NRC

Business Context and Reporting Period

Company: National Research Corporation (NRC Health)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 1998
Business Overview: NRC Health provides renewable performance tracking services, custom research, and syndicated services primarily to the healthcare industry. The company transitioned from S Corporation to C Corporation status in October 1997. A significant event during the period was the acquisition of Healthcare Research Systems, Ltd. ("HRS") effective June 1, 1998.

Key Financial Metrics

Note: Working capital calculated as Total Current Assets ($17,786,612) minus Total Current Liabilities ($5,587,703). Total Debt includes current portion ($30,754) and long-term portion ($82,358).

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 18.7% in the quarter and 11.7% for the nine-month period compared to 1997. Growth was driven by new clients, expanded project scope, and the HRS acquisition.
• Profitability Decline: While the quarter ended September 30, 1998, was profitable ($626k net income), the nine-month period resulted in a net loss of $180,651 compared to a net income of $3.54 million in the prior year. This reversal is primarily due to one-time acquisition costs.
• Acquisition Impact: The acquisition of HRS resulted in a $2.97 million charge for in-process research and development and a $303,740 severance charge. These non-recurring items significantly impacted operating income for the nine-month period.
• Expense Increases: Direct expenses rose 45.7% in the quarter and 29.6% for the nine months, largely due to increased labor, field services, and call center costs. Selling, general, and administrative (SG&A) expenses also increased due to the new Columbus, Ohio location and public company compliance costs.
• Liquidity Position: Cash and cash equivalents decreased significantly from $4.69 million at year-end 1997 to $911,276 at September 30, 1998. This reduction was driven by the $5.6 million cash outflow for the HRS acquisition and capital expenditures.

Guidance, Outlook, and Risks

• Stock Repurchase: In October 1998, the company announced a plan to repurchase up to 245,000 shares of common stock. Approximately 22,000 shares were repurchased in October.
• Year 2000 (Y2K) Compliance: The company estimates total Y2K compliance costs at $126,000, with $26,000 incurred to date. Management does not believe future costs will materially affect operating results. However, a material risk exists if clients fail to be Y2K compliant, as NRC Health relies on client data transmission to provide services.
• Deferred Revenue: The company holds $2.93 million in billings in excess of revenues earned (deferred revenue) and $920,000 in unbilled revenues, which are expected to be recognized within 12 months.
• Acquisition Contingencies: An amendment to the HRS acquisition agreement in October 1998 adjusted purchase price commitments, reducing the first scheduled payment to approximately $1.2 million in March 1999.

Investor Verification Checklist

• Acquisition Integration: Verify the realization of synergies and revenue growth from the HRS acquisition to offset the $3.3 million in one-time charges.
• Cash Burn Rate: Monitor the decline in cash reserves (from $4.7M to $0.9M) and the company's ability to fund operations without additional financing, given the heavy investing outflows.
• Y2K Client Dependency: Assess the Y2K readiness of major clients, as their system failures could disrupt NRC Health's data flow and revenue recognition.
• Expense Management: Track whether direct and SG&A expense ratios stabilize as the new Columbus location and call center operations mature.
• Debt Obligations: Confirm the schedule and impact of the remaining HRS purchase price payments and existing notes payable.