| NATIONAL RESEARCH CORP Item 1A Risk Factors 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 rely on a limited number of key clients, and a loss of one or more of these key clients will adversely affect our operating results |
| We rely on a limited number of key clients for a substantial portion of our revenues |
| Our ten largest clients for the years ended 2005, 2004 and 2003, generated 40prca, 43prca and 45prca, respectively, of our revenues in each of those years |
| The US Department of Veterans Affairs accounted for 11prca, 12prca and 15prca of our total revenues for the years ended 2005, 2004 and 2003, respectively |
| We cannot assure you that we will maintain our existing client base, maintain or increase the level of revenue or profits generated by our existing clients, or be able to attract new clients |
| Furthermore, the healthcare industry continues to undergo consolidation and we cannot assure you that such consolidation will not cause us to lose clients |
| The loss of one or more of our large clients or a significant reduction in business from such clients, regardless of the reason, will have a negative effect on our revenues and a corresponding effect on our operating and net income |
| See “Risk Factors — Because our clients are concentrated in the healthcare industry, we may be adversely affected by a business downturn or consolidation with respect to the healthcare industry |
| ” 6 _________________________________________________________________ We depend on performance tracking contract renewals for a large share of our revenues and our operating results could be adversely affected |
| We expect that a substantial portion of our revenues for the foreseeable future will continue to be derived from written and oral contracts for renewable performance tracking services |
| Substantially all such written contracts are renewable annually at the option of our clients, although a client generally has no minimum purchase commitment under a contract and the contracts are generally cancelable on short or no notice without penalty |
| To the extent that clients fail to renew or defer their renewals from the quarter we anticipate, our quarterly results may be materially adversely affected |
| Our ability to secure renewals depends on, among other things, our ability to gather and analyze performance data in a consistent, high-quality and timely fashion |
| In addition, the performance tracking and market research activities of our clients are affected by accreditation requirements, enrollment in managed care plans, the level of use of satisfaction measures in healthcare organizations’ overall management and compensation programs, the size of operating budgets, clients’ operating performance, industry and economic conditions, and changes in management or ownership |
| As these factors are beyond our control, we cannot assure you that we will be able to maintain our renewal rates |
| Any material decline in renewal rates from existing levels would have an adverse effect on our revenues and a corresponding effect on our operating and net income |
| Our operating results may fluctuate on a quarterly basis, and this may cause our stock price to decline |
| Our operating results have fluctuated from period to period in the past and will likely fluctuate significantly in the future due to various factors |
| There has historically been, and we expect that there will continue to be, fluctuation in our financial results related to the Market Guide, a stand-alone market information intelligence source and comparative performance database |
| We recognize revenue when the Market Guides are delivered to the principal customers pursuant to their contracts, typically in the third quarter of the year |
| Substantially all of the related costs are deferred and subsequently charged to direct expenses contemporaneously with the recognition of the revenue |
| A delay in completing and delivering the Market Guide in a given year, the timing of which is dependent upon our ability to access a third-party’s respondent panel on a timely basis, could delay recognition of such revenues and expenses, which could materially affect operating results for the interim periods |
| We generate additional revenues from incidental customers subsequent to the completion of each edition |
| The profit margin earned on such revenues is generally higher than that earned on revenues realized from customers under contract at the time of delivery |
| In addition, our overall operating results may fluctuate as a result of a variety of other factors, including the size and timing of orders from clients, client demand for our services (which, in turn, is affected by factors such as accreditation requirements, enrollment in managed care plans, operating budgets and clients’ operating performance), the hiring and training of additional staff, postal rate changes, and industry and general economic conditions |
| Because a significant portion of our overhead, particularly some costs associated with owning and occupying our building and full-time personnel expenses, is fixed in the short-term, our results of operations may be materially adversely affected in any particular quarter if revenues fall below our expectations |
| These factors, among others, make it possible that in some future quarter our operating results may be below the expectations of securities analysts and investors, which would have a material adverse effect on the market price of our common stock |
| 7 _________________________________________________________________ We operate in a highly competitive market and we could experience increased price pressure and expenses as a result |
| The healthcare information and market research industry is highly competitive |
| We compete both with healthcare organizations’ internal marketing, market research and/or quality improvement departments that create their own performance measurement tools, and with relatively small specialty research firms that provide survey-based healthcare market research and/or performance assessment |
| Our main competitors among such specialty firms are Press Ganey Associates, who we believe has revenues that are significantly larger than our revenues, and three or four other companies that we believe have revenues that are smaller than our revenues |
| We, to a certain degree, currently compete with, and we anticipate that in the future we may increasingly compete with, traditional market research firms that are significant providers of survey-based, general market research and firms that provide services or products that complement healthcare performance assessments, such as healthcare software or information systems |
| Although only a few of these competitors have to date offered survey-based, healthcare market research that competes directly with our services, many of these competitors have substantially greater financial, information gathering and marketing resources than 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 client service and marketing expenditures and market share losses, among other factors |
| We cannot assure you that we will continue to compete successfully against existing or new competitors, and our revenues and operating net income could be adversely affected as a result |
| Because our clients are concentrated in the healthcare industry, our revenues and operating results may be adversely affected by a business downturn or consolidation with respect to the healthcare industry |
| Substantially all of our revenues are 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 |
| Many federal and state legislators have proposed or have announced that they intend to propose programs to reform portions of the US healthcare system |
| These programs could result in lower reimbursement rates and otherwise change the environment in which providers and payers operate |
| In addition, large private purchasers of healthcare services are placing increasing cost pressure on providers |
| Healthcare providers may react to these cost pressures and other uncertainties by curtailing or deferring purchases, including purchases of our services |
| Moreover, there has been consolidation of companies in the healthcare industry, a trend which we believe will continue |
| Consolidation in this industry, including the potential acquisition of certain of our clients, could adversely affect aggregate client budgets for our services, or could result in the termination of a client’s relationship with us |
| The impact of these developments on the healthcare industry is difficult to predict and could have an adverse effect on our revenues and a corresponding effect on our operating and net income |
| Our future success depends on our ability to manage our growth, including by identifying acquisition candidates and effectively integrating acquired companies |
| Since our inception, our growth has placed significant demands on our management, administrative, operational and financial resources |
| In order to manage our growth, we will need to continue to implement and improve our operational, financial and management information systems and continue to expand, motivate and effectively manage an evolving workforce |
| If our management is unable to effectively manage under such circumstances, the quality of our services, our ability to retain key personnel and our results of operations could be materially adversely affected |
| Furthermore, we cannot assure you that our business will continue to expand |
| Reductions in clients’ spending on performance tracking and market research, increased competition, pricing pressures and other general economic and industry trends could adversely affect our growth |
| 8 _________________________________________________________________ We may achieve a portion of our future revenue growth, if any, through acquisitions of complimentary businesses, products, services or technologies, although we currently have no commitments or agreements with respect to any such acquisitions |
| Our management has limited experience dealing with the issues of product and service, systems, personnel and business strategy integration posed by acquisitions, and has encountered minor problems with integrating people and processes in connection with past acquisitions |
| We cannot assure you that the integration of any possible future acquisitions will be managed without incurring higher than expected costs and expenses |
| In addition, we cannot assure you that, as a result of such unexpected costs and expenses, any possible future acquisition will not negatively affect our operating and net income |
| We face several risks relating to our ability to collect the data on which our business relies |
| Our ability to provide timely and accurate performance tracking and market research to our clients depends on our ability to collect large quantities of high quality data through surveys and interviews |
| If receptivity to our survey and interview methods by respondents declines, or for some other reason their willingness to complete and return surveys declines, or if we, for any reason, cannot rely on the integrity of the data we receive, then our revenues could be adversely affected, with a corresponding effect on our operating and net income |
| In addition, we currently rely primarily on mail and telephone surveys for gathering information |
| If one or more of our competitors were to develop an online survey process that more effectively and efficiently gathers information, then we would be at a competitive disadvantage and our revenues could be adversely affected, with a corresponding effect on our operating and net income |
| We also rely on a third-party panel of pre-recruited consumer households to produce in a timely manner, annual editions of the Market Guide |
| If we are not able to continue to use this panel, or the time period in which we use this panel is altered and we cannot find an alternative panel on a timely, cost competitive basis, we could face an increase in our costs or an inability to effectively produce the Market Guide |
| In either case, our operating and net income would be negatively affected |
| Our principal shareholder effectively controls our company |
| Michael D Hays, our Chief Executive Officer, beneficially owned 69dtta7prca of our outstanding common stock as of March 15, 2006 |
| As a result, he is able to control matters requiring shareholder approval, including the election of directors and the approval of significant corporate matters such as change of control transactions |
| The effects of such influence could be to delay or prevent a change of control of our company unless the terms are approved by Mr |
| Our business and operating results could be adversely affected if we are unable to attract or retain key managers and other personnel |
| Our future performance will depend, to a significant extent, upon the efforts and ability of our key personnel who have expertise in gathering, interpreting and marketing survey-based performance information for healthcare markets |
| Although client relationships are managed at many levels within our company, the loss of the services of Michael D Hays, our Chief Executive Officer, or one or more of our other senior managers could have a material adverse effect, at least in the short to medium term, on most significant aspects of our business, including strategic planning, product development, and sales and customer relations |
| As of December 31, 2005, we maintained dlra500cmam000 of key officer life insurance on Mr |
| Our success will also depend on our ability to hire, train and retain skilled personnel in all areas of our business |
| Currently, we do not have employment agreements with our officers or our other key personnel |
| Competition for qualified personnel in our industry is intense, and many of the companies that compete with us for qualified personnel have substantially greater financial and other resources than us |
| Furthermore, we expect competition for qualified personnel to become more intense as competition in our industry increases |
| We cannot assure you that we will be able to recruit, retain and motivate a sufficient number of qualified personnel to compete successfully |
| 9 _________________________________________________________________ If intellectual property and other proprietary information technology were copied or independently developed by our competitors, our operating results could be negatively affected |
| Our success depends in part upon our data collection process, research methods, data analysis techniques, and internal systems and procedures that we have developed specifically to serve clients in the healthcare industry |
| Consequently, we rely on a combination of copyright, trade secret laws and employee nondisclosure agreements to protect our systems, survey instruments and procedures |
| We cannot assure you that the steps we have taken to protect our rights will be adequate to prevent misappropriation of such rights, or that third parties will not independently develop functionally equivalent or superior systems or procedures |
| We believe that our systems and procedures and other proprietary rights do not infringe upon the proprietary rights of third parties |
| We cannot assure you, however, that third parties will not assert infringement claims against us in the future, or that any such claims will not result in protracted and costly litigation, regardless of the merits of such claims, or whether we are ultimately successful in defending against such claims |
| Errors in, or dissatisfaction with, performance tracking and other surveys could adversely affect our business |
| Many healthcare providers, payers and other entities or individuals use our renewable performance tracking and other healthcare surveys in promoting and/or operating their businesses, and as a factor in determining physician or employee compensation |
| Consequently, any errors in the data received or in the final surveys, as well as the actual results of such surveys, can have a significant impact on such providers’, payers’ or other entities’ businesses, and on any such individual’s compensation |
| In addition, parties who have not performed well in our surveys may be dissatisfied with the results of the surveys or the manner in which the results may be used by competitors or others |
| Although any such errors or dissatisfaction with the results of the surveys, or the manner in which the surveys have been used, has not resulted in litigation against us, we cannot assure you that we will not face future litigation, which may be costly, as a result of a healthcare provider’s, payer’s, other entity’s or individual’s allegation of errors in our surveys or dissatisfaction with the results thereof |
| Regulatory developments could adversely affect our revenues and results of operations |
| In the operation of our business, we have access to, or gather certain confidential information, such as medical histories of our respondents |
| As a result, we could be subject to potential liability for any inappropriate disclosure or use of such information |
| Even if we do not improperly disclose confidential information, privacy laws, including the US Health Insurance Portability and Accountability Act of 1996, the US Patriot Act and Canadian legislation relating to personal health information, have had, and could in the future have, the effect of increasing our costs and restricting our ability to gather and disseminate information which could ultimately have a negative effect on our revenues |
| In addition, several years ago, the Centers for Medicare and Medicaid Services initiated a nationwide effort to collect and publicly report hospital quality data, including the patient experience of care questionnaire |
| This questionnaire is called the HCAHPS questionnaire and was developed by the Agency for Healthcare Research and Quality |
| After several years of development and consensus building, the HCAHPS survey program will begin in 2006 |
| This survey program may increase competition and pricing pressures, which could adversely affect our operating and net income |