Business Context and Reporting Period
Company: National Research Corporation (NRC Health)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended September 30, 1999
Business Overview: The Company provides performance tracking services, custom research, and syndicated services. It is currently undergoing a planned internal software conversion and renovating a new headquarters.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 1999 |
Nine Months Ended Sep 30, 1999 |
Nine Months Ended Sep 30, 1998 |
|---|---|---|---|
| Revenues | $5,597,544 | $13,565,808 | $13,050,341 |
| Net Income | $626,407 | $850,056 | $(96,569) |
| Operating Income | $865,365 | $952,045 | $(821,426) |
| EPS (Basic & Diluted) | $0.09 | $0.12 | $(0.01) |
| Cash & Equivalents | $1,116,228 | $1,116,228 | $911,276 |
| Working Capital | $6,000,000 (Approx) | $6,000,000 (Approx) | N/A |
| Debt (Current) | $1,970,754 | $1,970,754 | N/A |
Note: Working capital calculated as Total Current Assets ($14.7M) minus Total Current Liabilities ($8.7M).
Material Changes vs. Prior Period
- Revenue Growth: Nine-month revenue increased 4.0% to $13.6 million, driven by new clients and expanded scope in performance tracking and custom research. Quarterly revenue remained flat at $5.6 million.
- Profitability Turnaround: The Company returned to profitability with $850k net income for the nine months of 1999, compared to a $97k loss in the same period of 1998. This excludes one-time acquisition charges incurred in 1998.
- Expense Increases: Direct expenses rose 30.9% year-over-year (nine months) to $9.1 million, primarily due to $606,000 in software conversion costs and increased labor. Selling, general, and administrative (SG&A) expenses decreased 18.0% to $3.0 million due to reduced marketing and payroll costs.
- Depreciation: Depreciation and amortization increased 125% to $551,000 (nine months) due to the acquisition of intangible assets and internal software development.
- Cash Flow: Net cash provided by operating activities increased to $3.9 million from $2.5 million in the prior year. However, cash and cash equivalents decreased by $3.8 million due to significant investing outflows.
Guidance, Outlook, and Risks
- Software Conversion: Management anticipates the completion of the internal software conversion in the fourth quarter of 1999. Direct expenses as a percentage of revenue are expected to remain elevated until completion.
- Capital Expenditures: The Company is renovating a new headquarters, utilizing a $5.7 million line of credit (currently $1.94 million drawn). This is expected to be refinanced with long-term debt upon completion.
- Year 2000 (Y2K) Risk: The Company estimates total Y2K compliance costs under $100,000, with $57,000 already incurred. While internal systems are largely compliant, the Company faces risk if clients fail to transmit data due to their own Y2K issues. Contingency plans are being finalized.
- Stock Repurchases: The Company repurchased 245,000 shares in early 1999 and authorized an additional 150,000 shares in April 1999. As of October 31, 1999, 10,000 shares of the new authorization had been repurchased.
Investor Verification Checklist
- Software Conversion Timeline: Verify if the internal software conversion is completed in Q4 1999 as projected to assess future margin recovery.
- Headquarters Financing: Confirm the refinancing of the $1.94 million construction line of credit into long-term debt to evaluate future interest obligations.
- Client Y2K Compliance: Monitor for any disruption in data transmission from clients that could impact revenue recognition in late 1999 or early 2000.
- Deferred Revenue: Review the $3.1 million in billings in excess of revenues earned to understand the backlog and future revenue recognition.
- Direct Expense Trends: Track direct expenses as a percentage of revenue post-conversion to ensure they return to historical levels (approx. 53-60%).