127,982 $
119,686 $
117,559 $
109,384 $
102,343
46,435
32,973
5,539
84,947
43,035
(2,516)
40,519
8,113
32,406 $
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 $
1.30 $
-- $
1.26 $
-- $
1.08 $
1.31 $
1.04 $
1.27 $
0.54 $
3.26 $
0.52 $
3.18 $
0.49 $
2.93 $
0.48 $
2.88 $
44,610
27,177
4,109
75,896
26,447
913
27,360
9,750
17,610
0.42
2.52
0.41
2.49
$
$
$
$
$
24,809
--
25,653
--
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
2019(2)(3)
2018(1)(2)
2016
2017
(In thousands, except per share data)
2015
$
(8,998) $
110,685
(18,699) $
108,032
19,949 $
127,316
15,551 $
120,624
10,890
128,049
34,959
32,892
38,723
19,083
1,225
90,041
3,732
82,806
5,917
74,222
$
0.78
-- $
1.13
.60 $
.40
2.40 $
.34
2.04 $
.62
3.72
(1)On January 1, 2018, we 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 3 to our consolidated financial statements.
(2)As described in Note 2 to our consolidated financial statements, we 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.
(3)On January 1, 2019, we adopted Accounting Standards Update 2016-02, Leases, and all related amendments using the
modified retrospective method for all incomplete contracts as of the date of adoption. See Notes 1 and 10 to our
consolidated financial statements.
15
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are 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. Our solutions enable our
clients to understand the voice of the customer with greater clarity, immediacy and depth. Our 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. Our 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. We believe that access to and analysis of our 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.
Our 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. We partner with clients across the continuum of
healthcare services. Our clients include integrated health systems, post-acute providers and payer organizations. We believe 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 following areas are considered critical accounting estimates because they involve significant judgments or assumptions,
involve complex or uncertain matters or they are susceptible to change and the impact could be material to our financial condition
or operating results:
(cid:404)
(cid:404)
(cid:404)
Revenue recognition;
Valuation of goodwill and identifiable intangible assets; and
Income taxes.
Revenue Recognition
We derive a majority of our revenue from annually renewable subscription-based service agreements with our customers. See Notes
1 and 3 to our consolidated financial statements for a description of our revenue recognition policies.
Our 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. We combine 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. We estimate the total contract consideration
we expect to receive for variable arrangements based on the most likely amount we expect to earn from the arrangement based on
the expected quantities. We only include 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. We consider the sensitivity of the estimate,
our 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.
Our fixed, non-subscription arrangements typically require us 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.
16
Valuation of Goodwill and Identifiable Intangible Assets
Intangible assets include customer relationships, trade names, technology, 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. We review 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, we will first assess qualitative factors to determine whether it is necessary to
recalculate the fair value of the intangible assets with indefinite lives. If we believe, 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, we calculate 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. We did not recognize any impairments related to indefinite-lived
intangibles during 2019, 2018 or 2017.
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 our goodwill is allocated to our reporting units, which are the same as
our 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.
We review for goodwill impairment by first assessing qualitative factors to determine whether any impairment may exist. If we
believe, 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. We performed a qualitative
analysis as of October 1, 2019 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, 2019, 2018 or 2017.
Our Canadian reporting unit generates service revenue from a relatively small number of customers with approximately 56.5% of
its revenue concentrated in one customer contract which currently expires in March 2021. While historically we have been successful
in renewing or retaining contracts with our customers, should we be unable to or choose not to renew a significant contract, it would
likely result in an impairment of goodwill at this reporting unit. The carrying amount of goodwill related to our Canadian reporting
unit at December 31, 2019 was $2.3 million.
Income Taxes
We use 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. We recognize 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.
17
Results of Operations
The following table and graphs set forth, for the periods indicated, selected financial information derived from our 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 our consolidated financial statements.
Revenue
Operating expenses:
Direct
Selling, general and administrative
Depreciation and amortization
Total operating expenses
Operating income
Percentage of Total Revenue
Year Ended December 31,
2019
2018
2017
Percentage
Increase (Decrease)
2019 over
2018
2018 over
2017
100.0 %
100.0%
100.0%
6.9%
1.8 %
36.3
25.8
4.3
66.4
33.6 %
39.7
26.2
4.6
70.5
29.5%
41.7
25.3
3.9
70.9
29.1%
(2.4)
5.1
1.4
0.6
22.0%
(3.0 )
5.7
19.1
1.3
3.1 %
Year Ended December 31, 2019, Compared to Year Ended December 31, 2018
Revenue. Revenue in 2019 increased 6.9% to $128.0 million, compared to $119.7 million in 2018, which was driven primarily due
to new customer sales, as well as increases in sales to the existing client base. Our solutions within the VoC platform in 2019
accounted for 62.7% of total revenue compared to 49.6% in 2018. The remaining revenue consists of legacy Experience and
Governance Solutions. Clients with agreements for multiple solutions represented 27% of our client base at the end of 2019, up
from 24% at the end of 2018.
Direct expenses. Direct expenses decreased 2.4% to $46.4 million in 2019, compared to $47.6 million in 2018. This was due to a
decrease in variable expenses of $2.6 million, partially offset by an increase in fixed expenses of $1.4 million. 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 partially offset by $730,000 of state payroll and sales tax incentives and lower contracted services. Direct expenses decreased
as a percentage of revenue to 36.3% in 2019, from 39.7% in 2018, as expenses decreased by 2.4% while revenue for the same period
increased by 6.9%.
Selling, general and administrative expenses. Selling, general and administrative expenses increased 5.1% to $33.0 million in 2019
compared to $31.4 million in 2018, primarily due to increased software license fees and platform hosting expenses of $790,000,
sales tax expense of $775,000 as a result of a recent sales tax analysis, higher salary and benefit costs of $690,000, additional
insurance costs of $285,000, increased travel costs of $196,000, higher marketing program expenses of $89,000 and additional
company incentive event costs of $81,000. These were partially offset by decreased contract services of $529,000, a reduction in
legal and accounting costs of $469,000 mainly associated with the Recapitalization, the Tax Cut and Jobs Act and adoption of ASC
606 in 2018 and state payroll and sales tax incentives of $917,000. Selling, general, and administrative expenses decreased as a
percentage of revenue to 25.8% in 2019, from 26.2% in 2018 as expenses increased by 5.1% while revenue increased by 6.9%
during the same period.
18
Depreciation and amortization. Depreciation and amortization expenses remained at $5.5 million for the twelve-month period ended
December 31, 2019 and 2018, however, there was increased amortization from additional computer software investments primarily
offset by an intangible asset that has been fully amortized. Depreciation and amortization expenses decreased as a percentage of
revenue to 4.3% in 2019, from 4.6% in 2018 as depreciation and amortization expenses increased by 1.4% while revenue increased
by 6.9% during the same period.
Other income (expense). Other expense, net was $2.5 million for the twelve-month period ended December 31, 2019, compared to
$566,000 for the same period in 2018. Interest expense increased $578,000 due to additional interest related to the term loan
originated in April 2018 and borrowings on the line of credit. Other expense, net increased $1.3 million primarily due to revaluation
of intercompany transactions for changes in the foreign exchange rates.
Provision for income taxes. Provision for income taxes was $8.1 million (20.0% effective tax rate) in 2019, compared to $4.7 million
(13.4% effective tax rate) in 2018. The effective tax rate for the twelve-month period ended December 31, 2019, was higher mainly
due to lower income tax benefits from the exercise of share-based compensation awards and higher state income taxes due to
requirements to file in more states.
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. Our 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.
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, we 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
7 to our 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.
19
Liquidity and Capital Resources
We believe that our existing sources of liquidity, including cash and cash equivalents, borrowing availability, and operating cash
flows will be sufficient to meet our projected capital and debt maturity needs and dividend policy for the foreseeable future and
therefore we feel that our working capital deficit has little impact on our liquidity. Cash dividends in the aggregate amount of $19.4
million were declared in 2019 with $14.2 million paid in 2019 and the remaining $5.2 million paid in January 2020. The dividends
were paid from cash on hand and $4.5 million in borrowings on our line of credit.
As of December 31, 2019, our principal sources of liquidity included $13.5 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, $3.9 million was
held in Canada. The delayed draw term note can only be used to fund permitted future business acquisitions or repurchasing our
Common Stock.
Working Capital
We had a working capital deficit of $9.0 million and $18.7 million on December 31, 2019 and 2018, respectively.
The change was primarily due to a decrease in dividends payable of $11.9 million, and an increase in other current assets of $1.7
million. These were partially offset by an increase in other current liabilities of $841,000, an increase in current portion of notes
payable of $711,000, an increase of accounts payable of $666,000, an increase in accrued expenses $574,000, and a decrease of
$887,000 in prepaid expenses. Dividends payable decreased due to a special dividend of $12.4 million that was declared in 2018
and paid in January of 2019. Deferred contract costs, net increased due to growth in capitalized commission and incentives directly
related to new sales. Other current liabilities increased due to adoption of Accounting Standards Update (“ASU”) 2016-02, Leases
(Topic 842) (“Topic 842” or the “New Leases Standard”) and deferred income benefits from the state payroll and sales tax
incentives. Topic 842 requires lessees to recognize a lease liability and a right-of-use (“ROU”) asset on the balance sheet for
operating leases. Accounts payable and accrued expenses increased and prepaid expenses decreased due to timing of payment for
services and supplies. Our working capital is significantly impacted by our 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, 2019 and
December 31, 2018, were $16.4 million and $16.2 million, respectively.
The deferred revenue balance is primarily due to timing of initial billings on new and renewal contracts. We typically invoice clients
for services before they have been completed. Billed amounts are recorded as billings in excess of revenue earned, or deferred
revenue, on our consolidated financial statements, and are recognized as income when earned. In addition, when work is performed
in advance of billing, we record 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.
Cash Flow Analysis
A summary of operating, investing, and financing activities are shown in the following table:
2019
For the Year Ended December 31,
2018
(In thousands)
2017
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
$
$
40,917 $
(4,656)
(36,346)
611
526
13,517 $
39,848 $
(5,971)
(54,497)
(1,122)
(21,742)
12,991 $
28,091
(6,118)
(21,116)
855
1,712
34,733
Cash flows from operating activities consist of net income adjusted for non-cash items including depreciation and amortization,
deferred income taxes, share-based compensation and related taxes, reserve for uncertain tax positions, loss on disposal of property
and equipment and the effect of working capital changes.
Net cash provided by operating activities was $40.9 million for the year ended December 31, 2019, which included net income of
$32.4 million, plus non-cash charges (benefits) for deferred income taxes, depreciation and amortization, reserve for uncertain tax
positions, loss on disposal of property and equipment and non-cash share based compensation totaling $7.9 million. Changes in
working capital increased cash flows from operating activities by $616,000, primarily from increases in accounts payable, accrued
expenses, wages, bonus and profit sharing, deferred tax incentives, and deferred contract costs, net, which fluctuate due to the timing
of payments of prepaids, accounts payable and accrued expenses, and the timing of direct and incremental costs directly related to
sales. These increases to cash flows were partially offset by decreases in prepaid expenses and other current assets.
20
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 share based 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 a decrease in 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 share based 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 an increase in deferred revenue.
Cash Flows from Investing Activities
Net cash of $4.7 million was used for investing activities in the year ended December 31, 2019 for purchases of property and
equipment. These expenditures consisted mainly of computer software classified in property and equipment.
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, we 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.
Cash Flows from Financing Activities
Net cash used in financing activities was $36.3 million in the year ended December 31, 2019. Cash was used to repay borrowings
under the term notes totaling $3.7 million, to repay borrowings on the line of credit of $21.0 million and for finance lease obligations
of $229,000. Cash was also used to pay $31.3 million of dividends on our common stock, and to pay payroll tax withholdings related
to share-based compensation of $1.1 million. Cash of $21.0 million was provided from borrowings on the line of credit.
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 our 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 finance lease obligations of $157,000. 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 finance 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.
Capital Expenditures
Capital expenditures for the year ended December 31, 2019 were $4.7 million. These expenditures consisted mainly of computer
equipment and software. We expect similar capital expenditure purchases in 2020 consisting primarily of computer equipment and
software and other equipment, to be funded through cash generated from operations.
Debt and Equity
On April 18, 2018, in connection with the Recapitalization, we 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”). We used the Term Loan to fund, in part, the cash portion paid
to holders of our 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 repurchases of our Common Stock and the Line of
Credit will be used to fund ongoing working capital needs and for other general corporate purposes.
21
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 per annum 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 (3.94% at December 31, 2019). 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, 2019, 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, 2019. The weighted average borrowings on the Line of Credit for year ended December
31, 2019 was $2.4 million. The weighted average interest on borrowings on the Line of Credit for the year ended December 31,
2019 was 4.72%.
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.
We paid a one-time fee equal to 0.25% of the amount borrowed under the Term Loan at the closing of the Credit Facilities. We are
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.
All obligations under the Credit Facilities are to be guaranteed by each of our 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 our and our 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 our 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, we are required to maintain a minimum fixed charge coverage ratio of 1.10x for
all testing periods throughout the terms of the Credit Facilities. We are also required to maintain a maximum cash flow leverage
ratio of 3.00x for all testing periods throughout the terms of the Credit Facilities. As of December 31, 2019, we were in compliance
with our financial covenants.
We have finance leases for computer equipment, office equipment, printing and inserting equipment. The balance of the finance
leases as of December 31, 2019 was $786,000.
We 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.
A sales tax accrual was recorded in 2019 after we became aware that a state sales tax liability was both probable and estimable as
of December 31, 2019, due to sales taxes that should have been collected from customers in 2019 and certain previous years. As a
result, we recorded an expense of $775,000 through selling and administrative expenses and an associated liability through accrued
expenses. We are working through voluntary disclosure agreements with certain states and will have procedures in place to start
collecting and remitting sales tax in the second quarter of 2020. State and local jurisdictions have differing rules and regulations
governing sales, use, and other taxes and these rules and regulations can be complex and subject to varying interpretations that may
change over time. As a result, we could face the possibility of tax assessment and audits, and our liability for these taxes and
associated interest and penalties could exceed our original estimates. In addition, we will incur additional sales tax expense in the
first quarter of 2020, since we will not start collecting sales tax from customers until the 2nd quarter of 2020.
22
Contractual Obligations
We had contractual obligations to make payments in the following amounts in the future as of December 31, 2019:
Contractual Obligations(1)
(In thousands)
Operating leases
Finance 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
$
$
1,837 $
848
--
38,838
41,523 $
591 $
257
--
6,063
6,911 $
679 $
455
--
12,633
13,767 $
449 $
136
--
20,142
20,727 $
118
--
--
--
118
(1) Amounts are inclusive of interest payments, where applicable.
(2) We have $599,000 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.
We generally do not make unconditional, non-cancelable purchase commitments. We enter into purchase orders in the normal course
of business, but these purchase obligations do not exceed one year.
Stock Repurchase Program
Our Board of Directors 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, our Board of Directors further amended the stock repurchase program to eliminate the repurchase of the former class B
common stock. As of December 31, 2019, the remaining number of shares of Common Stock that could be purchased under this
authorization was 280,491 shares.
Off-Balance Sheet Obligations
We have no significant off-balance sheet obligations.
Recent Accounting Pronouncements
See Note 1 to our consolidated financial statements for a description of recently issued accounting pronouncements.
23
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Our primary market risk exposures are changes in foreign currency exchange rates and interest rates.
Our 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. We include translation gains and losses in accumulated other comprehensive income (loss),
a component of shareholders’ equity. Foreign currency translation gains (losses) were, $707,000, ($1.3 million), and 991,000 in
2019, 2018 and 2017, respectively. Gains and losses related to transactions denominated in a currency other than the functional
currency of the countries in which we operate and short-term intercompany accounts are included in other income (expense) in the
consolidated statements of income and amounted to ($483,000), $893,000 and $63,000 in 2019, 2018 and 2017, 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 $507,000. We have not entered into any foreign currency hedging transactions.
We do not purchase or hold any derivative financial instruments for trading or otherwise 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, 2019, our fixed-rate term debt totaled $34.3 million. Based on a sensitivity analysis, a one percent change
in market interest rates as of December 31, 2019, would impact the estimated fair value of our fixed-rate debt outstanding at
December 31, 2019 by approximately $863,000.
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, 2019. There were no borrowings outstanding under the Delayed Draw Term Note at December 31, 2019, or at any time during
2019. 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 for 2019 indicated that such a movement would not have a material
impact on our consolidated financial position, results of operations or cash flows. We have not entered into any interest rate swaps
or hedging transactions.
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.
24
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, 2019. This unaudited information has been prepared 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 our audited consolidated
financial statements and the notes thereto.
(In thousands, except per share data)
Quarter Ended
Dec. 31,
2019
Sept 30,
2019
June 30,
2019
Mar. 31,
2019
Dec. 31,
2018
Sept 30,
2018
June 30,
2018
Mar. 31,
2018
$ 32,623 $ 32,465 $ 31,414 $ 31,480 $ 30,639 $ 30,013 $ 28,017 $ 31,017
11,166 12,109 11,506 11,654 11,892 11,780 10,996 12,909
8,241
8,706
8,319
7,707
7,885
7,679
7,940
7,867
1,254
1,415
11,962 10,220 10,149 10,704
(844)
1,430
1,440
(597)
(664)
(411)
1,467
9,395
145
1,388
9,166
(783)
1,325
7,756
63
1,283
8,958
9
2,667
8,698 $
1,690
8,119 $
2,092
7,393 $
1,664
8,196 $
1,739
7,801 $
1,391
6,992 $
(129)
7,948 $
1,661
7,306
$
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
Common (formerly
class A)
Class B
$
$
0.35 $
- $
0.33 $
- $
0.30 $
- $
0.33 $
- $
0.32 $
- $
0.28 $
- $
0.29 $
0.27 $
0.17
1.04
Dilutive earnings per
share
Common (formerly
class A)
Class B
$
$
0.34 $
- $
0.31 $
- $
0.29 $
- $
0.32 $
- $
0.30 $
- $
0.27 $
- $
0.28 $
0.26 $
0.17
1.01
Weighted average
shares outstanding –
basic
Common (formerly
class A)
Class B
Weighted average
shares outstanding –
diluted
Common (formerly
class A)
Class B
24,852 24,827 24,789 24,766 24,684 24,671 23,957 20,884
3,527
-
3,527
-
-
-
-
-
25,715 25,741 25,586 25,509 25,534 25,526 24,846 21,837
3,630
-
3,620
-
-
-
-
-
25
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
National Research Corporation:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of National Research Corporation and subsidiary (the Company)
as of December 31, 2019 and 2018, 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, 2019, and the related notes (collectively, the
consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31,
2019, 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position
of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles. Also in our opinion,
the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019 based
on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission.
Change in Accounting Principle
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 Opinions
The Company’s management is responsible for these consolidated financial statements, 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 consolidated financial statements and an opinion on the Company’s internal control over financial reporting based
on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(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
audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements 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. 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 audits
also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.
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.
26
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
We have served as the Company’s auditor since 1997.
Lincoln, Nebraska
March 6, 2020
27
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 $144 and $175,
$
13,517 $
12,991
2019
2018
respectively
Prepaid expenses
Income taxes receivable
Other current assets
Total current assets
Net property and equipment
Intangible assets, net
Goodwill
Operating lease right-of-use assets
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
Income taxes payable
Dividends payable
Deferred revenue
Other current liabilities
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 30,151,574 in 2019 and 29,917,667 in 2018, outstanding 24,947,500 in 2019
and 24,800,796 in 2018
Additional paid-in capital
Retained earnings (accumulated deficit)
Accumulated other comprehensive loss, foreign currency translation adjustment
Treasury stock, at cost; 5,204,074 Common (formerly Class A) shares in 2019 and
5,116,871 in 2018
Total shareholders’ equity
11,639
2,038
69
1,894
29,157
13,530
1,728
57,935
1,628
4,204
2,503
11,922
2,925
348
224
28,410
14,153
2,102
57,831
--
3,484
2,052
$
110,685 $
108,032
$
4,378 $
1,279
6,086
3,408
366
5,239
16,354
1,045
38,155
29,795
7,399
2,444
77,793
3,667
613
5,798
2,834
636
17,113
16,244
204
47,109
34,176
6,276
1,388
88,949
--
--
30
162,154
(93,357 )
(2,209 )
(33,726 )
32,892
30
157,312
(106,339 )
(2,916 )
(29,004 )
19,083
Total liabilities and shareholders’ equity
$
110,685 $
108,032
See accompanying notes to consolidated financial statements.
28
NATIONAL RESEARCH CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share amounts)
2019
2018
2017
$
127,982 $
119,686 $
117,559
Revenue
Operating expenses:
Direct, exclusive of depreciation and amortization
Selling, general and administrative, exclusive of depreciation and
amortization
Depreciation and amortization
Total operating expenses
46,435
47,577
49,068
32,973
5,539
84,947
31,371
5,463
84,411
29,686
4,586
83,340
Operating income
43,035
35,275
34,219
Other income (expense):
Interest income
Interest expense
Other, net
Total other income (expense)
Income before income taxes
37
(2,091)
(462)
62
(1,513)
885
(2,516)
(566)
96
(82)
50
64
40,519
34,709
34,283
Provision for income taxes
8,113
4,662
11,340
Net income
$
32,406 $
30,047 $
22,943
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.
$
$
$
$
1.30 $
-- $
1.26 $
-- $
1.08 $
1.31 $
1.04 $
1.27 $
24,809
--
25,653
--
23,562
3,527
24,448
3,628
0.54
3.26
0.52
3.18
20,770
3,514
21,627
3,603
29
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.
2019
2018
2017
32,406 $
30,047 $
22,943
707 $
707 $
(1,281) $
(1,281) $
991
991
33,113 $
28,766 $
23,934
$
$
$
$
30
NATIONAL RESEARCH CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands except share and per share amounts)
Balances at December 31, 2016
Purchase of 132,836 class A and 15,074
class B shares of treasury stock
Common
Stock
(formerly
Class A)
Class B
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Total
$
26 $
4 $
46,725 $
71,507 $
(2,626) $
(32,830) $ 82,806
--
--
--
--
--
(4,123)
(4,123)
Issuance of 197,784 class A and 13,600
class B common shares for the exercise
of stock options
Issuance of 19,314 class A and 3,219 class
B restricted common shares, net of
(forfeitures)
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 class A and 3,677
class B shares of treasury stock
Issuance of 468,318 class A and 9,296
$
class B common shares for the exercise
of stock options
Issuance of 3,496 class A restricted
common shares, net of (forfeitures)
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 4,328,552 class B common
shares in connection with
Recapitalization
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
Purchase of 87,203 shares of treasury
stock
Issuance of 227,902 common shares for
the exercise of stock options
Issuance of 6,005 restricted common
shares
Non-cash stock compensation expense
Dividends declared of $0.78 per common
share
Other comprehensive income, foreign
currency translation adjustment
Net income
Balances at December 31, 2019
$
--
--
2,455
--
--
--
2,455
--
--
--
--
--
26 $
--
--
--
--
--
4 $
--
1,845
--
--
--
(16,876)
--
--
--
--
--
--
1,845
-- (16,876)
--
--
51,025 $
--
22,943
77,574 $
991
--
(1,635) $
--
991
-- 22,943
(36,953) $ 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 $
--
--
--
--
--
--
--
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) $
--
(1,281)
-- 30,047
(29,004) $ 19,083
--
3,618
--
1,224
--
--
--
--
--
(19,424)
--
(4,722)
(4,722)
--
--
--
--
--
3,618
--
--
--
1,224
-- (19,424)
--
--
-- $
--
--
162,154 $
--
32,406
(93,357) $
707
--
(2,209) $
707
--
-- 32,406
(33,726) $ 32,892
See accompanying notes to consolidated financial statements.
31
NATIONAL RESEARCH CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
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
Non-cash share-based compensation expense
Change in assets and liabilities:
Trade accounts receivable
Prepaid expenses and other current assets
Operating lease assets and liability, net
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 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 finance lease obligations
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
2019
2018
2017
$
32,406 $
30,047 $
22,943
5,539
1,099
39
(6)
1,224
311
(529)
(8)
(719)
647
806
11
97
40,917
(4,656)
--
--
(4,656)
--
--
21,000
(21,000)
(3,715)
--
(229)
(1,103)
(31,299)
(36,346)
611
526
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
Cash and cash equivalents at beginning of period
12,991
34,733
33,021
Cash and cash equivalents at end of period
$
13,517 $
12,991 $
34,733
Supplemental disclosure of cash paid for:
Interest expense, (none capitalized)
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.
Finance lease obligations originated for property and equipment
Stock tendered to the Company for cashless exercise of stock options
$
$
2,014 $
6,946 $
1,282 $
2,635 $
76
12,827
-- $
192 $
121,371 $
879 $
--
74
in connection with equity incentive plans
$
3,618 $
6,098 $
2,455
See accompanying notes to consolidated financial statements.
32
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. Our
portfolio of solutions represent a unique set of capabilities that individually and collectively provide value to our clients. The
solutions are offered at an enterprise level through the Voice of the Customer ("VoC") platform, The Governance Institute, and
legacy Experience solutions
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and our 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
Our 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. We include 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 we operate and short-term intercompany accounts are included in other income (expense) in the
consolidated statements of income.
Revenue Recognition
On January 1, 2018, we 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. We 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. We recorded a
transition adjustment of approximately $2.7 million, net of $814,000 of tax, to the opening balance of retained earnings.
We derive a majority of our revenues from our annually renewable subscription-based service agreements with our 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 our contracts
with customers. We account for revenue using the following steps:
Identify the contract, or contracts, with a customer;
Identify the performance obligations in the contract;
(cid:404)
(cid:404)
(cid:404) Determine the transaction price;
(cid:404) Allocate the transaction price to the identified performance obligations; and
(cid:404) Recognize revenue when, or as, we satisfy the performance obligations.
33
Our 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. We combine 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. We estimate the amount of total contract consideration we expect to receive for
variable arrangements based on the most likely amount we expect to earn from the arrangement based on the expected quantities of
services we expect to provide and the contractual pricing based on those quantities. We only include 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. We consider the sensitivity of the estimate, our 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.
Our 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.
Our 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 us to perform a specific one-time service in a particular month. We are
entitled to a fixed payment upon completion of the service. Under these arrangements, we recognize revenue at the point in time we
complete the service and it is accepted by the customer.
Fixed, non-subscription services – These arrangements typically require us 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.
Unit-price services – These arrangements typically require us 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. Revenue is presented net of any sales
tax charged to our clients that we are required to remit to taxing authorities. We recognize 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 we have 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.
34
Deferred Contract Costs
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, we defer 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 we expect to receive net of the expected future costs directly
related to providing those services. We have 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.
We 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.
We deferred incremental costs of obtaining a contract of $3.6 million and $2.6 million in the years ended December 31, 2019 and
2018, respectively. Deferred contract costs, net of accumulated amortization was $4.2 million and $3.5 million at December 31,
2019 and 2018, respectively. Total amortization by expense classification for the years ended December 31, 2019 and 2018 was as
follows:
Direct expenses
Selling, general and administrative expenses
Total amortization
2019
2018
(In thousands)
34 $
2,874 $
2,908 $
83
2,400
2,483
$
$
$
Additional expense included in selling, general and administrative expenses for impairment of costs capitalized due to lost clients
was $22,000 and $51,000 for the years December 31, 2019 and 2018, respectively.
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount. The allowance for doubtful accounts is our best estimate of the
amount of probable credit losses in the Company’s existing accounts receivable. We determine the allowance based on our historical
write-off experience and current economic conditions. We review 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.
The following table provides the activity in the allowance for doubtful accounts for the years ended December 31, 2019, 2018 and
2017:
Balance at
Beginning
of Year
Bad Debt
Expense
Write-offs,
net of
Recoveries
Balance
at End
of Year
Year Ended December 31, 2017
Year Ended December 31, 2018
Year Ended December 31, 2019
$
$
$
169 $
200 $
175 $
249 $
80 $
75 $
218 $
105 $
106 $
200
175
144
35
Property and Equipment
Property and equipment is stated at cost. Major expenditures to purchase property or to substantially increase useful lives of property
are capitalized. Maintenance, repairs and minor renewals are expensed as incurred. When assets are retired or otherwise disposed
of, their costs and related accumulated depreciation are removed from the accounts and resulting gains or losses are included in
income.
We capitalize 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. We capitalized approximately $4.1 million and $4.0 million of costs incurred for the development of internal-
use software for the years ended December 31, 2019 and 2018, respectively.
We provide 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. We use 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 our office building and related improvements. Software licenses are amortized
over the term of the license.
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, we first compare
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 significant impairments were
recorded during the years ended December 31, 2019, 2018, or 2017.
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:
(cid:404)
(cid:404)
(cid:404)
(cid:404)
(cid:404)
Significant underperformance in comparison to historical or projected operating results;
Significant changes in the manner or use of acquired assets or our overall strategy;
Significant negative trends in our industry or the overall economy;
A significant decline in the market price for our common stock for a sustained period; and
Our market capitalization falling below the book value of our net assets.
Goodwill and Intangible Assets
Intangible assets include customer relationships, trade names, technology, 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. We review
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, we will first assess qualitative factors to determine whether it is necessary to
recalculate the fair value of the intangible assets with indefinite lives. If we believe, 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, we calculate 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. We did not recognize any impairments related to indefinite-lived
intangibles during 2019, 2018 or 2017.
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 our goodwill is allocated to our reporting units, which are the same as
our 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.
36
We review for goodwill impairment by first assessing qualitative factors to determine whether any impairment may exist. If we
believe, 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 the carrying value, then goodwill is written down by this
difference. We performed a qualitative analysis as of October 1, 2019 and determined the fair value of each reporting unit likely
significantly exceeded the carrying value. No impairments were recorded during the years ended December 31, 2019, 2018 or 2017.
The carrying amount of goodwill related to our Canadian subsidiary at December 31, 2019 was $2.3 million. A substantial portion
of the revenue earned by our Canadian subsidiary is concentrated with one customer. If we are unable to renew or retain our contract,
which expires in March 2021, our goodwill associated with our Canadian subsidiary would likely be impaired.
Income Taxes
We use 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. We use the deferral
method of accounting for our investment tax credits related to state tax incentives. During the years ended December 31, 2019, 2018
and 2017, we recorded income tax benefits relating to these tax credits of $24,000, $0, and $4,000, respectively. Interest and
penalties related to income taxes are included in income taxes in the Statement of Income.
We recognize 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 our 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. We recognize 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
$
$
1,224 $
(2,081)
(857) $
1,514 $
(3,566)
(2,052) $
1,845
(2,310)
(465)
2019
2018
(In thousands)
2017
Cash and Cash Equivalents
We consider all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents
were $3.7 million and $1.8 million as of December 31, 2019, and 2018, respectively, consisting primarily of money market accounts.
At certain times, cash equivalent balances may exceed federally insured limits.
Leases
We adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“Topic 842” or the “New Leases Standard”)
effective January 1, 2019 using a modified retrospective transition and did not adjust prior periods. We elected practical expedients
related to existing leases at transition to not reassess whether contracts are or contain leases, to not reassess lease classification,
initial direct costs, or lease terms. Additionally, we elected the practical expedient to account for lease and non-lease components
as a single lease component for all asset classifications. We have also made a policy election to not record short-term leases with a
duration of 12 months or less on the balance sheet.
Topic 842 requires lessees to recognize a lease liability and a right-of-use (“ROU”) asset on the balance sheet for operating leases.
We recorded $2.3 million of ROU assets and $2.3 million of lease liabilities related to operating leases at the date of transition. The
ROU assets recorded were net of $43,000 of accrued liabilities and prepaid expenses representing previously deferred (prepaid)
rent. There was no significant impact to the consolidated statements of income, comprehensive income, shareholders’ equity or cash
flows. Accounting for finance leases is substantially unchanged.
37
We determine whether a lease is included in an agreement at inception. Operating lease ROU assets are included in operating lease
right-of-use assets in our consolidated balance sheet. Finance lease assets are included in property and equipment. Operating and
finance lease liabilities are included in other current liabilities and other long term liabilities. Certain lease arrangements may include
options to extend or terminate the lease. We include these provisions in the ROU and lease liabilities only when it is reasonably
certain that we will exercise that option. Lease expense for operating lease payments is recognized on a straight-line basis over the
lease term and is included in direct expenses and selling, general and administrative expenses. Our lease agreements do not contain
any residual value guarantees.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make
lease payments during the lease term. ROU assets and lease liabilities are recorded at lease commencement based on the estimated
present value of lease payments. Because the rate of interest implicit in each lease is not readily determinable, we use our estimated
incremental collateralized borrowing rate at lease commencement, to calculate the present value of lease payments. When
determining the appropriate incremental borrowing rate, we consider our available credit facilities, recently issued debt and public
interest rate information
Fair Value Measurements
Our 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
our market assumptions. The inputs are then classified into the following hierarchy: (1) Level 1 Inputs—quoted prices in active
markets for identical assets and liabilities; (2) Level 2 Inputs—observable market-based inputs other than Level 1 inputs, such as
quoted prices for similar assets or liabilities in active markets, quoted prices for similar or identical assets or liabilities in markets
that are not active, or other inputs that are observable or can be corroborated by observable market data; (3) Level 3 Inputs—
unobservable inputs.
The following details our financial assets within the fair value hierarchy at December 31, 2019 and 2018:
As of December 31, 2019
Money Market Funds
Total Cash Equivalents
As of December 31, 2018
Money Market Funds
Total Cash Equivalents
Level 1
Level 2
Level 3
Total
(In thousands)
$
$
$
$
3,662 $
3,662 $
1,848
1,848 $
-- $
-- $
--
-- $
-- $
-- $
3,662
3,662
--
-- $
1,848
1,848
There were no transfers between levels during the years ended December 31, 2019 and 2018.
Our long-term debt described in Note 8 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,
2019
December 31,
2018
$
$
(In thousands)
34,281 $
35,205 $
37,966
38,257
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, 2019 and 2018, there was no indication of impairment related to these
assets.
Commitments and Contingencies
From time to time, we are 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. There were no outstanding claims at December 31, 2019.
38
A sales tax accrual was recorded in 2019 after we became aware that a state sales tax liability was both probable and estimable as
of December 31, 2019, due to sales taxes that should have been collected from customers in 2019 and certain previous years. As a
result, we recorded an expense of $775,000 in selling and administrative expenses and an associated liability in accrued expenses.
We are working through voluntary disclosure agreements with certain states and will have procedures in place to start collecting
and remitting sales tax in the second quarter of 2020. State and local jurisdictions have differing rules and regulations governing
sales, use, and other taxes and these rules and regulations can be complex and subject to varying interpretations that may change
over time. As a result, we could face the possibility of tax assessment and audits, and our liability for these taxes and associated
interest and penalties could exceed our original estimates. In addition, we will incur additional sales tax expense in the first quarter
of 2020, since we will not start collecting sales tax from customers until the second quarter of 2020.
We became self-insured for group medical and dental insurance on January 1, 2019. We carry excess loss coverage in the amount
of $150,000 per covered person per year for group medical insurance. We do not self-insure for any other types of losses, and
therefore do not carry any additional excess loss insurance. We record a reserve for our group medical and dental insurance for all
unresolved claims and for an estimate of incurred but not reported (“IBNR”) claims. On a quarterly basis, we adjust our accrual
based on a review of our claims experience and a third-party actuarial IBNR analysis. As of December 31, 2019, our accrual related
to self-insurance was $270,000.
Earnings Per Share
Prior to the Recapitalization, net income per share of our 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 our
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 participation rights of the former class A and former class B
common stock under our then-effective Articles of Incorporation as if the earnings for the year had been distributed.
As described in Note 2, we completed a Recapitalization in April 2018, resulting in the elimination of the class B common stock
and settlement of all then-existing outstanding class B share-based awards and reclassification of all 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.
We had 16,221, 93,346 and 104,647 options of Common Stock (former class A shares) for the years ended December 31, 2019,
2018 and 2017, respectively and 1,858 options of former class B shares for the year ended December 31, 2017, respectively which
have been excluded from the diluted net income per share computation because their inclusion would be anti-dilutive.
39
2019
2018
2017
Common
Stock
Common
Stock
(formerly
Class A)
Class B
Common
Stock
(In thousands, except per share data)
Common
Stock
(formerly
Class A)
Class B
Common
Stock
$
32,406 $
25,423 $
4,624 $
11,388 $
11,555
(109)
32,297 $
(82)
25,341 $
(18)
4,606 $
(88)
11,300 $
(87)
11,468
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
24,809
1.30 $
23,562
1.08 $
3,527
1.31 $
20,770
0.54 $
3,514
3.26
$
Numerator for net income per share - diluted:
Net income attributable to common shareholders
for basic computation
$
32,297 $
25,341 $
4,606 $
11,300 $
11,468
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
24,809
23,562
3,527
20,770
3,514
844
886
101
857
89
25,653
1.26 $
24,448
1.04 $
3,628
1.27 $
21,627
0.52 $
3,603
3.18
$
Recent Accounting Pronouncements Not Yet Adopted
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. We believe our adoption on January 1, 2020 will not significantly impact our results of operations and financial position.
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. We plan to adopt the guidance prospectively and
believe our adoption on January 1, 2020 will not significantly impact our results of operations and financial position.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). Among other
clarifications and simplifications related to income tax accounting, this ASU simplifies the accounting for income taxes by
eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes
in an interim period, hybrid taxes and the recognition of deferred tax liabilities for outside basis differences. The guidance is
effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. Early adoption is
permitted in interim or annual periods with any adjustments reflected as of the beginning of the annual period that includes that
interim period. Additionally, entities that elect early adoption must adopt all the amendments in the same period. Amendments are
to be applied prospectively, except for certain amendments that are to be applied either retrospectively or with a modified
retrospective approach through a cumulative effect adjustment recorded to retained earnings. We are currently in the process of
further evaluating the impact that this new guidance will have on our consolidated financial statements.
40
(2) Recapitalization
On April 16, 2018, our shareholders approved, among other things, an amendment to our Amended and Restated Articles of
Incorporation (the “Articles”) to effect a recapitalization (the “Recapitalization”) pursuant to which each share of our then-existing
class B common stock was exchanged for one share of the our then-existing Class A common stock plus $19.59 in cash, without
interest. On April 17, 2018, we filed an amendment to our Articles effecting the Recapitalization, followed by an amendment and
restatement of our Articles, which resulted in the elimination of our class B common stock and the reclassification of our class A
common stock as a share of Common Stock, par value $0.001 per share (“Common Stock”). We 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.”
In connection with the Recapitalization, on April 18, 2018, we entered into a credit agreement with First National Bank of Omaha,
a national banking association (“FNB”), as described in Note 8.
(3) Contracts with Customers
The following table disaggregates revenue for the years ended December 31, 2019 and 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
2019
2018
114,329 $
4,992
2,766
5,895
127,982 $
104,777
4,775
3,163
6,971
119,686
$
$
Our solutions within the digital VoC platform in 2019, 2018 and 2017 accounted for 62.7%, 49.6% and 33.9% of total revenue,
respectively. 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
December 31,
2019
December 31,
2018
$
$
$
11,639 $
103 $
(16,354 ) $
11,922
53
(16,244 )
41
Significant changes in contract assets and contract liabilities during the years ended December 31, 2019 and 2018 are as follows (in
thousands):
2019
2018
Contract
Asset
Deferred
Revenue
Contract
Asset
Increase (Decrease)
Deferred
Revenue
Revenue recognized that was included in deferred revenue at
beginning of year due to completion of services
$
- $
(15,785) $
- $
(16,372)
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
-
15,631
-
16,119
(53)
-
(74)
-
-
264
-
-
(145)
-
103
-
53
-
We have 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, 2019
approximated $1,097,000, of which $1,037,000 and $60,000 are expected to be recognized during 2020 and 2021, respectively.
(4) Equity Investments
We make equity investments to promote business and strategic objectives. For investments that do not have a readily determinable
fair value, we apply either cost or equity method of accounting depending on the nature of our investment and our 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. During 2017, we acquired a $1.3
million investment in convertible preferred stock of PracticingExcellence.com, Inc., a privately-held Delaware corporation (“PX”).
It is not practicable for us to estimate fair value at each reporting date due to the cost and complexity of the calculations for this
non-public entity. Our investment in PX 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. We have a seat on PX's board of directors and our investment, which is not considered to be in-substance common
stock, represents approximately 15.7% of the issued and outstanding equity interests in PX.
42
(5)
Property and Equipment
At December 31, 2019, and 2018, 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
2019
2018
(In thousands)
5,025 $
2,706
24,532
9,349
41
425
42,078
28,548
13,530 $
5,321
2,900
26,694
9,349
41
425
44,730
30,577
14,153
$
$
Depreciation and amortization expense related to property and equipment, including assets under capital lease, for the years ended
December 31, 2019, 2018, and 2017 was $5.4 million, $4.8 million, and $4.0 million, respectively. There were no significant
impairments in property and equipment during 2019, 2018, and 2017.
(6) Goodwill and Intangible Assets
Goodwill and intangible assets consisted of the following at December 31, 2019:
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
$
57,935
$
57,935
5
5
- 15
7
- 10
$
1,191
9,338
1,360
1,572
12,270
13,461 $
9,154
1,007
1,572
11,733
11,733 $
1,191
184
353
--
537
1,728
43
Goodwill and intangible assets consisted of the following at December 31, 2018:
Useful Life
(In years)
Gross
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
$
$
5
5
- 15
7
- 10
Accumulated
Amortization
(In thousands)
$
57,831
1,191
9,327
1,360
1,572
12,259
13,450 $
9,011
765
1,572
11,348
11,348 $
Net
57,831
1,191
316
595
--
911
2,102
The following represents a summary of changes in the carrying amount of goodwill for the years ended December 31, 2019 and
2018 (in thousands):
Balance as of December 31, 2017
Foreign currency translation
Balance as of December 31, 2018
Foreign currency translation
Balance as of December 31, 2019
$
$
$
58,021
(190)
57,831
104
57,935
Aggregate amortization expense for customer related intangibles, trade names, and technology for the years ended December 31,
2019, 2018 and 2017 was $374,000, $662,000, and $610,000, respectively. Estimated future amortization expense for 2020, 2021
and 2022 is $318,000, $180,000, and $39,000, respectively.
(7)
Income Taxes
For the years ended December 31, 2019, 2018, and 2017, 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
2019
2018
(In thousands)
2017
40,045 $
474
40,519 $
32,056 $
2,653
34,709 $
32,750
1,533
34,283
2019
2018
(In thousands)
2017
5,574 $
718
6,292 $
94 $
33
127 $
1,322 $
372
1,694 $
2,144 $
1,328
3,472 $
882 $
(178)
704 $
204 $
282
486 $
10,947
(1,596 )
9,351
387
704
1,091
837
61
898
8,113 $
4,662 $
11,340
$
$
$
$
$
$
$
$
$
44
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, we made a reasonable estimate as of
December 31, 2017, and recorded a provisional net tax benefit of $1.9 million related to the remeasurement of the deferred tax
assets and liabilities related to the following elements of the Tax Act:
(cid:404) Reduction in the U.S. Federal Corporate Tax Rate: The Tax Act reduced the corporate tax rate to 21%, effective January
1, 2018.
(cid:404) Availability of 100% bonus depreciation on assets placed in service after September 27, 2017.
(cid:404) 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, we were also subject to a one-time mandatory deemed repatriation tax on accumulated
non-U.S. earnings, payable over eight years.
In addition, as a result of the Tax Act, we determined that we would no longer indefinitely reinvest the earnings of our 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. In 2019, we recorded additional withholding tax of $107,000 for the unremitted Canadian earnings.
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, we are continuing to evaluate this provision of the Tax Act. Under Generally Accepted Accounting Principles,
we 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. We elected the current period expense method and have 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 $13,000 and $40,000 in 2019 and 2018, respectively.
We received notice in December 2019, that we met qualification requirements for the Nebraska Advantage LB312 Act (“NAA”)
related to certain investment and full-time equivalent employee thresholds in the year ended 2017. NAA provides direct refunds of
sales tax on qualified property, as well as investment credits and employment credits that can be claimed through credits of Nebraska
income tax, employment tax, and sales tax on non-qualified property. We will receive direct refunds of Nebraska sales tax on
qualified property incurred from 2014 to 2023. Investment credits started to accumulate in 2014 and can be earned through 2023.
These credits can be claimed against Nebraska income taxes or through sales tax on non-qualified property through 2028. The
employment credits are earned from 2017 through 2023, and they can be claimed against Nebraska payroll taxes through 2028. In
December, we recorded cumulative adjustments for direct refunds and credits earned through the year ending December 31, 2019,
which reduced operating expenses by approximately $1.9 million. In addition, income tax credits for the years 2017 to 2019 of
$24,000 were recorded as a reduction to income tax expense.
The difference between our 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 2019 and 2018 and 35% for 2017 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 (income) 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
$
$
45
2019
2018
(In thousands)
2017
8,509 $
26
1,344
(419)
34
(24)
(1,579)
--
--
--
--
107
13
102
8,113 $
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
Deferred tax assets and liabilities at December 31, 2019 and 2018, 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
Unrealized translation gain on intercompany loan
Other
Deferred tax liabilities
Net deferred tax liabilities
2019
2018
(In thousands)
$
$
35 $
537
1,267
120
535
--
2,494
(535)
1,959
135
990
1,926
5,553
528
214
12
9,358
(7,399) $
41
424
1,264
198
535
46
2,508
(535)
1,973
95
786
1,944
4,919
505
--
--
8,249
(6,276)
In assessing the realizability of deferred tax assets, we consider 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. We consider 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, we believe it is more
likely than not that it will realize the benefits of these deductible differences excluding the foreign tax credit carryforward.
We had an unrecognized tax benefit at December 31, 2019 and 2018, of $592,000 and $554,000, respectively, excluding interest of
$7,000 and $6,000 at December 31, 2019 and 2018, respectively. Of these amounts, $515,000 and $482,000 at December 31, 2019
and 2018, 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 2019 and 2018 is as follows:
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
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, 2019
(In thousands)
843
(35 )
(66 )
(300 )
112
554
(43 )
--
(300 )
381
592
$
$
$
We file a U.S. federal income tax return, various state jurisdictions returns and a Canada federal and provincial income tax return.
All years prior to 2016 are now closed for US federal income tax and for years prior to 2016 for state income tax returns, and no
exposure items exist for these years. The 2015 to 2019 Canada federal and provincial income tax returns remain open to examination.
46
(8) Notes Payable
Our long-term debt consists of the following:
Term Loans
Less: current portion
Less: unamortized debt issuance costs
Notes payable, net of current portion
2019
2018
(In thousands)
$
$
34,281 $
(4,378 )
(108 )
29,795 $
37,996
(3,667 )
(153 )
34,176
On April 18, 2018, in connection with the Recapitalization, we 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”). We used the Term Loan to fund, in part, the cash portion paid to holders of our 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 repurchases of our Common Stock and the Line of Credit will be used to fund
ongoing working capital needs and for 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 per annum 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 (3.94% at December 31, 2019). 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, 2019 and 2018, the Line of Credit did not have a balance. The weighted average borrowings on the Line of Credit
for year ended December 31, 2019 was $2.4 million. The weighted average interest on borrowings on the Line of Credit for the year
ended December 31, 2019 was 4.72%. There have been no borrowings on the Delayed Draw Term Loan since origination.
We paid a one-time fee equal to 0.25% of the amount borrowed under the Term Loan at the closing of the Credit Facilities. We are
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 our 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 our 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. As of December 31, 2019, we were in
compliance with our financial covenants.
Scheduled maturities of notes payable at December 31, 2019 are as follows:
2020
2021
2022
2023
$
4,418
4,916
5,171
19,776
47
(9)
Share-Based Compensation
We measure and recognize compensation expense for all share-based payments based on the grant-date fair value of those awards.
All of our existing stock option awards and unvested stock awards have been determined to be equity-classified awards. We account
for forfeitures as they occur. As described in Note 2, we 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, we 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.
Our 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 our former class A common stock and
300,000 shares of our 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.
Our 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 our Common Stock and, prior to the Recapitalization, 500,000 shares of our
former class B common stock. The 2004 Director Plan provides for grants of nonqualified stock options to each of our directors
who we do not employ. Beginning in 2018, on the date of each annual meeting of shareholders, 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, options to purchase
36,000 shares of our former class A common stock and 6,000 shares of our 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 the earlier of ten years following the date of grant, or three years from the termination of the outside
director’s service. At December 31, 2019, there were 851,956 shares of Common Stock available for issuance pursuant to future
grants under the 2004 Director Plan. We have accounted for grants of 2,148,044 shares of Common Stock under the 2004 Director
Plan using the date of grant as the measurement date for financial accounting purposes.
Our 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 our 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, 2019, there were 736,492 shares of Common Stock
available for issuance pursuant to future grants under the 2006 Equity Incentive Plan. We have accounted for grants of 1,063,508
shares of 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 2019 and 2018, we granted options to purchase 100,615 and 116,276 shares of Common Stock, respectively. We granted
options to purchase 299,917 shares of our former class A common stock and 49,986 shares of our former class B common stock
during 2017. 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. We do, 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)
2019
2018
2017
Common
Stock
Common
Stock
Common
Stock
(former
Class A)
Former Class
B Common
Stock
2.60 %
34.01 %
2.38 %
7.46
2.59%
32.47%
2.51%
7.28
2.62%
32.45%
2.18%
6.80
8.06%
26.75%
2.18%
6.80
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 our stock based on the expected life of the options at the date of grant.
The expected life of options is the average number of years we estimate that options will be outstanding. We consider groups of
associates that have similar historical exercise behavior separately for valuation purposes.
48
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, 2019:
Common Stock
Outstanding at December 31, 2018
Granted
Exercised
Forfeited
Outstanding at December 31, 2019
Exercisable at December 31, 2019
Number of
Options
Weighted
Average
Exercise
Price
1,373,209 $
100,615 $
(227,902 ) $
-- $
1,245,922 $
807,537 $
15.99
41.64
15.88
--
18.08
14.33
Weighted
Average
Remaining
Contractual
Terms
(Years)
Aggregate
Intrinsic
Value
(In thousands)
$
8,280
4.45 $
3.02 $
59,631
41,677
The following table summarizes information related to stock options for the years ended December 31, 2019, 2018 and 2017:
2019
Common
Stock
2018
Common
Stock (former
Class A)
2017
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)
$
$
$
11.99 $
8,280 $
1,891 $
10.02 $
10,621 $
2,719 $
5.83 $
2,681 $
5,258 $
3.66
202
787
As of December 31, 2019, the total unrecognized compensation cost related to non-vested stock option awards was approximately
$1.5 million which was expected to be recognized over a weighted average period of 2.90 years.
There was no cash received from stock options exercised for the year ended December 31, 2019, 2018 or 2017. We recognized
$934,000, $1.1 million and $1.2 million of non-cash compensation for the years ended December 31, 2019, 2018, and 2017,
respectively, related to options, which is included in direct fixed and selling, general and administrative expenses. The actual tax
benefit realized for the tax deduction from stock options exercised was $1.9 million, $3.8 million and $1.1 million for the years
ended December 31, 2019, 2018 and 2017, respectively.
During 2019 and 2018, we granted 6,005 and 6,793 non-vested shares of Common Stock, respectively, under the 2006 Equity
Incentive Plan. No shares were granted during the year ended December 31, 2017. As of December 31, 2019, we had 84,176 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. We recognized $290,000, $428,000 and $629,000
of non-cash compensation for the years ended December 31, 2019, 2018, and 2017, respectively, related to this non-vested stock,
which is included in direct fixed and selling, general and administrative expenses. The actual tax benefit realized for the tax
deduction from vesting of restricted stock was $168,000 and $1.3 million for the years ended December 31, 2018 and 2017,
respectively. No restricted stock vested during the year end December 31, 2019.
49
The following table summarizes information regarding non-vested stock granted to associates under the 2006 Equity Incentive Plans
for the year ended December 31, 2019:
Outstanding at December 31, 2018
Granted
Vested
Forfeited
Outstanding at December 31, 2019
Common Stock
Weighted
Average Grant
Date Fair Value
Per Share
Common Stock
Outstanding
78,171 $
6,005 $
-- $
-- $
84,176 $
15.61
38.30
--
--
17.23
As of December 31, 2019, the total unrecognized compensation cost related to non-vested stock awards was approximately $411,000
and is expected to be recognized over a weighted average period of 3.03 years.
(10) Leases
We lease printing, computer, other equipment and office space in the United States and Canada. The leases remaining terms as of
December 31, 2019 range from less than one year to 5.7 years.
Certain equipment and office lease agreements include provisions for periodic adjustments to rates and charges. The rates and
charges are adjusted based on actual usage or actual costs for internet, common area maintenance, taxes or insurance, as determined
by the lessor and are considered variable lease costs.
The components of lease expense for the year ended December 31, 2019 included (in thousands):
Operating leases
Finance leases:
Asset amortization
Interest on lease liabilities
Variable lease cost
Short-term lease cost
Total net lease cost
$
$
2019
781
252
39
86
42
1,200
We recorded rent expense in connection with our operating leases of $779,000 and $869,000 in 2018 and 2017, respectively.
50
Supplemental balance sheet information related to leases (in thousands):
Operating leases:
Operating ROU assets
Current operating lease liabilities
Noncurrent operating lease liabilities
Total operating lease liabilities
December 31, 2019
January 1, 2019
$
$
1,628 $
2,287(1)
524
1,139
1,663 $
692(1)
1,639(1)
2,331(1)
(1) Represents the December 31, 2018 balance recorded at implementation of Topic 842
December 31, 2019 December 31, 2018
Finance leases:
Furniture and equipment
Computer Equipment
Computer Software
Property and equipment under finance lease, gross
Less accumulated amortization
Property and equipment under finance lease, net
Current obligations of finance leases
Noncurrent obligations of finance leases
Total finance lease liabilities
Weighted average remaining lease term (in years):
Operating leases
Finance leases
Weighted average discount rate:
Operating leases
Finance leases
$
$
$
$
802 $
511
207
1,520
(734)
786 $
227 $
559
786 $
Supplemental cash flow and other information related to leases was as follows (in thousands):
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Operating cash flows from finance leases
Financing cash flows from finance leases
ROU assets obtained in exchange for operating lease liabilities
ROU assets obtained in exchange for finance lease liabilities
2019
$
1,062
487
224
1,773
(839)
934
204
676
880
4.17
3.56
4.81%
4.60%
789
38
229
16
192
Undiscounted payments under non-cancelable finance and operating leases at December 31, 2019 are as follows (in thousands):
2020
2021
2022
2023
2024
Thereafter
Total minimum lease payments
Less: Amount representing interest
Present value of minimum lease payments
Current portion
Lease obligations, net of current portion
Finance Leases
Operating Leases
$
$
257 $
251
204
123
13
--
848
(62)
786
(227)
559 $
591
453
226
246
203
118
1,837
(174)
1,663
(524)
1,139
51
Undiscounted payments under non-cancelable operating leases and finance leases at December 31, 2018 were as follows (in
thousands):
Year Ending December 31,
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
(11) Related Party
Finance Leases Operating Leases
882
258 $
$
672
241
564
214
273
168
262
85
966
(86)
880
(204)
676
$
One of our directors also served as an officer and director of Ameritas Life Insurance Corp. (“Ameritas”) as of December 31, 2019.
In connection with our regular assessment of our insurance-based associate benefits, which is conducted by an independent
insurance broker, and the costs associated therewith, we purchase dental and vision insurance for certain of our associates from
Ameritas. The total value of these purchases was $242,000, $200,000 and $248,000 in 2019, 2018 and 2017 respectively.
Mr. Hays, our Chief Executive Officer and director, is an owner of 14% of the equity interest of Nebraska Global Investment
Company LLC (“Nebraska Global”). We, directly or indirectly through our 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 in 2017.
Mr. Hays personally incurred approximately $538,000 of fees and expenses in connection with exploring our strategic alternatives,
including the Recapitalization (see Note 2), for which we 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 we would have
directly borne if they had not been advanced by Mr. Hays.
During 2017, we acquired a cost method investment in convertible preferred stock of PX (see Note 4). Also in 2017, we paid
$250,000 to acquire certain perpetual content licenses from PX for content we include in certain of our subscription services. We
also have an agreement with PX which commenced in 2016 under which we act as a reseller of PX services and receive a portion
of the revenues. The total revenue earned from the PX reseller agreement in the years ended December 31, 2019, 2018 and 2017
was $578,000, $439,000 and $633,000, respectively. We will no longer earn revenue under this agreement after December 31, 2020.
(12) Associate Benefits
We sponsor a qualified 401(k) plan covering substantially all associates with no eligibility service requirement. Under the 401(k)
plan, we match 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. We contributed $447,000, $396,000 and $350,000 in 2019, 2018 and
2017, respectively, as a matching percentage of associate 401(k) contributions.
52
(13) Segment Information
Our 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 our revenue and assets by geographic area:
Revenue:
United States
Canada
Total
Long-lived assets:
United States
Canada
Total
Total assets:
United States
Canada
Total
2019
2018
(In thousands)
2017
$
$
$
$
$
$
124,369 $
3,613
127,982 $
78,906 $
2,622
81,528 $
95,668 $
15,017
110,685 $
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
53
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”), our management evaluated, with
the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31,
2019. 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, 2019.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in
Rule 13a-15(f) of the Exchange Act). Our 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.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of our 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, our management
concluded that our internal control over financial reporting was effective as of December 31, 2019.
The effectiveness of our internal control over financial reporting as of December 31, 2019, 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 our internal control over financial reporting that occurred during the quarter ended December 31, 2019, that
has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
We have no other information to report pursuant to this item.
54
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 “Delinquent Section 16(a) Reports,” respectively, in our definitive Proxy
Statement for our 2020 Annual Meeting of Shareholders (“Proxy Statement”) and is hereby incorporated herein by reference.
Information with respect to our executive officers 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.
We have adopted a Code of Business Conduct and Ethics that applies to all of our associates, including our Chief Executive Officer
and Chief Financial Officer and other persons performing similar functions. We have posted a copy of the Code of Business Conduct
and Ethics on our 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 our Secretary. We intend 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 our
website at www.nrchealth.com. We are not including the information contained on our 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,” “2019 Summary
Compensation Table,” “Grants of Plan-Based Awards in 2019,” “Outstanding Equity Awards at December 31, 2019,” “2019
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, 2019.
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)
1,245,922 $
--
1,245,922 $
18.08
--
18.08
1,588,448(2)
--
1,588,448
Plan Category Common Shares
Equity compensation plans approved by security holders (1)
Equity compensation plans not approved by security holders
Total
Includes our 2006 Equity Incentive Plan, 2004 Director Plan, and the 2001 Equity Incentive Plan.
(1)
(2) Under the 2006 Equity Incentive Plan, we had authority to award up to 325,081 additional shares of restricted 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 736,492 shares of Common Stock as of December 31, 2019. The Director Plan
provides for granting options for 3,000,000 shares of Common Stock. Option awards through December 31, 2019 totaled 2,148,044
shares of Common Stock. No future awards are available under the 2001 Equity Incentive Plan due to its expiration.
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.
55
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
Number
(3.1)
(3.2)
(4.1)
(4.2)
EXHIBIT INDEX
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)]
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)]
(4.3)**
Description of the Securities of the Registrant.
(10.1)
(10.2)*
(10.3)*
(10.4)*
(10.5)*
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 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 National Research
Corporation 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 National Research
Corporation 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 National Research
Corporation 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. 000-29466)]
56
Exhibit
Number
(10.6)*
(10.7)*
(10.8)*
(10.9)*
(10.10)*
(10.11)*
Exhibit Description
Form of Restricted Stock Agreement (one year vesting) used in connection with the National Research Corporation
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]
Form of Restricted Stock Agreement (five year vesting) used in connection with the National Research Corporation
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 National Research Corporation 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. 000-29466)]
Form of Restricted Stock Agreement used in connection with the National Research Corporation 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. 000-29466)]
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. 000-29466)]]
National Research Corporation 2006 Equity Incentive Plan, [Incorporated by reference to Appendix A to National
Research Corporation’s Proxy Statement for the 2006 Annual Meeting of Shareholders filed on April 3, 2006 (File
No. 000-29466)]
(10.12)* ** Form of Grant used in connection with the National Research Corporation 2004 Non-Employee Director Stock Plan,
as amended
(21)**
Subsidiary of National Research Corporation
(23)**
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)**
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
(101)**
Financial statements from the Annual Report on Form 10-K of National Research Corporation for the year ended
December 31, 2019, 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.
** Filed herewith.
Item 16.
Form 10-K Summary
None.
57
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page in this
Form 10-K
Report of Independent Registered Public Accounting Firm ..........................................................................................
Consolidated Balance Sheets as of December 31, 2019 and 2018 ................................................................................
Consolidated Statements of Income for the Three Years Ended December 31, 2019 ...................................................
Consolidated Statements of Comprehensive Income for the Three Years Ended December 31, 2019 .........................
Consolidated Statements of Shareholders’ Equity for the Three Years Ended December 31, 2019 .............................
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2019 ............................................
Notes to Consolidated Financial Statements .................................................................................................................
26
28
29
30
31
32
33
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.
58
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 6th day of March 2020.
SIGNATURES
NATIONAL RESEARCH CORPORATION
By: /s/ Michael D. Hays
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
Date
/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
Chief Executive Officer and Director
(Principal Executive Officer)
March 6, 2020
Senior Vice President Finance, Chief Financial
Officer, Treasurer and Secretary (Principal
Financial and Accounting Officer)
Director
Director
Director
Director
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
59
DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
Exhibit 4.3
As of December 31, 2019, National Research Corporation (the “Company,” “we,” “us” or “our”) has one class of securities
registered under Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our common stock, par
value $.001 (“Common Stock”).
The summary of the general terms and provisions of the Common Stock set forth below does not purport to be complete
and is subject to and qualified by reference to the Company’s Amended and Restated Articles of Incorporation (“Articles”) and
Bylaws (“Bylaws”), each of which is incorporated by reference as exhibits to the Annual Report on Form 10-K. For additional
information, please read the Articles and Bylaws and the applicable provisions of the Wisconsin Business Corporation Law.
Authorized Capital Stock
Our authorized capital stock consists of 62,000,000 shares, consisting of: (i) 60,000,000 shares of Common Stock, par
value $0.001 per share, and (ii) 2,000,000 shares of Preferred Stock, par value $0.01 per share. As of February 28, 2020,
25,027,889 shares of Common Stock were issued and outstanding, and no shares of our preferred stock were issued and outstanding.
Common Stock
After all cumulative dividends have been paid or declared and set apart for payment on any shares of preferred stock that
are outstanding, the Common Stock is entitled to such dividends as may be declared from time to time by our board of directors in
accordance with applicable law.
Except as provided under Wisconsin law and except as may be determined by our board of directors with respect to any
series of preferred stock, only the holders of Common Stock shall be entitled to vote for the election of directors of the Company
and on all other matters. Holders of Common Stock are entitled to one vote for each share of Common Stock held by them on all
matters properly submitted to a vote of shareholders, subject to Section 180.1150 of the Wisconsin Business Corporation Law.
Shareholders have no cumulative voting rights, which means that the holders of shares entitled to exercise more than 50% of the
voting power are able to elect all of the directors to be elected.
All shares of Common Stock are entitled to participate equally in distributions in liquidation, subject to the prior rights of
any preferred stock which may be outstanding. Holders of Common Stock have no preemptive rights to subscribe for or purchase
shares of our capital stock. There are no conversion rights, sinking fund or redemption provisions applicable to Common Stock.
The outstanding shares of our Common Stock are fully paid and nonassessable.
Our Common Stock is listed on the NASDAQ Global Market under the trading symbol “NRC.” The transfer agent for our
Common Stock is American Stock Transfer & Trust Company LLC.
Preferred Stock
Pursuant to our Amended and Restated Articles of Incorporation, the board of directors has the authority, without further
action by the shareholders, to issue up to 2,000,000 shares of preferred stock in one or more series and to fix the designations,
powers, preferences, privileges and relative participating, optional or special rights and the qualifications, limitations or restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of
which may be greater than the rights of our Common Stock. The board of directors, without shareholder approval, can issue preferred
stock with voting, conversion or other rights that could adversely affect the voting power and other rights of the holders of Common
Stock. As a result, preferred stock could be issued quickly with terms calculated to delay or prevent a change of control of the
company or make removal of management more difficult. Additionally, the issuance of preferred stock may have the effect of
decreasing the market price of our Common Stock and may adversely affect the voting and other rights of the holders of Common
Stock.
As of the date of the Annual Report on Form 10-K of which this Exhibit is a part, no shares of preferred stock are
outstanding.
Anti-Takeover Effects of Various Provisions of Wisconsin Law and Our Amended and Restated Articles of Incorporation
and By-Laws
Certain anti-takeover provisions in the Wisconsin Business Corporation Law are applicable to “resident domestic
corporations” (we do not believe we are a resident domestic corporation but it is a fact-specific determination). Through Article 10
of our Amended and Restated Articles of Incorporation, we have elected to be treated as an “issuing public corporation” for purposes
of the “Fair Price” and “Control Share” statutes described below. In addition, Article 9 of our Amended and Restated Articles of
Incorporation incorporates a substantial portion of the “Business Combination” statute described below. Because these provisions
are set forth in our Amended and Restated Articles of Incorporation rather than by statute, assuming we are not otherwise a resident
domestic corporation, future amendments could eliminate or modify these provisions.
Control Share Statute. Section 180.1150 of the Wisconsin Business Corporation Law provides that the voting power of
shares of public Wisconsin corporations such as us held by any person or persons acting as a group in excess of 20% of the voting
power in the election of directors is limited to 10% of the full voting power of those shares. This statutory voting restriction does
not apply to shares acquired directly from us or in certain specified transactions or shares for which full voting power has been
restored pursuant to a vote of shareholders.
Fair Price Statute. Section 180.1130 to 180.1133 of the Wisconsin Business Corporation Law provide that some “business
combinations” not meeting specified adequacy-of-price standards must be approved by a vote of at least 80% of the votes entitled
to be cast by shareholders and by two-thirds of the votes entitled to be cast by shareholders other than a “significant shareholder”
who is a party to the transaction. The term “business combination” is defined to include, subject to some exceptions, a merger or
consolidation of us (or any subsidiary of ours) with, or the sale or other disposition of substantially all of our assets to, any significant
shareholder or affiliate thereof. “Significant shareholder” is defined generally to include a person that is the beneficial owner of
10% or more of the voting power of the common stock.
Business Combinations. Sections 180.1140 to 180.1144 of the Wisconsin Business Corporation Law regulate a broad
range of “business combinations” between a Wisconsin corporation and an “interested stockholder.” Wisconsin Business
Corporation Law defines a “business combination” to include a merger or share exchange, sale, lease, exchange, mortgage, pledge,
transfer, or other disposition of assets equal to at least 5% of the market value of the stock or assets of a corporation or 10% of its
earning power, issuance of stock or rights to purchase stock with a market value equal to 5% of the outstanding stock, adoption of
a plan of liquidation, and certain other transactions involving an “interested stockholder.” An “interested stockholder” is defined as
a person who beneficially owns, directly or indirectly, 10% of the voting power of the outstanding voting stock of a corporation, or
who is an affiliate or associate of the corporation and beneficially owned 10% of the voting power of the then outstanding voting
stock within the last three years. Sections 180.1140 to 180.1144 prohibit a corporation from engaging in a business combination
(other than a business combination of a type specifically excluded from the coverage of the statute) with an interested stockholder
for a period of three years following the date such person becomes an interested stockholder, unless the board of directors approved
the business combination or the acquisition of the stock that resulted in a person becoming an interested stockholder before such
acquisition. Business combinations after the three-year period following the stock acquisition date are permitted only if:
(cid:404)
(cid:404)
(cid:404)
(cid:404)
the board of directors approved the acquisition of the stock prior to the acquisition date; or
the business combination is approved by a majority of the outstanding voting stock not beneficially owned by
the interested stockholder; or
the consideration to be received by shareholders meets certain requirements with respect to form and amount;
or
the business combination is of a type specifically excluded from the coverage of the statute.
Our Amended and Restated Articles of Incorporation contain provisions that are similar to the provisions of Sections 180.1140 to
180.1144.
Section 180.1134 provides that, in addition to the vote otherwise required by law or the articles of incorporation of an
issuing public corporation, the approval of the holders of a majority of the shares entitled to vote is required before such corporation
can take certain action while a takeover offer is being made or after a takeover offer has been publicly announced and before it is
concluded. Under Section 180.1134, shareholder approval is required for the corporation to:
(cid:404)
acquire more than 5% of the outstanding voting shares at a price above the market price from any individual or
organization that owns more than 3% of the outstanding voting shares and has held such shares for less than two
years, unless a similar offer is made to acquire all voting shares; or
(cid:404)
sell or option assets of the corporation that amount to at least 10% of the market value of the corporation, unless
the corporation has at least three independent directors and a majority of the independent directors vote not to
have the provision apply to the corporation.
The restrictions described in the first bullet point above may have the effect of deterring a shareholder from acquiring our shares
with the goal of seeking to have us repurchase such shares at a premium over the market price.
Under our Amended and Restated Articles of Incorporation and by-laws, our board of directors is divided into three classes,
with staggered terms of three years each. Each year the term of one class expires. The Amended and Restated Articles of
Incorporation provide that any vacancies on the board of directors shall be filled only by the affirmative vote of a majority of the
directors in office, even if less than a quorum. Any director so elected will serve until the next election of the class for which such
director is chosen and until his or her successor is duly elected and qualified.
Our Amended and Restated Articles of Incorporation provide that any directors may be removed from office, but only for
cause by the affirmative vote of at least 66-2/3% of all outstanding shares entitled to vote in the election of directors. However, if
at least two-thirds of the board of directors plus one director vote to remove a director, such director may be removed without cause
by a majority of the voting power of our outstanding shares of capital stock entitled to vote thereon.
In addition, our by-laws establish a procedure that shareholders seeking to call a special meeting of shareholders must
satisfy. This procedure involves notice to us, our receipt of written demands for a special meeting from holders of 10% or more of
the issued and outstanding shares of Common Stock, a review of the validity of such demands by an independent inspector appointed
by us and the fixing of the record and meeting dates by the board of directors. In addition, shareholders demanding such a special
meeting must deliver to us a written agreement to pay the costs we incur in holding a special meeting, including the costs of preparing
and mailing the notice of meeting and the proxy material for our solicitation of proxies for use at such meeting, in the event such
shareholders are unsuccessful in their proxy solicitation.
Our by-laws also provide the board of directors with discretion in postponing shareholder meetings, including, within
some limits, special meetings of shareholders. Additionally, the chief executive officer or the board of directors, acting by resolution,
may adjourn a shareholder meeting at any time prior to the transaction of business at such meeting. Our by-laws also contain strict
time deadlines and procedures applicable to shareholders seeking to nominate a person for election as a director or to otherwise
bring business before a meeting.
These provisions of our Articles and Bylaws and the Wisconsin Business Corporation Law could have the effect of
delaying or preventing a change of control of the Company.
FORM OF GRANT USED IN CONNECTION WITH THE NATIONAL RESEARCH CORPORATION
2004 NON-EMPLOYEE DIRECTOR STOCK PLAN, AS AMENDED
Exhibit 10.12
[Director name]
Re: Stock Option Grant National Research Corporation Director Stock Plan
This letter is to confirm that on [date], you were automatically granted a nonqualified stock option to purchase [# of shares] shares
of Common Stock, $.001 par value, of National Research Corporation (“Company”) pursuant to the terms of the 2004 Non-
Employee Director Stock Plan (the “Plan”).
Your stock option to purchase up to [# of shares] shares of Common Stock is subject to the terms and conditions of the Plan. The
option price is [price] per share, which was the last sale price of a share of Common Stock on the NASDAQ Stock Market on [date
of grant], the date of grant.
In accordance with the terms of the Plan, your options are not exercisable until one year after the date of grant unless your status as
a director of the Company terminates because of death prior to that time, in which event the options become immediately exercisable
in full and may be exercised for a period of three (3) years after the date of death. If for any reason other than death you cease to be
an outside director of the Company within one year of the date of grant, the options will be cancelled as of the date of such
termination. Subject to the foregoing, the options expire ten (10) years after the date of grant, or if earlier, three (3) years after you
cease to be an outside director of the Company.
The other terms which govern your stock options are as set forth below and as provided in the Plan.
Procedure for Exercise. You may exercise your options in whole or in part at any time after the options have become exercisable
(as discussed above) by delivering written notice to the Company together with payment of the option price in cash, previously
acquired shares of Common Stock valued at their fair market value or such other forms as the Board or Plan administrator approves.
Securities Laws Matters. Applicable federal and state securities laws govern the disposition by you of shares purchased through the
exercise of your options. You may sell such shares only (1) pursuant to an effective registration statement under the Securities Act
of 1933, as amended (“Act”), or (2) in a transaction which is exempt from registration under the Act, such as a sale which fully
complies with Rule 144 under the Act.
Non-Transferability. Your options may not be sold or transferred other than by will or under the laws of descent and distribution,
except that an option may be transferred to the extent allowed by the Board or the Plan administrator. The designation of a
beneficiary will not constitute a transfer.
Conformity with Plan. Your options are intended to conform in all respects with, and are subject to all applicable provisions of, the
Plan. Inconsistencies between this letter and the Plan will be resolved in accordance with the terms of the Plan.
Please execute and return the enclosed copy of this letter to the Company. By doing so, you agree to be bound by all of the terms of
this letter and of the Plan.
Very truly yours,
NATIONAL RESEARCH CORPORATION
By: [Authorized Officer]
Accepted on this _____ day of _______________, [yyyy].
[Director name], Director
Subsidiary of National Research Corp.
National Research Corporation’s subsidiary as of December 31, 2019 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, 333-226715, and 333-226716) on Forms S-8 and (File Nos. 333-
120529, 333-211190, and 333-232534) on Forms S-3 of National Research Corporation of our report dated March 6, 2020, with
respect to the consolidated balance sheets of National Research Corporation and subsidiary as of December 31, 2019 and 2018, 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, 2019, and the related notes (collectively, the consolidated financial statements), and the
effectiveness of internal control over financial reporting as of December 31, 2019, which report appears in the December 31, 2019
annual report on Form 10-K of National Research Corporation.
Our report dated March 6, 2020, 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 6, 2020
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 6, 2020
/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 6, 2020
/s/ Kevin R. Karas
Kevin R. Karas
Chief Financial Officer
Certification Pursuant to 18 U.S.C. Section 1350
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32
In connection with the accompanying Annual Report on Form 10-K of National Research Corporation (the “Company”) for the
year ended December 31, 2019 (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 6, 2020
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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