-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Thb5xLB7tbK9l1lrcmCcvrcaZok8rRa7sjihn5UVImjK9t6QbYQUrEkofNoUxmt+ 4JubVmYAyZnjxcaojVZxlw== 0000950124-97-004748.txt : 19970918 0000950124-97-004748.hdr.sgml : 19970918 ACCESSION NUMBER: 0000950124-97-004748 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19970916 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL RESEARCH CORP CENTRAL INDEX KEY: 0000070487 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-TESTING LABORATORIES [8734] FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-33273 FILM NUMBER: 97681268 BUSINESS ADDRESS: STREET 1: 1033 O ST CITY: LINCOLN STATE: NE ZIP: 68508 BUSINESS PHONE: 4024752525 MAIL ADDRESS: STREET 1: 1033 O ST CITY: LINCOLN STATE: NE ZIP: 68508 S-1/A 1 S-1/A 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 16, 1997 REGISTRATION NO. 333-33273 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ NATIONAL RESEARCH CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) WISCONSIN (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) 8732 (PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER) 47-0634000 (I.R.S. EMPLOYER IDENTIFICATION NO.) 1033 "O" STREET LINCOLN, NEBRASKA 68508 (402) 475-2525 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ MICHAEL D. HAYS PRESIDENT AND CHIEF EXECUTIVE OFFICER NATIONAL RESEARCH CORPORATION 1033 "O" STREET LINCOLN, NEBRASKA 68508 (402) 475-2525 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ Copies to: BENJAMIN F. GARMER, III FOLEY & LARDNER 777 EAST WISCONSIN AVENUE MILWAUKEE, WISCONSIN 53202 (414) 271-2400 WILLIAM N. WEAVER, JR. SACHNOFF & WEAVER, LTD. 30 SOUTH WACKER DRIVE CHICAGO, ILLINOIS 60606 (312) 207-1000 ------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED SEPTEMBER 16, 1997 PROSPECTUS 2,100,000 SHARES [NATIONAL RESEARCH CORPORATION LOGO] COMMON STOCK Of the 2,100,000 shares of Common Stock offered hereby, 1,250,000 are being sold by National Research Corporation ("NRC" or the "Company") and 850,000 are being sold by the Selling Shareholder. See "Principal and Selling Shareholders." The Company will not receive any of the proceeds from the sale of shares by the Selling Shareholder. Prior to this offering, there has been no public market for the Common Stock. It is currently estimated that the initial public offering price for the Common Stock will be between $11.00 and $13.00 per share. See "Underwriting" for information relating to the determination of the initial public offering price. The Common Stock has been approved for quotation on the Nasdaq National Market under the symbol NRCI. SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON STOCK OFFERED HEREBY. ------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
===================================================================================================================== PROCEEDS TO PRICE TO UNDERWRITING PROCEEDS TO SELLING PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDER - --------------------------------------------------------------------------------------------------------------------- Per Share............ $ $ $ $ Total(3)............. $ $ $ $ - --------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------
(1) The Company and the Selling Shareholder have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses of the offering payable by the Company estimated at $500,000. (3) The Selling Shareholder has granted the Underwriters a 30-day option to purchase up to an additional 315,000 shares of Common Stock solely to cover over-allotments, if any. See "Underwriting." If all such shares are purchased, the total Price to Public, Underwriting Discount and Proceeds to Selling Shareholder will be $ , $ and $ , respectively. The Common Stock is offered by the several Underwriters when, as and if delivered to and accepted by them and subject to their right to reject orders in whole or in part. It is expected that delivery of the certificates for the Common Stock will be made on or about , 1997. WILLIAM BLAIR & COMPANY ROBERT W. BAIRD & CO. INCORPORATED THE DATE OF THIS PROSPECTUS IS , 1997 3 ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission"), a Registration Statement on Form S-1 (of which this Prospectus is a part) under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the Common Stock offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto, certain parts of which have been omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement and to the exhibits and schedules filed as part of the Registration Statement. Statements contained in this Prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. Copies of the Registration Statement and the exhibits and schedules thereto may be inspected without charge at the public reference facilities maintained by the Securities and Exchange Commission in Room 1024, 450 Fifth Street, N.W., Washington D.C. 20549, and at the regional offices of the Commission located at 7 World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and copies of all or any part thereto may be obtained from such office upon payment of prescribed fees. The Registration Statement, including the exhibits and schedules thereto, is also available on the Commission's Web site at http://www.sec.gov. ------------------------ The Company intends to furnish its shareholders with annual reports containing audited financial statements certified by its independent auditors and quarterly reports containing interim unaudited financial information for the first three quarters of each year. ------------------------ The NRC logo, the NRC Healthcare Market Guide and map design, the NRC Listening System and The Report Card are trademarks or registered trademarks of the Company. ------------------------ CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF THE COMPANY. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON STOCK OR MAINTAIN THE PRICE OF THE COMMON STOCK, AND THE IMPOSITION OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements and related notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, all information contained in this Prospectus: (i) assumes that the Underwriters' over-allotment option is not exercised and (ii) gives retroactive effect to an approximately 239.5-for-1 stock dividend paid on September 15, 1997. This Prospectus contains certain forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements can generally be identified as such because the context of the statement includes words such as the Company "believes," "anticipates," "expects," "estimates," "intends" or other words of similar import. Similarly, statements that describe the Company's future plans, objectives and goals are also forward-looking statements. The Company's actual results, performance or achievements could differ materially from those expressed or implied in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY The Company is a leading provider of ongoing survey-based performance measurement, analysis and tracking services and products to the healthcare industry. The Company addresses the growing need of healthcare providers and payers to measure the care outcomes, specifically satisfaction and health status, of their patients and/or members. NRC has led the industry in developing tools that enable healthcare organizations to obtain service quality information necessary to comply with industry and regulatory standards and to improve their business practices so that they can maximize new member and/or patient attraction, member retention and profitability. Since its founding 16 years ago, NRC has focused on the information needs of the healthcare industry. While performance data has always been of interest to healthcare providers and payers, such information has become increasingly important to these entities as a result of regulatory, industry and competitive requirements. In recent years, the healthcare industry has been under significant pressure from consumers, employers and the government to reduce costs. Through the implementation of managed care, which currently covers approximately 61% of all Americans, the rate of growth in healthcare costs has been substantially reduced. However, the same parties that demanded cost reductions are now concerned that healthcare service quality is being compromised under managed care. This concern has created a demand for consistent, objective performance information by which healthcare providers and payers can be measured and compared and on which physicians' compensation can, in part, be based. NRC offers three primary types of information services and products. The NRC Listening System (the "Listening System"), which represented 75.9% of the Company's total revenues in 1996, is a renewable performance tracking tool for gathering and analyzing data from survey respondents, which can include patients, health plan members, physicians and/or employers. The surveys are customized according to the client's needs and the level at which the client would like performance to be measured (from enterprise-wide to physician/caregiver specific), and, in most cases, are personalized to the services provided to each respondent. Survey results are used by the Company's clients to (i) identify improvements that can be made to business practices, (ii) establish physician and other employee compensation, (iii) identify strengths that can be highlighted in marketing and (iv) comply with industry and regulatory requirements. The syndicated NRC Healthcare Market Guide (the "Market Guide"), which represented 10.1% of the Company's total revenues in 1996, is a stand-alone market information and competitive intelligence source as well as a comparative performance database. The Market Guide allows the Company's clients to assess their performance relative to the industry, access best practice examples and utilize competitive information for marketing purposes. Finally, NRC performs custom research for its clients, assisting them in the identification of areas for improvement and the measurement of market issues and opportunities. Custom research represented 14.0% of the Company's total revenues in 1996. The Company expects that revenues from the Listening System and the Market Guide will grow faster than revenues from custom research. During 1996, NRC provided services to more than 200 healthcare organizations, including health maintenance organizations ("HMOs"), integrated healthcare systems, medical groups and industry regulatory 3 5 bodies. The Company gathered and analyzed over 1,000,000 completed surveys for these clients in 1996. The Company's current clients include Kaiser Permanente-Northern California Region ("Kaiser"), the United States Department of Defense, HealthSouth Corporation, BJC Health System and Mayo Clinic. NRC has benefited from a high rate of renewable revenues. Specifically, over 80% of the Company's total billings in each of the last two years was generated from clients billed in the prior year. NRC increased its revenues from $6.8 million in 1994 to $12.6 million in 1996, a compound annual growth rate of 36.6%. Over this same period, the Company increased its operating income from $1.7 million to $3.7 million, a compound annual growth rate of 49.0%. The Company believes that it can continue to grow rapidly through: (i) expanding the depth and breadth of its current clients' performance tracking programs, since healthcare organizations are increasingly interested in gathering performance information at deeper levels of their organizations and from more of their constituencies, (ii) increasing the cross-selling of its complementary services and products, (iii) adding new clients through penetrating the sizeable portion of the healthcare industry that is not yet conducting performance assessments beyond the enterprise-wide level or is not yet outsourcing this function and (iv) pursuing acquisitions of, or investments in, firms providing products, services or technologies that complement those of the Company. THE OFFERING Shares Offered by the Company........................ 1,250,000 Shares Offered by the Selling Shareholder............ 850,000 Shares Outstanding Immediately After the Offering.... 7,305,000(1) Use of Proceeds...................................... For general corporate purposes, including working capital and possible acquisitions of, or investments in, complementary businesses, products, services or technologies. Nasdaq National Market Symbol........................ NRCI
- ------------------------- (1) Excludes (i) 225,000 shares of Common Stock issuable upon exercise of employee stock options to be granted under the National Research Corporation 1997 Equity Incentive Plan (the "Equity Incentive Plan") simultaneously with this offering at an exercise price per share equal to the initial public offering price, (ii) 505,000 additional shares of Common Stock reserved for future issuance under the Equity Incentive Plan and (iii) 30,000 shares of Common Stock reserved for future issuance under the National Research Corporation Director Stock Plan (the "Director Plan"). See "Management -- Employee Benefit Plans -- Equity Incentive Plan" and "-- Director Compensation." 4 6 SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------------- ----------------- 1992 1993 1994 1995 1996 1996 1997 ------ ------ ------ ------ ------- ------- ------- STATEMENT OF INCOME DATA: Revenues: Renewable performance tracking services...................... $ 454 $ 507 $4,420 $6,839 $ 9,569 $4,313 $5,954 Renewable syndicated product..... 415 435 652 493 1,276 101 444 Custom and other research........ 1,737 1,869 1,683 1,585 1,755 899 552 ------ ------ ------ ------ ------- ------ ------ Total revenues................ 2,606 2,811 6,755 8,917 12,600 5,313 6,950 Operating income..................... 157 511 1,658 2,939 3,682 1,595 2,023 Pro forma net income(1).............. 166 514 1,007 1,828 2,300 1,002 1,272 Pro forma net income per share(1).... $ 0.37 $ 0.16 $ 0.20 Weighted average shares outstanding(2)..................... 6,217 6,217 6,217
JUNE 30, 1997 ----------------------- PRO FORMA ACTUAL AS ADJUSTED(3) ------ -------------- BALANCE SHEET DATA: Working capital............................................. $2,830 $11,987 Total assets................................................ 7,883 17,189 Total debt.................................................. -- -- Total shareholders' equity.................................. 2,948 12,254
- ------------------------- (1) From 1984 through July 31, 1994, the Company was a C Corporation. Since August 1, 1994, the Company has been an S Corporation and, accordingly, was not subject to Federal and state income taxes for the five months ended December 31, 1994, for the years ended December 31, 1995 and 1996 or for the six months ended June 30, 1996 and 1997. Pro forma net income reflects a pro forma tax provision at a combined Federal and state rate of 40% for the periods the Company was an S Corporation as if it had been a C Corporation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "S Corporation Termination" and Note 3 to the Company's Financial Statements. (2) Includes 162,265 shares of Common Stock which, had they been issued (at an assumed initial public offering price of $12.00 per share less the underwriting discount), would have generated cash sufficient to fund the portion of the estimated S Corporation distributions in excess of the Company's 1996 net income. See Note 1 to the Company's Financial Statements. (3) Pro forma as adjusted to (i) give effect to special cash bonuses aggregating $1,740,000 to be paid to the named executive officers (as hereinafter defined) of the Company other than the Selling Shareholder and to be recognized by the Company as a compensation charge in the fourth quarter of 1997, (ii) reflect S Corporation distributions subsequent to June 30, 1997 estimated to be $2,654,000, (iii) reflect deferred tax benefits that will arise upon adoption of Financial Accounting Standards No. 109, and (iv) give effect to the sale of 1,250,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $12.00 per share and the application of the estimated net proceeds therefrom. The special cash bonuses will reduce the amount otherwise available for distribution to the Company's shareholders prior to the termination of its S Corporation status upon completion of this offering. Substantially all of the after-tax proceeds of these bonuses will be used by the recipients to purchase shares of the Company's Common Stock. The deferred tax benefits are estimated to be approximately $250,000 and will be reflected as a deferred tax asset and as a reduction to income tax expense in the statement of income upon termination of the Company's S Corporation status, which will occur upon the completion of this offering. See "Use of Proceeds," "S Corporation Termination," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 1 and 3 to the Company's Financial Statements. *** The Company was founded in 1981 as a Nebraska corporation and reincorporated in Wisconsin in September 1997. The principal office of the Company is located at 1033 "O" Street, Lincoln, Nebraska 68508, and its telephone number is (402) 475-2525. 5 7 RISK FACTORS In addition to the other information in this Prospectus, the following factors should be considered carefully in evaluating an investment in the shares of Common Stock offered hereby. This Prospectus contains certain forward-looking statements which involve substantial risks and uncertainties. These forward-looking statements can generally be identified as such because the context of the statement includes words such as the Company "believes," "anticipates," "expects," "estimates," "intends" or other words of similar import. Similarly, statements that describe the Company's future plans, objectives and goals are also forward-looking statements. The Company's actual results, performance or achievements could differ materially from those expressed or implied in these forward-looking statements as a result of certain factors, including those set forth below and elsewhere in this Prospectus. RELIANCE ON KEY CLIENTS The Company has relied on a limited number of key clients for the majority of its revenues. In 1996 and the six months ended June 30, 1997, the Company's largest client, Kaiser, accounted for 40.4% and 34.7%, respectively, of the Company's total revenues. The Company expects that this client will account for approximately 30% of total revenues for all of 1997. The Company also expects that another client, United Healthcare Corporation, which is a primary contractor (while the Company is a named subcontractor) with the United States Department of Defense (hereinafter referred to collectively as the "Department of Defense"), will account for approximately 15% of the Company's total revenues in 1997. The Company's ten largest clients in 1995, 1996 and the six months ended June 30, 1997 generated 71.1%, 63.9% and 67.9%, respectively, of the Company's revenues in each of those periods. No assurances can be given that the Company will maintain its existing client base, maintain or increase the level of revenue or profits generated by its existing clients or be able to attract new clients. Furthermore, the healthcare industry is undergoing significant consolidation and no assurances can be given that such consolidation will not cause the Company to lose clients. The loss of one or more of the Company's large clients or a significant reduction in business from such clients, regardless of the reason, would have a material adverse effect on the Company. See "Business -- Clients" and "Risk Factors -- Healthcare Industry Concentration." DEPENDENCE ON PERFORMANCE TRACKING CONTRACT RENEWALS In 1996, 75.9% of the Company's total revenues was generated from contracts for the NRC Listening System, a renewable performance tracking service. The Company expects that a substantial portion of its revenues for the foreseeable future will continue to be derived from such contracts. Substantially all such contracts are renewable annually at the option of the Company's clients, although a client generally has no minimum purchase commitments thereunder 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 anticipated by the Company, the Company's quarterly results may be materially adversely affected. The Company's ability to secure renewals is dependent upon, among other things, its 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 the Company's 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 the Company's control, there can be no assurance that the Company will be able to maintain its renewal rates. Any material decline in renewal rates from existing levels would have a material adverse effect on the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." FLUCTUATIONS IN OPERATING RESULTS The Company's 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 the Company expects that there will continue to be, fluctuation in the financial results related to the Market Guide, a product which accounted for 10.1% of the Company's total revenues in 1996. The Company recognizes 6 8 revenue when the Market Guides are delivered to the 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 the ability of the Company 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. The Company generally has some incidental sales of the Market Guide subsequent to the completion of each edition. Revenues and marginal expenses related to such incidental sales are recognized upon delivery. 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, the Company's 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 the Company's 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 the Company's overhead, particularly rent and full-time personnel expenses, is fixed in the short-term, the Company's results of operations may be materially adversely affected in any particular quarter if revenues fall below the Company's expectations. These factors, among others, make it possible that in some future quarter the Company's operating results may be below the expectations of securities analysts and investors, which would have a material adverse effect on the market price of the Company's Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." COMPETITION The healthcare information and market research industry is highly competitive. The Company has traditionally competed both with healthcare organizations' internal marketing, market research and/or quality improvement departments which create their own performance measurement tools and with relatively small specialty research firms which provide survey-based healthcare market research and/or performance assessment. The Company anticipates that in the future it may increasingly compete with (i) traditional market research firms which are significant providers of survey-based, general market research and (ii) firms which provide services or products that complement healthcare performance assessments, such as healthcare software or information systems. Although only a few of these competitors have to date offered survey-based, healthcare performance measurement and/or market research that competes directly with the Company's services and products, many of these competitors have substantially greater financial, information gathering and marketing resources than the Company and could decide to increase their resource commitments to the Company's market. There are relatively few barriers to entry into the Company's market, and the Company expects increased competition in its market, which could adversely affect the Company's operating results through pricing pressure, increased client service and marketing expenditures and market share losses, among other factors. There can be no assurance that the Company will continue to compete successfully against existing or new competitors. See "Business -- Competition." HEALTHCARE INDUSTRY CONCENTRATION Substantially all of the Company's revenues are derived from clients in the healthcare industry. As a result, the Company's 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 announced that they intend to propose programs to reform the United States 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 the Company's services and products. Moreover, there has been significant consolidation of companies in the healthcare industry, a trend which the Company believes will continue. Consolidation in this industry, including the potential acquisition of certain of the Company's clients, could adversely affect aggregate client budgets for the Company's services 7 9 and products or could result in the termination of a client's relationship with the Company. The impact of these developments on the healthcare industry is difficult to predict and could have a material adverse effect on the Company. MANAGEMENT OF GROWTH; POSSIBLE ACQUISITIONS Since inception, the Company's growth has placed significant demands on the Company's management, administrative, operational and financial resources. In order to manage its growth, the Company will need to continue to implement and improve its operational, financial and management information systems and continue to expand, motivate and effectively manage an evolving workforce. If the Company's management is unable to effectively manage under such circumstances, the quality of the Company's services and products, its ability to retain key personnel and its results of operations could be materially adversely affected. Furthermore, there can be no assurance that the Company's business will continue to expand. The Company's growth could be adversely affected by reductions in clients' spending on performance tracking and market research, increased competition, pricing pressures and other general economic and industry trends. The Company may achieve a portion of its future revenue growth, if any, through acquisitions of complementary businesses, products, services or technologies, although the Company currently has no commitments or agreements with respect to any such acquisition. The Company's management has no experience dealing with the issues of product and service, systems, personnel and business strategy integration posed by acquisitions, and no assurance can be given that the integration of any possible future acquisitions will be managed without a material adverse effect on the Company. In addition, there can be no assurance that any possible future acquisition will not dilute the Company's earnings per share. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Growth Strategy." CONTROL BY PRINCIPAL SHAREHOLDER Prior to this offering, the Company's President and Chief Executive Officer, Michael D. Hays, beneficially owned 99.3% of the outstanding Common Stock and upon the closing of this offering he will beneficially own approximately 70.7% (66.4% if the Underwriters' over-allotment option is exercised in full) of the outstanding Common Stock. As a result, he will be 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 the Company unless the terms are approved by such shareholder. See "Management" and "Principal and Selling Shareholders." DEPENDENCE ON KEY PERSONNEL The Company's future performance will depend to a significant extent upon the efforts and ability of its 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 in the Company, the loss of the services of Michael D. Hays, President and Chief Executive Officer, or one or more of the Company's other senior managers could have a material adverse effect on the Company. As of the date of this Prospectus, the Company maintains $500,000 of key man life insurance on Mr. Hays. The Company's success will also depend on its ability to hire, train and retain skilled personnel in all areas of its business. Competition for qualified personnel in the Company's industry is intense, and many of the companies with which the Company competes for qualified personnel have substantially greater financial and other resources than the Company. Furthermore, competition for qualified personnel can be expected to become more intense as competition in the Company's industry increases. There can be no assurance that the Company will be able to recruit, retain and motivate a sufficient number of qualified personnel to compete successfully. 8 10 EXPANSION OF DIRECT SALES FORCE As of June 30, 1997, the Company had four sales associates, however, one of these sales associates was added at the end of the second quarter of 1997. The Company recently hired another new sales associate and is in the process of searching for additional sales associates. The Company's plans for future growth depend in part on its unproven ability to hire, train, deploy, manage and retain an increasingly large direct sales force. There can be no assurance that the Company will be able to develop or manage such a sales force. See "Business -- Sales and Marketing." DATA COLLECTION RISKS The Company's ability to provide timely and accurate performance tracking and market research to its clients depends on its ability to collect large quantities of high quality data through surveys and interviews. If receptivity to the Company's survey and interview methods by respondents declines, or for some other reason their willingness to complete and return surveys declines, or if the Company for any reason cannot rely on the integrity of the data it receives, the Company could be adversely affected. In addition, in the operation of its business the Company has access to or gathers certain confidential information such as medical histories on its respondents. As a result, the Company could be subject to future regulation or potential liability for any inappropriate disclosure or use of such information. The Company also relies on a third-party panel of pre-recruited consumer households to produce in a timely manner annual editions of its Market Guide. If the Company was not able to continue to use this panel, or the time period in which the Company uses this panel was altered, and the Company could not find an alternative panel on a timely, cost competitive basis it could have a material adverse effect on the Company. See "Business -- Services and Products." LIMITED PROTECTION OF THE COMPANY'S SYSTEMS AND PROCEDURES The Company's success is in part dependent upon its data collection process, research methods, data analysis techniques and internal systems and procedures that it has developed specifically to serve clients in the healthcare industry. The Company has no patents; consequently, it relies on a combination of copyright, trademark and trade secret laws and employee nondisclosure agreements to protect its systems and procedures. There can be no assurance that the steps taken by the Company to protect its rights will be adequate to prevent misappropriation of such rights or that third parties will not independently develop functionally equivalent or superior systems or procedures. The Company believes that its systems and procedures and other proprietary rights do not infringe upon the proprietary rights of third parties. There can be no assurance, however, that third parties will not assert infringement claims against the Company in the future or that any such claims will not result in protracted and costly litigation, regardless of the merits of such claims. See "Business -- Intellectual Property and Other Proprietary Rights." RISKS RELATING TO PERFORMANCE TRACKING AND OTHER SURVEYS Many healthcare providers, payers and other entities or individuals use the Company's 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 the Company's 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 the Company, there can be no assurance that the Company will not face future litigation as a result of a healthcare provider's, payer's or other entity's or individual's allegation of errors in NRC's surveys or dissatisfaction with the results thereof. 9 11 UNSPECIFIED USE OF PROCEEDS The principal purposes of the offering of shares by the Company are to obtain additional capital, facilitate the Company's access to public equity markets and enhance the Company's ability to use its Common Stock as consideration for possible acquisitions and as a means of attracting and retaining key employees. The Company will not receive any proceeds from the sale of shares by the Selling Shareholder. A significant portion of the net proceeds that the Company will receive from this offering has not been designated for any specific purpose. As a consequence, the Company's management will have broad discretion with respect to the use of such proceeds. See "Use of Proceeds." EFFECT OF ANTI-TAKEOVER PROVISIONS The Company's Articles of Incorporation and By-Laws contain provisions that, among other things, establish staggered terms for members of the Company's Board of Directors, place certain restrictions on the removal of directors, authorize the Board of Directors to issue preferred stock in one or more series without shareholder approval and require advance notice for director nominations and certain other matters to be considered at meetings of shareholders. In addition, the Wisconsin Business Corporation Law (the "WBCL") and the Company's Articles of Incorporation, among other things, prohibit certain business combinations with "interested stockholders" and may limit the voting power of shares of the Company held by any person in excess of 20% of the voting power in the election of directors. These provisions could have the effect of delaying, deferring or preventing a change of control or the removal of existing management of the Company, which could adversely affect the market price of the Company's Common Stock. See "Description of Capital Stock." SHARES ELIGIBLE FOR FUTURE SALES Sales of a substantial number of shares of Common Stock in the public market following this offering could adversely affect the market price for the Company's Common Stock. The number of shares of Common Stock available for sale in the public market is limited by restrictions under the Securities Act and lock-up agreements entered into by the Company and its executive officers and directors, including all current shareholders. Under those restrictions, subject to certain specified exceptions, the Company and the holders of such shares have agreed not to sell or otherwise dispose of any of their shares for a period of 180 days after the date of this Prospectus without the prior written consent of William Blair & Company, L.L.C. However, William Blair & Company, L.L.C. may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to such lock-up agreements. As a result of these restrictions, only the 2,100,000 shares of Common Stock offered hereby will be freely tradeable on the date of this Prospectus, unless purchased by affiliates of the Company; an additional 5,205,000 shares will be eligible for sale 180 days after the date of this Prospectus, in accordance with Rule 144 under the Securities Act. The Company also intends, not earlier than 180 days after the effective date of this offering, to file a registration statement on Form S-8 covering 730,000 shares of Common Stock reserved for issuance under the Equity Incentive Plan and the Company also intends to file a registration statement on Form S-8 covering 30,000 shares of Common Stock reserved for issuance under the Director Plan. See "Shares Eligible for Future Sale." NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE; IMMEDIATE AND SUBSTANTIAL DILUTION Prior to this offering, there has been no public market for the Common Stock. Consequently, the initial offering price for the Common Stock will be determined by agreement among the Company, the Selling Shareholder, William Blair & Company, L.L.C. and Robert W. Baird & Co. Incorporated, and may not be indicative of future market prices. See "Underwriting" for factors to be considered in determining such offering price. The Common Stock has been approved for quotation on the Nasdaq National Market, but there can be no assurance that there will be an active market following this offering. In addition, broad market trading and valuation fluctuations have adversely affected the valuation of healthcare information and market research focused companies (often unrelated to the operating performance of such companies) and may adversely affect the market price of the Company's Common Stock. The Common Stock may be subject to wide fluctuations in price in response to variations in quarterly operating results and other factors, including the evolving business prospects of the Company, its clients and competitors, changes in the financial estimates by securities analysts, possible acquisitions, general economic or market conditions and other events or factors. There can be no assurance that the market price of the Common Stock will not decline below the initial public offering price. Investors participating in this offering will incur immediate and substantial dilution of book value. See "Dilution." 10 12 USE OF PROCEEDS The net proceeds to the Company from the sale of the 1,250,000 shares of Common Stock being offered by the Company hereby are estimated to be approximately $13,450,000 based upon an assumed initial public offering price of $12.00 per share after deducting the underwriting discount and estimated offering expenses. The principal purposes of the offering of shares by the Company are to obtain additional capital, facilitate the Company's access to public equity markets and enhance the Company's ability to use its Common Stock as consideration for possible acquisitions and as a means of attracting and retaining key employees. Net proceeds from this offering will be available for general corporate purposes, including the replenishment of working capital used to distribute S Corporation income to the Company's existing shareholders in connection with the termination of the Company's S Corporation status and to pay special cash bonuses to the named executive officers of the Company other than the Selling Shareholder. See "S Corporation Termination" and Note 8 to the Company's Financial Statements. A portion of the proceeds may also be used to acquire or invest in complementary businesses, products, services or technologies; however, there are no commitments or agreements with respect to any such transactions at the present time. Pending use of the net proceeds for the above purposes, the Company intends to invest such funds in short-term, interest-bearing, investment-grade obligations. The Company will not receive any proceeds from the sale of Common Stock by the Selling Shareholder. S CORPORATION TERMINATION From 1984 through July 31, 1994, the Company was a C Corporation. Since August 1, 1994, the Company has been treated as an S Corporation for Federal and state income tax purposes under Subchapter S of the Internal Revenue Code of 1986, as amended (the "Code"). As a result, the income of the Company has been taxed directly to its shareholders rather than to the Company. Concurrent with the completion of this offering, the Company's S Corporation election will be terminated and the Company will be subject to corporate income taxation as a C Corporation. In connection with the termination of the Company's S Corporation status, the Company will record a deferred income tax benefit of approximately $250,000 in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." This amount will be reflected as a deferred tax asset and a reduction to income tax expense otherwise incurred in such quarter and will be recorded upon termination of the Company's S Corporation status, which will occur upon the completion of this offering. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 1 and 3 to the Financial Statements. Subsequent to June 30, 1997, the Company made S Corporation distributions of $536,000 to its shareholders. In connection with the termination of the Company's S Corporation status, the Company will also distribute to its shareholders approximately $2,118,000, which represents all previously taxed but undistributed S Corporation income of the Company through December 31, 1996 and an estimate as to the additional taxable and undistributed income of the Company generated from January 1, 1997 until completion of this offering. Prior to the termination of its S Corporation status and the distribution of approximately $2,118,000 to its shareholders, the Company will pay special cash bonuses aggregating $1,740,000 to the named executive officers of the Company other than the Selling Shareholder. Substantially all of the after-tax proceeds of these bonuses will be used to purchase shares of the Company's Common Stock. See "Principal and Selling Shareholders." 11 13 DIVIDEND POLICY The Company does not intend to pay any cash dividends on its Common Stock in the foreseeable future. The Company intends to retain all of its future earnings for use in the expansion and operation of its business. Any future determination to pay cash dividends will be at the discretion of the Company's Board of Directors and will depend upon, among other things, the Company's results of operations, financial condition, contractual restrictions and such other factors deemed relevant by the Board of Directors. Since its S Corporation election in 1994, the Company has made cash distributions to its shareholders in amounts necessary to allow the shareholders to at least pay the Federal and state income taxes on their proportionate shares of the Company's net income. In connection with the termination of the Company's S Corporation status, the Company expects to make distributions estimated to be $2,118,000 to its existing shareholders. Investors purchasing Common Stock in this offering will not receive any portion of such distribution and the Company will not make any additional distributions of this kind in the future. See "S Corporation Termination." 12 14 CAPITALIZATION The following table sets forth as of June 30, 1997: (i) the actual cash and cash equivalents, total short-term debt and total capitalization of the Company and (ii) such cash and cash equivalents, short-term debt and capitalization on a pro forma basis as adjusted to give effect to (a) S Corporation distributions estimated to be $2,654,000, (b) special cash bonuses aggregating $1,740,000 to be paid prior to the termination of the Company's S Corporation status to the named executive officers of the Company other than the Selling Shareholder, (c) recognition of a $250,000 deferred tax asset in connection with the termination of the Company's S Corporation status and (d) the sale of 1,250,000 shares of Common Stock offered by the Company hereby (assuming an initial public offering price of $12.00 per share and after deducting the underwriting discount and estimated offering expenses) and the application of the estimated net proceeds therefrom. See "Use of Proceeds," "S Corporation Termination," "Dividend Policy" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
JUNE 30, 1997 ------------------------ PRO FORMA ACTUAL AS ADJUSTED ------ ----------- (IN THOUSANDS) Cash and cash equivalents............................... $3,622 $12,770 ====== ======= Total short-term debt................................... $ -- $ -- ====== ======= Total long-term debt.................................... $ -- $ -- ------ ------- Shareholders' equity: Preferred Stock, par value $.01 per share; 2,000,000 shares authorized; no shares issued and outstanding actual and pro forma as adjusted................... -- -- Common Stock, par value $.001 per share; 20,000,000 shares authorized; 6,055,000 shares issued and outstanding actual; 7,305,000 shares issued and outstanding pro forma as adjusted(1)............... 6 7 Additional paid-in capital............................ -- 13,449 Retained earnings (accumulated deficit)............... 2,942 (1,202) ------ ------- Total shareholders' equity....................... 2,948 12,254 ------ ------- Total capitalization.......................... $2,948 $12,254 ====== =======
- ------------------------- (1) Excludes (i) 225,000 shares of Common Stock issuable upon exercise of employee stock options to be outstanding immediately after the offering at an exercise price equal to the initial public offering price, (ii) 505,000 additional shares of Common Stock reserved for future issuance under the Equity Incentive Plan and (iii) 30,000 shares of Common Stock reserved for future issuance under the Director Plan. 13 15 DILUTION The pro forma net tangible book deficit of the Company as of June 30, 1997 was $1.2 million, or $.20 per share of Common Stock (after giving effect to the S Corporation distributions estimated to be $2,654,000, the special cash bonuses aggregating $1,740,000 to be paid to the named executive officers other than the Selling Shareholder and the estimated $250,000 of deferred income tax benefits arising upon termination of the Company's S Corporation status). See "S Corporation Termination" and Note 8 to the Company's Financial Statements. Pro forma net tangible book deficit per share represents the amount of the Company's pro forma tangible net deficit (total liabilities less total tangible assets) divided by the total number of shares of Common Stock outstanding. After giving effect to the sale of 1,250,000 shares of Common Stock by the Company in this offering at an assumed initial public offering price of $12.00 per share and the application of the net proceeds therefrom (after deducting the underwriting discount and estimated offering expenses), the pro forma net tangible book value as of June 30, 1997 would have been $12.3 million or $1.68 per share. This represents an immediate increase in net tangible book value of $1.88 per share to existing shareholders of the Company and an immediate dilution of $10.32 per share to new investors purchasing shares in this offering. Since July 1992, the Company has issued only 18,520 shares of Common Stock to one officer of the Company, at a weighted average price per share of approximately $0.08. The following table illustrates the per share dilution:
Assumed initial public offering price per share............. $12.00 Pro forma net tangible book deficit per share before the offering............................................... $(.20) Increase attributable to new investors.................... 1.88 ----- Pro forma net tangible book value per share after the offering.................................................. 1.68 ------ Dilution per share to new investors(1)...................... $10.32 ======
- ------------------------- (1) Dilution is determined by subtracting pro forma net tangible book value per share of Common Stock after this offering from the assumed initial public offering price per share. 14 16 SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and with the Financial Statements and the Notes thereto and other financial information included elsewhere in this Prospectus. The selected statement of income data for the years ended December 31, 1994, 1995, and 1996 and the balance sheet data at December 31, 1995 and 1996 are derived from, and are qualified by reference to, the audited financial statements of the Company included elsewhere in this Prospectus. The selected statement of income data for the years ended December 31, 1992 and 1993 and the balance sheet data at December 31, 1992, 1993 and 1994 are derived from unaudited financial statements not included herein. The selected statement of income data for the six month periods ended June 30, 1996 and 1997 and the balance sheet data at June 30, 1996 and 1997 are derived from the Company's unaudited financial statements, which have been prepared on the same basis as the Company's audited financial statements and, in the opinion of management, contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations of the Company. The results of operations for the period ended June 30, 1997 are not necessarily indicative of results for the full fiscal year.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ----------------------------------------------- ---------------- 1992 1993 1994 1995 1996 1996 1997 ------ ------ ------ ------ ------- ------ ------ (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: Revenues: Renewable performance tracking services... $ 454 $ 507 $4,420 $6,839 $ 9,569 $4,313 $5,954 Renewable syndicated product.............. 415 435 652 493 1,276 101 444 Custom and other research................. 1,737 1,869 1,683 1,585 1,755 899 552 ------ ------ ------ ------ ------- ------ ------ Total revenues........................ 2,606 2,811 6,755 8,917 12,600 5,313 6,950 Operating expenses: Direct expenses........................... 1,264 1,083 2,967 3,495 5,685 2,327 3,011 Selling, general and administrative....... 1,149 1,167 2,044 2,364 3,060 1,319 1,837 Depreciation and amortization............. 36 50 86 119 173 72 79 ------ ------ ------ ------ ------- ------ ------ Total operating expenses.............. 2,449 2,300 5,097 5,978 8,918 3,718 4,927 ------ ------ ------ ------ ------- ------ ------ Operating income............................ 157 511 1,658 2,939 3,682 1,595 2,023 Other income and expenses, net.............. 9 12 46 108 152 75 97 ------ ------ ------ ------ ------- ------ ------ Income before income taxes.................. 166 523 1,704 3,047 3,834 1,670 2,120 Provision for income taxes.................. -- 9 114 -- -- -- -- Pro forma income taxes(1)................... -- -- 583 1,219 1,534 668 848 ------ ------ ------ ------ ------- ------ ------ Pro forma net income(1)..................... $ 166 $ 514 $1,007 $1,828 $ 2,300 $1,002 $1,272 ====== ====== ====== ====== ======= ====== ====== Pro forma net income per share(1)........... $ 0.37 $ 0.16 $ 0.20 ======= ====== ====== Weighted average shares outstanding(2)...... 6,217 6,217 6,217
JUNE 30, 1997 DECEMBER 31, JUNE 30, -------------------------------------- ----------------------------------------- -------- PRO PRO FORMA 1992 1993 1994 1995 1996 1996 ACTUAL FORMA(3) AS ADJUSTED(4) ----- ------ ------ ------ ------ -------- ------ ----------- --------------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital........ $(361) $ 54 $1,358 $1,534 $2,018 $ 764 $2,830 $(1,463) $11,987 Total assets........... 912 1,368 3,539 4,996 6,153 3,880 7,883 4,511 17,189 Total debt............. 117 54 9 -- -- -- -- -- -- Total shareholders' equity (deficit)..... (223) 290 1,623 1,830 2,079 1,022 2,948 (1,196) 12,254
(footnotes on following page) 15 17 - ------------------------- (1) From 1984 through July 31, 1994, the Company was a C Corporation. Since August 1, 1994, the Company has been an S Corporation and, accordingly, was not subject to Federal and state income taxes for the five months ended December 31, 1994, for the years ended December 31, 1995 and 1996 or for the six months ended June 30, 1996 and 1997. Pro forma net income reflects a pro forma tax provision at a combined Federal and state rate of 40% for the periods the Company was an S Corporation as if it had been a C Corporation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "S Corporation Termination" and Note 3 to the Company's Financial Statements. (2) Includes 162,265 shares of Common Stock which, had they been issued (at an assumed initial public offering price of $12.00 per share less the underwriting discount), would have generated cash sufficient to fund the portion of the estimated S Corporation distributions in excess of the Company's 1996 net income. See Note 1 to the Company's Financial Statements. (3) As adjusted to reflect (i) special cash bonuses aggregating $1,740,000 to be paid to the named executive officers of the Company other than the Selling Shareholder and to be recognized by the Company as a compensation charge in the fourth quarter of 1997, (ii) S Corporation distributions subsequent to June 30, 1997 estimated to be $2,654,000 and (iii) deferred tax benefits that will arise upon adoption of Financial Accounting Standards No. 109. The special cash bonuses will reduce the amount otherwise available for distribution to the Company's shareholders prior to the termination of its S Corporation status upon completion of this offering. Substantially all of the after-tax proceeds of these bonuses will be used by the recipients to purchase shares of the Company's Common Stock. The deferred tax benefits are estimated to be approximately $250,000 and will be reflected as a deferred tax asset and as a reduction to income tax expense in the statement of income upon termination of the Company's S Corporation status, which will occur upon completion of this offering. See "S Corporation Termination," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 1 and 3 to the Company's Financial Statements. (4) As adjusted to give effect to the pro forma adjustments described in (3) above and to give effect to the sale of 1,250,000 shares of Common Stock offered by the Company hereby at an assumed initial offering price of $12.00 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds," "S Corporation Termination," "Capitalization," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 1 and 3 to the Company's Financial Statements. 16 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains trend analysis and other forward-looking statements that involve substantial risks and uncertainties. The Company's actual results could differ materially from those expressed or implied in the forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. OVERVIEW The Company is a leading provider of ongoing survey-based performance measurement, analysis and tracking services and products to the healthcare industry. The Company addresses the growing need of healthcare providers and payers to measure the care outcomes, specifically satisfaction and health status, of their patients and/or members. NRC has led the industry in developing tools that enable healthcare organizations to obtain service quality information necessary to comply with industry and regulatory standards and to improve their business practices so that they can maximize new member and/or patient attraction, member retention and profitability. The Company's historical revenue growth has been primarily the result of increasing the scope of existing performance tracking projects, undertaking new projects for existing clients and adding new clients. In each of the last two years, the Company's billings to clients served in the prior year were at least 80% of total billings. The number of clients billed per year has increased to 210 in 1996 from 154 in 1995. The Company believes substantial opportunities exist to increase revenues by expanding the depth and breadth of existing clients' performance tracking programs, increasing the cross selling of the Company's services and products and adding new clients and pursuing acquisitions of, or investments in, firms providing products, services or technologies that complement those of the Company. The Company offers three primary types of information services and products: renewable performance tracking services, a renewable syndicated product and custom research. In 1996, these categories accounted for 75.9%, 10.1% and 14.0%, respectively, of the Company's total revenues. The Company expects that revenues from its custom research activities will increase on an annual basis, but at a lower rate than revenues from its renewable services and product (i.e., revenues generated pursuant to a service or product whose nature contemplates continued renewals) because of the Company's increasing focus on its renewable services and product. The Company's most significant expense is direct expenses, which are primarily composed of data collection costs such as postage and printing, direct labor costs (of which the majority are associated with part-time personnel) and other costs directly attributable to projects. The Company's renewable performance tracking service, the NRC Listening System, is a performance tracking tool for gathering and analyzing data from survey respondents. Such services are provided pursuant to contracts which are generally renewable annually. Typically, a portion of the project fee is billed in advance and the remainder is billed periodically over the duration of the project. Revenues and direct expenses are recognized on a percentage of completion basis. The Company's renewable nationally syndicated product, the NRC Healthcare Market Guide, serves as a stand-alone market information and competitive intelligence source as well as a comparative performance database. Published by NRC bi-annually from 1988 to 1996 and annually since 1996, this survey is a comprehensive consumer-based healthcare assessment. Amounts due for the Market Guide are billed prior to or at delivery. The Company recognizes revenue when the Market Guides are delivered to the 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. The Company generally has some incidental sales of the Market Guide subsequent to completion of each edition. Revenues and marginal expenses related to such incidental sales are recognized upon delivery. The profit margin earned on such revenues is generally higher than that earned on revenues realized from 17 19 customers under contract at the time of delivery. As a result, the Company's margins vary throughout the year. The Company conducts custom research which measures and monitors market issues specific to individual healthcare organizations. The majority of the Company's custom research is performed under contracts which provide for advance billing of 65% of the total project fee with the remainder due upon delivery. Revenues and direct expenses are recognized on a percentage of completion basis. Prior to termination of its S Corporation status, the Company intends to pay special cash bonuses aggregating $1,740,000 to its named executive officers other than the Selling Shareholder. Substantially all of the after-tax proceeds of these bonuses will be used to purchase shares of the Company's Common Stock. The related compensation charge will be recognized by the Company in the fourth quarter of 1997. These special cash bonuses will reduce the amount otherwise available for distribution to the Company's shareholders prior to the termination of its S Corporation status. Selling, general and administrative expenses consist primarily of personnel and other costs associated with sales, marketing, administration, finance, information systems, human resources and general management. Selling, general and administrative expenses as a percentage of total revenues have decreased as the Company has spread its infrastructure expenses across its expanding revenue base. The Company recently hired two new sales associates and is in the process of searching for additional sales associates. The Company anticipates that its selling, general and administrative expenses as a percentage of total revenues might increase slightly in the periods immediately following the hiring of such new sales associates as their productivity increases. The Company plans to move to a new leased facility by the end of the first quarter of 1998 to accommodate its growth. The Company anticipates increased rent and certain one-time costs associated with such move but does not expect this to significantly increase the annual selling, general and administrative expenses as a percentage of total revenues. Depreciation and amortization expenses currently consist of expenses related to equipment and furniture. From 1984 through July 31, 1994, the Company was a C Corporation. Since August 1, 1994, the Company has been treated as an S Corporation for Federal and state income tax purposes. As a result, the Company's income has been taxed directly to its shareholders rather than to the Company. Concurrent with the completion of this offering, the Company's S Corporation election will be terminated and the Company will be subject to corporate income taxation as a C Corporation. For each of the periods in which the Company was an S Corporation, the statement of income data reflects a provision for income taxes on a pro forma basis at a combined Federal and state rate of 40% as if the Company had been operating as a C Corporation during such periods. In connection with the termination of the Company's S Corporation status, the Company will record a deferred income tax benefit of approximately $250,000 in accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes." This amount will be reflected as a deferred tax asset and a reduction to income tax expense otherwise incurred in such quarter and will be recorded upon termination of the Company's S Corporation status, which will occur upon completion of this offering. See "S Corporation Termination." 18 20 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, selected statement of operations data expressed as a percentage of total revenues and the percentage change in such items versus the prior comparable period. The trends illustrated in the following table may not necessarily be indicative of future results.
PERCENTAGE OF TOTAL REVENUES PERCENTAGE INCREASE ------------------------------------- (DECREASE) SIX MONTHS -------------------------- YEAR ENDED ENDED SIX MONTHS DECEMBER 31, JUNE 30, 1995 1996 1997 OVER --------------------- ------------- OVER OVER SIX MONTHS 1994 1995 1996 1996 1997 1994 1995 1996 ----- ----- ----- ----- ----- ----- ----- ---------- Revenues: Renewable performance tracking services............................ 65.4% 76.7% 75.9% 81.2% 85.7% 54.8% 39.9% 38.1% Renewable syndicated product.......... 9.7 5.5 10.1 1.9 6.4 (24.3) 158.7 337.0 Custom and other research............. 24.9 17.8 14.0 16.9 7.9 (5.9) 10.8 (38.6) ----- ----- ----- ----- ----- Total revenues.................... 100.0 100.0 100.0 100.0 100.0 32.0 41.3 30.8 ===== ===== ===== ===== ===== Operating expenses: Direct expenses....................... 43.9 39.2 45.1 43.8 43.3 17.8 62.7 29.4 Selling, general and administrative... 30.3 26.5 24.3 24.8 26.4 15.7 29.4 39.3 Depreciation and amortization......... 1.3 1.3 1.4 1.4 1.1 39.1 45.4 10.5 ----- ----- ----- ----- ----- Total operating expenses.......... 75.5 67.0 70.8 70.0 70.8 17.3 49.2 32.5 ----- ----- ----- ----- ----- Operating income........................ 24.5% 33.0% 29.2% 30.0% 29.2% 77.3% 25.3% 26.8% ===== ===== ===== ===== =====
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996 Total revenues. Total revenues increased 30.8% in the first six months of 1997 to $7.0 million from $5.3 million in the first six months of 1996. Revenues from the Company's renewable performance tracking services increased 38.1% to $6.0 million in the first six months of 1997 from $4.3 million in the first six months of 1996 primarily due to an increase in the scope of existing tracking projects and the number of new projects for existing clients, as well as the addition of new clients. Revenues from the Company's renewable syndicated product increased 337.0% to $444,000 in the first six months of 1997 from $101,000 in the first six months of 1996. Such increase reflects the timing of releases of new editions of the Market Guide. In the first six months of 1997 the Company was selling its 1996 edition of the Market Guide whereas in the first six months of 1996 the Company was selling its 1994 edition of the Market Guide. The Company's custom research revenue decreased 38.6% to $552,000 in the first six months of 1997 from $899,000 in the first six months of 1996 primarily due to the start and completion of one large project during the first quarter of 1996. Direct expenses. Direct expenses increased 29.4% to $3.0 million in the first six months of 1997 from $2.3 million in the first six months of 1996. Direct expenses decreased as a percentage of total revenues to 43.3% in the first six months of 1997 from 43.8% in the first six months of 1996. The decrease in direct expenses as a percentage of total revenues was due primarily to incidental sales of the 1996 edition of the Market Guide in the first six months of 1997 while the majority of the direct expenses related to this edition of the Market Guide were expensed upon its completion in the third quarter of 1996. Selling, general and administrative expenses. Selling, general and administrative expenses increased 39.3% to $1.8 million for the first six months of 1997 from $1.3 million for the first six months of 1996. This increase was primarily due to an increase of $83,000 associated with the expansion of the Company's sales and marketing infrastructure, an increase of $149,000 in expenses related to enhancements to the Company's dynamic questionnaire production software and an increase of $130,000 in profit sharing expense. Selling, general and administrative expenses increased as a percentage of total revenues to 26.4% for the first six months of 1997 from 24.8% for the first six months of 1996. Depreciation and amortization. Depreciation and amortization expense increased 10.5% to $79,000 in the first six months of 1997 from $72,000 in the first six months of 1996. Depreciation and amortization expenses decreased as a percentage of total revenues to 1.1% in the first six months of 1997 from 1.4% in the first six months of 1996. 19 21 YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Total revenues. Total revenues increased 41.3% in 1996 to $12.6 million from $8.9 million in 1995. Revenues from the Company's renewable performance tracking services increased 39.9% in 1996 to $9.6 million from $6.8 million in 1995 due primarily to an increase in the scope of existing tracking projects and the number of new projects for existing clients, as well as the addition of new clients. Revenues from the Company's renewable syndicated product increased 158.7% to $1.3 million in 1996 from $493,000 in 1995 due to the timing of releases of new editions of the Market Guide. A new edition of the Market Guide was published in 1996 but not in 1995 since the Market Guide was published on a bi-annual basis prior to 1996. Revenues from the Company's custom research increased 10.8% to $1.8 million in 1996 from $1.6 million in 1995. Direct expenses. Direct expenses increased 62.7% to $5.7 million in 1996 from $3.5 million in 1995. Direct expenses increased as a percentage of total revenues to 45.1% in 1996 from 39.2% in 1995. The increase in direct expenses as a percentage of total revenues was due to higher staffing levels in 1996 which increased labor and payroll expenses by $845,000, increased postage and printing expenses of $515,000, one-time costs of $122,000 associated with converting the internal processing of certain surveys to a new image scanning and editing system, and sales of the Market Guide in 1996 at lower gross margins than sales in 1995 since a new edition of the Market Guide (with associated costs) was published in 1996 but not in 1995. Selling, general and administrative expenses. Selling, general and administrative expenses increased 29.4% to $3.1 million in 1996 from $2.4 million in 1995. Selling, general and administrative expenses decreased as a percentage of total revenues to 24.3% in 1996 from 26.5% in 1995. The decrease in these expenses as a percentage of total revenues reflects the Company's efforts to spread its general and administrative costs over a higher revenue base, which were partially offset by an increase in selling and marketing expenses of $222,000. Depreciation and amortization. Depreciation and amortization expense increased 45.4% to $173,000 in 1996 from $119,000 in 1995 but remained relatively constant as a percentage of total revenues at 1.4% and 1.3% in 1996 and 1995, respectively. The aggregate increase was principally due to computer equipment purchases to improve internal systems to support business growth. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Total revenues. Total revenues increased 32.0% in 1995 to $8.9 million from $6.8 million in 1994. Revenues from the Company's renewable performance tracking services increased 54.8% in 1995 to $6.8 million from $4.4 million in 1994 due primarily to an increase in the scope of existing tracking projects and the number of new projects for existing clients, as well as the addition of new clients. Revenues from the Company's renewable syndicated product decreased 24.3% to $493,000 in 1995 from $652,000 in 1994 due to the timing of releases of new editions of the Market Guide. A new edition of the Market Guide was produced in 1994 but not in 1995. Revenues from the Company's custom research decreased 5.9% to $1.6 million in 1995 from $1.7 million in 1994. Direct expenses. Direct expenses increased 17.8% to $3.5 million in 1995 from $3.0 million in 1994. Direct expenses decreased as a percentage of total revenues to 39.2% in 1995 from 43.9% in 1994. The decrease in direct expenses as a percentage of total revenues was primarily due to sales of the Market Guide in 1995 at higher gross margins than sales in 1994 since a new edition of the Market Guide was not published in 1995 but was in 1994. Selling, general and administrative expenses. Selling, general and administrative expenses increased 15.7% to $2.4 million in 1995 from $2.0 million in 1994. Selling, general and administrative expenses decreased as a percentage of total revenues to 26.5% in 1995 from 30.3% in 1994. The decrease in these expenses as a percentage of total revenues reflects the Company's efforts to leverage its general and administrative costs over a higher revenue base. Selling, general and administrative expenses were unusually high in 1994 due to certain one-time compensation and lease-related charges of $601,000. 20 22 Depreciation and amortization. Depreciation and amortization expense increased 39.1% to $119,000 in 1995 from $86,000 in 1994 but remained relatively constant as a percentage of total revenues at 1.3% in both 1995 and 1994. The aggregate increase was principally due to computer, printer and mail room production equipment purchases to improve internal systems to support business growth. SELECTED QUARTERLY RESULTS The following tables set forth unaudited statement of income data for each of the last eight quarters, as well as the percentage of the Company's total revenues represented by each item. In management's opinion, this unaudited information has been prepared on the same basis as the annual financial statements and includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information for the quarters presented, when read in conjunction with the Company's Financial Statements and Notes thereto included elsewhere in this Prospectus. The operating results for any quarter are not necessarily indicative of results for the full year or for any future quarter.
QUARTER ENDED ------------------------------------------------------------------------------------------------ SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, 1995 1995 1996 1996 1996 1996 1997 1997 --------- -------- --------- -------- --------- -------- --------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Renewable performance tracking services........ $1,753 $2,409 $2,122 $2,191 $2,320 $2,936 $2,871 $3,083 Renewable syndicated product.................. 80 18 82 19 923 252 341 103 Custom and other research................. 407 392 447 452 397 459 228 324 ------ ------ ------ ------ ------ ------ ------ ------ Total revenues......... 2,240 2,819 2,651 2,662 3,640 3,647 3,440 3,510 Direct expenses.............. 899 1,226 1,132 1,195 1,926 1,432 1,393 1,618 Selling, general and administrative............. 539 704 660 659 677 1,064 951 886 Depreciation and amortization............... 24 45 36 36 41 60 42 37 ------ ------ ------ ------ ------ ------ ------ ------ Operating income............. 778 844 823 772 996 1,091 1,054 969 Other income and expenses, net........................ 25 20 37 38 32 45 45 52 Pro forma income taxes(1).... 321 346 344 324 411 455 440 408 ------ ------ ------ ------ ------ ------ ------ ------ Pro forma net income(1)...... $ 482 $ 518 $ 516 $ 486 $ 617 $ 681 $ 659 $ 613 ====== ====== ====== ====== ====== ====== ====== ====== Pro forma net income per share(1)................... $ .08 $ .08 $ .10 $ .11 $ .11 $ .10 ====== ====== ====== ====== ====== ====== Weighted average shares outstanding(2)............. 6,217 6,217 6,217 6,217 6,217 6,217
- ------------------------- (1) Since August 1, 1994, the Company has been an S Corporation and, accordingly, was not subject to Federal and state income taxes for any of the quarterly periods presented above. Pro forma net income reflects a pro forma tax provision at a combined Federal and state rate of 40% for the periods the Company was an S Corporation as if it had been a C Corporation. See "S Corporation Termination." (2) Includes 162,265 shares of Common Stock which, had they been issued (at an assumed initial public offering price of $12.00 per share less the underwriting discount), would have generated cash sufficient to fund the portion of the estimated S Corporation distributions in excess of the Company's 1996 net income. See Note 1 to the Company's Financial Statements.
AS A PERCENTAGE OF TOTAL REVENUES ------------------------------------------------------------------------------------------------ SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, 1995 1995 1996 1996 1996 1996 1997 1997 --------- -------- --------- -------- --------- -------- --------- -------- Revenues: Renewable performance tracking services........ 78.3% 85.5% 80.0% 82.3% 63.7% 80.5% 83.5% 87.9% Renewable syndicated product.................. 3.6 0.6 3.1 0.7 25.4 6.9 9.9 2.9 Custom and other research................. 18.1 13.9 16.9 17.0 10.9 12.6 6.6 9.2 ----- ----- ----- ----- ----- ----- ----- ----- Total revenues......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Direct expenses.............. 40.1 43.5 42.7 44.9 52.9 39.3 40.5 46.1 Selling, general and administrative............. 24.1 25.0 24.9 24.8 18.6 29.2 27.6 25.2 Depreciation and amortization............... 1.1 1.6 1.4 1.4 1.1 1.6 1.2 1.1 ----- ----- ----- ----- ----- ----- ----- ----- Operating income............. 34.7% 29.9% 31.0% 28.9% 27.4% 29.9% 30.7% 27.6% ===== ===== ===== ===== ===== ===== ===== =====
21 23 The Company's 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 the Company expects that there will continue to be, fluctuation in the financial results related to the Market Guide, a product which accounted for 10.1% of the Company's total revenues in 1996. See "-- Overview." In addition, the Company's 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 the Company's services and products (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 the Company's overhead, particularly rent and full-time personnel expenses, is fixed in the short-term, the Company's results of operations may be materially adversely affected in any particular quarter if revenues fall below the Company's expectations. These factors, among others, make it possible that in some future quarter the Company's operating results may be below the expectations of securities analysts and investors, which would have a material adverse effect on the market price of the Company's Common Stock. See "Risk Factors -- Fluctuations in Operating Results." LIQUIDITY AND CAPITAL RESOURCES The Company's principal source of funds has been cash flow from its operations. The Company's cash flow has been sufficient to provide funds for working capital and capital expenditures. As of June 30, 1997, the Company had cash and cash equivalents of $3.6 million and working capital of $2.8 million. Subsequent to June 30, 1997, the Company made S Corporation distributions of $536,000 to its shareholders and, in connection with the termination of the Company's S Corporation status, the Company will also distribute approximately $2.1 million to its existing shareholders. In addition, the Company intends to pay special cash bonuses aggregating $1.7 million to its named executive officers other than the Selling Shareholder in the fourth quarter of 1997 and prior to the termination of the Company's S Corporation status. See "Use of Proceeds," "S Corporation Termination" and Note 8 to the Company's Financial Statements. During the six months ended June 30, 1997, the Company generated $1.5 million of net cash from operating activities as compared to $2.9 million of net cash generated during the same period in the prior year. The decrease in cash flow was mainly due to the timing of the collection of a $1.3 million account receivable in January 1996 and the timing of costs incurred in advance of billings on certain projects, combined with growth in accounts receivable, unbilled revenues and deferred revenues. The Company generated $6.3 million of net cash from operating activities for the year ended December 31, 1996 as compared to $1.8 million from operating activities for the year ended December 31, 1995. This increase in cash generated was a result of an increase in the Company's business and, in part, the collection in January 1996 of a $1.3 million receivable. For the six months ended June 30, 1997 and 1996, net cash provided by investing activities was $938,000 and $490,000, respectively. The increase in cash provided was primarily due to the maturing of investments available for sale, which was partially offset by an investment of $232,000 in furniture, computer equipment and production equipment to meet the expansion of the Company's business. The Company's investments available-for-sale consist principally of United States government securities with maturities of twelve months or less. Net cash used in investing activities increased to $1.2 million from $15,000 for the years ended December 31, 1996 and December 31, 1995, respectively, primarily as a result of an increase in investments available for sale. Furniture, computer equipment and production equipment purchases in these years were $272,000 and $161,000, respectively. The Company expects to make additional purchases of equipment as necessary to accommodate any future growth. Net cash used in financing activities was $1.6 million and $2.8 million for the six months ended June 30, 1997 and 1996, respectively, and was $3.3 million and $2.8 million for the years ended December 31, 1996 and December 31, 1995, respectively. Net cash used in financing activities for these periods was primarily the 22 24 result of S Corporation distributions to shareholders. Through June 30, 1997, the Company paid S Corporation distributions of $1.6 million to its shareholders. Subsequent to June 30, 1997, the Company paid S Corporation distributions of $536,000 to its shareholders. In connection with the termination of the Company's S Corporation status, the Company will also distribute approximately $2.1 million to its shareholders. See "S Corporation Termination." The Company has budgeted approximately $850,000 for capital expenditures in 1997, to be funded through cash generated from operations. Through June 30, 1997, the Company's capital expenditures were $232,000. The Company expects that capital expenditures during the remainder of 1997 will be primarily for leasehold improvements, telecommunications equipment, computer hardware, production equipment and furniture. The Company typically bills clients for projects before they have been completed. Billed amounts are recorded as billings in excess of costs or deferred revenue on the Company's financial statements and are recognized as income when earned. As of June 30, 1997 and December 31, 1996, the Company had $3.3 million and $2.2 million of deferred revenues, respectively. In addition, when work is performed in advance of billing, the Company records this work as a cost in excess of billings or unbilled revenue. At June 30, 1997 and December 31, 1996, the Company had $654,000 and $282,000 of unbilled revenues, respectively. Substantially all deferred and unbilled revenues will be earned and billed, respectively, within 12 months of the respective period ends. The Company believes that the net proceeds from the sale of the Common Stock by the Company in this offering, together with cash flows from operations and existing cash balances will be sufficient to meet its working capital and capital expenditure requirements for at least the next 12 months. Beyond that time, if the net proceeds from this offering, together with cash flows from operations and existing cash balances are not sufficient to satisfy its capital needs, the Company may seek debt or additional equity financing. There can be no assurance that such financing can be obtained on favorable terms, if at all. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In October 1995, the Financial Accounting Standards Board ("FASB") issued Statement No. 123, Accounting for Stock-Based Compensation. Statement No. 123 establishes a fair value based method of recognizing compensation expense for stock-based compensation. As permitted by Statement No. 123, the Company expects to continue to use the intrinsic value based method of recognizing compensation expense for stock-based compensation to employees. Therefore, for those options granted with exercise prices equal to fair market value, no compensation charge will be recognized by the Company in its financial statements. However, the Company will be required to disclose the pro forma effects of the fair value based method of measuring compensation expenses on the Company's net income and net income per share as if that method were adopted in the 1997 annual financial statements. The Company has not determined the effects its recent stock option grants will have on the annual disclosures required under Statement No. 123. In February 1997, the FASB issued Statement No. 128, Earnings per Share, which revises the calculation and presentation provisions of Accounting Principles Board Opinion No. 15 and related interpretations. Statement No. 128 is effective for the Company's fiscal year ending December 31, 1997. Retroactive application will be required. The Company believes the adoption of Statement No. 128 will not have a significant effect on its reported earnings per share. 23 25 BUSINESS The following Business section contains forward-looking statements that involve substantial risks and uncertainties. The Company's actual results could differ materially from those expressed or implied in the forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. The Company is a leading provider of ongoing survey-based performance measurement, analysis and tracking services and products to the healthcare industry. The Company addresses the growing need of healthcare providers and payers to measure the care outcomes, specifically satisfaction and health status, of their patients and/or members. NRC has led the industry in developing tools that enable healthcare organizations to obtain service quality information necessary to comply with industry and regulatory standards and to improve their business practices so that they can maximize new member and/or patient attraction, member retention and profitability. Since its founding 16 years ago, NRC has focused on the information needs of the healthcare industry. The Company offers three primary types of information services and products: renewable performance tracking services, a renewable syndicated product and custom research. During 1996, NRC provided services to more than 200 healthcare organizations, including HMOs, integrated healthcare systems, medical groups and industry regulatory bodies. The Company gathered and analyzed over 1,000,000 completed surveys for these clients in 1996. The Company's clients include Kaiser, the Department of Defense, HealthSouth Corporation, BJC Health System and Mayo Clinic. NRC has benefited from a high rate of renewable revenues. Specifically, over 80% of the Company's total billings in each of the last two years was generated from clients billed in the prior year. INDUSTRY BACKGROUND Managed Care The United States healthcare industry continues to undergo significant change. During the past decade, escalating costs and the rise in the number of uninsured Americans brought healthcare reform to the forefront of public debate, culminating in the Federal government's failed attempt to legislate broad change in 1994. As a result of consumer, employer and governmental scrutiny, however, the healthcare industry continues to shift towards a managed care model. Managed care redefines payment structures and relationships between healthcare payers and providers. In recent years, governmental and market-driven reform initiatives have produced significant pressures on healthcare providers to control costs. In the past, the financial risk of healthcare delivery was principally absorbed by third-party payers, and providers were not focused on cost containment. Through managed care and provider capitation arrangements, the economic risk of healthcare delivery is shifting from payers to providers. In order to manage this risk, providers are being forced to change the way that they operate and are increasingly focused on measuring and controlling the cost of delivering care. As managed care's tight rein on costs has kept premium increases to a minimum, employee benefit managers are gravitating from traditional fee-for-service plans to managed care plans. Managed care enrollment has been increasing rapidly and, according to the American Association of Health Plans (the "AAHP"), as of December 31, 1995 represented approximately 61% of Americans. This was comprised of approximately 47.5 million members of HMOs, approximately 91.8 million people who are being serviced by preferred provider organizations ("PPOs") and approximately 13.9 million people who are being serviced by point-of-service ("POS") plans. In total, there are approximately 700 HMOs, 1,000 PPOs and 500 POS plans in the United States. According to the AAHP and Sanford C. Bernstein Co., Inc., HMO and POS plan enrollment grew at a compound annual rate of 10.9% from 1990 to 1995 and enrollment is projected to be 112.5 million by 2000, representing a compound annual growth rate of 12.9% from 1996 to 2000. Part of the reason for the expected growth in HMO enrollment is the increasing enrollment of Medicare and Medicaid beneficiaries in HMOs. 24 26 These changes in healthcare payment arrangements have caused modifications in the organizational structures of healthcare providers. Specifically, physicians, many of whom are financially challenged under a managed care environment to sustain solo or small group practices, are banding together and forming medical groups in order to provide more cost-effective service. According to the American Medical Association, more than 850 medical groups with at least 25 physicians have been formed to date nationwide. Similarly, in order to compete for patients while reducing cost structures, many hospitals have formed integrated healthcare systems that provide services across the care continuum (inpatient, outpatient, emergency care, home health, rehabilitation, long-term care, hospice, pharmacy, etc.). Totaling more than 630 in 1996, according to the St. Anthony's Integrated Health Care 100 Directory, integrated healthcare systems drive market consolidation to more efficiently manage care and services. In addition, this source indicates that the number of organizations affiliated with these integrated healthcare systems has increased from 5,000 in 1996 to more than 7,300 in 1997. Due to intensified media coverage of and lawmaker attention to possible managed care abuses, the public has come to recognize that managed care's reduction in healthcare costs often comes at the "expense" of less patient choice and potentially lowered healthcare quality. In response, an increasing amount of healthcare legislation has been proposed and healthcare "watch dog" organizations have been formed to establish performance standards. Sharing similar concerns, employers increasingly demand that the health plans with which they contract deliver high quality medical care, evidenced by contractual performance guarantees. Facing this quality-minded environment, a growing number of health plans, health systems and medical groups are soliciting their customers for feedback on the care and service provided. As a result, healthcare organizations are increasingly retaining independent performance tracking firms which serve as credible "scorekeepers." Performance Tracking Industry accrediting bodies, employers and the government are increasingly demanding ongoing enterprise-wide performance tracking. In order to implement performance standards, however, healthcare quality must first be defined and quantified in a consistent and objective manner. The two primary constituencies in a position to opine on healthcare quality are healthcare practitioners, who have a clinical orientation, and patients, who have a service orientation. Because of difficulty in obtaining consistent, comparable clinical data across physician and patient bases, the healthcare industry has not been able to develop a uniform approach to measuring clinical outcomes. The industry has, however, recognized that patient satisfaction can be quantified and therefore currently represents the most effective means of measuring and comparing healthcare service quality. The National Committee for Quality Assurance ("NCQA") began accrediting managed care organizations in 1991 in response to the need for standardized, objective information about the healthcare quality these organizations provided. The NCQA, which has accredited more managed care organizations than any other accrediting body, requires health plans to contract with an independent third party to conduct a standardized member satisfaction survey on an annual basis. Data collected from the surveys is then reported as part of the Health Plan Employer Data and Information Set ("HEDIS"), a collection of performance indicators created to support employers' review of health plan options. One of the nation's longest-standing healthcare organization accrediting bodies, The Joint Commission on Accreditation of Healthcare Organizations (the "Joint Commission"), also broadened the performance measurement requirements in its accreditation process in 1997 with its ORYX initiative. In addition, the Health Care Financing Administration ("HCFA"), the government administrator of Medicare benefits, mandates that all HMOs providing Medicare benefits evaluate their senior population's health plan satisfaction and health/functional status on an annual basis. Finally, during 1997 state legislators across the country have introduced several hundred managed care bills and 16 states have passed comprehensive consumer-rights bills covering a number of managed-care issues. Influenced by consumers, employers, accrediting bodies, competitive factors and the government, approximately 99% of HMOs, 96% of hospitals and 80% of PPOs currently measure satisfaction according to the AAHP and the American Hospital Association. The Company believes that most of these organizations are measuring satisfaction only at the enterprise-wide level. Due to competitive pressures, however, healthcare 25 27 organizations are increasingly seeking ways to affect positive change in their organizations by "drilling down" their performance tracking from enterprise-wide levels to more discreet levels. To identify where change and quality improvements are needed, healthcare organizations must go beyond enterprise-wide level performance tracking to narrower performance tracking at the departmental level and ultimately at the individual physician/caregiver level. Departmental level measurement reflects the historical practice of hospitals, in particular, using static, mass produced questionnaires for each service point (inpatient, emergency room, outpatient, etc.). This approach shows how each department is doing and may support quality improvement but, given the merging of services within integrated healthcare systems, most industry departmental measurement does not provide a uniform means to gather data and then apply information to effect system-wide improvements. In contrast, physician/caregiver level performance tracking is critical to learning where improvements are needed and what service issues, when addressed, will effect the greatest positive change. Since patients' or members' relationships with their primary care physicians strongly influence satisfaction and retention, healthcare organizations are increasingly using performance tracking in physicians' compensation packages to provide incentives for physicians to maintain and/or improve patient relationships. According to a 1995 survey in the New England Journal of Medicine, 36% of managed care plans use patient satisfaction as a component in their physician compensation packages. Finally, other healthcare information providers are measuring outcomes of care measures such as cost, utilization and appropriateness of care at the physician/caregiver level, perpetuating the trend toward more physician/caregiver level measurement. While the Company believes that less than one-half of healthcare organizations are currently tracking patient satisfaction at the physician/caregiver level, the Company believes that the healthcare organizations that are not tracking satisfaction at this level are currently considering the potential benefits of doing so. THE NRC SOLUTION The Company addresses healthcare organizations' growing need to track their performance at the enterprise-wide, departmental and physician/caregiver levels. The Company has led the industry in developing tools that enable its clients to collect, in an unobtrusive manner, a substantial amount of comparative service quality information in order to analyze and improve their practices to maximize new member and/or patient attraction, member retention and profitability. NRC's performance assessments offer the tangible measurement of health service quality currently demanded by consumers, employers, industry accreditation organizations and lawmakers. The Company's innovative solutions respond to managed care's redefined relationships among consumers, employers, payers and providers. While many vendors exclusively use static, mass produced questionnaires, NRC also utilizes its dynamic data collection process to create a personalized questionnaire that evaluates service issues specific to each respondent's specific healthcare experience. The flexibility of the Company's data collection process allows healthcare organizations to add timely, market driven questions relevant to matters such as industry performance mandates, employer performance guarantees and internal quality improvement initiatives. In addition, the Company's dynamic data collection process is used to assess core service factors relevant to all healthcare respondent groups (patients, members, employers, employees, physicians, etc.) and to all service points of a healthcare system (inpatient, emergency room, outpatient, home health, rehabilitation, long-term care, hospice, pharmacy, etc.). As differentiated from others in the marketplace, the Company can gather data through fewer, more efficient questionnaires as opposed to other firms' multiple questionnaires that often bombard the same respondents. NRC offers three primary types of information services and products. The NRC Listening System is a renewable performance tracking tool for gathering and analyzing data from survey respondents. The Company has the capacity to measure performance beyond the enterprise-wide level and has the ability and experience to determine key performance indicators at the department and individual physician/caregiver measurement levels, where the Company's services can best guide the efforts of its clients to improve quality and enhance their market position. The syndicated Market Guide, a stand-alone market information and competitive intelligence source as well as a comparative performance database, allows the Company's clients to assess their performance relative to the industry, to access best practice examples and to utilize competitive 26 28 information for marketing purposes. The Company's custom research enables NRC's clients to conduct specific studies in order to identify areas of improvement and measure market issues and opportunities. Recognizing the increasing applications for self-reported healthcare assessments, NRC works with its clients to integrate satisfaction measurement into various areas of their businesses, including physician compensation. As the Company partners with its clients, it seeks to enhance relationships throughout the healthcare organization and thereby both broaden and deepen the scope of its projects. BUSINESS STRENGTHS The Company believes the following factors have been of principal importance in achieving its current position as a leading provider of ongoing survey-based performance measurement, analysis and tracking services and products to the healthcare industry. Leadership Position. The Company, over its 16-year history, has established its position as an innovative leader of survey-based, renewable healthcare performance tracking. NRC's client partnerships with leading healthcare payers and providers exemplify the Company's leadership position. NRC's client base includes Kaiser, the Department of Defense, HealthSouth Corporation, BJC Health System and Mayo Clinic. In addition, industry bodies shaping the direction of healthcare performance tracking have sought NRC's expertise. For example, the Company served as a technical advisor to the NCQA during its development of a standardized satisfaction measurement process and also tracks the Joint Commission's own service performance by measuring satisfaction levels of those healthcare organizations undergoing the Joint Commission's accreditation process. Healthcare Focus. The Company devotes all of its resources to the healthcare industry and that industry's evolving performance information needs. This focus allows NRC to deliver high quality, survey-based performance information through its staff of 63 full-time professionals who understand the complex competitive and industry issues facing healthcare organizations. The Company believes that its healthcare expertise and experience enhance its competitive position relative to those market research firms that serve multiple industries. Service and Product Renewability. The Company has benefited from high renewal rates. Specifically, in each of the last two years over 80% of the Company's total billings were generated from clients served in the prior year. The Company's high renewal rates reflect, in part, competitive factors and industry mandates which necessitate periodic performance tracking as well as the use of performance information, which must be updated regularly and which must be consistent, as a component of physician compensation. The Company believes its dynamic data collection process, multi-level measurement (enterprise-wide, departmental and physician/caregiver level) and multi-year comparative data foster project renewability as healthcare organizations rely on these capabilities to monitor and improve their performance. NRC's Dynamic Data Collection Process. The Company believes that its dynamic performance data collection process represents an important competitive advantage over those performance tracking firms that only use static, mass produced questionnaires focusing on one point of care (inpatient, outpatient, emergency room, etc.) regardless of whether they are personalized to each respondent and his or her unique experience. The Company's dynamic data collection process offers questionnaire personalization such as patient name, treating caregiver name, encounter date and, in some cases, exact services received. This level of personalization enables the Company to realize increased response rates and identify client service issues needing improvement. NRC's dynamic data collection process also allows healthcare organizations to add questions relevant to time, market or organization specific issues. This approach allows NRC's dynamic data collection process to evolve with healthcare organizations as they grow and as their performance objectives change as a result of competitive conditions, industry mandates, employer performance guarantees and quality improvement initiatives. Healthcare Market Database and Complementary Services. Over the last 11 years, NRC has developed the healthcare industry's most comprehensive syndicated database of performance tracking data. The Market Guide enables the Company's clients to compare their performance results against national and local benchmarks and thereby facilitate the identification of competitive strengths, weaknesses and opportunities. 27 29 Representing the views of one in every 650 households across the 48 continental states, the Market Guide provides name specific performance data on 600 managed care plans and 2,500 hospitals nationwide and addresses more than 100 industry issues relevant to healthcare payers, providers and purchasers. The Company gives its clients "point and click" access to NRC's syndicated assessments, comparative performance data and industry mandated requirements via its proprietary NRC Report Card System. Finally, in order to provide its clients with a full-service performance tracking and market research capability, NRC also offers its clients custom research services. GROWTH STRATEGY The Company's growth strategy includes the following key elements: Leverage Existing Client Base. The Company believes substantial opportunities exist to expand the depth and breadth of current clients' performance tracking programs. During 1996, the Company provided services to more than 200 healthcare organizations, for which the Company gathered and analyzed over 1,000,000 completed surveys. The Company believes that since a majority of its clients do not yet measure performance at either the department or physician/caregiver level, the average number of surveys per client will continue to grow as more healthcare organizations take performance tracking deeper to these levels. This natural measurement progression is emerging as healthcare organizations seek to effect change that will solidify or improve their competitive market position and enhance member retention rates. Furthermore, NRC believes its clients' programs can be broadened through the addition of comprehensive satisfaction surveys of all the constituencies of a healthcare plan or provider, including employers, employees, physicians, patients and/or members. Finally, the Company believes it has the opportunity to cross-sell complementary services and products to its existing clients because the Company's comparative database, competitor intelligence and best practice information can provide added value to its existing clients' current performance tracking programs. Expand Client Base. From 1995 to 1996, the number of clients billed has increased from 155 to 210. The Company believes that its industry experience and reputation as a high quality, cost effective performance tracking provider serving the nation's leading healthcare organizations will enable it to continue to attract new clients for its services and products. For example, the Company believes a substantial opportunity exists to penetrate those healthcare organizations which do not currently measure performance beyond the enterprise- wide level required by industry mandates or which do not outsource performance tracking. NRC believes there is also an opportunity to sell its renewable syndicated product to healthcare providers and payers not previously served by the Company but whose members' satisfaction is already tracked as part of the Company's syndicated Market Guide. This database of performance information on prospective clients and their competitors has historically been an important point of initial contact for NRC's direct sales force. At the end of 1996, the Company maintained a small direct sales force of only three people. However, NRC added a new sales associate at the end of the second quarter of 1997 and another in the third quarter of 1997 and plans to hire one or more additional sales associates within the next 12 months. The Company believes this sales force growth will allow each sales associate to develop more aggressively new clients in more manageable geographic territories. Pursue Strategic Acquisitions and Alliances. The Company believes the fragmented nature of the healthcare performance tracking industry presents strategic opportunities for the Company to acquire or align with other performance information providers. The Company currently intends to explore the acquisition of, or alliances with, firms providing complementary products, services or technologies. The Company sees this strategy as a means to expand its market position, increase its client base and geographic presence and obtain additional personnel with industry experience. NRC may also pursue possible industry partnerships or alliances with firms such as financial or clinical healthcare information companies interested in integrating the Company's syndicated performance information into their own product portfolios. 28 30 SERVICES AND PRODUCTS The Company is a leading provider of ongoing survey-based performance measurement, analysis and tracking services and products to the healthcare industry, specializing in survey-based assessments designed to monitor care outcomes including satisfaction and health status. NRC's three primary types of information services and products are as follows: Renewable Performance Tracking Services. The Listening System is NRC's state-of-the-art data collection process which provides ongoing, renewable performance tracking. The Listening System represented 75.9% and 85.7% of the Company's total revenue in 1996 and the first six months of 1997, respectively. This performance tracking program efficiently coordinates and centralizes an organizations' satisfaction monitoring, thereby establishing a uniform methodology and survey instrument needed to obtain valid performance information and improve quality. Using the industry mandated method of mail-based data collection, this assessment process monitors satisfaction across healthcare respondent groups (patients, members, employers, employees, physicians, etc.) and service settings (inpatient, emergency room, outpatient, etc.). Rather than be limited to only static, mass produced questionnaires that provide limited flexibility and performance insights, NRC's proprietary software generates individualized questionnaires, which include personalization such as patient name, treating caregiver name, encounter date and, in most cases, the services received. This personalization enhances the response rates and the relevance of performance data. Flexible and responsive to healthcare organizations changing information needs, NRC creates personalized questionnaires that evaluate service issues specific to each respondent's specific healthcare experience and include questions that address core service factors throughout a healthcare organization. As differentiated from other competitors, the Company gathers data through one efficient questionnaire as opposed to multiple questionnaires that often bombard the same respondents. As a result, the Company's renewable performance tracking programs and data collection process (i) realize higher response rates, obtain data more efficiently, and thereby provide healthcare organizations with more feedback, (ii) eliminate oversurveying (where one respondent receives multiple surveys) and (iii) allow healthcare organizations to adapt questionnaire content to address management objectives and to assess quality improvement programs or other timely marketplace issues. Recognizing that performance programs must do more than just measure satisfaction, NRC has developed a one-page reporting format called the NRC Action Plan that provides a basis on which to make improvements. NRC Action Plans show healthcare organizations which service factors their customer groups value, which have the greatest impact on satisfaction levels and how their performance in relationship to these key indicators changes over time. Renewable Syndicated Product. The Company's renewable nationally syndicated product, the NRC Healthcare Market Guide, serves as a stand-alone market information and competitive intelligence source as well as a comparative performance database. This product accounted for 10.1% and 6.4% of the Company's revenue in 1996 and the first six months of 1997, respectively. Since the Company currently sells this product to less than 5% of the nation's healthcare providers, the Company believes there is substantial opportunity to further penetrate this market. Published by NRC bi-annually from 1988 to 1996 and annually since 1996, this survey, which is the largest of its kind, asks consumers via a pre-recruited third-party panel, members of which are sent Market Guide questionnaires to complete, to evaluate their health plans, health systems, physicians/ caregivers and personal health status. Representing the views of one in every 650 households across every county in the continental United States, the Market Guide provides name specific performance data on 600 managed care plans and 2,500 hospitals nationwide and addresses more than 100 data items relevant to healthcare payers, providers and purchasers. Utilizing this proprietary database, the Company is able to produce reports tailored to meet individual client's needs. Among the data featured are benchmarks specific to the NCQA standardized HEDIS Member Satisfaction Survey that compare health plans on a local, state and/or national level. Similarly, the product's national name search feature allows a healthcare organization with a national or regional presence to simultaneously compare the performance of all its sites and pinpoint where strengths and weaknesses exist. The product's trending capacity details how the performance of a healthcare organization changes over time. Other data collected in the Market Guide profile health plan market share, consumers' health plan decision making factors, physician/caregiver accessibility, hospital/ healthcare system quality and chronic patient populations. The Company gives clients easy access to the 29 31 Market Guide via its CD-ROM-based desktop delivery system -- the Report Card System. This delivery system allows healthcare professionals to generate reports in numerous formats to support their decision making. Custom Research. In order to be a sole source provider to its clients, the Company also conducts custom research that measures and monitors market characteristics or issues specific to individual healthcare organizations. NRC's custom research includes consumer recall of promotional and branding campaigns, consumer response to new service offerings and provider perception of health plans and healthcare organizations. The Company generally utilizes phone interviews to collect relevant data for these custom studies. Custom research accounted for 14.0% and 7.9% of the Company's total revenues in 1996 and the first six months of 1997, respectively. CLIENTS The Company's ten largest clients in 1995, 1996 and the first six months of 1997 accounted for 71.1%, 63.9% and 67.9%, respectively, of the Company's total revenues in each of those periods. The Company's largest client, Kaiser, accounted for 43.7%, 40.4% and 34.7% of the Company's total revenues in 1995, 1996 and the first six months of 1997, respectively, and the Company expects that this client will account for approximately 30% of its total revenues for all of 1997. The Company, as a named subcontractor, also expects that the Department of Defense, through a primary contractor, United Healthcare Corporation, will account for more than 10% of total revenues in 1997. Overall, the Company served more than 150 and 200 healthcare organizations in 1995 and 1996, respectively, and the Company believes substantial opportunities exist to further penetrate its existing clients as well as to expand its client base. The Company's clients include the following:
HEALTH PLANS INTEGRATED HEALTHCARE SYSTEMS ------------ -----------------------------
Aetna Dental BJC Health System Empire Blue Cross and Blue Shield HealthSouth Corporation Kaiser Jewish Hospital Healthcare Services MEDICAL GROUPS OTHER Healthcare Partners Medical Group American Hospital Association Mayo Clinic Department of Defense Ochsner Medical Institutions Joint Commission Examples of the Company's client relationships, which represent the nature of the Company's services and performance measurement solutions, are set forth below: Health Plan Multi-Level Measurement. One of the nation's largest HMOs began working with the Company four years ago to assess the satisfaction of its members and patients. The project's first phase approached this measurement from an enterprise-wide level -- how the HMO is performing in its West Coast marketplace -- and at the department level -- examining the performance of each of its owned medical centers and medical practices. From its original contract, the Company has substantially expanded the scope of services provided to this client by drilling down to the physician level. As a result, the number of questionnaires processed by the Company on behalf of this client in 1996 was 150% greater than the number processed in 1994. This continuous measurement allows the HMO to monitor the physician-patient relationship in terms of key market issues such as access (including wait time, days to appointment and doctor choice) and care dynamics (including familiarity with health history, effective listening, understandable explanations of procedures, etc.) With the aid of the Company, the HMO is able to internally disseminate detailed physician "report cards" or performance reports that provide feedback to physicians and management, allowing them to improve the physician-patient relationship. This HMO uses the individual physician's scores in its physician compensation and bonus structures. Integrated Healthcare System Measurement. More than seven years ago, the Company began a performance measurement program for a Midwestern hospital covering inpatient, outpatient and emergency room services. The Company's dynamic data collection process facilitated expanded client surveying as the hospital led local market consolidation, culminating in its current status as a 16-hospital health system. The 30 32 Company utilizes a survey instrument assessing performance not only of acute care services historically measured for the system but also of services added to the healthcare system such as long-term care, home health, occupational medicine, mental health and hospice. The Company's ability to measure simultaneously issues specific to each service point as well as core service factors (also found on employee and physician surveys) pertinent throughout the organization enables the health system to monitor performance and identify improvement opportunities at the department and enterprise-wide levels. The Company's long-term relationship with the health system has fostered a highly valued measurement system championed by top management and used in conjunction with continuous quality improvement processes. To create enterprise-wide accountability, satisfaction results are used as a component within executives' incentive programs and staff performance appraisals. The Company collected data specific to the client's organizational objectives which the client was able to utilize in establishing incentives to influence positive behavior. The Company's tracking program can seamlessly respond to the client's specific information needs for tracking management objectives and quality initiatives by adding questions, service points assessed and reporting formats. Medical Group Performance Measurement Leveraging Market Position. The Company's physician/caregiver level performance measurement and database of industry comparables provided the information solution a Southern-based medical group needed to efficiently address performance improvement opportunities and enhance its market position. The medical group, prior to its nine-year relationship with the Company, used an internally created tool to analyze physician and practice performance. However, because other local medical groups used different satisfaction instruments, the medical group could not fulfill its need to compare its scores with those of other local physicians. The Company's solution involved questionnaires tailored to the unique information needs of the group's practices and also included "core" questions represented in the Company's comparative database. Implemented across the group's more than 450 physicians in 45 specialties and subspecialties, the Company's performance system allowed physicians and clinics to determine whether their performance was worse than, the same as or better than colleagues in similar specialities locally, as well as nationwide. These benchmarks and best-practice examples have allowed the group to capitalize on strengths and address weaknesses identified by the Company's measurement system. The Company's data supported a marketing campaign emphasizing the group's very high "overall quality of care" score compared to other physicians in its market. In addition, the Company assisted the group in leveraging its access scores by conducting a custom community study that quantified patients' access expectations (how long was an acceptable office wait time, days to appointment, etc.). Knowing what patients wanted and how the group compared to other local practices, the Company helped the group identify where resources should be allocated to improve patient experiences and service ratings. SALES AND MARKETING The Company has generated the majority of its revenues from client renewals, supplemented by its internal marketing efforts and a limited sales force. In order to increase geographic penetration, NRC added one sales associate to its existing three person sales force at the end of the second quarter of 1997 and another in the third quarter of 1997. These new sales associates will direct NRC's sales efforts from Nashville and Atlanta. The Company is also in the process of searching for additional sales associates. As compared to the typical industry practice of compensating salespeople with relatively high base pay and a relatively small sales commission, NRC compensates its sales associates with relatively low base pay and a relatively high, per sale commission. The Company believes this compensation structure provides incentives to its sales associates to surpass sales goals and increases the Company's ability to attract top quality sales associates. The average healthcare/market research industry experience of the Company's sales associates is 8.75 years. Numerous marketing efforts support the direct sales force's new business generation and project renewal initiatives. NRC conducts an annual direct marketing campaign around scheduled trade shows, including leading industry conferences such as the National Managed Healthcare Congress and American Association of Health Plans' Institute. NRC uses this lead generation mechanism to track the effectiveness of marketing efforts and add generated leads to its database of current and potential client contacts. In addition, NRC plans to implement a telemarketing sales strategy to qualify the highest quality potential leads. Finally, the Company's public relations program includes (i) an ongoing presence in leading industry trade press and in the mainstream press; (ii) public speaking at strategic industry conferences; (iii) monthly "Perspectives on 31 33 Performance" articles (which are in-depth discussions of performance tracking applications, trends and policies) sent to current clients and top prospects; (iv) fostering relationships with key industry constituencies (HCFA, Joint Commission and NCQA); and (v) an annual Quality Leaders award program recognizing top-ranking HMOs and health systems in approximately 100 markets. The Company is also co-authoring an industry manual with renowned researcher John E. Ware, Ph.D., of the New England Medical Center's Health Institute. The Company's integrated marketing activities facilitate its ongoing receipt of project requests-for-proposals as well as direct sales force initiated prospect contact. The sales process typically spans a 90-day period encompassing the identification of a healthcare organization's information needs, the education of prospects on NRC solutions (via proposals, in-person sales presentations and on-line product demonstrations) and the closing of the sale. The Company's sales cycle varies depending on the particular product or service being marketed and the size of the potential project. COMPETITION The healthcare information and market research industry is highly competitive. The Company has traditionally competed both with healthcare organizations' internal marketing, market research and/or quality improvement departments which create their own performance measurement tools and with relatively small specialty research firms which provide survey-based healthcare market research and/or performance assessment. The Company anticipates that in the future it may increasingly compete with (i) traditional market research firms which are significant providers of survey-based, general market research and (ii) firms which provide services or products that complement healthcare performance assessments, such as healthcare software or information systems. Although only a few of these competitors have to date offered survey-based, healthcare market research that competes directly with the Company's services and products, many of these competitors have substantially greater financial, information gathering and marketing resources than the Company and could decide to increase their resource commitments to the Company's market. There are relatively few barriers to entry into the Company's market, and the Company expects increased competition in its market, which could adversely affect the Company's operating results through pricing pressure, increased marketing expenditures and market share losses, among other factors. There can be no assurance that the Company will continue to compete successfully against existing or new competitors. See "Risk Factors -- Competition." The Company believes the primary competitive factors within its market include quality of service, timeliness of delivery, service uniqueness, credibility of provider, industry experience and price. NRC believes that its industry leadership position, exclusive focus on the healthcare industry, dynamic questionnaire, syndicated Market Guide and comparative performance database, and its relationships with leading healthcare payers and providers position the Company to compete in this market. INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS The Company's success is in part dependent upon its data collection process, research methods, data analysis techniques and internal systems and procedures that it has developed specifically to serve clients in the healthcare industry. The Company has no patents; consequently, it relies on a combination of copyright, trademark and trade secret laws and employee nondisclosure agreements to protect its systems and procedures. There can be no assurance that the steps taken by the Company to protect its rights will be adequate to prevent misappropriation of such rights or that third parties will not independently develop functionally equivalent or superior systems or procedures. The Company believes that its systems and procedures and other proprietary rights do not infringe upon the proprietary rights of third parties. There can be no assurance, however, that third parties will not assert infringement claims against the Company in the future or that any such claims will not result in protracted and costly litigation, regardless of the merits of such claims. See "Risk Factors -- Limited Protection of the Company's Systems and Procedures." 32 34 EMPLOYEES As of July 1, 1997, the Company employed a total of 64 persons on a full-time basis. In addition, as of such date the Company had 160 part-time associates primarily in its survey operations, representing approximately 101 full-time equivalent employees. None of the Company's employees are represented by a collective bargaining agreement. The Company considers its relationship with its employees to be excellent. FACILITIES The Company's headquarters is located in approximately 25,000 square feet of leased office space in Lincoln, Nebraska. This facility houses all the capabilities necessary for NRC's survey programming, printing and distribution; telephone interviewing; data processing, analysis and report generation; marketing; and corporate administration. The lease on this facility is on a month to month basis. The Company plans to move to an approximately 35,000 square foot new leased facility by the end of the first quarter of 1998 to accommodate its growth. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." LEGAL PROCEEDINGS The Company is not subject to any material pending litigation. 33 35 MANAGEMENT OFFICERS AND DIRECTORS The following table sets forth information, as of the date of this Prospectus, regarding the officers and directors of the Company.
NAME AGE POSITIONS ---- --- --------- Michael D. Hays................ 42 President, Chief Executive Officer and Director Jona S. Raasch................. 38 Vice President and Chief Operations Officer Patrick E. Beans............... 40 Vice President, Treasurer, Chief Financial Officer and Director Sharon Flaherty................ 50 Vice President-Sales, Marketing and Client Services Daniel Bernard................. 47 Vice President-Information Systems
Michael D. Hays has served as President and Chief Executive Officer and as a director since he founded the Company in 1981. Mr. Hays has more than 23 years of experience in the healthcare and survey-based research industries. Jona S. Raasch has served as Vice President and Chief Operations Officer since September 1988. Ms. Raasch has more than 17 years of experience in the healthcare and survey-based research industries. Patrick E. Beans has served as the principal financial officer since he joined the Company in August 1994. Mr. Beans was elected Vice President, Treasurer and Chief Financial Officer in August 1997. Immediately prior to this offering, Mr. Beans will be elected as a director. From June 1993 until joining the Company, Mr. Beans was the finance director for the Central Interstate Low-Level Radioactive Waste Commission, a five-state compact developing a low-level radioactive waste disposal plan. From 1979 to 1988 and from June 1992 to June 1993, he practiced as a certified public accountant. Sharon Flaherty joined the Company in December 1996 and serves as Vice President-Sales, Marketing and Client Services. From 1972 until joining the Company, Ms. Flaherty held various positions with Kaiser Foundation Health Plan, Inc. and its affiliates, an HMO, including the last three years (from May 1993 to June 1996) as President of Kaiser Foundation Health Plan of Texas. Daniel Bernard has served as Vice President-Information Systems since he joined the Company in 1986. Mr. Bernard has more than 24 years of experience in the healthcare and survey-based research industries. Executive officers of the Company are elected by, and serve at the discretion of, the Board of Directors. The Board of Directors currently consists of one director and Mr. Beans will be elected a director immediately prior to this offering. The Company intends to name at least two additional directors, who will be independent directors, within 60 days of the completion of this offering to serve with Mr. Hays and Mr. Beans. Mr. Hays, as a director and the Company's principal shareholder, and Mr. Beans, as a director, will determine who the two additional directors will be. The Company's Articles of Incorporation and By-Laws divide the Board of Directors into three classes. The directors serve staggered terms of three years, with the members of one class being elected in any year, as follows: (i) one director has been designated as a Class I Director and will serve until the 1998 annual meeting; (ii) Patrick E. Beans will be designated as a Class II Director and will serve until the 1999 annual meeting; (iii) Michael D. Hays and one other director have been designated as Class III Directors and will serve until the 2000 annual meeting; and in each case until their respective successors are duly elected and qualified. There are no family relationships between any directors or executive officers of the Company. DIRECTOR COMPENSATION Directors who are executive officers of the Company receive no compensation for service as members of either the Board of Directors or committees thereof. Directors who are not executive officers of the Company will be paid an annual retainer and a fee for each committee meeting attended, the amounts of which will be 34 36 determined within 60 days of the completion of this offering. Additionally, directors will be reimbursed for out-of-pocket expenses associated with attending meetings of the Board of Directors and committees thereof. Pursuant to the Director Plan, each director who is not an employee of the Company will receive 40% of his or her annual retainer in cash and the remaining 60% in shares of Common Stock, and will receive an annual grant of an option to purchase 1,000 shares of Common Stock. The options will have an exercise price equal to the fair market value of the Common Stock on the date of grant and will vest one year after the grant date. BOARD COMMITTEES The Board of Directors established standing Audit and Compensation Committees in August 1997. The Audit Committee is responsible for recommending to the Board of Directors the appointment of independent auditors, approving the scope of the annual audit activities of the auditors, approving the audit fee payable to the auditors and reviewing audit results. It is expected that within 60 days of the completion of this offering the Board of Directors will appoint the members of the Audit Committee, which will consist of three directors, including two independent directors. The Compensation Committee reviews and recommends to the Board of Directors the compensation structure for the Company's directors, officers and other managerial personnel, including salary rates, participation in any incentive compensation and benefit plans, fringe benefits, non-cash perquisites and other forms of compensation, and administers the Equity Incentive Plan. It is expected that within 60 days of the completion of this offering the Board of Directors will appoint the members of the Compensation Committee, which will consist of two independent directors. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Company will not have an active Compensation Committee of the Board of Directors until the two independent directors are named. As a result, Michael D. Hays was, and, until such directors are named, he and Patrick E. Beans will be, responsible for fixing the compensation to be paid to the executive officers of the Company. EXECUTIVE COMPENSATION The following table sets forth certain information concerning the compensation paid to, earned by or awarded to the Company's Chief Executive Officer and the Company's only other executive officers whose total cash compensation exceeded $100,000 in the fiscal year ended December 31, 1996. The persons named in the table are sometimes referred to herein as the "named executive officers." SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ---------------------- ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION --------------------------- ---- ------ ----- ------------ Michael D. Hays................................... 1996 $140,000 $ 70,000(1) $1,523(2) President and Chief Executive Officer Jona S. Raasch.................................... 1996 72,472 117,290(3) 1,167(4) Vice President and Chief Operations Officer Patrick E. Beans.................................. 1996 72,472 117,290(3) 1,167(4) Vice President, Treasurer and Chief Financial Officer
- ------------------------- (1) Discretionary bonus. (2) Premiums for disability insurance paid by the Company for the benefit of Mr. Hays. (3) Includes $77,036 awarded in 1996 under the Company's prior annual incentive plan, $21,627 paid in 1996 under the Company's prior annual incentive plan as a result of awards made in earlier years, $15,407 awarded in 1996 under the Company's prior quarterly incentive plan and $3,220 paid in 1996 under the 35 37 Company's prior quarterly incentive plan as a result of an award made in 1995. Subject to potential forfeiture on termination of employment, awards made under the Company's prior annual incentive plan vest and become payable in 20% increments following the end of each fiscal year over a five-year period. Effective June 30, 1997, the Company terminated its prior annual and quarterly incentive plans and currently intends to replace them with a new incentive plan, the terms of which have not been established. (4) Additional wages paid by the Company when professional development programs were attended. EMPLOYMENT AGREEMENTS On July 15, 1994, the Company set forth the terms and conditions of Patrick E. Beans' employment with the Company in an employment memorandum. Pursuant to this memorandum, Mr. Beans is entitled to an annual base salary of $70,000 and is entitled to participate in the Company's incentive plan, the National Research Corporation 401(k) Savings Plan and a stock option pool or similar benefit plan (which will be the Equity Incentive Plan). Under this memorandum, the Company agreed to employ Mr. Beans as its Chief Financial Officer. EMPLOYEE BENEFIT PLANS Equity Incentive Plan. In August 1997, the Board of Directors adopted, and the Company's shareholders approved, the Equity Incentive Plan. The purpose of the Equity Incentive Plan is to promote the best interests of the Company and its shareholders by providing employees of the Company with an opportunity to acquire an interest in the Company. The Equity Incentive Plan is intended to promote continuity of management and to provide increased incentive and personal interest in the welfare of the Company by employees upon whose judgment, interest and special effort the successful conduct of the Company's business is dependent. The Equity Incentive Plan may be administered by a committee of the Board of Directors consisting of two or more directors or by the entire Board of Directors. Once the members of the Compensation Committee of the Board of Directors (the "Committee") are appointed, the Committee will administer the Equity Incentive Plan and will have the authority to establish rules for the administration of the Equity Incentive Plan; to select the employees of the Company to whom awards will be granted; to determine the types of awards to be granted to employees and the number of shares covered by such awards; and to set the terms and conditions of such awards. Prior to such time, the entire Board of Directors shall perform the functions of the Committee with respect to the Equity Incentive Plan. Any employee of the Company or of any of its future affiliates, including any officer or employee-director of the Company or of any of its future affiliates, is eligible to be granted awards by the Committee under the Equity Incentive Plan. The Equity Incentive Plan authorizes the granting to employees of: (i) stock options, which may be either incentive stock options meeting the requirements of Section 442 of the Code or non-qualified stock options, (ii) stock appreciation rights, (iii) restricted stock, (iv) performance shares and (v) other stock-based awards and benefits. No awards may be granted under the Equity Incentive Plan after the date of the Company's annual meeting of shareholders in the year 2001. The maximum number of shares of Common Stock which may be issued and sold under the Equity Incentive Plan is 730,000 shares. The Company expects to grant options to purchase approximately 225,000 shares of Common Stock simultaneously with this offering at an exercise price per share equal to the initial public offering price, of which none are expected to be granted to the named executive officers. The Company anticipates that options granted to other executive officers will vest in equal increments over a three-year period and that each of the other options granted will vest in equal increments over a two-year period. Consequently, none of such options will be exercisable until one year after the date of this Prospectus. If any dividend or other distribution, recapitalization, stock split, reorganization, merger, consolidation, combination, repurchase or exchange of shares of Common Stock, issuance of warrants or other rights to purchase shares of Common Stock or other similar corporate transaction or event effects the shares of Common Stock so that an adjustment is appropriate in order to prevent dilution or enlargement of the benefits intended to be made available under the Equity Incentive Plan, then the Committee will have the authority to adjust (i) the 36 38 number and type of shares subject to the Equity Incentive Plan and which thereafter may be made the subject of awards, (ii) the number and type of shares subject to outstanding awards, and (iii) the grant, purchase or exercise price with respect to an award or may make provision for a cash payment to the holder of an outstanding award. Profit Sharing Plan. The Company maintains the National Research Corporation Profit Sharing Plan (the "Profit Sharing Plan"). The Profit Sharing Plan permits employee before-tax contributions, employee after-tax contributions and provides for employer incentive matching contributions and employer discretionary contributions. Substantially all of the Company's employees who have completed one year of service and attained age 21 become participants in the Profit Sharing Plan on the first day coinciding with or following the date on which they satisfy the eligibility criteria. Employee contributions to the Profit Sharing Plan are 100% vested at the time of contribution. Company contributions to the Profit Sharing Plan may be, at the Company's option, partly or fully vested at the time of contribution, with any portion thereof not vested at the time of contribution vesting in equal increments over a five-year period starting after two years of service. Vested accounts are distributable upon a participant's retirement. 401(k) Savings Plan. The Company maintains the National Research Corporation 401(k) Savings Plan, a defined contribution retirement plan with a cash or deferred arrangement as described in Section 401(k) of the Code (the "401(k) Savings Plan"). The 401(k) Savings Plan is intended to be qualified under Section 401(a) of the Code. All employees of the Company who have completed one year of service and attained age 21 are eligible to participate in the 401(k) Savings Plan on the first day of the month coinciding with or following the date on which they satisfy the eligibility criteria. The 401(k) Savings Plan provides that each participant may make elective contributions from 1% to 15% of his or her compensation, subject to statutory limits. The 401(k) Savings Plan also provides for matching contributions and discretionary contributions, subject to statutory limits. INDEMNIFICATION OF DIRECTORS AND OFFICERS Under the WBCL and the Company's By-Laws, directors and officers of the Company are entitled to mandatory indemnification from the Company against certain liabilities and expenses (a) to the extent such officers or directors are successful in the defense of a proceeding and (b) in proceedings in which the director or officer is not successful in the defense thereof, unless (in the latter case only) it is determined that the director or officer breached or failed to perform his or her duties to the Company and such breach or failure constituted: (i) a willful failure to deal fairly with the Company or its shareholders in connection with a matter in which the director or officer had a material conflict of interest; (ii) a violation of the criminal law unless the director or officer had reasonable cause to believe his or her conduct was lawful or had no reasonable cause to believe his or her conduct was unlawful; (iii) a transaction from which the director or officer derived an improper personal profit; or (iv) willful misconduct. Under the WBCL, directors of the Company are not personally liable to the Company, its shareholders or any person asserting rights on behalf of the Company or its shareholders for certain breaches or failures to perform any duty resulting solely from their status as such directors, except in circumstances paralleling those in subparagraphs (i) through (iv) outlined above. These provisions pertain only to breaches of duty by directors as directors and not in any other corporate capacity, such as officers. As a result of such provisions, shareholders may be unable to recover monetary damages against directors for actions taken by them which constitute negligence or gross negligence or which are in violation of their fiduciary duties, although it may be possible to obtain injunctive or other equitable relief with respect to such actions. If equitable remedies are found not to be available to shareholders in any particular case, shareholders may not have an effective remedy against the challenged conduct. It is possible, although unlikely, that as a result of these provisions, directors may not demonstrate the same level of diligence or care since they are protected by these provisions. The Company believes the limitations of liability provisions in the Company's By-Laws and under the WBCL will facilitate the Company's ability to attract and retain qualified individuals to serve as directors of the Company. 37 39 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership of Common Stock as of September 15, 1997, and as adjusted to reflect the sale of the shares offered hereby, by: (i) each of the Company's directors; (ii) each of the named executive officers; (iii) all directors and all executive officers as a group; and (iv) each person or other entity known by the Company to own beneficially more than 5% of the Common Stock. Except as otherwise indicated in the footnotes, each of the holders has an address in care of the Company's principal executive offices and has sole voting and investment power over the shares beneficially owned, subject to any applicable community or marital property laws.
NUMBER OF SHARES SHARES SHARES BENEFICIALLY BENEFICIALLY OWNED BEING OWNED AFTER PRIOR TO OFFERING(1) OFFERED(2) OFFERING(1)(2) ---------------------- ---------- ---------------------- NAME NUMBER PERCENT NUMBER PERCENT - ---- ------ ------- ------ ------- Michael D. Hays............................ 6,012,910 99.3% 850,000 5,162,910 70.7% Jona S. Raasch............................. 42,090 * -- 42,090(3) * Patrick E. Beans........................... 0 -- -- 0(3) -- All directors and executive officers as a group (4 persons)........................ 6,055,000 100.0% 850,000 5,205,000 71.3%
- ------------------------- * Less than 1% (1) Based on 6,055,000 shares of Common Stock outstanding as of September 15, 1997 and 7,305,000 shares of Common Stock outstanding immediately after this offering. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. (2) Assumes no exercise of the Underwriters' over-allotment option to purchase 315,000 shares of Common Stock from the Selling Shareholder. If the Underwriters' over-allotment option is exercised in full, upon completion of this offering Mr. Hays would beneficially own 4,847,910 shares (or 66.4%). (3) In connection with this offering and prior to termination of the Company's S Corporation status, the Company intends to pay special cash bonuses aggregating $1,740,000 to Ms. Raasch and Mr. Beans in order to allow them to purchase shares of Common Stock and align the interests of all the named executive officers with the interests of the Company's shareholders. Substantially all of the after-tax proceeds of these bonuses will be used by Ms. Raasch and Mr. Beans to purchase shares of the Company's Common Stock. 38 40 CERTAIN TRANSACTIONS Prior to joining the Company in 1996, Sharon Flaherty, Vice President-Sales, Marketing and Client Services, served as President of Kaiser Foundation Health Plan of Texas and as a Vice President of Kaiser Foundation Health Plan, Inc., the parent of Kaiser. Kaiser Permanente-Northern California Region began its relationship with the Company in 1994 and accounted for 40.4% of the Company's total revenues in 1996. DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 20,000,000 shares of Common Stock, par value $.001, and 2,000,000 shares of Preferred Stock, par value $.01. The following summary of certain provisions of the Common Stock and Preferred Stock does not purport to be complete and is subject to, and qualified in its entirety by, the provisions of the Company's Articles of Incorporation, which is included as an exhibit to the Registration Statement of which this Prospectus is a part, and by the provisions of applicable law. COMMON STOCK There will be 7,305,000 shares of Common Stock outstanding after giving effect to the sale of Common Stock offered by the Company hereby. 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 the Board of Directors in accordance with applicable law. Except as provided under Wisconsin law and except as may be determined by the Board of Directors of the Company 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 WBCL (described below under "Certain Statutory, Articles of Incorporation and By-Law Provisions"). 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 the Company. There are no conversion rights, sinking fund or redemption provisions applicable to the Common Stock. The outstanding shares of Common Stock are, and the Common Stock to be issued by the Company in this offering will be, fully paid and nonassessable, except for certain statutory liabilities which may be imposed by Section 180.0622(2)(b) of the WBCL for unpaid employee wages. The transfer agent for the Common Stock is Firstar Trust Company, Milwaukee, Wisconsin. PREFERRED STOCK Pursuant to the Company's 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 the 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. Preferred Stock could thus 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 the Common Stock, and may 39 41 adversely affect the voting and other rights of the holders of Common Stock. At present, there are no shares of Preferred Stock outstanding and the Company has no plans to issue any of the Preferred Stock. CERTAIN STATUTORY, ARTICLES OF INCORPORATION AND BY-LAW PROVISIONS Section 180.1150 of the WBCL provides that the voting power of shares of public Wisconsin corporations such as the Company 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 the Company or in certain specified transactions or shares for which full voting power has been restored pursuant to a vote of shareholders. Sections 180.1140 to 180.1144 of the WBCL and Article 9 of the Articles of Incorporation of the Company (collectively, the "Wisconsin Business Combination Restriction") regulate a broad range of "business combinations" between a Wisconsin corporation and an "interested stockholder." The Wisconsin Business Combination Restriction 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 at least 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. The Wisconsin Business Combination Restriction prohibits 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 (a) the board of directors approved the acquisition of the stock prior to the acquisition date, (b) the business combination is approved by a majority of the outstanding voting stock not beneficially owned by the interested stockholder, or (c) the consideration to be received by shareholders meets certain requirements of the Wisconsin Business Combination Restriction with respect to form and amount. The Wisconsin Business Combination Restriction does not currently apply to Michael D. Hays since it does not apply to the shares of Common Stock currently held by Mr. Hays and the Board of Directors of the Company approved for purposes of the Wisconsin Business Combination Restriction any acquisitions (whether by purchase, gift or otherwise) made by Mr. Hays after September 12, 1997. Sections 180.1130 to 180.1133 of the WBCL provide that certain "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 certain exceptions, a merger or consolidation of the Company (or any subsidiary thereof) with, or the sale or other disposition of substantially all of the assets of the Company 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. Section 180.1134 (the "Wisconsin Defensive Action Restrictions") 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 the Wisconsin Defensive Action Restrictions, shareholder approval is required for the corporation to (a) 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 (b) sell or option assets of the corporation which 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 40 42 have this provision apply to the corporation. The restrictions described in clause (a) above may have the effect of deterring a shareholder from acquiring shares of the Company with the goal of seeking to have the Company repurchase such shares at a premium over the market price. Under the Company's Articles of Incorporation and By-Laws, the Board of Directors of the Company is divided into three classes, with staggered terms of three years each. Each year the term of one class expires. The Articles 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 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. See "Management -- Executive Officers and Directors." The Articles of Incorporation of the Company provide that any director 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 outstanding shares of the Company entitled to vote thereon. In addition, the By-Laws of the Company establish a procedure which shareholders seeking to call a special meeting of shareholders must satisfy. This procedure involves notice to the Company, the receipt by the Company 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 the Company 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 the Company a written agreement to pay the costs incurred by the Company in holding a special meeting, including the costs of preparing and mailing the notice of meeting and the proxy materials for the solicitation by the Company of proxies for use at such meeting, in the event such shareholders are unsuccessful in their proxy solicitation. The By-Laws of the Company also provide the Board of Directors of the Company with discretion in postponing shareholder meetings, including, within certain limits, special meetings of shareholders. Additionally, the President 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. The By-Laws of the Company 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. The foregoing provisions of the Company's Articles of Incorporation and By-Laws and the WBCL could have the effect of delaying, deferring or preventing a change of control of the Company. See "Risk Factors -- Effect of Anti-Takeover Provisions." SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, the Company will have outstanding an aggregate of 7,305,000 shares of Common Stock. Of these outstanding shares of Common Stock, the 2,100,000 shares sold in this offering will be freely tradeable without restriction or further registration under the Securities Act, unless purchased by "affiliates" of the Company as that term is defined in Rule 144 under the Securities Act. The remaining 5,205,000 shares of Common Stock held by existing shareholders are "restricted securities" as that term is defined in Rule 144 under the Securities Act ("Restricted Shares") and will be subject to the lock-up arrangements described below. Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144 or 144(k) promulgated under the Securities Act, which are summarized below. All of such Restricted Shares have been held in excess of one year. Sales of the Restricted Shares in the public market, or the availability of such shares for sale, could adversely affect the market price of the Common Stock. The Company and its directors and executive officers, including all current shareholders, have entered into contractual "lock-up" agreements providing that, except for the granting of options or the issuance of shares of Common Stock under the Director Plan, they will not offer, sell, contract to sell or grant any option to purchase or otherwise dispose of the shares of Common Stock owned by them or that could be purchased 41 43 by them through the exercise of options to purchase Common Stock of the Company for a period of 180 days after the date of this Prospectus without the prior written consent of William Blair & Company, L.L.C. As a result of these contractual restrictions, notwithstanding possible earlier eligibility for sale under the provisions of Rules 144 and 144(k), the shares subject to lock-up agreements will not be saleable until 180 days after the date of this Prospectus. William Blair & Company, L.L.C., in its discretion, may waive the foregoing restrictions in whole or in part, with or without a public announcement of such action. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least one year (including the holding period of any prior owner except an affiliate of the Company) would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: (i) one percent of the number of shares of Common Stock then outstanding (which will equal 73,050 shares immediately after this offering); or (ii) the average weekly trading volume of the Common Stock during the four calendar weeks preceding the filing of a Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about the Company. Under Rule 144(k), a person who is not deemed to have been an affiliate of the Company at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years (including the holding period of any prior owner except an affiliate of the Company), is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144; therefore, unless otherwise restricted, "144(k) shares" may be sold immediately upon the completion of this offering. The preceding description does not give effect to the shares of Common Stock which may be offered and sold pursuant to the Equity Incentive Plan or the Director Plan. See "Management -- Director Compensation" and "-- Employee Benefit Plans -- Equity Incentive Plan." The Company intends to file registration statements under the Securities Act, in the case of the Equity Incentive Plan not earlier than 180 days after the date of this Prospectus, to register the shares of Common Stock issuable under the Equity Incentive Plan and the Director Plan, which shares will be available for sale in the public market, subject to the volume and other limitations of Rule 144 for shares held by affiliates of the Company. In connection with this offering, options to purchase 225,000 shares of Common Stock will be granted under the Equity Incentive Plan at an exercise price equal to the offering price. Since there has been no public market for the Common Stock prior to this offering, no predictions can be made as to the effect, if any, that market sales of shares or the availability of shares for sale will have on the market price prevailing from time to time. Nevertheless, sales of substantial amounts of the Common Stock, or the perception that such sales could occur, could adversely affect the prevailing market price of the Common Stock. 42 44 UNDERWRITING The several Underwriters named below (the "Underwriters"), for whom William Blair & Company, L.L.C. and Robert W. Baird & Co. Incorporated are acting as Representatives (the "Representatives"), have severally agreed, subject to the terms and conditions set forth in the Underwriting Agreement by and among the Company, the Selling Shareholder and the Underwriters (the "Underwriting Agreement"), to purchase from the Company and the Selling Shareholder, and the Company and the Selling Shareholder have agreed to sell to the Underwriters, the respective number of shares of Common Stock set forth opposite each Underwriter's name in the table below.
NUMBER OF UNDERWRITERS SHARES ------------ --------- William Blair & Company, L.L.C.............................. Robert W. Baird & Co. Incorporated.......................... --------- Total.................................................. 2,100,000 =========
In the Underwriting Agreement, the Underwriters have agreed, subject to the terms and conditions set forth therein, to purchase all of the Common Stock offered hereby if any is purchased (excluding shares covered by the over-allotment option granted therein). In the event of a default by any Underwriter, the Underwriting Agreement provides that, in certain circumstances, purchase commitments of the non-defaulting Underwriters shall be increased or the Underwriting Agreement may be terminated. The Representatives have advised the Company and the Selling Shareholder that the Underwriters propose to offer the Common Stock to the public initially at the public offering price set forth on the cover page of this Prospectus and to selected dealers at such price less a concession of not more than $ per share. The Underwriters may allow, and such dealers may re-allow, a concession not in excess of $ per share to certain other dealers. After the public offering, the public offering price and other selling terms may be changed by the Underwriters. The Selling Shareholder has granted to the Underwriters an option, exercisable within 30 days after the date of this Prospectus, to purchase up to an additional 315,000 shares of Common Stock at the same price per share to be paid by the Underwriters for the other shares offered hereby. If the Underwriters purchase any such additional shares pursuant to this option, the Underwriters will be committed to purchase such additional shares in approximately the same proportion as set forth in the table above. The Underwriters may exercise the option only for the purpose of covering over-allotments, if any, made in connection with the distribution of the Common Stock offered hereby. The Company and its directors and executive officers, including all current shareholders, have agreed that they will not sell, contract to sell or otherwise dispose of any Common Stock or any interest therein for a period of 180 days after the date of this Prospectus without the prior written consent of William Blair & Company, L.L.C., except for the Common Stock offered hereby. William Blair & Company, L.L.C., in its discretion, may waive the foregoing restrictions in whole or in part, with or without a public announcement of such action. See "Shares Eligible for Future Sale." The Company and the Selling Shareholder have agreed to indemnify the Underwriters and their controlling persons against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the Underwriters may be required to make in respect thereof. 43 45 Prior to this offering, there has been no public market for the Common Stock of the Company. Consequently, the initial public offering price for the Common Stock will be determined by negotiations among the Company and the Representatives. Among the factors which will be considered in such negotiations will be the prevailing market conditions, the results of operations of the Company in recent periods, the market capitalizations and stages of development of other companies which the Company, the Selling Shareholder and the Representatives believe to be comparable to the Company, estimates of the business potential of the Company, the present state of the Company's development and other factors which may be deemed relevant. The Representatives have informed the Company that the Underwriters will not confirm, without client authorization, sales to their client accounts as to which they have discretionary authority. Until the distribution of the shares is completed, the rules of the Commission may limit the ability of the Underwriters and certain selling group members to bid for and purchase shares of Common Stock. As an exception to these rules, the Representatives are permitted to engage in certain transactions that stabilize the price of the Common Stock. Such transactions may consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Common Stock. In addition, if the Representatives over-allot (i.e., if they sell more shares of Common Stock than are set forth on the cover page of this Prospectus), and thereby create a short position in the Common Stock in connection with this offering, the Representatives may reduce that short position by purchasing Common Stock in the open market. The Representatives may also elect to reduce any short position by exercising all or part of the over-allotment option described herein. The Representatives may also impose a penalty bid on certain Underwriters and selling group members. This means that if the Representatives purchase shares of the Common Stock in the open market to reduce the Underwriters' short position or to stabilize the price of the Common Stock, they may reclaim the amount of the selling concession from the Underwriters and selling group members who sold those shares as part of this offering. In general, purchases of a security for the purpose of stabilization or to reduce a syndicate short position could cause the price of the security to be higher than it might otherwise be in the absence of such purchases. The imposition of a penalty bid might have an effect on the price of a security to the extent that it were to discourage resales of the security by purchasers in the offering. Neither the Company nor any of the Underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Common Stock. In addition, neither the Company nor any of the Underwriters makes any representation that the Representatives will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. LEGAL MATTERS The validity of the issuance of the shares of Common Stock offered hereby will be passed upon for the Company and the Selling Shareholder by Foley & Lardner, Milwaukee, Wisconsin. Certain legal matters will be passed upon for the Underwriters by Sachnoff & Weaver, Ltd., Chicago, Illinois. EXPERTS The financial statements of the Company at December 31, 1995 and 1996, and for each of the three years in the period ended December 31, 1996, appearing in this Prospectus and in the Registration Statement, have been audited by KPMG Peat Marwick LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein and in the Registration Statement, and are included herein in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. 44 46 NATIONAL RESEARCH CORPORATION INDEX TO FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report................................ F-2 Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997 and Pro Forma Balance Sheet as of June 30, 1997...... F-3 Statements of Income for the years ended December 31, 1994, 1995 and 1996 and for the six months ended June 30, 1996 and 1997.................................................. F-4 Statements of Shareholders' Equity for the years ended December 31, 1994, 1995 and 1996 and for the six months ended June 30, 1997....................................... F-5 Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and for the six months ended June 30, 1996 and 1997............................................. F-6 Notes to Financial Statements............................... F-7
F-1 47 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders National Research Corporation: We have audited the accompanying balance sheets of National Research Corporation as of December 31, 1995 and 1996, and the related statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of National Research Corporation as of December 31, 1995 and 1996, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Lincoln, Nebraska June 6, 1997, except as to note 8 which is as of August 8, 1997 F-2 48 NATIONAL RESEARCH CORPORATION BALANCE SHEETS
DECEMBER 31, PRO FORMA ----------------------- JUNE 30, JUNE 30, 1995 1996 1997 1997 ---------- ---------- ---------- ---------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................... $ 934,800 $2,782,212 $3,621,662 $ -- Investments in marketable debt securities... 587,245 1,476,965 306,779 306,779 Trade accounts receivable, less allowance for doubtful accounts of $25,000 in 1995, $45,000 in 1996, and $55,000 in 1997..... 2,912,122 1,216,812 2,171,018 2,171,018 Unbilled revenues........................... 97,334 282,358 653,934 653,934 Prepaid expenses and other.................. 24,610 46,022 628,429 728,929 ---------- ---------- ---------- ---------- Total current assets..................... 4,556,111 5,804,369 7,381,822 3,860,660 ---------- ---------- ---------- ---------- Property and equipment: Furniture and fixtures...................... 173,225 291,514 304,598 304,598 Computer equipment.......................... 409,008 481,055 700,423 700,423 ---------- ---------- ---------- ---------- 582,233 772,569 1,005,021 1,005,021 Less accumulated depreciation and amortization............................. 310,851 434,937 514,505 514,505 ---------- ---------- ---------- ---------- Net property and equipment............... 271,382 337,632 490,516 490,516 ---------- ---------- ---------- ---------- Cash surrender value of life insurance........ 157,872 -- -- -- Other......................................... 10,657 10,657 10,657 160,157 ---------- ---------- ---------- ---------- Total assets............................. $4,996,022 $6,152,658 $7,882,995 $4,511,333 ========== ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses....... $ 359,988 $ 494,614 $ 194,100 $ 194,100 Accrued wages, bonuses and profit sharing... 503,755 764,784 1,062,478 1,062,478 Dividends payable........................... 269,876 359,384 -- 772,338 Billings in excess of revenues earned....... 1,888,154 2,168,026 3,294,856 3,294,856 ---------- ---------- ---------- ---------- Total current liabilities................ 3,021,773 3,786,808 4,551,434 5,323,772 Bonuses and profit sharing accruals........... 144,684 286,443 383,205 383,205 ---------- ---------- ---------- ---------- Total liabilities........................ 3,166,457 4,073,251 4,934,639 5,706,977 ---------- ---------- ---------- ---------- Shareholders' equity: Common stock, $.001 par value; authorized 20,000,000 shares, issued and outstanding 6,055,000 shares......................... 6,055 6,055 6,055 6,055 Preferred stock, $.01 par value; authorized 2,000,000 shares, no shares issued and outstanding.............................. -- -- -- -- Additional paid-in capital.................. -- -- -- -- Retained earnings (deficit)................. 1,823,510 2,073,352 2,942,301 (1,201,699) ---------- ---------- ---------- ---------- Total shareholders' equity (deficit)..... 1,829,565 2,079,407 2,948,356 (1,195,644) ---------- ---------- ---------- ---------- Commitments and contingencies Total liabilities and shareholders' equity................................. $4,996,022 $6,152,658 $7,882,995 $4,511,333 ========== ========== ========== ==========
See accompanying notes to financial statements. F-3 49 NATIONAL RESEARCH CORPORATION STATEMENTS OF INCOME
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------------ ----------------------- 1994 1995 1996 1996 1997 ---------- ---------- ---------- ---------- ---------- (UNAUDITED) Revenues: Renewable performance tracking services........................... $4,419,564 $6,839,410 $9,568,915 $4,312,747 $5,954,150 Renewable syndicated product.......... 652,192 493,416 1,276,423 101,676 444,312 Custom and other research............. 1,683,198 1,584,533 1,754,895 899,304 552,116 ---------- ---------- ---------- ---------- ---------- Total revenues................... 6,754,954 8,917,359 12,600,233 5,313,727 6,950,578 ---------- ---------- ---------- ---------- ---------- Operating expenses: Direct expenses....................... 2,967,397 3,494,706 5,685,200 2,327,458 3,010,725 Selling, general and administrative... 2,043,878 2,364,269 3,060,189 1,319,317 1,837,420 Depreciation and amortization......... 85,620 119,093 173,148 71,996 79,568 ---------- ---------- ---------- ---------- ---------- Total operating expenses......... 5,096,895 5,978,068 8,918,537 3,718,771 4,927,713 ---------- ---------- ---------- ---------- ---------- Operating income................. 1,658,059 2,939,291 3,681,696 1,594,956 2,022,865 ---------- ---------- ---------- ---------- ---------- Other income: Interest income....................... 23,579 106,300 125,948 75,297 97,030 Other, net............................ 22,491 1,651 26,484 -- -- ---------- ---------- ---------- ---------- ---------- Total other income............... 46,070 107,951 152,432 75,297 97,030 ---------- ---------- ---------- ---------- ---------- Income before income taxes....... 1,704,129 3,047,242 3,834,128 1,670,253 2,119,895 Provision for income taxes.............. 114,500 -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net income....................... $1,589,629 $3,047,242 $3,834,128 $1,670,253 $2,119,895 ========== ========== ========== ========== ========== Pro forma information: Net income............................ $1,589,629 $3,047,242 $3,834,128 $1,670,253 $2,119,895 Pro forma income taxes................ 582,796 1,218,897 1,533,651 668,101 847,958 ---------- ---------- ---------- ---------- ---------- Pro forma net income............. $1,006,833 $1,828,345 $2,300,477 $1,002,152 $1,271,937 ========== ========== ========== ========== ========== Pro forma net income per share.......... $ 0.37 $ 0.16 $ 0.20 ========== ========== ========== Weighted average common shares and common share equivalents outstanding........................... 6,217,265 6,217,265 6,217,265 ========== ========== ==========
See accompanying notes to financial statements. F-4 50 NATIONAL RESEARCH CORPORATION STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
ADDITIONAL PREFERRED COMMON PAID-IN TREASURY RETAINED STOCK STOCK CAPITAL STOCK EARNINGS TOTAL --------- ------- ---------- -------- ----------- ----------- Balances at December 31, 1993.... $100 $12,642 $ 13,812 $(7,543) $ 270,635 $ 289,646 Treasury stock canceled, 6,134,371 shares............... -- (6,134) (1,724) 7,543 315 -- Common stock retired, 456,019 shares................. -- (456) (12,560) -- (62,066) (75,082) Preferred stock retired, 10 shares......................... (100) -- -- -- -- (100) Common stock issued, 2,886 shares......................... -- 3 472 -- -- 475 Net income....................... -- -- -- -- 1,589,629 1,589,629 Dividends declared, $.01 per share.......................... -- -- -- -- (42,797) (42,797) ---- ------- -------- ------- ----------- ----------- Balances at December 31, 1994.... -- 6,055 -- -- 1,755,716 1,761,771 Net income....................... -- -- -- -- 3,047,242 3,047,242 Dividends declared, $.49 per share.......................... -- -- -- -- (2,979,448) (2,979,448) ---- ------- -------- ------- ----------- ----------- Balances at December 31, 1995.... -- 6,055 -- -- 1,823,510 1,829,565 Net income....................... -- -- -- -- 3,834,128 3,834,128 Dividends declared, $.59 per share.......................... -- -- -- -- (3,584,286) (3,584,286) ---- ------- -------- ------- ----------- ----------- Balances at December 31, 1996.... -- 6,055 -- -- 2,073,352 2,079,407 Net income....................... -- -- -- -- 2,119,895 2,119,895 Dividends declared, $.21 per share.......................... -- -- -- -- (1,250,946) (1,250,946) ---- ------- -------- ------- ----------- ----------- Balances at June 30, 1997 (unaudited).................... $ -- $ 6,055 $ -- $ -- $ 2,942,301 $ 2,948,356 ==== ======= ======== ======= =========== ===========
See accompanying notes to financial statements. F-5 51 NATIONAL RESEARCH CORPORATION STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, -------------------------------------- ------------------------- 1994 1995 1996 1996 1997 ---------- ----------- ----------- ----------- ----------- (UNAUDITED) Cash flows from operating activities: Net income............................... $1,589,629 $ 3,047,242 $ 3,834,128 $ 1,670,253 $ 2,119,895 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......... 85,620 119,093 173,148 71,996 79,568 Loss on sale of property and equipment............................ -- -- 32,837 -- -- Change in assets and liabilities: Trade accounts receivable............ (94,234) (2,355,788) 1,695,310 1,355,034 (954,206) Unbilled revenues.................... -- (97,334) (185,024) -- (371,576) Prepaid expenses and other........... (23,388) 1,278 (21,412) (10,259) (582,407) Other receivables.................... 246,556 -- -- -- -- Accounts payable and accrued expenses.......................... 11,630 128,422 134,626 (113,907) (300,514) Accrued wages, bonuses and profit sharing........................... 91,801 449,724 402,788 168,024 394,456 Billings in excess of revenues earned............................ 701,589 488,969 279,872 (221,698) 1,126,830 Increase in cash surrender value of life insurance.................... (21,018) (27,211) -- -- -- ---------- ----------- ----------- ----------- ----------- Net cash provided by operating activities.................... 2,588,185 1,754,395 6,346,273 2,919,443 1,512,046 ---------- ----------- ----------- ----------- ----------- Cash flows from investing activities: Purchases of property and equipment...... (194,330) (160,923) (272,235) (96,396) (232,452) Purchases of securities available-for-sale..................... (733,519) (1,503,726) (4,154,720) (13,961) (329,871) Proceeds from the maturities of securities available-for-sale.......... -- 1,650,000 3,265,000 600,000 1,500,057 ---------- ----------- ----------- ----------- ----------- Net cash provided by (used in) investing activities.......... (927,849) (14,649) (1,161,955) 489,643 937,734 ---------- ----------- ----------- ----------- ----------- Cash flows from financing activities: Dividends paid........................... (42,797) (2,709,572) (3,336,906) (2,756,338) (1,610,330) Payments on capital leases............... (41,294) (12,301) -- (1,941) -- Proceeds from issuance of common stock... 475 -- -- -- -- Payments to acquire preferred stock...... (100) -- -- -- -- Payments to acquire common stock......... (45,976) (29,106) -- -- -- ---------- ----------- ----------- ----------- ----------- Net cash used in financing activities.................... (129,692) (2,750,979) (3,336,906) (2,758,279) (1,610,330) ---------- ----------- ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents.......... 1,530,644 (1,011,233) 1,847,412 650,807 839,450 Cash and cash equivalents at beginning of period................................ 415,389 1,946,033 934,800 934,800 2,782,212 ---------- ----------- ----------- ----------- ----------- Cash and cash equivalents at end of period................................... $1,946,033 $ 934,800 $ 2,782,212 $ 1,585,607 $ 3,621,662 ========== =========== =========== =========== =========== SUPPLEMENTARY INFORMATION Cash paid for: Interest............................... $ 3,947 $ 431 -- -- -- ========== =========== =========== =========== =========== Taxes.................................. $ 126,845 -- -- -- -- ========== =========== =========== =========== =========== Noncash investing and financing activities: In 1996, the Company assigned a life insurance policy to its majority shareholder and recorded a dividend of $178,236 for the cash surrender value of the life insurance policy.
See accompanying notes to financial statements. F-6 52 NATIONAL RESEARCH CORPORATION NOTES TO FINANCIAL STATEMENTS THREE YEARS ENDED DECEMBER 31, 1996 AND THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION National Research Corporation (the "Company") is a provider of ongoing survey-based performance measurement, analysis and tracking services and products to the healthcare industry. The Company provides market research services to hospitals and insurance companies on an unsecured credit basis. One client accounted for 28.9%, 43.7% and 40.4% of total revenues in 1994, 1995 and 1996, respectively, and 48.7% and 34.7% of total revenues for the six months ended June 30, 1996 and 1997, respectively. Another client accounted for 23.1% and 13.6% of total revenues in 1994 and 1995, respectively. A third client accounted for 14.1 % of the revenues for the six months ended June 30, 1997. The Company operates in a single industry segment. BASIS OF PRESENTATION Interim Financial Statements -- The financial information as of June 30, 1997 and for the six months ended June 30, 1996 and 1997 is unaudited and has been prepared in conformity with generally accepted accounting principles and includes all adjustments, in the opinion of management, necessary to a fair presentation of the results of operations for the interim periods presented. All such adjustments are, in the opinion of management, of a normal, recurring nature. Pro Forma Net Income Per Share -- Pro forma net income per share has been computed assuming that the Company had been taxed as a C corporation for Federal and state income tax purposes for all periods presented. The weighted average shares outstanding for 1996 and the first six months of 1996 and 1997 include the pro forma effect of shares that would have had to have been issued (at an assumed initial public offering price of $12.00 less the underwriting discount expense) to generate sufficient cash to fund the portion of the approximately $5.6 million of estimated S corporation distributions and special cash bonuses that are in excess of the net income for the year ended December 31, 1996. While this assumption is being made to calculate the weighted average shares outstanding for 1996 and the first six months of 1996 and 1997, the Company plans to use operating cash flows, and not IPO proceeds, to fund the $2.7 million of distributions. The weighted average shares outstanding is calculated as follows:
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, ---------------------- 1996 1996 1997 ------------ --------- --------- Common stock............................................... 6,055,000 6,055,000 6,055,000 Dilutive effect of assumed IPO shares for distribution..... 162,265 162,265 162,265 --------- --------- --------- Weighted average common shares and common share equivalents outstanding.............................................. 6,217,265 6,217,265 6,217,265 ========= ========= =========
USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles 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 revenues and expenses during the reporting period. Actual results could differ from those estimates. F-7 53 NATIONAL RESEARCH CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED REVENUE RECOGNITION The Company derives a substantial majority of its operating revenues from its annually renewable services and products, which include the NRC Listening System ("Renewable Performance Tracking Services") and the NRC Healthcare Market Guide ("Renewable Syndicated Product"). Under the NRC Listening System, the Company provides interim and annual performance tracking to its clients under annual client service contracts, although such contracts are generally cancelable on short or no notice without penalty. Through its syndicated NRC Healthcare Market Guide, the Company publishes healthcare market information to its clients generally on an annual or (prior to 1996) bi-annual basis. The Company also derives revenues from custom and other research projects. The Company recognizes revenues from its Renewable Performance Tracking Services and its custom and other research projects using the percentage of completion method of accounting. The recognized revenue is the percent of estimated total revenues that incurred costs to date bear to estimated total costs after giving effect to estimates of costs to complete based upon most recent information. Losses expected to be incurred on jobs in progress are charged to income as soon as such losses are known. Revenues earned on contracts in progress in excess of billings are classified as a current asset. Amounts billed in excess of revenues earned are classified as a current liability. Client projects are generally completed within a twelve-month period. Direct costs of producing the Renewable Syndicated Product are deferred. The Company recognizes revenues and related direct costs for its Renewable Syndicated Product upon its delivery to clients. 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. The Company provides for depreciation and amortization of property and equipment using annual rates which are sufficient to amortize the cost of depreciable assets over their estimated useful lives of 5 to 7 years. The Company uses accelerated methods of depreciation and amortization over estimated useful lives of 5 to 7 years for furniture and fixtures and 3 to 5 years for computer equipment. MARKETABLE SECURITIES All marketable securities held by the Company at December 31, 1995 and 1996 were classified as available-for-sale and recorded at cost, which approximates market value. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from income and are reported as a separate component of shareholders' equity until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific-identification basis. Fair values are estimated based on quoted market prices. INCOME TAXES Effective August 1, 1994, the Company, with consent of its shareholders, elected under the Internal Revenue Code to be an S corporation. In lieu of corporation income taxes, the shareholders of an S corporation are taxed on their proportionate share of the Company's taxable income. Therefore, no provision or liability for Federal income taxes has been included in these financial statements for the five months ended December 31, 1994, for the years ended December 31, 1995 and 1996, or for the six months ended June 30, 1996 and 1997. F-8 54 NATIONAL RESEARCH CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED The Company will adopt Statement of Financial Accounting Standards No. 109, (SFAS No. 109) (see also note 4) in the quarter ending September 30, 1997, upon successful completion of its initial public offering ("IPO"). Deferred income taxes are provided for temporary differences between tax and financial reporting bases of assets and liabilities using enacted tax rates under SFAS No. 109. CASH AND CASH EQUIVALENTS For purposes of the statements of cash flows, the Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. (2) INVESTMENTS IN MARKETABLE DEBT SECURITIES The carrying value for available-for-sale securities by major security type is shown below. Amortized cost approximates fair value.
DECEMBER 31, --------------------- JUNE 30, 1995 1996 1997 -------- ---------- ----------- (UNAUDITED) Debt securities: U.S. Treasury securities................................. $243,776 $ -- $305,576 Obligations of other U.S. agencies....................... 342,361 1,475,752 -- -------- ---------- -------- 586,137 1,475,752 305,576 Other...................................................... 1,108 1,213 1,203 -------- ---------- -------- Total............................................ $587,245 $1,476,965 $306,779 ======== ========== ========
There were no sales of marketable securities in advance of scheduled maturities available-for-sale during 1994, 1995, 1996 or for the six months ended June 30, 1996 and 1997. All marketable debt securities have stated maturities of one year or less. (3) INCOME TAXES AND PRO FORMA INCOME TAXES Income tax expense for the seven months ended July 31, 1994 consisted of the following components: Federal..................................................... $ 99,000 State....................................................... 15,500 -------- $114,500 ========
For the seven months ended July 31, 1994, there were no deferred income taxes. Income tax expense for the seven months ended July 31, 1994 differed from that computed by applying U.S. Federal income tax statutory rates to income before income taxes of $247,139. The reasons for this difference are shown below: Computed "expected" income tax expense...................... $ 84,000 State income taxes, net of Federal tax benefit.............. 10,200 Nondeductible portion of meals and entertainment expense.... 2,700 Officer life insurance...................................... 3,800 Other, net.................................................. 13,800 -------- $114,500 ========
F-9 55 NATIONAL RESEARCH CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (3) INCOME TAXES AND PRO FORMA INCOME TAXES, CONTINUED The accompanying financial statements of income reflect a provision for income taxes on a pro forma basis, at a combined rate of 40 percent (Federal statutory rate of 34 percent plus estimated state rate, net of Federal benefit, of 6 percent) as if the Company was liable for Federal and state income taxes as a taxable corporate entity throughout the periods presented. The components of the provision for pro forma income taxes are as follows:
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------- ------------------- 1994 1995 1996 1996 1997 -------- ---------- ---------- -------- -------- Federal................................ $466,237 $ 975,118 $1,226,921 $534,481 $678,366 State.................................. 116,559 243,779 306,730 133,620 169,592 -------- ---------- ---------- -------- -------- Pro forma income taxes............ $582,796 $1,218,897 $1,533,651 $668,101 $847,958 ======== ========== ========== ======== ========
The primary temporary differences giving rise to deferred tax assets are accrued liabilities not currently deductible for income tax purposes. Pro forma deferred tax assets of approximately $250,000 will be recorded upon completion of the Company's IPO (see also note 4). Based upon the historical earnings of the Company, management believes it is more likely than not that the assets will be realized. The effects of this deferred tax benefit have been given effect as if the S Corporation status were terminated in the unaudited June 30, 1997 pro forma balance sheet. In connection with the termination of its S Corporation status, the Company expects to distribute approximately $2,654,000 of retained earnings subsequent to June 30, 1997, and as a final distribution to S Corporation shareholders. The effects of this distribution have been given effect as if the distribution had already occurred in the unaudited pro forma balance sheet as of June 30, 1997. (4) COMMON STOCK The Company is planning to file a registration statement on Form S-1 for an IPO of the Company's common stock. In connection with its IPO, the Company plans to reincorporate in Wisconsin and pay a stock dividend of approximately 239.5-to-1, which has been given retroactive effect in the accompanying financial statements. In connection with the reincorporation, the Company plans to increase its authorized common stock from 100,000 shares to 20,000,000 shares and authorize up to 2,000,000 shares of undesignated preferred stock. (5) LEASES The Company leases office space for a monthly base rental payment plus maintenance and utilities. The lease expired on April 30, 1997. Rental expense during 1994, 1995 and 1996 was $176,448, $168,417 and $183,118, respectively, and $88,117 and $113,833 for the six months ended June 30, 1996 and 1997, respectively, and is included in selling, general and administrative expense on the statements of income. (6) EMPLOYEE BENEFITS During 1995, the Company established a qualified defined contribution profit-sharing plan covering substantially all employees with a minimum service of 1,000 hours and one year of service except for highly compensated employees covered by nonqualified profit sharing plans. Employer contributions, which are discretionary, vest to participants at a rate of 20% per year. Total profit-sharing expense was $48,989 and $75,229 in 1995 and 1996, respectively, and no expense was recognized for the six months ended June 30, 1996 and 1997. F-10 56 NATIONAL RESEARCH CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (6) EMPLOYEE BENEFITS, CONTINUED The Company sponsors nonqualified profit sharing bonus and incentive plans for employees and members of executive management of the Company. Certain bonuses under the executive management incentive plan are paid over a five-year period. Expense recorded under these plans was $118,775, $468,052 and $552,832 in 1994, 1995 and 1996, respectively, and $258,104 and $422,568 for the six months ended June 30, 1996 and 1997, respectively. (7) RELATED PARTY TRANSACTIONS At December 31, 1994, accrued wages, bonuses and profit sharing included amounts due to a former minority shareholder in the amount of $29,106 on an unsecured 3.5% note issued by the Company in conjunction with its redemption of the former shareholder's stock in the Company. The note was paid in full in January 1995. Interest expense incurred on this note during 1994 was $431. There was no interest expense incurred during 1995. (8) SPECIAL BONUS In August 1997, the Company decided to pay special cash bonuses aggregating $1,740,000 to certain executive officers (other than the selling shareholder) prior to termination of its S Corporation status. The related compensation charge will be recognized by the Company in the fourth quarter of 1997. The effect of this charge has been given effect as if the bonuses had been paid in the unaudited pro forma balance sheet as of June 30, 1997. These special cash bonuses will reduce the amount otherwise available for distribution to the Company's shareholders prior to the termination of its S Corporation status. F-11 57 ====================================================== NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDER OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS. ------------------ TABLE OF CONTENTS
PAGE ---- Additional Information................. 2 Prospectus Summary..................... 3 Risk Factors........................... 6 Use of Proceeds........................ 11 S Corporation Termination.............. 11 Dividend Policy........................ 12 Capitalization......................... 13 Dilution............................... 14 Selected Financial Data................ 15 Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 17 Business............................... 24 Management............................. 34 Principal and Selling Shareholders..... 38 Certain Transactions................... 39 Description of Capital Stock........... 39 Shares Eligible for Future Sale........ 41 Underwriting........................... 43 Legal Matters.......................... 44 Experts................................ 44 Index to Financial Statements.......... F-1
------------------ UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ====================================================== ====================================================== 2,100,000 SHARES [NATIONAL RESEARCH CORPORATION LOGO] COMMON STOCK --------------------------- PROSPECTUS , 1997 --------------------------- WILLIAM BLAIR & COMPANY ROBERT W. BAIRD & CO. INCORPORATED ====================================================== 58 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Securities and Exchange Commission registration fee......... $ 9,514 NASD filing fee............................................. 3,640 Nasdaq National Market listing fee.......................... 36,000 Blue sky fees and expenses.................................. 10,000 Transfer agent expenses and fees............................ 6,000 Printing and engraving expenses............................. 100,000 Accountants' fees and expenses.............................. 95,000 Legal fees and expenses..................................... 170,000 Miscellaneous............................................... 69,846 -------- Total............................................. $500,000 ========
All of the above fees, costs and expenses will be paid by the Company. Other than the SEC registration fee, the NASD filing fee and the Nasdaq National Market listing fee, all fees and expenses are estimated. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Pursuant to the Wisconsin Business Corporation Law and the Company's By-Laws, directors and officers of the Company are entitled to mandatory indemnification from the Company against certain liabilities and expenses (i) to the extent such officers or directors are successful in the defense of a proceeding and (ii) in proceedings in which the director or officer is not successful in defense thereof, unless (in the latter case only) it is determined that the director or officer breached or failed to perform his or her duties to the Company and such breach or failure constituted: (a) a willful failure to deal fairly with the Company or its shareholders in connection with a matter in which the director or officer had a material conflict of interest; (b) a violation of the criminal law unless the director or officer had reasonable cause to believe his or her conduct was lawful or had no reasonable cause to believe his or her conduct was unlawful; (c) a transaction from which the director or officer derived an improper personal profit; or (d) willful misconduct. The Wisconsin Business Corporation Law specifically states that it is the public policy of Wisconsin to require or permit indemnification, allowance of expenses and insurance in connection with a proceeding involving securities regulation, as described therein, to the extent required or permitted as described above. Additionally, under the Wisconsin Business Corporation Law, directors of the Company are not subject to personal liability to the Company, its shareholders or any person asserting rights on behalf thereof for certain breaches or failures to perform any duty resulting solely from their status as directors, except in circumstances paralleling those in subparagraphs (a) through (d) outlined above. Expenses for the defense of any action for which indemnification may be available may be advanced by the Company under certain circumstances. The indemnification provided by the Wisconsin Business Corporation Law and the Company's By-Laws is not exclusive of any other rights to which a director or officer may be entitled. The general effect of the foregoing provisions may be to reduce the circumstances which an officer or director may be required to bear the economic burden of the foregoing liabilities and expense. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. The shares issued by the Company or its predecessor, as hereinafter set forth, have been adjusted to reflect an approximately 239.5-for-1 stock dividend paid on September 15, 1997. II-1 59 In connection with the reincorporation of the Company in the State of Wisconsin in September 1997, the Company (a) was formed as a wholly-owned subsidiary of its predecessor Nebraska corporation and (b) issued an aggregate of 6,055,000 shares, on a one-for-one basis, to the two shareholders of its predecessor corporation, Michael D. Hays and Jona S. Raasch. No underwriters were engaged in connection with the foregoing issuances. Such issuances were effected in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933 for transactions not involving a public offering. On October 25, 1994, the predecessor corporation to the Company issued and sold 2,886 shares of Common Stock to an employee and director of the predecessor corporation to the Company for $475.20. No underwriters were engaged in connection with the foregoing sale. Such sale was effected in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933 for transactions not involving a public offering. Other than as set forth in the preceding paragraphs, the Company has not sold any securities within the past three years. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits. The exhibits listed in the accompanying Exhibit Index are filed as part of this Registration Statement. (b) Financial Statement Schedules. The financial statement schedules listed in the accompanying Financial Statement Schedule Index are filed as part of this Registration Statement. ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-2 60 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Lincoln, and State of Nebraska, on this 15th day of September, 1997. NATIONAL RESEARCH CORPORATION By: /s/ MICHAEL D. HAYS ------------------------------------ MICHAEL D. HAYS President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment to the Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ MICHAEL D. HAYS President, Chief Executive September 15, 1997 - --------------------------------------------- Officer and Director (Principal Michael D. Hays Executive Officer) /s/ PATRICK E. BEANS Vice President, Treasurer, September 15, 1997 - --------------------------------------------- Secretary and Chief Financial Patrick E. Beans Officer (Principal Financial and Accounting Officer)
II-3 61 FINANCIAL STATEMENT SCHEDULE INDEX
FORM S-1 PAGE -------- Independent Auditors' Report on Financial Statement Schedules................................................. S-2 Schedule II -- Valuation and Qualifying Accounts............ S-3
All other 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 financial statements and notes thereto. S-1 62 INDEPENDENT AUDITORS' REPORT The Board of Directors National Research Corporation: The audits referred to in our report dated June 6, 1997, except as to note 8 which is as of August 8, 1997, included the related financial statement schedule as of December 31, 1996, and for each of the years in the three-year period ended December 31, 1996, included in the registration statement. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. KPMG Peat Marwick LLP Lincoln, Nebraska June 6, 1997 S-2 63 NATIONAL RESEARCH CORPORATION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT WRITE-OFFS, BALANCE BEGINNING BAD DEBT NET OF AT END OF YEAR EXPENSE RECOVERIES OF YEAR ---------- -------- ----------- ------- Allowance for doubtful accounts: Year ended December 31, 1994........................ $ -- $10,000 $ -- $10,000 Year ended December 31, 1995........................ 10,000 24,100 9,100 25,000 Year ended December 31, 1996........................ $25,000 $30,764 $10,764 $45,000
See accompanying independent auditors' report. S-3 64 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- (1) Proposed Form of Underwriting Agreement.* (3.1) Articles of Incorporation of National Research Corporation, as amended to date. (3.2) By-Laws of National Research Corporation, as amended to date. (5) Opinion of Foley & Lardner regarding legality of securities being offered. (10.1) Lease, dated as of , 1997, between National Research Corporation and .** (10.2) National Research Corporation 1997 Equity Incentive Plan.* (10.3) National Research Corporation Incentive Plan adopted as of October 14, 1994 but terminated in August 1997.* (10.4) National Research Corporation Director Stock Plan. (10.5) Employment Memorandum, dated as of July 15, 1994, from National Research Corporation to Patrick E. Beans.* (10.6) Employment Agreement, dated as of December 1, 1996, between National Research Corporation and Sharon Flaherty.* (10.7) Subcontract, dated as of May 9, 1997, as amended, between National Research Corporation and United HealthCare Corporation.+ (23.1) Consent of Foley & Lardner (included in Exhibit (5)). (23.2) Consent of KPMG Peat Marwick LLP. (27) Financial Data Schedule (EDGAR version only). (99) Consent of Patrick E. Beans regarding his election to the Board of Directors immediately prior to the effective date of this Registration Statement.
- ------------------------- * Previously filed. ** To be filed by amendment. + Portions of this exhibit have been redacted and are subject to a confidential treatment request filed with the Secretary of the Securities and Exchange Commission pursuant to Rule 406 under the Securities Act of 1933, as amended. The redacted material is being filed separately with the Securities and Exchange Commission. E-1 EX-3.1 2 Exhibit (3.1) ARTICLES OF INCORPORATION OF NATIONAL RESEARCH CORPORATION The undersigned, acting as the sole incorporator of a corporation under the Wisconsin Business Corporation Law, Chapter 180 of the Wisconsin Statutes, hereby adopts the following articles of incorporation for the purpose of forming the corporation herein described (the "corporation"): ARTICLE 1 The name of the corporation is National Research Corporation. ARTICLE 2 The aggregate number of shares which the corporation shall have the authority to issue shall be Twenty-Two Million (22,000,000) shares, consisting of: (i) Twenty Million (20,000,000) shares of a class designated as "Common Stock," with a par value of $.001 per share; and (ii) Two Million (2,000,000) shares of a class designated as "Preferred Stock," with a par value of $.01 per share. The designation, relative rights, preferences and limitations of the shares of each class and the authority of the Board of Directors of the corporation to establish and to designate series of Preferred Stock and to fix variations in the relative rights, preferences and limitations as between such series, shall be as set forth herein. A. Preferred Stock. (1) Series and Variations Between Series. The Board of Directors of the corporation is authorized, to the full extent permitted under the Wisconsin Business Corporation Law and the provisions of this Section A, to provide for the issuance of the Preferred Stock in series, each of such series to be distinctively designated, and to have such redemption rights, dividend rights, rights on dissolution or distribution of assets, conversion or exchange rights, voting powers, designations, preferences and relative participating, optional or other special rights, if any, and such qualifications, limitations or restrictions thereof as shall be provided by the Board of Directors of the corporation consistent with the provisions of this Article 2. (2) Dividends. Before any dividends shall be paid or set apart for payment upon shares of Common Stock, the holders of each series of Preferred Stock shall be entitled to receive dividends at the rate (which may be fixed or variable) and at such times as specified in the particular series. The holders of shares of Preferred Stock shall have no rights to participate with the holders of shares of Common Stock in any distribution of dividends in excess of the preferential dividends, if any, fixed for such Preferred Stock. (3) Liquidation Rights. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the corporation, the holders of shares of each series of Preferred Stock shall be entitled to receive out of the assets of the corporation in money or money's worth the preferential amount, if any, specified in the particular series for each share at the time outstanding together with all accrued but unpaid dividends thereon, before any of such assets shall be paid or distributed to holders of Common Stock. The holders of Preferred Stock shall have no rights to participate with the holders of Common Stock in the assets of the corporation available for distribution to shareholders in excess of the preferential amount, if any, fixed for such Preferred Stock. (4) Voting Rights. The holders of Preferred Stock shall have only such voting rights as are fixed for shares of each series by the Board of Directors pursuant to this Section A or are provided, to the extent applicable, by the Wisconsin Business Corporation Law. B. Common Stock. (1) Dividends. Subject to the provisions of this Article 2, the Board of Directors of the corporation may, in its sole discretion, out of funds legally available for the payment of dividends and at such times and in such manner as determined by the Board of Directors, declare and pay dividends or other distributions on the Common Stock. (2) Liquidation Rights. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the corporation, after there shall have been paid to or set aside for the holders of Preferred Stock the full preferential amounts, if any, to which they are entitled, the holders of outstanding shares of Common Stock shall be entitled to receive pro rata, according to the number of shares held by each, the remaining assets of the corporation available for distribution. (3) Voting Rights. Except as otherwise provided by the Wisconsin Business Corporation Law, and except as may be determined by the Board of Directors with respect to Preferred Stock pursuant to Section A of this Article 2, only the holders of Common Stock shall be entitled to vote for the election of directors of the corporation and for all other corporate purposes. Upon any such vote the holders of Common Stock shall, except as otherwise provided by law, be entitled to one vote for each share of Common Stock held by them respectively. C. Preemptive Rights. No holder of shares of any class of capital stock of the corporation shall have any preferential or preemptive right to acquire unissued shares of capital stock of the corporation or securities convertible into such shares or conveying a right to subscribe for or acquire shares. ARTICLE 3 A. General Powers, Number, Classification and Tenure of Directors. The general powers, number, classification, tenure and qualifications of the directors of the corporation shall be as set forth in Sections 3.01 and 3.02 of Article III of the By-Laws of the corporation (and as such Sections shall exist from time to time). Such Sections 3.01 and 3.02 of the By-Laws, or any provision thereof, may only be amended, altered, changed or repealed by the affirmative vote of shareholders holding at least sixty-six and two-thirds percent (66-2/3%) of the voting power of the then outstanding shares of all classes of capital stock of the corporation generally possessing voting rights in the election of directors, considered for this purpose as a single class; provided, however, that the Board of Directors, by resolution adopted by the Requisite Vote (as hereinafter defined), may amend, alter, change or repeal Sections 3.01 and 3.02 of the By-Laws, or any provision thereof, without a vote of the shareholders. As used herein, the term "Requisite Vote" shall mean the affirmative vote of at least two-thirds of the directors then in office plus one director, but in no case more than all of the directors then in office. B. Removal of Directors. Any director may be removed from office, but only for Cause (as hereinafter defined) by the affirmative vote of holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of the then outstanding shares of stock of the voting group of shareholders that elected the director to be removed; provided, however, that if the Board of Directors by resolution adopted by the Requisite Vote shall have recommended removal of a director, then the shareholders may remove such director from office without Cause by a majority vote of such outstanding shares. As used herein, "Cause" shall exist only if the director whose removal is proposed (i) has been convicted of a felony by a court of competent jurisdiction and such conviction is no longer subject to direct appeal or (ii) has been adjudged by a court of competent jurisdiction to be liable for willful misconduct in the performance of his or her duties to the corporation in a matter which has a material adverse effect on the business of the corporation and such adjudication is no longer subject to direct appeal. C. Vacancies. Any vacancy occurring in the Board of Directors, including a vacancy created by the removal of a director or an increase in the number of directors, shall be filled by the affirmative vote of a majority of the directors then in office, although less than a quorum of the Board of Directors; provided, however, that if the vacant office was held by a director elected by a voting group of shareholders, only the remaining directors elected by that voting group shall fill the vacancy. For purposes of this Article 3, a director elected by directors to fill a vacant office pursuant to this Section C shall be deemed to be a director elected by the same voting group of shareholders that elected the director(s) who voted to fill the vacancy. Any director elected pursuant to this Section C shall serve until the next election of the class for which such director shall have been chosen and until his or her successor shall be elected and qualified. D. Amendments. (1) Notwithstanding any other provision of these Articles of Incorporation, the provisions of this Article 3 may be amended, altered, changed or repealed only by the affirmative vote of shareholders holding at least sixty-six and two-thirds percent (66-2/3%) of the voting power of the then outstanding shares of all classes of capital stock of the corporation generally possessing voting rights in the election of directors, considered for this purpose as a single class. (2) Notwithstanding the foregoing and any provisions in the By-Laws of the corporation, whenever the holders of any one or more series of Preferred Stock issued by the corporation pursuant to Article 2 hereof shall have the right, voting separately as a class or by series, to elect directors at an annual or special meeting of shareholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of the series of Preferred Stock applicable thereto, and such directors so elected shall not be divided into classes unless expressly provided by the terms of the applicable series. ARTICLE 4 The name and address of the corporation's initial director is: Michael D. Hays 1033 "O" Street Lincoln, Nebraska 68508 ARTICLE 5 The By-Laws of the corporation may limit the authority of the shareholders of the corporation to call a special meeting of shareholders to the fullest extent permitted by the Wisconsin Business Corporation Law. ARTICLE 6 The address of the corporation's initial registered office is 777 East Wisconsin Avenue, Suite 3800, Milwaukee, Wisconsin 53202-5367. The name of the corporation's initial registered agent at such address is F&L Corp., a Wisconsin corporation. ARTICLE 7 The name and address of the sole incorporator of the corporation is Russell E. Ryba, Foley & Lardner, 777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202-5367. ARTICLE 8 These Articles of Incorporation may be amended solely as authorized herein and by law at the time of amendment. ARTICLE 9 A. Business Combinations Within Three Years of the Stock Acquisition Date. In addition to any affirmative vote otherwise required by law, the By-Laws of the corporation, these Articles of Incorporation or the terms of any series of Preferred Stock, and except as otherwise expressly provided in Section C of this Article 9, the corporation may not engage in a Business Combination (as hereinafter defined) with an Interested Shareholder (as hereinafter defined) for three (3) years after the Interested Shareholder's Stock Acquisition Date (as hereinafter defined) unless the Board of Directors of the corporation has approved by resolution, before the Interested Shareholder's Stock Acquisition Date, that Business Combination or the purchase of Stock (as hereinafter defined) made by the Interested Shareholder on that Stock Acquisition Date. B. Business Combinations More Than Three Years After the Stock Acquisition Date. Except as otherwise expressly provided in Section C of this Article 9, at any time after the three-year period described in Section A of this Article 9, the corporation may engage in a Business Combination with an Interested Shareholder but only if, in addition to any affirmative vote otherwise required by law, the By-Laws of the corporation, these Articles of Incorporation or the terms of any series of Preferred Stock, any of the following conditions is satisfied: (1) The Board of Directors of the corporation has approved, before the Interested Shareholder's Stock Acquisition Date, the purchase of Stock made by the Interested Shareholder on that Stock Acquisition Date. (2) The Business Combination is approved by the affirmative vote of the holders of a majority of the voting power of the outstanding Voting Stock (as hereinafter defined) not beneficially owned by the Interested Shareholder at a meeting called for that purpose. (3) The Business Combination meets all of the following conditions: (i) Holders of all outstanding shares of Stock of the corporation not beneficially owned by the Interested Shareholder are each entitled to receive per share an aggregate amount of cash and the market value, as of the Consummation Date (as hereinafter defined), of noncash consideration at least equal to the higher of the following: (a) The highest of: the market value per share on the Announcement Date (as hereinafter defined) with respect to the Business Combination, the market value per share on the Interested Shareholder's Stock Acquisition Date, the highest price per share paid by the Interested Shareholder, including brokerage commissions, transfer taxes and soliciting dealers' fees, for shares of the same class or series within the three (3) years immediately before and including the Announcement Date of the Business Combination or the highest price per share paid by the Interested Shareholder, including brokerage commissions, transfer taxes and soliciting dealers' fees, for shares of the same class or series within the three (3) years immediately before and including the Interested Shareholder's Stock Acquisition Date; plus, in each case, interest compounded annually from the earliest date on which that highest per share acquisition price was paid or the per share market value was determined, through the Consummation Date, at the rate for one-year U.S. Treasury obligations from time to time in effect; less the aggregate amount of any cash and the market value, as of the dividend payment date, of any noncash dividends paid per share since that date, up to the amount of that increase. (b) The highest preferential amount per share, if any, to which the holders of shares of that class or series of Stock are entitled upon the voluntary or involuntary liquidation of the corporation, plus the aggregate amount of dividends declared or due which those holders are entitled to before payment of dividends on another class or series of Stock, unless the aggregate amount of those dividends is included in the preferential amount. (ii) The form of consideration to be received by holders of each particular class or series of outstanding Stock in the Business Combination is in cash or, if the Interested Shareholder holds previously acquired shares of that class or series, the same form as the Interested Shareholder previously used to acquire the largest number of shares of that class or series. C. Excluded Transactions. The provisions of this Article 9 shall not apply to any of the following: (1) A Business Combination of the corporation with an Interested Shareholder if the corporation did not have a class of Voting Stock registered or traded on a national securities exchange or registered under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), on the Interested Shareholder's Stock Acquisition Date. (2) A Business Combination of the corporation with an Interested Shareholder which became an Interested Shareholder inadvertently, if the Interested Shareholder satisfies both of the following: (i) As soon as practicable divests itself of a sufficient amount of the Voting Stock of the corporation so that the Interested Shareholder is no longer the beneficial owner of at least 10% of the voting power of the outstanding Voting Stock of the corporation, or a Subsidiary of the corporation (as hereinafter defined). (ii) Would not at any time within the three (3) years before the Announcement Date with respect to the Business Combination in question have been an Interested Shareholder except for the inadvertent acquisition. D. Definitions. For the purposes of this Article 9: (1) "Affiliate" shall mean a person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with a specified person. (2) "Announcement Date" shall mean the date of the first public announcement of a final, definitive proposal for a Business Combination. (3) "Associate" of a person shall mean any of the following: (i) A corporation or organization of which the person is an officer, director or partner or is the beneficial owner of at least 10% of any class of Voting Stock. (ii) A trust or other estate in which the person has a substantial beneficial interest or as to which the person serves as trustee or in a similar fiduciary capacity. (iii) Individually, or with or through any of the person's Affiliates or Associates, directly or indirectly has the right to vote the Stock pursuant to a written or unwritten agreement, arrangement or understanding, except that a person is not the Beneficial Owner of Stock under this subsection if the agreement, arrangement or understanding to vote that Stock arises solely from a revocable proxy or consent given in response to a proxy or consent solicitation made in accordance with the applicable regulations under the Exchange Act and is not reportable under the report required under 17 CFR 240.13d- 1(1)(a) or a comparable or successor report. (iv) Has a written or unwritten agreement, arrangement or understanding with another person that is directly or indirectly a Beneficial Owner, or whose Affiliates or Associates are direct or indirect Beneficial Owners, of the Stock, if the agreement, arrangement or understanding is for the purpose of acquiring, holding, disposing of or voting the Stock, unless the voting is pursuant to a revocable proxy or consent described in subsection (iii) above. Notwithstanding the foregoing, a person is not the direct or indirect Beneficial Owner of Stock tendered pursuant to a tender or exchange offer which is made by that person or an Affiliate or Associate of that person until the tendered Stock is accepted for purchase or exchange. (5) "Business Combination" means any of the following: (i) A merger or share exchange of the corporation or any Subsidiary of the corporation with any of the following: (a) An Interested Shareholder. (b) A corporation, whether or not it is an Interested Shareholder, which is, or after a merger or share exchange would be, an Affiliate or Associate of an Interested Shareholder. (ii) A sale, lease, exchange, mortgage, pledge, transfer or other disposition, in one transaction or a series of transactions, to or with an Interested Shareholder or an Affiliate or Associate of an Interested Shareholder of assets of the corporation or a Subsidiary of the corporation if those assets meet any of the following conditions: (a) Have an aggregate market value equal to at least 5% of the aggregate market value of all the assets, determined on a consolidated basis, of the corporation. (b) Have an aggregate market value equal to at least 5% of the aggregate market value of all the outstanding Stock of the corporation. (c) Represent at least 10% of the earning power or income, determined on a consolidated basis, of the corporation. (iii) The issuance or transfer by the corporation or a Subsidiary of the corporation, in one transaction or a series of transactions, of any Stock of the corporation or a Subsidiary of the corporation if all of the following conditions are satisfied: (a) The stock has an aggregate market value equal to at least 5% of the aggregate market value of all of the outstanding Stock of the corporation. (b) The Stock is issued or transferred to an Interested Shareholder or an Affiliate or Associate of an Interested Shareholder, except for Stock of the corporation or such Subsidiary issued or transferred pursuant to the exercise of warrants, rights or options to purchase such Stock offered, or a dividend paid, or distribution made, proportionately to all holders of Stock of the corporation. (iv) The adoption of a plan or proposal for the liquidation or dissolution of the corporation which is proposed by, on behalf of, or pursuant to a written or unwritten agreement, arrangement or understanding with, an Interested Shareholder or an Affiliate or Associate of an Interested Shareholder. (v) Any of the following, if the direct or indirect effect is to increase the proportionate share of the outstanding Stock of a class or series of securities convertible into Voting Stock of the corporation or a Subsidiary of the corporation beneficially owned by the Interested Shareholder of an Affiliate or Associate of the Interested Shareholder, unless the increase is the result of immaterial changes due to fractional share adjustment: (a) A reclassification of securities, including, without limitation, a stock split, stock dividend or other distribution of Stock in respect of Stock, or reverse stock split. (b) A recapitalization of the corporation. (c) A merger or share exchange of the corporation with a Subsidiary of the corporation. (d) Any other transaction, whether or not with, into or involving the Interested Shareholder, which is proposed by, on behalf of, or pursuant to a written or unwritten agreement, arrangement or understanding with, the Interested Shareholder or an Affiliate or Associate or the Interested Shareholder. (vi) Receipt by an Interested Shareholder or an Affiliate or Associate of an Interested Shareholder of the direct or indirect benefit of a loan, advance, guarantee, pledge or other financial assistance or a tax credit or other tax advantage provided by or through the corporation or any Subsidiary of the corporation, unless the Interested Shareholder receives the benefit proportionately as a holder of Stock of the corporation. (6) "Consummation Date" means the date of consummation of a Business Combination. (7) "Control", "controlled by" or "under common control with" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of Voting Stock, except as provided in the next sentence, by contract, or otherwise. "Control" of a corporation is not established for purposes of this Article 9 if a person, in good faith and not for the purpose of circumventing this Article 9, holds voting power as an agent, bank, broker, nominee, custodian or trustee for one or more beneficial owners who do not individually or as a group have control of the corporation. For purposes of this Article 9, a person's beneficial ownership of at least 10% of the voting power of a corporation's outstanding Voting Stock creates a presumption that the person has control of the corporation. (8) (i) "Interested Shareholder," with respect to the corporation, means a person other than the corporation or a Subsidiary of the corporation that meets any of the following conditions: (a) Is the beneficial owner of at least 10% of the voting power of the outstanding Voting Stock of the corporation. (b) Is an Affiliate or Associate of the corporation and at any time within three (3) years immediately before the date in question was the beneficial owner of at least 10% of the voting power of the then outstanding Voting Stock of the corporation. (ii) For the purpose of determining whether a person is an Interested Shareholder, the number of shares of Voting Stock of the corporation considered outstanding includes shares beneficially owned by the person but does not include any other unissued shares of Voting Stock of the corporation which may be issuable pursuant to an agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. (9) "Stock" means any of the following: (i) Shares, stock or similar security, certificate of interest, participation in a profit sharing agreement, voting trust certificate, or certificate of deposit for any of the items described herein. (ii) Security which is convertible, with or without consideration, into stock, or any warrant, call or other option or privilege of buying stock, or any other security carrying a right to acquire, subscribe to or purchase stock. (10) "Stock Acquisition Date", with respect to any person, means the date that that person first becomes an Interested Shareholder of the corporation. (11) "Subsidiary of the corporation" shall mean any other corporation of which Voting Stock having a majority of the votes entitled to be cast is owned, directly or indirectly, by the corporation. (12) "Voting Stock" means capital stock of a corporation entitled to vote generally in the election of directors. E. Determination of Market Value. For purposes of this Article 9, the market value of Stock or other property other than cash or Stock is determined as follows: (1) In the case of Stock generally, by: (i) The highest closing sale price during the thirty (30) days immediately before the date in question of a share of that class or series of Stock on the composite tape for stocks listed on the New York Stock Exchange, or, if that class or series of Stock is not quoted on the composite tape or if that class or series of Stock is not listed on the New York Stock Exchange, on the principal U.S. securities exchange registered under the Securities Exchange Act of 1934, as amended, or the Nasdaq National Market of The Nasdaq Stock Market, or any similar system then in use, on which that class or series of Stock is listed. (ii) If that class or series of Stock is not listed on an exchange or system described above, the highest closing bid quotation for a share of that class or series of Stock during the thirty (30) days immediately before the date in question on The Nasdaq Stock Market, or any similar system then in use. (2) In the case of property other than cash or Stock (except for Stock not traded as provided above), the fair market value of the property or Stock on the date in question as determined in good faith by the Board of Directors of the corporation. F. Fiduciary Obligations. Nothing contained in this Article 9 shall be construed to relieve any Interested Shareholder from any fiduciary obligation imposed by law. G. Amendment. Notwithstanding any other provisions of these Articles of Incorporation or any provision of law that might permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the capital stock required by the Wisconsin Business Corporation Law, these Articles of Incorporation or the terms of any series of Preferred Stock, the affirmative vote of shareholders holding at least sixty-six and two-thirds percent (66-2/3%) of the voting power of the then outstanding Voting Shares, voting as a single class, shall be required to amend, alter, change, repeal, or adopt any provision inconsistent with this Article 9. ARTICLE 10 Sections 180.1130 to 180.1134 and 180.1150 of the Wisconsin Business Corporation Law as in effect on the date hereof, and as such Sections may be amended from time to time, shall apply to this corporation as if it were an "issuing public corporation" subject to such Sections. Notwithstanding any other provision of these Articles of Incorporation, the provisions of this Article 10 may be amended, altered, changed or repealed only by the affirmative vote of shareholders holding at least sixty-six and two-thirds percent (66-2/3%) of the voting power of the then outstanding shares of all classes of capital stock of the corporation generally possessing voting rights in the election of directors, considered for this purpose as a single class. EX-3.2 3 Exhibit 3.2 BY-LAWS OF NATIONAL RESEARCH CORPORATION (a Wisconsin corporation) ARTICLE I. OFFICES 1.01. Principal and Business Offices. The corporation may have such principal and other business offices, either within or without the State of Wisconsin, as the Board of Directors may designate or as the business of the corporation may require from time to time. 1.02. Registered Office. The registered office of the corporation required by the Wisconsin Business Corporation Law to be maintained in the State of Wisconsin may be, but need not be, identical with the principal office in the State of Wisconsin, and the address of the registered office may be changed from time to time by the Board of Directors or by the registered agent. The business office of the registered agent of the corporation shall be identical to such registered office. ARTICLE II. SHAREHOLDERS 2.01. Annual Meeting. The annual meeting of the shareholders (the "Annual Meeting"), commencing with the Annual Meeting in 1998, shall be held on the second Wednesday in April of each year, or at such other time and date as may be fixed by resolution of the Board of Directors. In fixing a meeting date for any Annual Meeting, the Board of Directors may consider such factors as it deems relevant within the good faith exercise of its business judgment. At each Annual Meeting, the shareholders shall elect that number of directors equal to the number of directors in the class whose term expires at the time of such meeting. At any such Annual Meeting, only other business properly brought before the meeting in accordance with Section 2.14 of these by-laws may be transacted. If the election of directors shall not be held on the date designated herein, or fixed as herein provided, for any Annual Meeting, or any adjournment thereof, the Board of Directors shall cause the election to be held at a special meeting of shareholders (a "Special Meeting") as soon thereafter as is practicable. 2.02. Special Meetings. (a) A Special Meeting may be called only by (i) the President, (ii) the Secretary or (iii) the Board of Directors and shall be called by the President upon the demand, in accordance with this Section 2.02, of the holders of record of shares representing at least 10% of all the votes entitled to be cast on any issue proposed to be considered at the Special Meeting. (b) In order that the corporation may determine the shareholders entitled to demand a Special Meeting, the Board of Directors may fix a record date to determine the shareholders entitled to make such a demand (the "Demand Record Date"). The Demand Record Date shall not precede the date upon which the resolution fixing the Demand Record Date is adopted by the Board of Directors and shall not be more than ten days after the date upon which the resolution fixing the Demand Record Date is adopted by the Board of Directors. Any shareholder of record seeking to have shareholders demand a Special Meeting shall, by sending written notice to the Secretary of the corporation by hand or by certified or registered mail, return receipt requested, request the Board of Directors to fix a Demand Record Date. The Board of Directors shall promptly, but in all events within ten days after the date on which a valid request to fix a Demand Record Date is received, adopt a resolution fixing the Demand Record Date and shall make a public announcement of such Demand Record Date. If no Demand Record Date has been fixed by the Board of Directors within ten days after the date on which such request is received by the Secretary, the Demand Record Date shall be the 10th day after the first date on which a valid written request to set a Demand Record Date is received by the Secretary. To be valid, such written request shall set forth the purpose or purposes for which the Special Meeting is to be held, shall be signed by one or more shareholders of record (or their duly authorized proxies or other representatives), shall bear the date of signature of each such shareholder (or proxy or other representative) and shall set forth all information about each such shareholder and about the beneficial owner or owners, if any, on whose behalf the request is made that would be required to be set forth in a shareholder's notice described in paragraph (a) (ii) of Section 2.14 of these by-laws. (c) In order for a shareholder or shareholders to demand a Special Meeting, a written demand or demands for a Special Meeting by the holders of record as of the Demand Record Date of shares representing at least 10% of all the votes entitled to be cast on any issue proposed to be considered at the Special Meeting must be delivered to the corporation. To be valid, each written demand by a shareholder for a Special Meeting shall set forth the specific purpose or purposes for which the Special Meeting is to be held (which purpose or purposes shall be limited to the purpose or purposes set forth in the written request to set a Demand Record Date received by the corporation pursuant to paragraph (b) of this Section 2.02), shall be signed by one or more persons who as of the Demand Record Date are shareholders of record (or their duly authorized proxies or other representatives), shall bear the date of signature of each such shareholder (or proxy or other representative), and shall set forth the name and address, as they appear in the corporation's books, of each shareholder signing such demand and the class and number of shares of the corporation which are owned of record and beneficially by each such shareholder, shall be sent to the Secretary by hand or by certified or registered mail, return receipt requested, and shall be received by the Secretary within seventy days after the Demand Record Date. (d) The corporation shall not be required to call a Special Meeting upon shareholder demand unless, in addition to the documents required by paragraph (c) of this Section 2.02, the Secretary receives a written agreement signed by each Soliciting Shareholder (as defined below), pursuant to which each Soliciting Shareholder, jointly and severally, agrees to pay the corporation's costs of holding the Special Meeting, including the costs of preparing and mailing proxy materials for the corporation's own solicitation, provided that if each of the resolutions introduced by any Soliciting Shareholder at such meeting is adopted, and each of the individuals nominated by or on behalf of any Soliciting Shareholder for election as a director at such meeting is elected, then the Soliciting Shareholders shall not be required to pay such costs. For purposes of this paragraph (d), the following terms shall have the meanings set forth below: (i) "Affiliate" of any Person (as defined herein) shall mean any Person controlling, controlled by or under common control with such first Person. (ii) "Participant" shall have the meaning assigned to such term in Rule 14a-11 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (iii) "Person" shall mean any individual, firm, corporation, partnership, joint venture, association, trust, unincorporated organization or other entity. (iv) "Proxy" shall have the meaning assigned to such term in Rule 14a-1 promulgated under the Exchange Act. (v) "Solicitation" shall have the meaning assigned to such term in Rule 14a-11 promulgated under the Exchange Act. (vi) "Soliciting Shareholder" shall mean, with respect to any Special Meeting demanded by a shareholder or shareholders, any of the following Persons: (A) if the number of shareholders signing the demand or demands of meeting delivered to the corporation pursuant to paragraph (c) of this Section 2.02 is ten or fewer, each shareholder signing any such demand; (B) if the number of shareholders signing the demand or demands of meeting delivered to the corporation pursuant to paragraph (c) of this Section 2.02 is more than ten, each Person who either (I) was a Participant in any Solicitation of such demand or demands or (II) at the time of the delivery to the corporation of the documents described in paragraph (c) of this Section 2.02 had engaged or intended to engage in any Solicitation of Proxies for use at such Special Meeting (other than a Solicitation of Proxies on behalf of the corporation); or (C) any Affiliate of a Soliciting Shareholder, if a majority of the directors then in office determine, reasonably and in good faith, that such Affiliate should be required to sign the written notice described in paragraph (c) of this Section 2.02 and/or the written agreement described in this paragraph (d) in order to prevent the purposes of this Section 2.02 from being evaded. (e) Except as provided in the following sentence, any Special Meeting shall be held at such hour and day as may be designated by whichever of the President, the Secretary or the Board of Directors shall have called such meeting. In the case of any Special Meeting called by the President upon the demand of shareholders (a "Demand Special Meeting"), such meeting shall be held at such hour and day as may be designated by the Board of Directors; provided, however, that the date of any Demand Special Meeting shall be not more than seventy days after the Meeting Record Date (as defined in Section 2.06 hereof); and provided further that in the event that the directors then in office fail to designate an hour and date for a Demand Special Meeting within ten days after the date that valid written demands for such meeting by the holders of record as of the Demand Record Date of shares representing at least 10% of all the votes entitled to be cast on each issue proposed to be considered at the Special Meeting are delivered to the corporation (the "Delivery Date"), then such meeting shall be held at 2:00 P.M. local time on the 100th day after the Delivery Date or, if such 100th day is not a Business Day (as defined below), on the first preceding Business Day. In fixing a meeting date for any Special Meeting, the President, the Secretary or the Board of Directors may consider such factors as he or it deems relevant within the good faith exercise of his or its business judgment, including, without limitation, the nature of the action proposed to be taken, the facts and circumstances surrounding any demand for such meeting, and any plan of the Board of Directors to call an Annual Meeting or a Special Meeting for the conduct of related business. (f) The corporation may engage regionally or nationally recognized independent inspectors of elections to act as an agent of the corporation for the purpose of promptly performing a ministerial review of the validity of any purported written demand or demands for a Special Meeting received by the Secretary. For the purpose of permitting the inspectors to perform such review, no purported demand shall be deemed to have been delivered to the corporation until the earlier of (i) five Business Days following receipt by the Secretary of such purported demand and (ii) such date as the independent inspectors certify to the corporation that the valid demands received by the Secretary represent at least 10% of all the votes entitled to be cast on each issue proposed to be considered at the Special Meeting. Nothing contained in this paragraph (f) shall in any way be construed to suggest or imply that the Board of Directors or any shareholder shall not be entitled to contest the validity of any demand, whether during or after such five Business Day period, or to take any other action (including, without limitation, the commencement, prosecution or defense of any litigation with respect thereto). (g) For purposes of these by-laws, "Business Day" shall mean any day other than a Saturday, a Sunday or a day on which banking institutions in the State of Wisconsin are authorized or obligated by law or executive order to close. 2.03. Place of Meeting. The Board of Directors, the President or the Secretary may designate any place, either within or without the State of Wisconsin, as the place of meeting for an Annual Meeting or Special Meeting. If no designation is made, the place of meeting shall be the principal office of the corporation. Any meeting may be adjourned to reconvene at any place designated by vote of the Board of Directors or by the President or the Secretary. 2.04. Notice of Meeting. Written notice stating the date, time and place of any meeting of shareholders shall be delivered not less than ten days nor more than sixty days before the date of the meeting (unless a different time period is provided by the Wisconsin Business Corporation Law or the articles of incorporation), either personally or by mail, by or at the direction of the President or the Secretary, to each shareholder of record entitled to vote at such meeting and to such other persons as required by the Wisconsin Business Corporation Law. In the event of any Demand Special Meeting, such notice of meeting shall be sent not more than thirty days after the Delivery Date. If mailed, notice pursuant to this Section 2.04 shall be deemed to be effective when deposited in the United States mail, addressed to the shareholder at his or her address as it appears on the stock record books of the corporation, with postage thereon prepaid. Unless otherwise required by the Wisconsin Business Corporation Law or the articles of incorporation of the corporation, a notice of an Annual Meeting need not include a description of the purpose for which the meeting is called. In the case of any Special Meeting, (a) the notice of meeting shall describe any business that the Board of Directors shall have theretofore determined to bring before the meeting and (b) in the case of a Demand Special Meeting, the notice of meeting (i) shall describe any business set forth in the statement of purpose of the demands received by the corporation in accordance with Section 2.02 of these by-laws and (ii) shall contain all of the information required in the notice received by the corporation in accordance with Section 2.14(b) of these by-laws. If an Annual Meeting or Special Meeting is adjourned to a different date, time or place, the corporation shall not be required to give notice of the new date, time or place if the new date, time or place is announced at the meeting before adjournment; provided, however, that if a new Meeting Record Date for an adjourned meeting is or must be fixed, the corporation shall give notice of the adjourned meeting to persons who are shareholders as of the new Meeting Record Date. 2.05. Waiver of Notice. A shareholder may waive any notice required by the Wisconsin Business Corporation Law, the articles of incorporation or these by-laws before or after the date and time stated in the notice. The waiver shall be in writing and signed by the shareholder entitled to the notice, contain the same information that would have been required in the notice under applicable provisions of the Wisconsin Business Corporation Law (except that the time and place of meeting need not be stated) and be delivered to the corporation for inclusion in the corporate records. A shareholder's attendance at any Annual Meeting or Special Meeting, in person or by proxy, waives objection to all of the following: (a) lack of notice or defective notice of the meeting, unless the shareholder at the beginning of the meeting or promptly upon arrival objects to holding the meeting or transacting business at the meeting; and (b) consideration of a particular matter at the meeting that is not within the purpose described in the meeting notice, unless the shareholder objects to considering the matter when it is presented. 2.06. Fixing of Record Date. The Board of Directors may fix in advance a date not less than ten days and not more than seventy days prior to the date of an Annual Meeting or Special Meeting as the record date for the determination of shareholders entitled to notice of, or to vote at, such meeting (the "Meeting Record Date"). In the case of any Demand Special Meeting, (i) the Meeting Record Date shall be not later than the 30th day after the Delivery Date and (ii) if the Board of Directors fails to fix the Meeting Record Date within thirty days after the Delivery Date, then the close of business on such 30th day shall be the Meeting Record Date. The shareholders of record on the Meeting Record Date shall be the shareholders entitled to notice of and to vote at the meeting. Except as provided by the Wisconsin Business Corporation Law for a court-ordered adjournment, a determination of shareholders entitled to notice of and to vote at an Annual Meeting or Special Meeting is effective for any adjournment of such meeting unless the Board of Directors fixes a new Meeting Record Date, which it shall do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. The Board of Directors may also fix in advance a date as the record date for the purpose of determining shareholders entitled to take any other action or determining shareholders for any other purpose. Such record date shall be not more than seventy days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. The record date for determining shareholders entitled to a distribution (other than a distribution involving a purchase, redemption or other acquisition of the corporation's shares) or a share dividend is the date on which the Board of Directors authorizes the distribution or share dividend, as the case may be, unless the Board of Directors fixes a different record date. 2.07. Shareholders' List for Meetings. After a Meeting Record Date has been fixed, the corporation shall prepare a list of the names of all of the shareholders entitled to notice of the meeting. The list shall be arranged by class or series of shares, if any, and show the address of and number of shares held by each shareholder. Such list shall be available for inspection by any shareholder, beginning two business days after notice of the meeting is given for which the list was prepared and continuing to the date of the meeting, at the corporation's principal office or at a place identified in the meeting notice in the city where the meeting will be held. A shareholder or his or her agent may, on written demand, inspect and, subject to the limitations imposed by the Wisconsin Business Corporation Law, copy the list, during regular business hours and at his or her expense, during the period that it is available for inspection pursuant to this Section 2.07. The corporation shall make the shareholders' list available at the meeting and any shareholder or his or her agent or attorney may inspect the list at any time during the meeting or any adjournment thereof. Refusal or failure to prepare or make available the shareholders' list shall not affect the validity of any action taken at a meeting of shareholders. 2.08. Quorum and Voting Requirements; Postponements; Adjournments. (a) Shares entitled to vote as a separate voting group may take action on a matter at any Annual Meeting or Special Meeting only if a quorum of those shares exists with respect to that matter. If the corporation has only one class of stock outstanding, such class shall constitute a separate voting group for purposes of this Section 2.08. Except as otherwise provided in the articles of incorporation or the Wisconsin Business Corporation Law, a majority of the votes entitled to be cast on the matter shall constitute a quorum of the voting group for action on that matter. Once a share is represented for any purpose at any Annual Meeting or Special Meeting, other than for the purpose of objecting to holding the meeting or transacting business at the meeting, it is considered present for purposes of determining whether a quorum exists for the remainder of the meeting and for any adjournment of that meeting unless a new Meeting Record Date is or must be set for the adjourned meeting. If a quorum exists, except in the case of the election of directors, action on a matter shall be approved if the votes cast within the voting group favoring the action exceed the votes cast opposing the action, unless the articles of incorporation or the Wisconsin Business Corporation Law requires a greater number of affirmative votes. Unless otherwise provided in the articles of incorporation, each director to be elected shall be elected by a plurality of the votes cast by the shares entitled to vote in the election of directors at an Annual Meeting or Special Meeting at which a quorum is present. (b) The Board of Directors acting by resolution may postpone and reschedule any previously scheduled Annual Meeting or Special Meeting; provided, however, that a Demand Special Meeting shall be postponed beyond the 100th day following the Delivery Date. Any Annual Meeting or Special Meeting may be adjourned from time to time, whether or not there is a quorum, (i) at any time, upon a resolution by shareholders if the votes cast in favor of such resolution by the holders of shares of each voting group entitled to vote on any matter theretofore properly brought before the meeting exceed the number of votes cast against such resolution by the holders of shares of each such voting group or (ii) at any time prior to the transaction of any business at such meeting, by the President or pursuant to a resolution of the Board of Directors. No notice of the time and place of adjourned meetings need be given except as required by the Wisconsin Business Corporation Law. At any adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. 2.09. Conduct of Meeting. The President, and in his or her absence, a Vice President in the order provided under Section 4.07 of these by-laws, and in their absence, any person chosen by the shareholders present shall call any Annual Meeting or Special Meeting to order and shall act as chairperson of the meeting, and the Secretary of the corporation shall act as secretary of all meetings of the shareholders, but, in the absence of the Secretary, the presiding officer may appoint any other person to act as secretary of the meeting. 2.10. Proxies. At any Annual Meeting or Special Meeting, a shareholder may vote his or her shares in person or by proxy. A shareholder may appoint a proxy to vote or otherwise act for the shareholder by signing an appointment form, either personally or by his or her attorney-in-fact. An appointment of a proxy is effective when received by the Secretary or other officer or agent of the corporation authorized to tabulate votes. An appointment is valid for eleven months from the date of its signing unless a different period is expressly provided in the appointment form. Unless otherwise provided, a proxy may be revoked at any time before it is voted, either by written notice filed with the Secretary or the acting secretary of the meeting or by oral notice given by the shareholder to the presiding officer during the meeting. The presence of a shareholder who has filed his or her appointment of proxy shall not itself constitute a revocation. The Board of Directors shall have the power and authority to make rules establishing presumptions as to the validity and sufficiently of proxies. 2.11. Voting of Shares. (a) Each outstanding share shall be entitled to one vote upon each matter submitted to a vote at an Annual Meeting or Special Meeting, except to the extent that the voting rights of the shares of any class or classes are enlarged, limited or denied by the Wisconsin Business Corporation Law or the articles of incorporation of the corporation. (b) Shares held by another corporation, if a sufficient number of shares entitled to elect a majority of the directors of such other corporation is held directly or indirectly by this corporation, shall not be entitled to vote at an Annual Meeting or Special Meeting, but shares held in a fiduciary capacity may be voted. 2.12. Action without Meeting. Any action required or permitted by the articles of incorporation or these by-laws or any provision of the Wisconsin Business Corporation Law to be taken at an Annual Meeting or Special Meeting may be taken without a meeting if a written consent or consents, describing the action so taken, is signed by all of the shareholders entitled to vote with respect to the subject matter thereof and delivered to the corporation for inclusion in the corporate records. 2.13. Acceptance of Instruments Showing Shareholder Action. If the name signed on a vote, consent, waiver or proxy appointment corresponds to the name of a shareholder, the corporation, if acting in good faith, may accept the vote, consent, waiver or proxy appointment and give it effect as the act of a shareholder. If the name signed on a vote, consent, waiver or proxy appointment does not correspond to the name of a shareholder, the corporation, if acting in good faith, may accept the vote, consent, waiver or proxy appointment and give it effect as the act of the shareholder if any of the following apply: (a) The shareholder is an entity and the name signed purports to be that of an officer or agent of the entity. (b) The name purports to be that of a personal representative, administrator, executor, guardian or conservator representing the shareholder and, if the corporation requests, evidence of fiduciary status acceptable to the corporation is presented with respect to the vote, consent, waiver or proxy appointment. (c) The name signed purports to be that of a receiver or trustee in bankruptcy of the shareholder and, if the corporation requests, evidence of this status acceptable to the corporation is presented with respect to the vote, consent, waiver or proxy appointment. (d) The name signed purports to be that of a pledgee, beneficial owner, or attorney-in-fact of the shareholder and, if the corporation requests, evidence acceptable to the corporation of the signatory's authority to sign for the shareholder is presented with respect to the vote, consent, waiver or proxy appointment. (e) Two or more persons are the shareholders as co-tenants or fiduciaries and the name signed purports to be the name of at least one of the co-owners and the person signing appears to be acting on behalf of all co-owners. The corporation may reject a vote, consent, waiver or proxy appointment if the Secretary or other officer or agent of the corporation who is authorized to tabulate votes, acting in good faith, has reasonable basis for doubt about the validity of the signature on it or about the signatory's authority to sign for the shareholder. 2.14. Notice of Shareholder Business and Nomination of Directors. (a) Annual Meetings. (i) Nominations of persons for election to the Board of Directors of the corporation and the proposal of business to be considered by the shareholders may be made at an Annual Meeting (A) pursuant to the corporation's notice of meeting, (B) by or at the direction of the Board of Directors or (C) by any shareholder of the corporation who is a shareholder of record at the time of giving of notice provided for in this by-law and who is entitled to vote at the meeting and complies with the notice procedures set forth in this Section 2.14. (ii) For nominations or other business to be properly brought before an Annual Meeting by a shareholder pursuant to clause (C) of paragraph (a)(i) of this Section 2.14, the shareholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a shareholder's notice shall be received by the Secretary of the corporation at the principal offices of the corporation not less than sixty days nor more than ninety days prior to the second Wednesday in the month of April; provided, however, that in the event that the date of the Annual Meeting is advanced by more than thirty days or delayed by more than sixty days from the second Wednesday in the month of April, notice by the shareholder to be timely must be so 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 (x) the 60th day prior to such Annual Meeting and (y) the 10th day following the day on which public announcement of the date of such meeting is first made. Such shareholder's notice shall be signed by the shareholder of record who intends to make the nomination or introduce the other business (or his duly authorized proxy or other representative), shall bear the date of signature of such shareholder (or proxy or other representative) and shall set forth: (A) the name and address, as they appear on this corporation's books, of such shareholder and the beneficial owner or owners, if any, on whose behalf the nomination or proposal is made; (B) the class and number of shares of the corporation which are beneficially owned by such shareholder or beneficial owner or owners; (C) a representation that such shareholder is a holder of record of shares of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to make the nomination or introduce the other business specified in the notice; (D) in the case of any proposed nomination for election or re-election as a director, (I) the name and residence address of the person or persons to be nominated, (II) a description of all arrangements or understandings between such shareholder or beneficial owner or owners and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination is to be made by such shareholder, (III) such other information regarding each nominee proposed by such shareholder as would be required to be disclosed in solicitations of proxies for elections of directors, or would be otherwise required to be disclosed, in each case pursuant to Regulation 14A under the Exchange Act, including any information that would be required to be included in a proxy statement filed pursuant to Regulation 14A had the nominee been nominated by the Board of Directors and (IV) the written consent of each nominee to be named in a proxy statement and to serve as a director of the corporation if so elected; and (E) in the case of any other business that such shareholder proposes to bring before the meeting, (I) a brief description of the business desired to be brought before the meeting and, if such business includes a proposal to amend these by-laws, the language of the proposed amendment, (II) such shareholder's and beneficial owner's or owners' reasons for conducting such business at the meeting and (III) any material interest in such business of such shareholder and beneficial owner or owners. (iii) Notwithstanding anything in the second sentence of paragraph (a)(ii) of this Section 2.14 to the contrary, in the event that the number of directors to be elected to the Board of Directors of the corporation is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the corporation at least seventy days prior to the second Wednesday in the month of April, a shareholder's notice required by this Section 2.14 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be received by the Secretary at the principal offices of the corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the corporation. (b) Special Meetings. Only such business shall be conducted at a Special Meeting as shall have been described in the notice of meeting sent to shareholders pursuant to Section 2.04 of these by-laws. Nominations of persons for election to the Board of Directors may be made at a Special Meeting at which directors are to be elected pursuant to such notice of meeting (i) by or at the direction of the Board of Directors or (ii) by any shareholder of the corporation who (A) is a shareholder of record at the time of giving of such notice of meeting, (B) is entitled to vote at the meeting and (C) complies with the notice procedures set forth in this Section 2.14. Any shareholder desiring to nominate persons for election to the Board of Directors at such a Special Meeting shall cause a written notice to be received by the Secretary of the corporation at the principal offices of the corporation not earlier than ninety days prior to such Special Meeting and not later than the close of business on the later of (x) the 60th day prior to such Special Meeting and (y) the 10th day following the day on which public announcement is first made of the date of such Special Meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. Such written notice shall be signed by the shareholder of record who intends to make the nomination (or his duly authorized proxy or other representative), shall bear the date of signature of such shareholder (or proxy or other representative) and shall set forth: (A) the name and address, as they appear on the corporation's books, of such shareholder and the beneficial owner or owners, if any, on whose behalf the nomination is made; (B) the class and number of shares of the corporation which are beneficially owned by such shareholder or beneficial owner or owners; (C) a representation that such shareholder is a holder of record of shares of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to make the nomination specified in the notice; (D) the name and residence address of the person or persons to be nominated; (E) a description of all arrangements or understandings between such shareholder or beneficial owner or owners and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination is to be made by such shareholder; (F) such other information regarding each nominee proposed by such shareholder as would be required to be disclosed in solicitations of proxies for elections of directors, or would be otherwise required to be disclosed, in each case pursuant to Regulation 14A under the Exchange Act, including any information that would be required to be included in a proxy statement filed pursuant to Regulation 14A had the nominee been nominated by the Board of Directors; and (G) the written consent of each nominee to be named in a proxy statement and to serve as a director of the corporation if so elected. (c) General. (i) Only persons who are nominated in accordance with the procedures set forth in this Section 2.14 shall be eligible to serve as directors. Only such business shall be conducted at an Annual Meeting or Special Meeting as shall have been brought before such meeting in accordance with the procedures set forth in this Section 2.14. The chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the procedures set forth in this Section 2.14 and, if any proposed nomination or business is not in compliance with this Section 2.14, to declare that such defective proposal shall be disregarded. (ii) For purposes of this Section 2.14, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (iii) Notwithstanding the foregoing provisions of this Section 2.14, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 2.14. Nothing in this Section 2.14 shall be deemed to limit the corporation's obligation to include shareholder proposals in its proxy statement if such inclusion is required by Rule 14a-8 under the Exchange Act. ARTICLE III. BOARD OF DIRECTORS 3.01. General Powers, Classification and Number. All corporate powers shall be exercised by or under the authority of, and the business affairs of the corporation managed under the direction of, the Board of Directors. The number of directors of the corporation shall be four (4), divided into three classes, designated as Class I, Class II and Class III; and such classes shall consist of one (1), one (1) and two (2) director(s), respectively. At the first meeting of shareholders at which directors are elected after the date these by-laws are adopted, the directors of Class I shall be elected for a term to expire at the first Annual Meeting after their election, and until their successors are duly elected and qualified, the directors of Class II shall be elected for a term to expire at the second Annual Meeting after their election, and until their successors are duly elected and qualified, and the directors of Class III shall be elected for a term to expire at the third Annual Meeting after their election, and until their successors are duly elected and qualified. At each Annual Meeting after the first meeting of shareholders at which directors are elected after the date these by-laws are adopted, the successors to the class of directors whose terms shall expire at the time of such Annual Meeting shall be elected to hold office until the third succeeding Annual Meeting, and until their successors are duly elected and qualified. 3.02. Tenure and Qualifications. Each director shall hold office until the next Annual Meeting in the year in which such director's term expires and until his or her successor shall have been duly elected and, if necessary, qualified, or until there is a decrease in the number of directors which takes effect after the expiration of his or her term, or until his or her prior retirement, death, resignation or removal. A director may be removed from office only as provided in the articles of incorporation at a meeting of the shareholders called for the purpose of removing the director, and the meeting notice shall state that the purpose, or one of the purposes, of the meeting is removal of the director. A director may resign at any time by delivering written notice which complies with the Wisconsin Business Corporation Law to the Board of Directors, to the President or to the corporation. A director's resignation is effective when the notice is delivered unless the notice specifies a later effective date. Directors need not be residents of the State of Wisconsin or shareholders of the corporation. No other restrictions, limitations or qualifications may be imposed on individuals for service as a director. 3.03. Regular Meetings. A regular meeting of the Board of Directors shall be held without other notice than this by-law immediately after the Annual Meeting and each adjourned session thereof. The place of such regular meeting shall be the same as the place of the Annual Meeting which precedes it, or such other suitable place as may be announced at such Annual Meeting. The Board of Directors may provide, by resolution, the date, time and place, either within or without the State of Wisconsin, for the holding of additional regular meetings of the Board of Directors without other notice than such resolution. 3.04. Special Meetings. Special meetings of the Board of Directors may be called by or at the request of the President, Secretary or any two directors. The President or Secretary may fix any place, either within or without the State of Wisconsin, as the place for holding any special meeting of the Board of Directors, and if no other place is fixed the place of the meeting shall be the principal office of the corporation in the State of Wisconsin. 3.05. Notice; Waiver. Notice of each meeting of the Board of Directors (unless otherwise provided in or pursuant to Section 3.03 of these by-laws) shall be given by written notice delivered in person, by telegraph, teletype, facsimile or other form of wire or wireless communication, or by mail or private carrier, to each director at his business address or at such other address as such director shall have designated in writing filed with the Secretary, in each case not less than forty-eight hours prior to the meeting. The notice need not describe the purpose of the meeting of the Board of Directors or the business to be transacted at such meeting. If mailed, such notice shall be deemed to be effective when deposited in the United States mail so addressed, with postage thereon prepaid. If notice is given by telegram, such notice shall be deemed to be effective when the telegram is delivered to the telegraph company. If notice is given by private carrier, such notice shall be deemed to be effective when delivered to the private carrier. Whenever any notice whatever is required to be given to any director of the corporation under the articles of incorporation or these by-laws or any provision of the Wisconsin Business Corporation Law, a waiver thereof in writing, signed at any time, whether before or after the date and time of meeting, by the director entitled to such notice shall be deemed equivalent to the giving of such notice. The corporation shall retain any such waiver as part of the permanent corporate records. A director's attendance at or participation in a meeting waives any required notice to him or her of the meeting unless the director at the beginning of the meeting or promptly upon his or her arrival objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting. 3.06. Quorum. Except as otherwise provided by the Wisconsin Business Corporation Law or by the articles of incorporation or these by- laws, a majority of the number of directors specified in Section 3.01 of these by-laws shall constitute a quorum for the transaction of business at any meeting of the Board of Directors. In the event that there are only two directors then in office, a quorum for the transaction of business at any meeting of the Board of Directors shall consist of one-third of the number of directors specified in Section 3.01 of these by-laws. Except as otherwise provided by the Wisconsin Business Corporation Law or by the articles of incorporation or by these by-laws, a quorum of any committee of the Board of Directors created pursuant to Section 3.12 of these by- laws shall consist of a majority of the number of directors appointed to serve on the committee. A majority of the directors present (though less than such quorum) may adjourn any meeting of the Board of Directors or any committee thereof, as the case may be, from time to time without further notice. 3.07. Manner of Acting. The affirmative vote of a majority of the directors present at a meeting of the Board of Directors or a committee thereof at which a quorum is present shall be the act of the Board of Directors or such committee, as the case may be, unless the Wisconsin Business Corporation Law, the articles of incorporation or these by-laws require the vote of a greater number of directors. 3.08. Conduct of Meetings. The President, and in his or her absence, a Vice President in the order provided under Section 4.07 of these by-laws, and in their absence, any director chosen by the directors present, shall call meetings of the Board of Directors to order and shall act as chairperson of the meeting. The Secretary of the corporation shall act as secretary of all meetings of the Board of Directors but in the absence of the Secretary, the presiding officer may appoint any other person present to act as secretary of the meeting. Minutes of any regular or special meeting of the Board of Directors shall be prepared and distributed to each director. 3.09. Vacancies. Any vacancies occurring in the Board of Directors, including a vacancy created by an increase in the number of directors, shall be filled only as provided in the articles of incorporation. A vacancy that will occur at a specific later date, because of a resignation effective at a later date or otherwise, may be filled before the vacancy occurs, but the new director may not take office until the vacancy occurs. 3.10. Compensation. The Board of Directors, irrespective of any personal interest of any of its members, may establish reasonable compensation of all directors for services to the corporation as directors or may delegate such authority to an appropriate committee. The Board of Directors also shall have authority to provide for or delegate authority to an appropriate committee to provide for reasonable pensions, disability or death benefits, and other benefits or payments, to directors, officers and employees and to their estates, families, dependents or beneficiaries on account of prior services rendered by such directors, officers and employees to the corporation. 3.11. Presumption of Assent. A director who is present and is announced as present at a meeting of the Board of Directors or any committee thereof created in accordance with Section 3.12 of these by- laws, when corporate action is taken, assents to the action taken unless any of the following occurs: (a) the director objects at the beginning of the meeting or promptly upon his or her arrival to holding the meeting or transacting business at the meeting; (b) the director dissents or abstains from an action taken and minutes of the meeting are prepared that show the director's dissent or abstention from the action taken; (c) the director delivers written notice that complies with the Wisconsin Business Corporation Law of his or her dissent or abstention to the presiding officer of the meeting before its adjournment or to the corporation immediately after adjournment of the meeting; or (d) the director dissents or abstains from an action taken, minutes of the meeting are prepared that fail to show the director's dissent or abstention from the action taken, and the director delivers to the corporation a written notice of that failure that complies with the Wisconsin Business Corporation Law promptly after receiving the minutes. Such right of dissent or abstention shall not apply to a director who votes in favor of the action taken. 3.12. Committees. The Board of Directors by resolution adopted by the affirmative vote of a majority of all of the directors then in office may create one or more committees, appoint members of the Board of Directors to serve on the committees and designate other members of the Board of Directors to serve as alternates. Each committee shall have two or more members who shall, unless otherwise provided by the Board of Directors, serve at the pleasure of the Board of Directors. A committee may be authorized to exercise the authority of the Board of Directors, except that a committee may not do any of the following: (a) authorize distributions; (b) approve or propose to shareholders action that the Wisconsin Business Corporation Law requires to be approved by shareholders; (c) fill vacancies on the Board of Directors or, unless the Board of Directors provides by resolution that vacancies on a committee shall be filled by the affirmative vote of the remaining committee members, on any Board committee; (d) amend the corporation's articles of incorporation; (e) adopt, amend or repeal by-laws; (f) approve a plan of merger not requiring shareholder approval; (g) authorize or approve reacquisition of shares, except according to a formula or method prescribed by the Board of Directors; and (h) authorize or approve the issuance or sale or contract for sale of shares, or determine the designation and relative rights, preferences and limitations of a class or series of shares, except that the Board of Directors may authorize a committee to do so within limits prescribed by the Board of Directors. Unless otherwise provided by the Board of Directors in creating the committee, a committee may employ counsel, accountants and other consultants to assist it in the exercise of its authority. 3.13. Telephonic Meetings. Except as herein provided and notwithstanding any place set forth in the notice of the meeting or these by-laws, members of the Board of Directors (and any committees thereof created pursuant to Section 3.12 of these by-laws) may participate in regular or special meetings by, or through the use of, any means of communication by which all participants may simultaneously hear each other, such as by conference telephone. If a meeting is conducted by such means, then at the commencement of such meeting the presiding officer shall inform the participating directors that a meeting is taking place at which official business may be transacted. Any participant in a meeting by such means shall be deemed present in person at such meeting. Notwithstanding the foregoing, no action may be taken at any meeting held by such means on any particular matter which the presiding officer determines, in his or her sole discretion, to be inappropriate under the circumstances for action at a meeting held by such means. Such determination shall be made and announced in advance of such meeting. 3.14. Action Without Meeting. Any action required or permitted by the Wisconsin Business Corporation Law to be taken at a meeting of the Board of Directors or a committee thereof created pursuant to Section 3.12 of these by-laws may be taken without a meeting if the action is taken by all members of the Board or of the committee. The action shall be evidenced by one or more written consents describing the action taken, signed by each director or committee member and retained by the corporation. Such action shall be effective when the last director or committee member signs the consent, unless the consent specifies a different effective date. ARTICLE IV. OFFICERS 4.01. Number. The principal officers of the corporation shall be a President, the number of Vice Presidents as authorized from time to time by the Board of Directors, a Secretary, and a Treasurer, each of whom shall be elected by the Board of Directors. Such other officers and assistant officers as may be deemed necessary may be elected or appointed by the Board of Directors. The Board of Directors may also authorize any duly appointed officer to appoint one or more officers or assistant officers. Any two or more offices may be held by the same person. 4.02. Election and Term of Office. The officers of the corporation to be elected by the Board of Directors shall be elected annually by the Board of Directors at the first meeting of the Board of Directors held after each Annual Meeting of the shareholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as is practicable. Each officer shall hold office until his or her successor shall have been duly elected or until his or her prior death, resignation or removal. 4.03. Removal. The Board of Directors may remove any officer and, unless restricted by the Board of Directors or these by-laws, an officer may remove any officer or assistant officer appointed by that officer, at any time, with or without cause and notwithstanding the contract rights, if any, of the officer removed. The appointment of an officer does not of itself create contract rights. 4.04. Resignation. An officer may resign at any time by delivering notice to the corporation that complies with the Wisconsin Business Corporation Law. The resignation shall be effective when the notice is delivered, unless the notice specifies a later effective date and the corporation accepts the later effective date. 4.05. Vacancies. A vacancy in any principal office because of death, resignation, removal, disqualification or otherwise, shall be filled by the Board of Directors for the unexpired portion of the term. If a resignation of an officer is effective at a later date as contemplated by Section 4.04 of these by-laws, the Board of Directors may fill the pending vacancy before the effective date if the Board provides that the successor may not take office until the effective date. 4.06. President. The President shall be the principal executive officer of the corporation and, subject to the direction of the Board of Directors, shall in general supervise and control all of the business and affairs of the corporation. The President shall, when present, preside at all meetings of the shareholders and of the Board of Directors. He or she shall have authority, subject to such rules as may be prescribed by the Board of Directors, to appoint such agents and employees of the corporation as he or she shall deem necessary, to prescribe their powers, duties and compensation, and to delegate authority to them. Such agents and employees shall hold office at the discretion of the President. He or she shall have authority to sign, execute and acknowledge, on behalf of the corporation, all deeds, mortgages, bonds, stock certificates, contracts, leases, reports and all other documents or instruments necessary or proper to be executed in the course of the corporation's regular business, or which shall be authorized by resolution of the Board of Directors; and, except as otherwise provided by law or the Board of Directors, he or she may authorize any Vice President or other officer or agent of the corporation to sign, execute and acknowledge such documents or instruments in his or her place and stead. In general he or she shall perform all duties incident to the office of President and such other duties as may be prescribed by the Board of Directors from time to time. 4.07. The Vice Presidents. In the absence of the President or in the event of the President's death, inability or refusal to act, or in the event for any reason it shall be impracticable for the President to act personally, the Vice President (or in the event there be more than one Vice President, the Vice Presidents in the order designated by the Board of Directors, or in the absence of any designation, then in the order of their election) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Any Vice President may sign, with the Secretary or Assistant Secretary, certificates for shares of the corporation; and shall perform such other duties and have such authority as from time to time may be delegated or assigned to him or her by the President or by the Board of Directors. The execution of any instrument of the corporation by any Vice President shall be conclusive evidence, as to third parties, of his or her authority to act in the stead of the President. 4.08. The Secretary. The Secretary shall: (a) keep minutes of the meetings of the shareholders and of the Board of Directors (and of committees thereof) in one or more books provided for that purpose (including records of actions taken by the shareholders or the Board of Directors (or committees thereof) without a meeting); (b) see that all notices are duly given in accordance with the provisions of these by-laws or as required by the Wisconsin Business Corporation Law; (c) be custodian of the corporate records and of the seal of the corporation and see that the seal of the corporation is affixed to all documents the execution of which on behalf of the corporation under its seal is duly authorized; (d) maintain a record of the shareholders of the corporation, in a form that permits preparation of a list of the names and addresses of all shareholders, by class or series of shares and showing the number and class or series of shares held by each shareholder; (e) sign with the President, or a Vice President, certificates for shares of the corporation, the issuance of which shall have been authorized by resolution of the Board of Directors; (f) have general charge of the stock transfer books of the corporation; and (g) in general perform all duties incident to the office of Secretary and have such other duties and exercise such authority as from time to time may be delegated or assigned by the President or by the Board of Directors. 4.09. The Treasurer. The Treasurer shall: (a) have charge and custody of and be responsible for all funds and securities of the corporation; (b) maintain appropriate accounting records; (c) receive and give receipts for moneys due and payable to the corporation from any source whatsoever, and deposit all such moneys in the name of the corporation in such banks, trust companies or other depositaries as shall be selected in accordance with the provisions of Section 5.04 of these by- laws; and (d) in general perform all of the duties incident to the office of Treasurer and have such other duties and exercise such other authority as from time to time may be delegated or assigned by the President or by the Board of Directors. If required by the Board of Directors, the Treasurer shall give a bond for the faithful discharge of his or her duties in such sum and with such surety or sureties as the Board of Directors shall determine. 4.10. Assistant Secretaries and Assistant Treasurers. There shall be such number of Assistant Secretaries and Assistant Treasurers as the Board of Directors may from time to time authorize. The Assistant Secretaries may sign with the President or a Vice President certificates for shares of the corporation the issuance of which shall have been authorized by a resolution of the Board of Directors. The Assistant Treasurers shall respectively, if required by the Board of Directors, give bonds for the faithful discharge of their duties in such sums and with such sureties as the Board of Directors shall determine. The Assistant Secretaries and Assistant Treasurers, in general, shall perform such duties and have such authority as shall from time to time be delegated or assigned to them by the Secretary or the Treasurer, respectively, or by the President or the Board of Directors. 4.11. Other Assistants and Acting Officers. The Board of Directors shall have the power to appoint, or to authorize any duly appointed officer of the corporation to appoint, any person to act as assistant to any officer, or as agent for the corporation in his or her stead, or to perform the duties of such officer whenever for any reason it is impracticable for such officer to act personally, and such assistant or acting officer or other agent so appointed by the Board of Directors or an authorized officer shall have the power to perform all the duties of the office to which he or she is so appointed to be an assistant, or as to which he or she is so appointed to act, except as such power may be otherwise defined or restricted by the Board of Directors or the appointing officer. 4.12. Salaries. The salaries of the principal officers shall be fixed from time to time by the Board of Directors or by a duly authorized committee thereof, and no officer shall be prevented from receiving such salary by reason of the fact that he or she is also a director of the corporation. ARTICLE V. CONTRACTS, LOANS, CHECKS AND DEPOSITS; SPECIAL CORPORATE ACTS 5.01. Contracts. The Board of Directors may authorize any officer or officers, agent or agents, to enter into any contract or execute or deliver any instrument in the name of and on behalf of the corporation, and such authorization may be general or confined to specific instances. In the absence of other designation, all deeds, mortgages and instruments of assignment or pledge made by the corporation shall be executed in the name of the corporation by the President or one of the Vice Presidents and by the Secretary, an Assistant Secretary, the Treasurer or an Assistant Treasurer; the Secretary or an Assistant Secretary, when necessary or required, shall affix the corporate seal, if any, thereto; and when so executed no other party to such instrument or any third party shall be required to make any inquiry into the authority of the signing officer or officers. 5.02. Loans. No indebtedness for borrowed money shall be contracted on behalf of the corporation and no evidences of such indebtedness shall be issued in its name unless authorized by or under the authority of a resolution of the Board of Directors. Such authorization may be general or confined to specific instances. 5.03. Checks, Drafts, etc. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation, shall be signed by such officer or officers, agent or agents of the corporation and in such manner as shall from time to time be determined by or under the authority of a resolution of the Board of Directors. 5.04. Deposits. All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks, trust companies or other depositaries as may be selected by or under the authority of a resolution of the Board of Directors. 5.05. Voting of Securities Owned by this Corporation. Subject always to the specific directions of the Board of Directors, (a) any shares or other securities issued by any other corporation and owned or controlled by this corporation may be voted at any meeting of security holders of such other corporation by the President of this corporation if he or she be present, or in his or her absence by any Vice President of this corporation who may be present, and (b) whenever, in the judgment of the President, or in his or her absence, of any Vice President, it is desirable for this corporation to execute a proxy or written consent in respect to any shares or other securities issued by any other corporation and owned by this corporation, such proxy or consent shall be executed in the name of this corporation by the President or one of the Vice Presidents of this corporation, without necessity of any authorization by the Board of Directors, affixation of corporate seal, if any, or countersignature or attestation by another officer. Any person or persons designated in the manner above stated as the proxy or proxies of this corporation shall have full right, power and authority to vote the shares or other securities issued by such other corporation and owned by this corporation the same as such shares or other securities might be voted by this corporation. 5.06. No Nominee Procedures. The corporation has not established, and nothing in these by-laws shall be deemed to establish, any procedure by which a beneficial owner of the corporation's shares that are registered in the name of a nominee is recognized by the corporation as a shareholder under Section 180.0723 of the Wisconsin Business Corporation Law. ARTICLE VI. CERTIFICATES FOR SHARES; TRANSFER OF SHARES 6.01. Certificates for Shares. Certificates representing shares of the corporation shall be in such form, consistent with the Wisconsin Business Corporation Law, as shall be determined by the Board of Directors. Such certificates shall be signed by the President or a Vice President and by the Secretary or an Assistant Secretary. All certificates for shares shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares represented thereby are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the corporation. All certificates surrendered to the corporation for transfer shall be canceled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and canceled, except as provided in Section 6.06 of these by-laws. 6.02. Facsimile Signatures and Seal. The seal of the corporation, if any, on any certificates for shares may be a facsimile. The signature of the President or Vice President and the Secretary or Assistant Secretary upon a certificate may be facsimiles if the certificate is manually signed on behalf of a transfer agent, or a registrar, other than the corporation itself or an employee of the corporation. 6.03. Signature by Former Officers. The validity of a share certificate is not affected if a person who signed the certificate (either manually or in facsimile) no longer holds office when the certificate is issued. 6.04. Transfer of Shares. Prior to due presentment of a certificate for shares for registration of transfer the corporation may treat the registered owner of such shares as the person exclusively entitled to vote, to receive notifications and otherwise to have and exercise all the rights and power of an owner. Where a certificate for shares is presented to the corporation with a request to register for transfer, the corporation shall not be liable to the owner or any other person suffering loss as a result of such registration of transfer if (a) there were on or with the certificate the necessary endorsements, and (b) the corporation had no duty to inquire into adverse claims or has discharged any such duty. The corporation may require reasonable assurance that such endorsements are genuine and effective and compliance with such other regulations as may be prescribed by or under the authority of the Board of Directors. 6.05. Restrictions on Transfer. The face or reverse side of each certificate representing shares shall bear a conspicuous notation of any restriction imposed by the corporation upon the transfer of such shares. 6.06. Lost, Destroyed or Stolen Certificates. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the person requesting such new certificate or certificates, or his or her legal representative, to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. 6.07. Consideration for Shares. The Board of Directors may authorize shares to be issued for consideration consisting of any tangible or intangible property or benefit to the corporation, including cash, promissory notes, services performed, contracts for services to be performed or other securities of the corporation. Before the corporation issues shares, the Board of Directors shall determine that the consideration received or to be received for the shares to be issued is adequate. The determination of the Board of Directors is conclusive insofar as the adequacy of consideration for the issuance of shares relates to whether the shares are validly issued, fully paid and nonassessable. The corporation may place in escrow shares issued in whole or in part for a contract for future services or benefits, a promissory note, or other property to be issued in the future, or make other arrangements to restrict the transfer of the shares, and may credit distributions in respect of the shares against their purchase price, until the services are performed, the benefits or property are received or the promissory note is paid. If the services are not performed, the benefits or property are not received or the promissory note is not paid, the corporation may cancel, in whole or in part, the shares escrowed or restricted and the distributions credited. 6.08. Stock Regulations. The Board of Directors shall have the power and authority to make all such further rules and regulations not inconsistent with law as it may deem expedient concerning the issue, transfer and registration of shares of the corporation. ARTICLE VII. SEAL 7.01. The Board of Directors may provide for a corporate seal for the corporation. ARTICLE VIII. FISCAL YEAR 8.01. The fiscal year of the corporation shall be from January 1 to December 31. ARTICLE IX. INDEMNIFICATION 9.01. Provision of Indemnification. The corporation shall, to the fullest extent permitted or required by Sections 180.0850 to 180.0859, inclusive, of the Wisconsin Business Corporation Law, including any amendments thereto (but in the case of any such amendment, only to the extent such amendment permits or requires the corporation to provide broader indemnification rights than prior to such amendment), indemnify its Directors and Officers against any and all Liabilities, and advance any and all reasonable Expenses, incurred thereby in any Proceeding to which any such Director or Officer is a Party because he or she is or was a Director or Officer of the corporation. The corporation shall also indemnify an employee who is not a Director or Officer, to the extent that the employee has been successful on the merits or otherwise in defense of a Proceeding, for all reasonable Expenses incurred in the Proceeding if the employee was a Party because he or she is or was an employee of the corporation. The rights to indemnification granted hereunder shall not be deemed exclusive of any other rights to indemnification against Liabilities or the advancement of Expenses which a Director, Officer or employee may be entitled under any written agreement, Board resolution, vote of shareholders, the Wisconsin Business Corporation Law or otherwise. The corporation may, but shall not be required to, supplement the foregoing rights to indemnification against Liabilities and advancement of Expenses under this Section 9.01 by the purchase of insurance on behalf of any one or more of such Directors, Officers or employees, whether or not the corporation would be obligated to indemnify or advance Expenses to such Director, Officer or employee under this Section 9.01. All capitalized terms used in this Article IX and not otherwise defined herein shall have the meaning set forth in Section 180.0850 of the Wisconsin Business Corporation Law. ARTICLE X. AMENDMENTS 10.01. By Shareholders. Except as otherwise provided in the articles of incorporation or these by-laws, these by-laws may be amended or repealed and new by-laws may be adopted by the shareholders at any Annual Meeting or Special Meeting at which a quorum is in attendance. 10.02. By Directors. Except as otherwise provided by the Wisconsin Business Corporation Law or the articles of incorporation, these by-laws may also be amended or repealed and new by-laws may be adopted by the Board of Directors by affirmative vote of a majority of the number of directors present at any meeting at which a quorum is in attendance; provided, however, that the shareholders in adopting, amending or repealing a particular by-law may provide therein that the Board of Directors may not amend, repeal or readopt that by-law. 10.03. Implied Amendments. Any action taken or authorized by the shareholders or by the Board of Directors which would be inconsistent with the by-laws then in effect but which is taken or authorized by affirmative vote of not less than the number of shares or the number of directors required to amend the by-laws so that the by-laws would be consistent with such action shall be given the same effect as though the by-laws had been temporarily amended or suspended so far, but only so far, as is necessary to permit the specific action so taken or authorized. EX-5 4 EXHIBIT (5) F O L E Y & L A R D N E R A T T O R N E Y S A T L A W CHICAGO FIRSTAR CENTER SAN DIEGO JACKSONVILLE 777 EAST WISCONSIN AVENUE SAN FRANCISCO LOS ANGELES MILWAUKEE, WISCONSIN 53202-5367 TALLAHASSEE MADISON TELEPHONE (414) 271-2400 TAMPA ORLANDO FACSIMILE (414) 297-4900 WASHINGTON, D.C. SACRAMENTO WEST PALM BEACH WRITER'S DIRECT LINE September 16, 1997 National Research Corporation 1033 "O" Street Lincoln, Nebraska 68508 Ladies and Gentlemen: We have acted as counsel for National Research Corporation, a Wisconsin corporation (the "Company"), and the majority shareholder of the Company (the "Selling Shareholder") with respect to the preparation of a Registration Statement on Form S-1 (the "Registration Statement"), including the prospectus constituting a part thereof (the "Prospectus"), filed by the Company with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Securities Act"), relating to 2,100,000 shares of the Company's common stock, $.001 par value ("Common Stock"), together with up to 315,000 additional shares of Common Stock being registered to cover the over-allotment option granted by the Selling Shareholder to the underwriters. In connection with our representation, we have examined: (a) the Registration Statement, including the Prospectus; (b) the Articles of Incorporation and Bylaws of the Company, as amended to date and as proposed to be amended immediately prior to the effective date of the Registration Statement; (c) resolutions of the Company's Board of Directors relating to the authorization of the issuance of certain of the securities covered by the Registration Statement; and (d) such other proceedings, documents and records as we have deemed necessary to enable us to render this opinion. Based on the foregoing, we are of the opinion that: 1. The Company is a corporation validly existing under the laws of the State of Wisconsin. 2. The shares of Common Stock covered by the Registration Statement that are to be offered and sold by the Company, when the price thereof has been determined by action of the Company's Board of Directors and when issued and paid for in the manner contemplated in the Registration Statement and Prospectus, will be validly issued, fully paid and nonassessable, except with respect to wage claims of, or other debts owing to, employees of the Company for services performed, but not exceeding six months' service in any one case, as provided in Section 180.0622(2)(b) of the Wisconsin Business Corporation Law and judicial interpretations thereof. 3. The shares of Common Stock covered by the Registration Statement that are to be offered and sold by the Selling Shareholder are, and when sold in the manner contemplated in the Registration Statement and Prospectus will continue to be, validly issued, fully paid and nonassessable, except with respect to wage claims of, or other debts owing to, employees of the Company for services performed, but not exceeding six months' service in any one case, as provided in Section 180.0622(2)(b) of the Wisconsin Business Corporation Law and judicial interpretations thereof. We consent to the use of this opinion as an exhibit to the Registration Statement and to the references to our firm therein. In giving our consent, we do not admit that we are "experts" within the meaning of Section 11 of the Securities Act or within the category of persons whose consent is required by Section 7 of the Securities Act. Very truly yours, FOLEY & LARDNER EX-10.4 5 Exhibit (10.4) NATIONAL RESEARCH CORPORATION DIRECTOR STOCK PLAN 1. Purpose. The purpose of the National Research Corporation Director Stock Plan (the "Plan") is to promote the best interests of National Research Corporation (the "Company") and its shareholders by providing a means to attract and retain competent independent directors and to provide opportunities for additional stock ownership by such directors which will further increase their proprietary interest in the Company and, consequently, their identification with the interests of the shareholders of the Company. 2. Administration. The Plan shall be administered by the Compensation Committee of the Board of Directors of the Company (the "Administrator"), subject to review by the Board of Directors (the "Board"). The Administrator may adopt such rules and regulations for carrying out the Plan as it may deem proper and in the best interests of the Company. The interpretation by the Board of any provision of the Plan or any related documents shall be final. 3. Stock Subject to the Plan. Subject to adjustment in accordance with the provisions of paragraph 7, the total number of shares of common stock, $.001 par value, of the Company ("Common Stock") available for issuance under the Plan shall be 30,000. Shares of Common Stock to be delivered under the Plan shall be made available from presently authorized but unissued Common Stock or authorized and issued shares of Common Stock reacquired and held as treasury shares, or a combination thereof. In no event shall the Company be required to issue fractional shares of Common Stock under the Plan. Whenever under the terms of the Plan a fractional share of Common Stock would otherwise be required to be issued, there shall be paid in lieu thereof one full share of Common Stock. 4. Eligible Directors. Each member of the Board who is not an employee of the Company or any subsidiary of the Company and who is paid a cash retainer fee by the Company for services as a director ("Outside Director") shall be eligible to receive shares of Common Stock under the Plan. 5. Director Grants. (a) Stock Awards. Each Outside Director shall automatically receive, in lieu of cash, 60% of his or her Annual Retainer (as defined below) earned in each calendar year in the form of Common Stock. Such shares of Common Stock (and cash in lieu of fractional shares) shall be transferred in accordance with paragraph 5(c) hereof. The term "Annual Retainer" as used herein means the annual retainer scheduled to be paid to an Outside Director for the calendar year for services on the Board, exclusive of any meeting and committee fees. (b) Option Awards. On the date of the Company's first annual meeting of shareholders and thereafter on the date of each succeeding annual meeting of shareholders of the Company ("Grant Date"), an Outside Director, if reelected or retained as an Outside Director at such meeting, shall automatically be granted a nonqualified stock option to purchase 1,000 shares of Common Stock. The option exercise price shall be the Fair Market Value (as defined below) of a share of Common Stock on the Grant Date, which shall be payable at the time of exercise in cash, previously acquired shares of Common Stock valued at their Fair Market Value or such other forms or combinations of forms as the Board or Administrator may approve. The term "Fair Market Value" as used herein shall mean the last sale price of the Common Stock as reported on The Nasdaq Stock Market on the last trading day of the applicable pay period. An option may be exercised in whole or in part, from time to time commencing one year after the Grant Date (the "Vesting Date"), subject to the following limitations: (i) If an Outside Director's status as an Outside Director of the Company terminates because of death prior to the Vesting Date, the option shall become immediately exercisable in full and may be exercised for a period of three years after the date of death. (ii) If for any reason other than death an Outside Director ceases to be an Outside Director of the Company prior to the "Vesting Date," the option shall be canceled as of the date of such termination. (iii) If an Outside Director ceases to be an Outside Director of the Company for any reason after the Vesting Date, the option shall expire ten years after the Grant Date, or if earlier, three years after termination of Outside Director status. (c) Transfer of Shares. Shares of Common Stock issuable to an Outside Director pursuant to paragraph 5(a) shall be transferred to such Outside Director at such time or times during the calendar year as the cash portion of the Annual Retainer is paid. The total number of shares of Common Stock to be so transferred shall be determined by dividing (i) an amount equal to 60% of the Annual Retainer payable during the applicable period by (ii) the Fair Market Value of a share of Common Stock on the last business day of such period. In no event shall the Company be required to issue fractional shares. Whenever under the terms of this paragraph 5(c) a fractional share of Common Stock would otherwise be required to be issued to an Outside Director, an amount in lieu thereof shall be paid in cash based upon the Fair Market Value of such fractional share. (d) Termination of Services. If an Outside Director's services as a Board member are terminated before the Vesting Date for any reason other than death so that the option is canceled pursuant to paragraph 5(b)(ii) hereof, the Outside Director shall receive in cash the Annual Retainer such Outside Director would otherwise have been entitled to receive for the applicable period in the absence of this Plan. 6. Restrictions on Transfer. (a) Stock Awards. Shares of Common Stock acquired under Section 5(a) of the Plan may not be sold or otherwise disposed of except pursuant to an effective registration statement under the Securities Act of 1933, as amended, or except in a transaction which, in the opinion of counsel, is exempt from registration under said Act. All certificates evidencing shares subject to awards to Outside Directors may bear an appropriate legend evidencing any such transfer restriction. All dividends and voting rights for shares issued under the Plan shall accrue as of the issue date thereof. (b) Option Awards. Options granted under the Plan shall not be transferable other than by will or the laws of descent and distribution, except that an Outside Director may, to the extent allowed by the Board or the Administrator, and in a manner specified by the Board or the Administrator, (i) designate in writing a beneficiary to exercise the option after the Outside Director's death or (ii) transfer any option. 7. Adjustment Provisions. In the event of any change in the Common Stock by reason of a declaration of a stock dividend (other than a stock dividend declared in lieu of an ordinary cash dividend), stock split, spin-off, merger, consolidation, recapitalization, or split-up, combination or exchange of shares, or otherwise, the aggregate number of shares available under the Plan shall be appropriately adjusted in order to prevent dilution or enlargement of the benefits intended to be made available under the Plan. 8. Amendment of Plan. The Board shall have the right to amend the Plan at any time or from time to time in any manner that it may deem appropriate; provided, however, that the provisions of paragraph 5 shall not be amended more than once every six months, other than to comport with changes in the Internal Revenue Code of 1986, as amended, the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. 9. Withholding. The Company may defer making payments under the Plan until satisfactory arrangements have been made for the payment of any federal, state or local income taxes required to be withheld with respect to such payment or delivery. Each Outside Director shall be entitled to irrevocably elect to have the Company withhold shares of Common Stock having an aggregate value equal to the amount required to be withheld. The value of fractional shares remaining after payment of the withholding taxes shall be paid to the Outside Director in cash. Shares so withheld shall be valued at Fair Market Value on the regular business day immediately preceding the date such shares would otherwise be transferred hereunder. 10. Documentation of Awards. Awards made under the Plan shall be evidenced by written agreements or such other appropriate documentation as the Board or the Admnistrator may prescribe. The Board and/or the Administrator need not require the execution of any instrument or acknowledgement of notice of an award under the Plan, in which case acceptance of such award by the respective Outside Director will constitute agreement to the terms of the award. 11. Governing Law. The Plan, all awards hereunder, and all determinations made and actions taken pursuant to the Plan shall be governed by the internal laws of the State of Wisconsin and applicable federal law. 12. Effective Date and Term of Plan. The effective date of the Plan is ______________, 1997. The Plan shall terminate on such date as may be determined by the Board. EX-10.7 6 Exhibit (10.7) SUBCONTRACT Between __________________________________________________________________________ United HealthCare Corporation & National Research Corporation 9900 Bren Road East 1033 O Street Minnetonka, Minnesota 55343 Gold's Galleria Lincoln, Nebraska 68508 for services to be performed for the Defense Medical Information System/System Integration, Design, Development, Operations and Maintenance (D/SIDDOMS - Lot III) in support of the Office of the Assistant Secretary of Defense for Health Affairs, Department of Defense. This Subcontract is issued in accordance with and is subordinate to: Prime Contract No. DASW01-95-0029. This subcontract is made as of May 9, 1997 ("Effective Date"), by and between United HealthCare Corporation, through its wholly owned subsidiary Applied HealthCare Informatics (hereinafter referred to as "UHC") and National Research Corporation, Inc. ("Subcontractor"). Witnesseth that: Whereas, UHC has entered into a contract with the U.S. Department of Defense to provide services for studies, econometric analysis and modeling for the D/SIDDOMS project, Contract No. DASW01-95-0029, (hereinafter "Prime Contract"); and Whereas, UHC desires to utilize the services of Subcontractor and Subcontractor desires to provide certain services as requested by the Department of Defense and described herein; and Whereas, UHC and Subcontractor executed an agreement entitled Subcontract Between United HealthCare Corporation and National Research Corporation, effective January 6, 1997; and Whereas, UHC and Subcontractor desire to terminate the January 6, 1997 agreement and execute this agreement in its place; Now, therefore, UHC and Subcontractor mutually agree as follows: Article 1 - Definitions 1.1 "Agreement" means this instrument and its Appendices. 1.2 "UHC Project Manager" means the individual identified in a Task Order as being responsible for supervision of work performed pursuant to the Task Order. 1.3 "Delivery Order" means an order executed by the U.S. Department of Defense under the Prime Contract and provided to UHC which summarizes the contents of both a task statement and technical proposal. 1.4 "DFARS" means the Department of Defense FAR Supplement contained in Title 48, Chapter 2 of the Code of Federal Regulations in effect as of the date of this Agreement unless otherwise updated by consent of the parties or by law. 1.5 "FAR" means the Federal Acquisition Regulations contained in Title 48 of the Code of Federal Regulations in effect as of the date of this Agreement unless otherwise updated by consent of the parties or by law. 1.6 "Prime Contract" means the contract between UHC and the U.S. Department of Defense, Contract No. DASW01-95-0029. 1.7 "Task Order" means any work request issued by UHC to Subcontractor in accordance with Article 2 of this Agreement. Article 2 - Services to be Performed. 2.1 Subcontractor shall assist UHC in responding to task statements issued under the Prime Contract, including assistance in preparing technical and cost proposals. Subcontractor shall not be compensated for these and other services not associated with a special Delivery Order issued under the Prime Contract, except as otherwise provided in this Agreement or a Task Order. 2.2 This is an indefinite-quantity subcontract for the supplies and services specified. Subcontractor will deliver or perform, and UHC shall be obligated to pay, only as provided in Task Orders issued in accordance with this Agreement. Each Task Order and corresponding Delivery Order, which shall together be entitled Delivery Order and Task Order Addendum, shall be executed by the parties and attached hereto as an Appendix and incorporated in this Agreement. 2.3 Prior to issuance of a Task Order by UHC, the parties will agree upon the contents of the order and the duties to be included therein. 2.4 Task Orders shall be issued to Subcontractor on the basis of Prime Contract specifications and, except as otherwise provided herein shall be subordinate to the terms, conditions, specifications and objectives of the Prime Contract. Each Task Order issued under this Agreement shall require the UHC Project Manager's approval. Each Task Order issued under this Agreement shall be individually and sequentially numbered, and shall include the specifications and requirements applicable to the Task Order. Task Orders may not conflict with the terms and conditions of this Agreement unless the variance is explicitly stated in the Task Order. In the event of conflict or ambiguity of terms, this Agreement shall prevail over the language in the Task Order. 2.5 Each Task Order assigned under this Agreement shall include at least the following information: a) Description of the work to be performed. b) Period of performance of the Task Order. c) Deliverable items schedule. d) The specific labor hours committed to the Task Order, by approved labor category; the names of Key Personnel and their actual job title. However, for services provided by Subcontractor where catalog or market prices of commercial items are used, this will be listed as deliverables. e) Subcontractor's estimated number of labor hours and total costs for preparation of progress reports and assistance under Article 4.2 of this Agreement. However, for services provided by Subcontractor where catalog or market prices of commercial items are used, these costs are part of the commercial per unit price. f) The total dollar value of the Task Order. g) Reporting requirements. h) Required participation in oral briefings, to the extent known at the time of issuance of the Task Order. 2.6 All work performed under this Agreement shall be supervised by Subcontractor's Project Manager, under the general technical direction of UHC's Project Manager. UHC will notify Subcontractor of the identity of its Project Manager for the project in each Task Order. Subcontractor shall notify UHC in writing of the identity of its Project Manager within twenty (20) days of execution of this Agreement, and by prior written notice if a new or alternate Project Manager will be appointed during the term of this Agreement. 2.7 UHC may modify a Task Order based on modifications made to a Delivery Order issued under the Prime Contract. UHC shall notify Subcontractor in writing of the required modification. If Subcontractor believes a change to a Task Order is necessary, Subcontractor shall notify UHC in writing. If a modification causes an increase or decrease in the cost of services to be provided by Subcontractor, UHC will make an equitable adjustment consistent with FAR 52.243-2, Alternate I. 2.8 In the event the Subcontractor anticipates difficulty in complying with the Task Order delivery schedule, Subcontractor shall immediately notify UHC in writing, giving pertinent details, including the date by which it expects to make delivery; provided, however, that this date shall be informational only and that receipt thereof shall not be construed as a waiver by UHC of any delivery schedule, or any rights or remedies provided by law or under this Agreement. 2.9 Subcontractor must strictly comply with the Limitation of Cost clause on cost reimbursement Task Orders and notify UHC in a timely fashion if additional funds will be required. No expenditures beyond the ceiling amount will be reimbursed unless specifically authorized by UHC's Project Manager. 2.10 Subcontractor shall promptly notify UHC in writing if it has reason to believe that the level of effort or the total cost to UHC of work under a Task Order will be either greater or substantially less than the amount obligated for that Task Order. In addition, Subcontractor shall promptly notify UHC in writing when the expenditures plus outstanding commitments and liabilities allowable under a Task Order have reached 75% of the amount obligated under the Task Order, or two months prior to exhaustion of the funds, whichever comes first. 2.11 In performing all services under this Agreement, Subcontractor shall use its best efforts to assist UHC in performing the requirements of the Prime Contract, including preparation of proposals and execution of Task Orders. Article 3 - Effective Date and Term of Agreement 3.1 The services to be performed under this Agreement shall be provided during the period of performance set out in each Task Order, or until all deliverables required by the Task Order are provided. If the Prime Contract is extended, this Agreement shall be extended for up to two additional years in accordance with Article 3.2 below. 3.2 This Agreement may be extended for up to two additional one-year periods based upon the options in the Prime Contract. UHC will notify Subcontractor of any extension of the Agreement upon receipt of written notification of extension under the Prime Contract. UHC will notify Subcontractor of its receipt of any preliminary written notice of intent to extend under the Prime Contract, but will not be committed to an extension based on a preliminary notice. All other terms and conditions of this Agreement shall remain in full force and effect during any period of extension. 3.3 Any Task Order issued during the effective period of this Agreement and not completed within that period shall be completed by Subcontractor within the time specified in the Task Order, unless the time is extended because of an excusable delay. This Agreement shall govern the Subcontractor's and UHC's rights and obligations with respect to the Task Order to the same extent as if the Order were completed during the Agreement's effective period. In the event that optional periods are exercised in the Prime Contract, the parties may extend a Task Order beyond the original Agreement expiration date. Such Task Order shall be completed within the terms and conditions of the Task Order as written prior to the expiration date of the contract year in which it was issued, unless specified otherwise in the extended Task Order. Article 4 - Reports and Deliverables 4.1 Monthly Progress Reports. Subcontractor will provide to UHC monthly progress reports that address total work activity under this Agreement for the reporting period and address individually each active Task Order. Each report shall include: a) Staff hours expended during the reporting period. This information shall be provided at two levels: cumulative, over the entire Agreement reporting period, and individually, by Task Order on a per person, per task basis. However, for services provided by Subcontractor where catalog or market prices of commercial items are used, this information will be provided on a commercial per unit basis. b) Staff hours remaining, by Task Order. However, for services provided by Subcontractor where catalog or market prices of commercial items are used, the report shall include remaining unit price information and remaining deliverables. c) Funds expended, overall and by individual Task Order, during the reporting period. d) Funds remaining, by individual Task Order. e) Status of work in progress. f) Problems or constraints encountered during the reporting period and suggested solution(s). 4.2 Subcontractor shall assist UHC, as required to comply with the requirements of Section C-3 of the Prime Contract, in providing information for Delivery Order management plans, status reports and cost reports. Subcontractor will, if requested by UHC, participate in management reviews and assist in developing the required materials and documentation to support review activities. 4.3 Subcontractor shall participate, as requested by UHC, in formal oral briefings as required under the Prime Contract. 4.4 All reports and other documentation supplied under this Agreement will be in compliance with the provisions of the Corporate IM Technical Standards, Technical Reference Model, Section J, Attachment 4 and the DoD Standard 7935A, "Automated Data Systems (ADP) Documentation," dated Oct. 1, 1988, or the most recent current revision. 4.5 The Subcontractor shall ensure that automated resources and procedures be used, whenever possible, to maintain the most cost-effective use of Government funds. All deliverables shall be formatted in Word and be available on a 3 1/2 inch IBM compatible diskette if so requested or as otherwise specified in the Task Order. The Subcontractor's software shall be capable of producing high quality "camera-ready" copies of deliverables. The Subcontractor's software shall also be capable of producing high quality graphics for use in deliverables if necessary. 4.6 Reports provided under this Agreement shall be considered "Technical Data" as defined in the "Rights in Data" clause in the Incorporated Provisions (DFARS 252.227-7013). 4.7 Subcontractor will submit three copies of all reports specified in each Task Order, and a camera-ready copy of all deliverable draft and final reports, if such reports are called for. 4.8 All reports, and any other materials as may be required under this Agreement or Task Orders, shall be addressed and delivered prepaid, unless otherwise directed by UHC, to the following address: Applied HealthCare Informatics United HealthCare Corporation ATTN: Kathia Kennedy Mail Route MN008-W125 PO Box 1459 Minneapolis, MN 55440-1459 4.9 The Subcontractor shall, over the term of this Agreement, correct errors in Subcontractor developed software and applicable documentation which are discovered by UHC, the Government, any other user of the software, or the Subcontractor. Such corrections shall be made within 25 days of the date the Subcontractor is notified that the error exists or the date the Subcontractor discovers the error. Inability of the parties to determine the cause of software errors shall be resolved in accordance with the Disputes clause in Article 12 of this Agreement, but in no event constitutes grounds for delay of error correction beyond the time frame specified above. 4.10 If, during performance of this Agreement, Subcontractor provides proprietary information, including intellectual property, which is related to this Agreement but has been developed by Subcontractor for purposes other than this Agreement, Subcontractor shall clearly identify the information as "NRC Proprietary Information." Such identification will not, in and of itself, be determinative of whether the information was developed separate from this Agreement or whether it is proprietary to the Subcontractor. The Government will retain rights to all intellectual property produced in the course of developing, deploying, conducting and reporting the surveys performed pursuant to this Agreement. 4.11 Notwithstanding any other provisions of this subcontract to the contrary, Subcontractor's failure to submit required reports when due, or failure to perform or deliver require services may, at the discretion of UHC, result in withholding of payments under this Agreement, unless such failure is beyond the control and without the fault or negligence of Subcontractor and is determined by UHC to be an Excusable Delay as defined in FAR 52.249-14. Any failure set out above which is not excused and not cured within a period specified by UHC, which must be a minimum of ten working days, may be considered a breach and grounds for termination in accordance with Article 11 herein. Article 5 - Consideration and Payment 5.1 In consideration of Subcontractor's satisfactory delivery of the work specified in any and all Task Orders issued under this Agreement, UHC shall reimburse Subcontractor for all allowable costs not to exceed the estimated amount for the Task Order. Funds shall be specific to each individual Task Order. Cost allowability shall be determined in accordance with the provisions of the Prime Contract, FAR Parts 30 and 31, and applicable provisions incorporated in Article 20 of this Agreement. 5.2 For the services provided by Subcontractor under this Agreement, UHC shall reimburse Subcontractor as specified in each Task Order. The billing instructions applicable to each Task Order may be specified in each Task Order, and shall supersede any inconsistent billing instructions in Appendix B of this Agreement. 5.3 Rates incurred by the Subcontractor in excess of the maximum amount specified in each Task Order for all services provided under that Task Order shall not be an allowable cost under this Agreement. The Subcontractor bears the sole risk of any costs exceeding these amounts. 5.4 Subcontractor shall submit to UHC on a monthly basis an invoice for each Task Order active in the invoice period. The invoice shall be prepared in accordance with the requirements set out in Appendix B, and shall be accompanied by a statement of costs incurred by Subcontractor, cumulative expenditures to date, and a statement of the original funds in the Task Order and the funds remaining in the Task Order. To the extent that some of this information is already being provided by Subcontractor under Article 4 of this Agreement, Subcontractor may submit copies of the progress reports instead of providing the identical information under this provision. Subcontractor shall clearly identify in the progress reports where the information required by this provision is constrained. 5.5 Subcontractor shall submit to UHC a weekly status report outlining activities performed to date and the status of pending and future deliverables and tasks. The status report may be submitted electronically via the Internet, or by facsimile. 5.6 Upon receipt of each invoice submitted by Subcontractor in accordance with this Agreement, UHC shall enter on a UHC invoice to be submitted to the Government all or such part of the labor, materials and indirect costs specified in Subcontractor's invoice that UHC determines to be allowable costs, plus the amount of the fixed fee applicable to Subcontractor under the Task Order if such fee is invoiced by Subcontractor. Upon receipt of payment from the Government for one or more of the items listed on Subcontractor's invoice, UHC shall pay Subcontractor within * after the amount is determined to be allowable. 5.7 UHC reserves the right to have invoices and statements of cost audited. Each payment made to Subcontractor shall be subject to reduction for amounts included in the audited invoice which are found by the UHC Project Manager, on the basis of an audit, not to constitute allowable or allocable cost, including Subcontractor's rates and fees. Any subsequent payment may be reduced for previous overpayment, or increased for underpayments. Article 6 - Travel and Per Diem 6.1 UHC will reimburse Subcontractor for the actual, reasonable, and necessary costs of local and out of town travel incurred in connection with Subcontractor's direct performance under this Agreement if the costs are in compliance with the Joint Travel Regulations, are approved by UHC in advance and are included in a Task Order. Article 7 - Key Personnel 7.1 Subcontractor shall provide the key personnel identified in each Task Order to perform services under this Agreement unless alternate personnel are assigned in accordance with this Article. Prior to assigning any alternate personnel, Subcontractor shall submit sufficient information to demonstrate that the qualifications of the prospective personnel are equal to or better than the qualifications of the personnel being replaced. No substitution will be made without prior approval of UHC. _______________ * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the SEC pursuant to Rule 406. Article 8 - Prime Contract 8.1 Subcontractor shall assume toward UHC all the obligations and responsibilities which UHC, by the Prime Contract, assumes toward the Government, with respect to any portion of the UHC's supplies or services performed or to be performed by the Subcontractor pursuant to this Agreement. The Prime Contract is subject to public law, statutes and regulations requiring the "flow-down" of contract terms and conditions to Subcontractors. Any such terms and conditions applicable to Subcontractors by reason of law or the Prime Contract, which is incorporated herein as Appendix A, shall be applicable to this Agreement. Nothing in this Agreement is intended by the parties to be in conflict with any such terms or conditions. 8.2 The parties agree that this Agreement is subject to the provisions of the Prime Contract and is intended to be interpreted consistently with the provisions of the Prime Contract. The parties also agree, however, that this Agreement shall not in any way be deemed to establish or create a contractual obligation between the Government and Subcontractor, and that Subcontractor shall have no privity of contract or other access to the Government by reason of this Agreement, unless explicitly stated herein. Article 9 - Publication and Rights in Data 9.1 Subcontractor shall not disseminate or publish, except within and between Subcontractor and UHC, and as required by the Government, any information received or developed under this Agreement or contained in the reports to be furnished pursuant to this Agreement, without prior written consent from UHC. 9.2 Title to all source data and materials furnished to UHC or the Government, together with all plans, systems analysis and design specifications and drawings, completed programs except proprietary programs and documentation thereof, reports and listings, all punched cards and all other items pertaining to the work and services to be performed under Task Orders pursuant to this Agreement, including any copyright shall become and remain with the Government upon completion. The Government shall have the full right to use each of these for its purposes without compensation or approval on the part of Subcontractor or UHC. The Government shall have access to and the right to make copies of the above mentioned items. Subcontractor shall indicate when proprietary programs are included in materials furnished under this Agreement. 9.3 Subcontractor agrees to grant and does grant, convey and reserve to the United States of America a nonexclusive, irrevocable, world wide, royalty-free license in all written material, published, printed, presented or used in connection with this Agreement, in which Subcontractor presently holds a copyright or in the future shall obtain a copyright or in which it has the right to issue royalty-free licenses. 9.4 All software to be provided under this agreement shall be delivered with unlimited rights in accordance with the provisions of DoD FAR Supplement 252.227-7013, 252.227-7018 and 252.227-7029. 9.5 If during the term of this Agreement, Subcontractor determines that it is more advantageous to UHC and/or the Government to incorporate a package, subroutine or module that can not be provided with unlimited rights into the system, Subcontractor shall notify UHC in writing. Such notification shall include at a minimum the name of the item to be furnished with restricted rights and cost saving or other benefits accruing to the Government from its use. If the parties agree to incorporate such software package, subroutine or module into the system the Government shall be given at a minimum the following rights: a. Use of the computer software with the computer for which or with which it was acquired, including use at any Government installation to which the computer may be transferred by the Government; b. Use of the computer software with a backup computer if the computer for which or with which it was acquired is inoperative; c. Modify the computer software, or combine it with other software, subject to the provision that those portions of the derivative software incorporating restricted rights software are subject to the same restricted rights; If Subcontractor includes any software packages, routines or modules developed at Subcontractor's expense in the system without identifying it to UHC, all such software shall be considered delivered with "unlimited rights". If the program maintenance of the system is dependent on the source code of any such software, the Subcontractor shall provide the source code and rights to the source code for the life of the system at the time the software and documentation is delivered. 9.6 If in performing under this Agreement Subcontractor requests access to proprietary data of other companies to conduct studies and research, it will enter into agreements with the supplying companies to protect such data from unauthorized use or disclosure so long as such data remains proprietary. These agreements shall be made available to UHC upon request. 9.7 If in performing under this Agreement Subcontractor is given access by UHC or the Government to the proprietary date of UHC or the Government or proprietary data of third parties possessed by UHC or the Government, Subcontractor agrees to protect such data from unauthorized use or disclosure so long as such data remains proprietary. This provision shall survive termination of this Agreement. Article 10 - Changes 10.1 UHC may at any time, by a written order, and without notice to the sureties, if any, make changes within the general scope of this Agreement. Any such change shall be in accordance with the terms in the Changes clause of the Incorporated Provisions of this Agreement included in Appendix A. However, in order to allow UHC time to complete its proposal for adjustment, the Subcontractor must submit its proposal within 5 days from the date of receipt of the written order unless otherwise given an extension in writing by UHC. Article 11 - Termination 11.1 UHC may at any time, by written notice to Subcontractor, terminate this Agreement in whole or in part either because termination is determined to be in the best interest of the Government or because Subcontractor fails to fulfill its obligations under this Agreement. Termination shall be in accordance with the terms and conditions of the Prime Contract termination provisions as specified in FAR 52.249-6, and incorporated herein in Appendix B, except that: a) notwithstanding the definitions provided in this Agreement, references in the Prime Contract termination clause to the Government shall be deemed to mean UHC; Contractor shall be deemed to mean Subcontractor; Contracting Officer shall be deemed to mean UHC; and b) in order to allow UHC time to complete its final termination settlement proposal, Subcontractor shall submit its proposal promptly but no later than nine (9) months after the effective date of termination unless this period is extended in writing by UHC. Article 12 - Disputes 12.1 The parties shall attempt to resolve any dispute arising out of or relating to this subcontract promptly by negotiation between executives who have authority to settle the controversy. Any party may give the other party written notice of any dispute not resolved in the normal course of business. Within twenty (20) days after delivery of the disputing party's notice, the executives of both parties shall meet at a mutually acceptable time and place to attempt to resolve the dispute. If the matter has not been resolved within thirty (30) days of the disputing party's notice, or if the parties fail to meet within thirty (30) days, either party may initiate further proceedings with respect to the controversy or claim as provided hereafter. All negotiations pursuant to this clause are confidential and shall be treated as compromise and settlement negotiations for purposes of the rules of evidence. 12.2 All claims, disputes and other matters in controversy arising out of or related to this Subcontract, or the performance or breach thereof, shall be decided by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association then obtaining, unless the parties mutually agree otherwise; provided, however, that UHC shall not be required to arbitrate any claim, dispute or other matter involving a claim by or against a third party or a third party who, in the judgment of UHC, is indispensable to a just and equitable resolution of the matter or who is alleged to be wholly or partially responsible for the matter, unless such third party is subjected to the jurisdiction of, and made a party to, the arbitration. The arbitrators are to decide only the issue(s) presented to them and shall have no authority to award any punitive damages or exemplary damages or to vary or ignore the terms of this agreement, and shall be bound by controlling law. The arbitrators shall be the final judge of the law and the facts. Their decision shall be final and binding. The award may be modified, set aside, or appealed based only upon the standards therefore set forth in the Uniform Arbitration Act as that Act is enacted in the State of Minnesota. In addition to such discovery as may be ordered in the discretion of the arbitrators, at least thirty (30) days prior to the hearing, the parties shall exchange documents relevant to the claims and defenses of the parties, a detailed itemization of damages, identification of witnesses, and any reports of experts who are expected to testify or, if there are not reports, summaries in reasonable detail of their expected testimony. The parties agree that there is no privity of contract between the Government and Subcontractor. If at any time any controversy should arise between UHC and Subcontractor with respect to any matter arising under this Subcontract which relates to an act, omission, or decision by the Government, and is not a separate dispute between UHC and Subcontractor, it is the intention of the parties that the UHC shall be liable to Subcontractor to the same extent that the Government is liable to UHC, but not to any greater extent. Subcontractor agrees to allow UHC to exhaust the remedies available under the Prime Contract, including remedies available for breach of contract, prior to instituting any separate action or proceeding. If a separate action or proceeding is instituted prior to the exhaustion of the aforesaid remedies, Subcontractor agrees to stay said action or proceeding pending the exhaustion of remedies against the Government. If UHC prosecutes or defends a matter against the Government under the terms of the Prime Contract, Subcontractor agrees to furnish all documents, certifications, statements, witnesses, notices, reports, and information reasonably required by UHC for such purposes. 12.3 The parties agree that, in the event a dispute arises concerning performance of any Task Order, performance of work under the Task Order will continue according to scheduled dates, at the direction of UHC, pending resolution of any arbitration, or other resolution of the dispute. Any arbitration must be initiated within the period of any applicable statute of limitations. The expenses of any arbitration proceeding, including compensation to the arbitrators, shall be borne equally by the parties. Article 13 - Workers' Compensation and Insurance The Subcontractor shall maintain the types of insurance and coverage listed below: TYPE OF INSURANCE MINIMUM AMOUNT (i) Worker's Compensation and all As required by State Law. occupational disease. (ii) Employer's Liability including all occupational disease when not so covered in Workmen's Compensation above. $100,000 per acc. (iii) General Liability (Comprehensive) Bodily Injury per occurrence $500,000 (iv) Automobile Liability (Comprehensive) Bodily Injury per person $200,000 Bodily Injury per occurrence $500,000 Property Damage per accident $ 20,000 Article 14 - Service Contract Act The Service Contract Act, 41 U.S.C. 351-358, and related regulations, are applicable to the Prime Contract and this Agreement. Subcontractor shall comply with the requirements of the Act and the regulations. Subcontractor shall also comply with the Department of Labor Wage Determination in Section J-1 of the Prime Contract, which is attached in Appendix B of this Agreement. Article 15 - Warranty Exclusion and Limitation of Damages Except as expressly set forth in writing in this Agreement and except for the implied warranty of merchantability, there are no warranties expressed or implied. In no event will the Subcontractor be liable to UHC for consequential damages as defined in the Uniform Commercial Code, section 2/715, in effect in the District of Columbia as of January 1, 1973, i.e. -- Consequential damages resulting from the seller's breach include -- (a) Any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and (b) Injury to person or property proximately resulting from any breach of warranty. Article 16 - Exclusive Services Subcontractor agrees that it will not agree to perform or perform any services in support of the D/SIDDOMS project - Lot III, Contract No. DASW01-95-0029 during the term of this Agreement, including any extension of the term in accordance with Article 3 herein, in association with any other prime contractors awarded a portion of the D/SIDDOMS - Lot III contract or their Subcontractors providing support for the Prime Contract. Nothing in this provision is intended by the parties to be in conflict with the provisions of FAR 52.203-6: Restrictions on Subcontractor Sales to the Government. Article 17 - Assignment Subcontractor may not assign this Agreement or any of its rights or obligations under this Agreement to any entity without the prior written consent of UHC. Article 18 - Applicable Law This Agreement shall be governed and construed in all respects by Federal Contract law. In the event that these laws and decisions do not apply to a given issue or dispute, then the laws of the State of Minnesota will apply. Article 19 - Indemnification Subcontractor will indemnify and hold harmless UHC and UHC's director, officers and employees from and against claims, liabilities, judgments or costs, including reasonable attorney's fees, arising out of the negligence or misconduct of Subcontractor or any of its employees, representatives or Subcontractors in the discharge of its or their duties under this Agreement. Subcontractor's obligation under this provision includes indemnification for losses resulting from Subcontractor's failure to comply with incorporated provisions, including FAR 52.203-3, 52.203-10 and 52.215.22. UHC will indemnify and hold harmless Subcontractor and its directors, officers and employees from and against claims, liabilities, judgments or costs, including reasonable attorney's fees, arising out of the negligence or misconduct of UHC or any of its employees or representatives in the discharge of its or their duties under this Agreement. Article 20 - Modification Except as specifically provided herein, this Agreement may not be altered, amended or modified without a written agreement between the parties. Article 21 - Incorporated Provisions Section I of the Prime Contract incorporates certain clauses by reference including, but not limited to, the following clauses. These clauses, as applicable, and as in effect on the date of this Agreement except where updated by consent of the parties or law, are incorporated in this Agreement by reference with the same force and effect as though herein set forth in full. Subcontractor agrees that is bound to UHC such UHC shall be entitled to any performance of the Subcontractor which the Government can require of UHC under the incorporated clauses, with respect to the supplies and services to be furnished by the Subcontractor under this Agreement. Federal Acquisition Regulations (FAR) FAR Clauses Title Reference # Date Definitions 52.202-1 SEP 1991 Restrictions on Subcontractor Sales to the Government 52.203-6 JUL 1985 Anti-Kickback Procedures 52.203-7 OCT 1988 Requirement for Certificate of Procurement Integrity - Modification 52.203-9 NOV 1990 Limitations on Payments to Influence Certain Federal Transactions 52.203-12 JAN 1990 Protecting the Government's Interest When 52.203-6 JUN 1991 Subcontracting with Contractors Debarred, Suspended, or Proposed for Debarment Stop-Work Order (Alternate I) 52.212-13 APR 1984 Examination of Records by Comptroller General 52.215-1 FEB 1993 Audit - Negotiation 52.215-2 FEB 1993 Subcontractor Cost or Pricing Data 52.215-24 DEC 1991 Integrity of Unit Prices 52.215-26 APR 1991 Termination of Defined Benefit Pension Plans 52.215-27 SEP 1989 Reversion of Adjustment of Plans for Postretirement Benefits Other than Pension 52.215-39 JUL 1991 Allowable Cost and Payment 52.216-7 JUL 1991 Fixed Fee 52.216-8 APR 1984 Option to Extend Service 52.217-8 AUG 1989 Option to Extend the Term of the Contract 52.217-9 MAR 1989 Utilization of Small Business Concerns and small Disadvantaged Business Concerns 52.219-8 FEB 1990 Small Business and Small Disadvantaged Business Subcontracting Plan 52.219-9 JAN 1991 Liquidated Damages - Small Business Subcontracting Plan 52.219-16 AUG 1989 Utilization of Labor Surplus Area Concerns 52.220-3 APR 1984 Labor Surplus Area Subcontracting Program 52.220-4 APR 1984 Notice to the Government of Labor Disputes 52.222-1 APR 1984 Convict Labor 52.222-3 APR 1984 Equal Opportunity - Alternate I 52.222-26 APR 1984 Affirmative Action of Special Disabled and Vietnam Era Veterans 52.222-35 APR 1984 Affirmative Action for Handicapped Workers 52.222-36 APR 1984 Employment Reports on Special Disabled Veterans and Veterans of the Vietnam Era 52.222-37 JAN 1988 Service Contract Act of 1965, As Amended 52.222-41 MAY 1989 Clean Air and Water 52.223-2 APR 1984 Drug-Free Workplace 52.223-6 JUL 1990 Privacy Act Notification 52.224-1 APR 1984 Privacy Act 52.224-2 APR 1984 Restrictions on Certain Foreign Purchase 52.225-11 MAY 1992 Authorization and Consent 52.227-1 APR 1984 Notice and Assistance Regarding Patent and Copyright Infringement 52.227-2 APR 1984 Patent Indemnity 52.227-3 APR 1984 Insurance - Liability to Third Person 52.228-7 APR 1984 Cost Accounting Standards 52.230-2 AUG 1992 Disclosure and Consistency of Cost Accounting Practices 52.230-3 AUG 1992 Consistency in Cost Accounting Practices 52.230-4 AUG 1992 Administration of Cost Accounting Standards 52.230-5 AUG 1992 Interest 52.232-17 JAN 1991 Limitation of Cost 52.232-20 APR 1984 Protest After Award - Alternate I 52.233-3 JUN 1985 Protection of Government Buildings, Equipment, and Vegetation 52.237-2 APR 1984 Bankruptcy 52.242-13 APR 1991 Changes - Cost-Reimbursement - Alternate I 52.243-2 APR 1984 Subcontracts (Cost-Reimbursement and Letter Contracts) - Alternate I 52.244-2 APR 1985 Competition in Subcontracting 52.244-5 APR 1984 Government Property (Cost- Reimbursement, Time-and-Material, or Labor-Hour Contracts) 52.245-5 JAN 1986 Government Property Furnished "As Is" 52.245-19 APR 1984 Inspection of Supplies - Cost Reimbursement 52.246-3 APR 1984 Inspection of Services - Cost Reimbursement 52.246-5 APR 1984 Limitation of Liability- Services 52.246-25 APR 1984 Preference for U.S. - Flag Air Carriers 52.247-63 APR 1984 Preference for Privately Owned U.S. - Flag Commercial Vessels Alt I 52.247-64 APR 1984 Value Engineering 52.248-1 MAR 1989 Termination (Cost-Reimbursement) 52.249-6 MAY 1986 Excusable Delays 52.249-14 APR 1984 DoD Federal Acquisition Regulation Supplement Clauses DoD Clauses Title Reference # Date Statutory Prohibition on Compensation to Department of Defense Employees 252.203-7000 DEC 1991 Special Prohibition on Employment 252.203-7001 APR 1993 Acquisitions From Subcontractors Subject to On-Site Inspection Under the Intermediate-Range Nuclear Forces (INF) Treaty 252.209-7000 DEC 1991 Pricing Adjustments 252.215-7000 DEC 1991 Availability of Contractor Records 252.215-7001 DEC 1991 Small Business and Small Disadvantaged Business Sub- contracting Plan (DoD Contracts) 252.219-7003 MAY 1994 Termination 252.227-7003 AUG 1994 Rights in Technical Data and Computer Software 252.227-7013 OCT 1988 Restrictive Markings on Technical Data 252.227-7018 OCT 1988 Identification of Restricted Rights Computer Software 252.227-7019 APR 1988 Identification of Technical Data 252.227-7029 APR 1988 Technical Data - Withholding of Payment 252.227-7030 OCT 1988 Validation of Restrictive Markings on Technical Data 252.227-7037 APR 1988 Supplemental Cost Principles 252.231-7000 DEC 1991 Penalties for Unallowable Costs 252.231-7001 MAY 1994 Identification of Uncompensated Overtime 252.237-7019 APR 1994 FIRMR Clauses Title Reference # Date Notification of Substantial Impact on Employment 252.249-7001 DEC 1991 Privacy or Security Safeguards (Oct 90 FIRMR) 201-39.5202-5 OCT 1990 UNITED HEALTHCARE CORPORATION NATIONAL RESEARCH CORPORATION By: /s/ Ken H. Roche By: /s/ Michael Hayes Title: CEO, Applied HealthCare Title: CEO, NRC Date: 4-8-97 Date: 4-11-97 APPENDIX A Prime Contract AWARD/CONTRACT 1. This contract is a rated order under DPAS (15 CFR 350) Rating U 2. Contract (Proc. Inst. Ident.) No. DASW01-95-D-0029 3. Effective Date 31 MAR 95 4. Requisition/Purchase Request/Project No. HT0003-1020-0095 5. Issued By Code - W74V8H DEFENSE SUPPLY SERVICE - WASHINGTON 5200 Army Pentagon Washington, DC 20310-5200 6. Administered By (If other than Item 5) Code - 52401A DCMAO Twin Cities 3001 Metro Drive Bloomington, MN 55425-1573 7. Name and Address of Contractor (No., Street, city, county, State and ZIP Code) Vendor ID: 00011849 UNITED HEALTHCARE CORPORATION 9900 Bren Road East Minneapolis, MN 55343 8. Delivery Other 9. Discount for prompt payment 00.000% 00 Net 030 10. Submit Invoices (4 copies unless otherwise specified) to the Address Shown in: Item: G-4 11. Ship To/Mark For Code: HT0003 DMSSC PRGM OFC INVESTIGATIVE SVC 5 Skyline Place, Suite 810 5111 Leesburg Pike Falls Church, VA 22041-3201 12. Payment will be made by DFAS COLUMBUS CENTER GATEWAY CONTRACT ACCTG. DIV. P.O. Box 192251 Columbus, OH 43218-2251 13. Authority for using other than full and open competition [blank] 14. Accounting and appropriation Data Award Oblig Amt US$ 0.00 15A. Item No. 15B. Supplies/Services See attached Schedule(s) 15C. Quantity 15D. Unit 15E. Unit Price 15F. Amount 15G. Total amount of contract $0.00 16. Table of Contents A Solicitation/Contract Form 1 B Supplies or Services and Prices/Costs 2 C Description/Specs./Work Statement 5 D Packaging and Marking 10 E Inspection and Acceptance 11 F Deliveries or Performance 12 G Contract Administration Data 14 H Special Contract Requirements 17 I Contract Clauses 24 J List of Attachments 32 17. Contractor's Negotiated Agreement [Blank] 18. Award [Blank] 19A. Name and Title of Signer Sheila Leatherman 19B. Name of Contractor By: Sheila Leatherman (Signature of person authorized to sign) 19C. Date signed 3/31/95 20A. Name of Contracting Officer Frankye E. Wehmhoner FEW 20B United States of America Frankye E. Wehmhoner (Signature of Contracting Officer 20C. Date signed 3/31/95 AMENDMENT OF SOLICITATION/MODIFICATION OF CONTRACT 1. Contract ID Code [Blank] 2. Amendment/Modification No. P00002 3. Effective Date 03/30/97 4. Requisition/Purchase Req. No. HT0003-7027-2527 5. Project No. (If applicable) [Blank] 6. Issued By Code: W74V8H DEFENSE SUPPLY SERVICE - WASHINGTON 5200 Army Pentagon Room 1D245 Pentagon Washington, DC 20310-5200 Faye D. Harler FDH(703) 681-9534 7. Administered By (If other than Item 6) Code: S2401A DCMAO TWIN CITIES 3001 Metro Drive Bloomington, MN 55425-1573 8. Name and Address of Contractor (No., street, county, State and ZIP Code) Vendor ID: 00011849 UNITED HEALTHCARE CORPORATION 9900 Bren Road East Minnetonka, MN 55343 9A. Amendment of Solication No. [Blank] 9B. Dated (See Item 11) [Blank] 10A. Modification of Contract/Order No. DASW01-95-D-0029 10B. Dated (See Item 13) 03/02/95 11. THIS ITEM ONLY APPLIES TO AMENDMENTS OF SOLICATIONS [Blank] 12. Accounting and Appropriation Data (if required) Mod Obligated Amount US $00.00 No Change 13. THIS ITEM APPLIES ONLY TO MODIFICATIONS OF CONTRACTS/ORDERS, IT MODIFIES THE CONTRACT/ORDER NO. AS DESCRIBED IN ITEM 14. A(checked) THIS CHANGE ORDER IS ISSUED PURSUANT TO: D(checked) OTHER (Specify type of modification and authority): iaw Section I, Article I-2 E IMPORTANT Contractor is not, required to sign this document and return ____________ copies to the issuing office. 14. DESCRIPTION OF AMENDMENT/MODIFICATION Contract noted above in Blk #10A is hereby modified to exercise Option Year Two (Months 25-36) beginning 31 MAR 97. Section F, Article F-3 TERM OF CONTRACT, is changed to read: The term of this contract is from 31 March 1995 through 30 March 1998, subject to the Government's option to renew in accordance with the provisions at Section I, Article I-2. 15A. Name and Title of Signer [Blank] 15B. Contractor/Offeror [Blank] 16A. Name and Title of Contacting Officer Gregory J. Nowak GJN 16B. United States of America By: Gregory J. Nowak (Signature of Contracting Officer) 15C. Date signed [Blank] 16C. Date signed 21 MAR 97 DASW01-95-D-0029 SECTION B - SUPPLIES/SERVICES AND PRICES/COSTS B-1. SCOPE a. This contract is for the acquisition of services for studies, econometric analysis and modeling for the Defense Medical Information System/Systems Integration, Design, Development, Operations and Maintenance (D/SIDDOMS - LOT III) in support of the Office of the Assistant Secretary of Defense for Health Affairs {OASD(HA)}. b. All services to be ordered under this contract shall be set forth in individual delivery orders. All delivery orders will be issued in accordance with the provisions of Section H, Article H-5. c. The potential maximum estimated amount for all awards for LOT III is $25,000,000.00. The maximum amount allowable under this contract is $ for the base year and four option years of the contract. The minimum amount for award for LOT III is $100,000.00 for the base year and $100,000.00 per year for any option exercised. B-2. SUPPLIES OR SERVICES AND PRICES/COSTS - Base Year (Months 1 - 12) ITEM NO. DESCRIPTION ESTIMATED AMOUNT Support services for studies, NSP* economic analysis and modeling to include documentation, plans & review, reports. 0001 Total Estimated Cost: $ 0001AA Fixed Fee: $ 0001AB Total Estimated Cost-Plus-Fixed-Fee: $3,600,900 * Not Separately Priced B-3. SUPPLIES OR SERVICES AND PRICES/COSTS - Option Year 1 (Months 13 - 24) ITEM NO. DESCRIPTION ESTIMATED AMOUNT Support services for studies, NSP* economic analysis and modeling to include documentation, plans & review, reports. 0002 Total Estimated Cost: $ 0002AA Fixed Fee: $ 0002AB Total Estimated Cost-Plus-Fixed-Fee: $3,909,641 * Not Separately Priced B-4. SUPPLIES OR SERVICES AND PRICES/COSTS - Option Year 2 (Months 25 - 36) ITEM NO. DESCRIPTION ESTIMATED AMOUNT Support services for studies, NSP* economic analysis and modeling to include documentation, plans & review, reports. 0003 Total Estimated Cost: $ 0003AA Fixed Fee: $ 0003AB Total Estimated Cost-Plus-Fixed-Fee: $4,765,078 * Not Separately Priced B-5. SUPPLIES OR SERVICES AND PRICES/COSTS - Option Year 3 (Months 37 - 48) ITEM NO. DESCRIPTION ESTIMATED AMOUNT Support services for studies, NSP* economic analysis and modeling to include documentation, plans & review, reports. 0004 Total Estimated Cost: $ 0004AA Fixed Fee: $ 0004AB Total Estimated Cost-Plus-Fixed-Fee: $5,659,030 B-6. SUPPLIES OR SERVICES AND PRICES/COSTS - Option Year 4 (Months 49 - 60) ITEM NO. DESCRIPTION ESTIMATED AMOUNT Support services for studies, NSP* economic analysis and modeling to include documentation, plans & review, reports. 0005 Total Estimated Cost: $ 0005AA Fixed Fee: $ 0005AC Total Estimated Cost-Plus-Fixed-Fee: $7,062,962 * Not Separately Priced B-7. PAYMENT OF FIXED FEE Subject to the withholding provisions to the FAR clauses entitled "Allowable Cost and Payment" and "Fixed Fee" of Section I, General Provisions, the Contractor at the time of Reimbursement of Allowable Costs will be entitled to payment of Fee on the basis of such cost in the same ratio as the total is to the estimated cost exclusive of fee. Furthermore, fixed fee will be dependent upon the number of and total cost of delivery orders issued in each contract year up to the maximum fee as set forth in the schedule. SECTION C - DESCRIPTION/SPECIFICATIONS C-1. SCOPE C-1.1 The Contractor shall provide the necessary personnel, materials, facilities and other supplies/services, as may be required to perform support services for studies, economic analysis and modeling for the Office of the Assistant Secretary of Defense for Health Affairs {OASD(HA)}. C-1.2 The services to be provided include work in the following area: C-1.2.1 Studies and Analysis -- Support for studies and analyses related to the health care econometric and statistical principles. C-1.3 All services to be ordered under the resulting contract(s) will be ordered by the issuance of Delivery Orders in accordance with the provisions of Section I, Articles I-3, I-4, and I-5. No hardware or hardware maintenance services will be procured under this contract other than those incidental to the performance of the effort. C-2. Requirements C-2.1 Studies and Analysis C-2.1.1 Economic Analysis and Modeling - Provide the necessary skills, models, tools, policies and procedures to support the on-going analysis function of {OASD(HA)} to ensure efficient and effective use of medical facilities, staff and services. This support will include, but not limited to, the development and maintenance of models, guidance, policies, procedures, studies and detailed analyses in the critical areas of health care facilities and services utilization, costs, staffing and patient care. C-3. Project Management The Contractor shall ensure that a project management approach for planning, organizing, managing and reporting staff and task activities is in place throughout the period of performance of this contract. C-3.1 Program Management - The Contractor shall provide all services to effectively plan for, perform, and manage the activities supporting this contract. The following are descriptions of the various categories of program management services that are representative, but not necessarily inclusive of, activities that the contractor shall be required to perform under this task. C-3.1.1 Provide Delivery Order Management Plans. Each plan shall describe the technical approach, organizational resources and management controls that the Contractor will employ to meet the contract, performance, cost and schedule requirements of the Delivery Order and all individual project plans associated with each Delivery Order throughout the period of performance. The Contractor shall provide additional plans/reports as required. C-3.1.2 Provide status reports, cost reports, participate in management reviews and develop the required materials and documentation supporting review activities. C-3.2 Project Planning and Control The Contractor shall conduct the project planning and control in accordance with the approved Contract Management Plan provided in the Contractor's proposal. C-3.3 Quality Assurance The Contractor shall ensure that a Total Quality Management (TQM) approach is implemented and followed throughout the performance period of this contract in accordance with the Contractor's proposal. C-3.4 Reporting Requirements The Contractor shall submit the following reports and other deliverables in accordance with delivery schedule in Section F. C-3.4.1 Monthly Progress Reports - These reports shall address total contract work activity for the reporting period and will individually address each active delivery order. Each report shall include: * Staff hours expended during the reporting period. This information will be provided at two levels: cumulative, over the entire contract reporting period, and individually, by delivery order on a per person, per task basis. * Staff hours remaining, by contract and individual delivery order. * Contract funds expended, overall and by individual delivery order, during the reporting period. * Funds remaining, by individual delivery order. * Status of work in progress. * Problems or constraints encountered during the reporting period and suggested solution(s). C-3.4.2 Delivery of Reports Reports delivered by the Contractor in performance of this contract shall be considered "Technical Data" as defined in the applicable "Rights in Data" clause of the General Provisions (DFARS 252.227-7013). * Bulky reports shall be mailed by other than first-class mail unless the urgency of submission requires use of first-class mail. In this situation, one (1) copy shall be mailed first-class and the remaining copies forwarded by less than first-class postage. * The heading of all reports shall contain the following information: CONTRACT NUMBER NAME OF CONTRACTOR CONTRACT EXPIRATION CONTRACTOR'S PROGRAM DATE AND TOTAL DOLLAR MANAGER NAME AND PHONE VALUE NUMBER SHORT TITLE OF THE CONTRACT NAME OF CONTRACT OFFICER'S REPRESENTATIVE (COR) In addition, for each delivery order: DELIVERY ORDER CONTRACTOR'S PROJECT NUMBER MANAGER NAME AND PHONE NUMBER DELIVERY ORDER NAME GOVERNMENT SPONSOR DELIVERY ORDER TOTAL DOLLAR VALUE C-3.4.3 Oral Briefings - Formal briefings on any and all aspects of the contract and work activities as required by the COR. C-4. Standards All documentation supplied under this contract will be in compliance with the provisions of the Corporate IM Technical Standards, Technical Reference Model, Section J, Attachment 4 and the DoD Standard 7935A, "Automated Data Systems (ADP) Documentation," dated 01 OCT 88, or the most recent current revision. C-5. Facilities and Support Requirements C-5.1 Project Office Location The Contractor shall provide a project office within a 15 minute standard commuting distance from HSO Headquarter's located in Skyline 6, 5109 Leesburg Pike, Falls Church VA 22041-3201. The size and complexity of this effort requires that the Contractor's personnel be readily available to the Government sponsor. The Project office shall provide for all day- to-day Contractor's staff interaction with their Government sponsors. C-5.2 Support Tools and Methods The Contractor shall ensure that automated resources and procedures will be used, wherever possible, to maintain the most cost-efficient and cost- effective use of Government funds. HSO requires that all deliverables be formatted in Wordperfect 5.1 (or current release as determined by the Government) and be available on a 5 1/4 inch IBM compatible diskette if so requested. The Contractor's software shall be capable of producing high quality "camera-ready" copies of deliverables. The Contractor's software shall also be capable of producing high quality graphics for use in contract deliverables if necessary. C-6. INCORPORATION OF TECHNICAL PROPOSAL (a) The Contractor shall furnish the necessary personnel, materials, products and other services as specified in the Contractor's technical proposal titled Defense Medical Information System/System Integration, Design, Development Operations and Maintenance (D/SIDDOMS), dated 1 JUL 93, 6 JUN 94, 2 DEC 94, and 13 FEB 95, a copy of which is in the possession of both parties to this contract. This proposal is hereby incorporated by reference with the same force and effect as if set forth in full text. (b) In the event of an inconsistency between the provisions of this contract and the technical proposal, the inconsistency shall be resolved by giving precedence in the following order: (i) the contract (excluding the technical proposal); and then (ii) the technical proposal. (c) Section K, "Representations, Certifications and Other Statements of Offerors" is hereby incorporated by reference with the same force and effect as if stated in full text. C-7. ENGLISH LANGUAGE DOCUMENTATION All contractor-prepared material to be furnished under the contract shall be written in the English language, and all measurements shall be in the English linear measure and avoirdupois weight systems. C-8. CORRECTION OF SOFTWARE AND DOCUMENTATION The Contractor shall, over the term of the contract, correct errors in contractor developed software and applicable documentation which are discovered by the Government, any other user of the software, or the contractor. Such corrections shall be made within 30 days of the date the contractor is notified that the error exists or the date the contractor discovers the error. Inability of the parties to determine the cause of software errors shall be resolved in accordance with the Disputes clause in the General Provisions, but in no event constitutes grounds for delay of error correction beyond the time frame specified above. SECTION D - PACKAGING AND MARKING D-1. PACKING, PACKAGING AND MARKING All items to be delivered under this contract shall be packaged, packed and marked to prevent deterioration and damage during shipping, handling and storage to insure safe arrival at destination. D-2. CONTAINER MARKING Containers shall be clearly marked as follows: 1. NAME OF CONTRACTOR 2. CONTRACT NO. 3. DESCRIPTION OF ITEMS CONTAINED THEREIN 4. CONSIGNEE'S NAME AND ADDRESS SECTION E - INSPECTION AND ACCEPTANCE E-1. SOLICITATION PROVISIONS INCORPORATED BY REFERENCE (JUN 1988) FAR 52.252-1 This solicitation incorporates one or more solicitation provisions by reference, with the same force and effect as if they were given in full text. Upon request, the Contracting Officer will make their full text available. I. FEDERAL ACQUISITION REGULATION (48 CFR CHAPTER 1) CLAUSES Title Date Reference Inspection of Supplies-Cost Reimbursement APR 1984 52.246-3 Inspection of Services-Cost Reimbursement APR 1984 52.246-5 E-2. MATERIAL INSPECTION AND RECEIVING REPORT (DEC 1991) DOD FARS 252.246-7000 At the time of each delivery of supplies or services under this contract, the Contractor shall prepare and furnish to the Government a Material Inspection and Receiving Report in the manner and to the extent required by Appendix F, "Material Inspection and Receiving Report". (See DoD FAR Supplement 246.670). E-3. INSPECTION AND ACCEPTANCE Inspection and acceptance of all work performed and/or items delivered under this contract shall be accomplished at destination by the Contracting Officer's Representative. E-4. INSPECTION OF PROGRESS REPORTS The Material Inspection and Receiving Report clause set forth herein is applicable only to the final report. SECTION F - DELIVERIES OR PERFORMANCE F-1. SOLICITATION PROVISIONS INCORPORATED BY REFERENCE (JUN 1988) FAR 52.252-1 This solicitation incorporates one or more clauses by reference, with the same force and effect as if they were given in full text. Upon request, the Contracting Officer will make their full text available. I. FEDERAL ACQUISITION REGULATION (48 CFR CHAPTER 1) CLAUSES TITLE DATE REFERENCE Stop-Work Order (Alternate I) APR 1984 52.212-13 F.O.B. Destination NOV 1991 52.247-34 F-2. TIME OF DELIVERY The items to be furnished hereunder shall be delivered in accordance with the following schedule: ITEM NO. QUANTITY TIME All All As specified on individual Delivery Orders F-3. TERM OF CONTRACT The term of this contract shall be for a period of one year from the date of award, subject to the Government's option to renew in accordance with the provision at Section I, Article I-2. F-4. PLACE OF PERFORMANCE The contractor shall perform all services to be performed under this contract at the Contractor's facility specified in Section K. Also, services to be performed under this contract may be specified on individual task/delivery orders. F-5. PLACE OF DELIVERY (COR) The Contractor shall deliver all items to be delivered under this contract, unless otherwise specified in the delivery order to the Contracting Officer's Representative (COR) at the locations specified below: DMSSC 5 Skyline Place, Suite 810 5111 Leesburg Pike Falls Church, VA 22041 F-6. NOTICE REGARDING LATE DELIVERY In the event the Contractor anticipates difficulty in complying with the contract delivery schedule, the Contractor shall immediately notify the Contracting Officer in writing, giving pertinent details, including the date by which it expects to make delivery; PROVIDED, however, that this data shall be informational only in character and that receipt thereof shall not be construed as a waiver by the Government of any contract delivery schedule, or any rights or remedies provided by law or under this contract. SECTION G - CONTRACT ADMINISTRATION DATA G-1. ACCOUNTING AND APPROPRIATION DATA To be provided on each Delivery Order. G-2. PAYMENT (a) The contractor shall complete a form SF 1034, Public Voucher for services and forward the voucher to the cognizant Audit Office who, upon provisional approval, will forward the invoice to the Disbursing Office for payment. The Contracting Officer's Representative will be furnished a copy of all invoices prepared by the contractor. (b) When submitting invoices/vouchers, the Contractor will simultaneously forward an information copy to the Payment Office, and will so annotate on the Face Sheet of that document. G-3. REMITTANCE ADDRESS All payments hereunder shall be made to the Contractor's address listed below: United HealthCare Corp. Corporate Accounting - Mail Route MN12-S222 PO Box 1459 Minneapolis, MN 55440-1459 G-4. VOUCHERS a. Vouchers, identified by contract number, with supporting statements, shall be submitted for review and provisional approval to the cognizant audit agency listed below: DCAA - Central Region Minneapolis Branch Office 110 South Fourth St., Room 177 Minneapolis, MN 55401-2216 b. One (1) copy of each voucher shall be mailed to the Contracting Officer's Representative at the address listed below: DMSSC 5 Skyline Place, Suite 810 5111 Leesburg Pike Falls Church, VA 22041 c. IMPORTANT - Only costs for services rendered in accordance with CONTRACTING OFFICER approved Delivery Orders will be recognized. The Contractor shall include on all invoices/vouchers, the applicable Delivery Order Number(s) for which billing is being submitted and attach to the invoice/voucher a signed copy of the appropriate delivery order. G-5. DELEGATION OF AUTHORITY FOR CONTRACT ADMINISTRATION The DCMAO - Twin Cities, 3001 Metro Drive, Bloomington, MN 55425-1573 is hereby designated as the authorized representative of the Contracting Officer for purpose of administering this contract in accordance with current directives. G-6. CONTRACTING OFFICER'S REPRESENTATIVE (COR) (a) The Contracting Officer's Representative (COR) under this contract is Brenda Mabrey, Telephone: 703/756-8720 See F-5. (b) The contractor is advised that only the Contracting Officer and Administrative Contracting Officer can change or modify the terms or take any other action which obligates the Government and then such action must be set forth in a formal modification to the contract. The authority of the COR is strictly limited to the specific duties set forth in his/her letter of appointment, a copy of which will be furnished the contractor. Contractors who rely on direction from other than the Contracting Officer or the Administrative Contracting Officer (or a COR acting within the strict limits of his responsibilities as set forth in his/her letter of appointment) do so at their own risk and expense as such actions do not bind the Government contractually. Any contractual questions should be referred to the Contracting Officer. G-7. CONTRACT MANAGEMENT Notwithstanding the contractor's responsibility for total management during the performance of this contract, the administration of the contract will require maximum coordination between the government and the contractor. The following individuals will be the government points of contact during the performance of the contract: (i) Contracting Officer. All contract administration will be effected by the Contracting Officer. Communications pertaining to contractual administrative matters will be addressed to the Contracting Officer. No changes in or deviation from the scope of work shall be effected without a written modification to the contract executed by the Contracting Officer authorizing such changes. (ii) Contracting Officer's Representative. A Contracting Officer's Representative (COR) will be given authority by the Contracting Officer to monitor all technical aspects and assist in administering the contract. The type of actions within the purview of the COR's authority are to assure that the contractor performs the technical requirements of the contract; to perform or cause to be performed inspections necessary in connection with performance of the contract; to maintain both written and oral communications with the contractor concerning the aspects of the contract within his purview; to issue written interpretations of technical requirements of government drawings, designs, and specifications; to monitor the contractor's performance under the contract and notify the contractor and Contracting Officer of any deficiencies observed; and to coordinate government furnished property availability and provide for site entry of contractor personnel if required. A letter of designation will be issued to the COR with a copy supplied to the contractor, stating the responsibilities and the limitations of the COR. This letter will clarify to all parties of this contract the responsibilities which would result in changes in cost or price totals or estimates or changes in delivery dates. (A) The COR is not authorized to change any of the terms and conditions of this contract. Changes in the scope of work will be made only by the Contracting Officer by properly signed written modification to the contract. (B) The COR is not authorized to redelegate his or her authority. (C) The COR is not authorized to initiate acquisition actions by use of imprest funds, blanket purchase agreements, or purchase orders, to place calls or delivery orders under basic agreements, basic ordering agreements, or indefinite delivery type contracts. SECTION H - SPECIAL CONTRACT REQUIREMENTS H.1. ALLOWABLE COSTS United HealthCare Corp. will be reimbursed at the lower of actual costs incurred or the ceiling for the following elements of cost: Base Opt 1 Opt 2 Opt 3 Opt 4 (a) Overhead: (b) G&A: (c) Fringe: N/A N/A N/A N/A N/A (d) Escalation: NOTE: Rates incurred by the Contractor in excess of these ceilings shall not be an allowable cost under the contract. The contractor bears the sole risk of any increase in costs resulting from indirect rates exceeding these ceilings. H-2. TERMINATION OF OVERSEAS ASSIGNMENT If relocation costs for an employee with an overseas assignment have been allowed either as an allocable direct or indirect costs, and the employee is terminated for just cause prior to the completion of twelve (12) months of service in the overseas area, the Contractor shall refund or credit to the Government the relocation costs incurred as the result of the overseas assignment. H-3. HOME LEAVE Home leave for employees under this contract will be in accordance with the JTR. The number of days of home leave shall be consistent with the contractor's normal leave policy. However, this number shall not exceed thirty (30) calendar days for an employee. H-4. DISSEMINATION OF INFORMATION There shall be no dissemination or publication, except within and between the Contractor and any subcontractors, of information developed under this contract or contained in the reports to be furnished pursuant to this contract without prior written approval from the Contracting Officer. H-5. DELIVERY ORDER PROCEDURE (a) All work under this contract will be defined by task statements developed by the Government. The task statement will include relevant background information, task objective, detailed description of the work to be performed, delivery and performance schedule, and place of performance. Any special requirements such as security requirements, Government furnished material, and travel will be outlined. The estimated level of effort may be disclosed. The contractor will be required to submit technical and cost proposals by the date required by the Government. The due date will ordinarily be 30 days from the date of request. (b) Technical proposals submitted will include offeror's understanding of the problem, a detailed work plan, proposed delivery schedule and any special assumptions. A breakout of hours by labor category must be included, along with resumes not included in the original proposal. (c) Cost proposals must be submitted in a Standard Form 1411 and be sufficiently detailed to facilitate an audit if deemed necessary. The proposal must include the following information: (1) Total number of hours required, broken out by category of personnel; (2) Any subcontracting or consultants required; (3) Any equipment, materials, or supplies needed that are incidental to the performance of the contract; (4) Travel and any other direct costs; (5) Any indirect cost elements, commonly including overhead, fringe benefits and General and Administrative expenses and costs associated with each, and (6) Profit or fee. (d) Once negotiations are satisfactorily concluded, a delivery order will be issued. This order will summarize the contents of both the task statement and the technical proposal and must be executed by the Contracting Officer before work may commence. All provisions of the contract will apply including the General Provisions titled indefinite Quantity, Ordering and Delivery Order Limitations. The following specific conditions apply: (1) All delivery orders must be accounted for separately. They will ordinarily be of a completion type unless they are for services which cannot with certainty be estimated beforehand. In those cases, professional staff hours to be furnished will be set forth. Whether cost reimbursement or fixed price, vouchering procedures set forth in the contract will apply. (2) If circumstances warrant, the delivery order may be modified. If the contractor believes a change is necessary, the Contracting Officer shall be notified in writing. No changes may take place without approval of the Contracting Officer. (3) The contractor must strictly comply with the Limitation of Cost clause on cost reimbursement orders and notify the Government in a timely fashion if additional funds will be required. No expenditures beyond the ceiling amount will be reimbursed unless specifically authorized by the Contracting Officer. e. In addition to the requirement of notifying the COR, the contractor shall also notify the Contracting Officer when the funding will expire under the delivery order and when the contractor has reached the 75% expenditure level or two months prior to funds exhaustion, whichever comes first. H-6. INSURANCE SCHEDULE The Contractor shall maintain the types of insurance and coverage listed below. TYPE OF INSURANCE MINIMUM AMOUNT (i) Workmen's Compensation and all As required by occupational disease. State Law. (ii) Employer's Liability including all $100,000 per acc. occupational disease when not so covered in Workmen's Compensation above. (iii) General Liability (Comprehensive) $500,000 Bodily Injury per occurrence (iv) Automobile Liability (Comprehensive) Bodily Injury per person $200,000 Bodily Injury per occurrence $500,000 Property Damage per accident $ 20,000 H-7. ALL ITEMS TO BECOME PROPERTY OF THE GOVERNMENT Title to all source data and materials furnished to the government, together with all plans, systems analysis and design specifications and drawings, completed programs except proprietary programs and documentation thereof, reports and listings, all punched cards and all other items pertaining to the work and services to be performed under orders pursuant to this Contract, including any copyright shall become and remain with the government upon completion. The government shall have the full right to use each of these for its purposes without compensation or approval on the part of the contractor. The government shall have access to and the right to make copies of the above mentioned items. All proprietary programs shall be indicated as such in individual proposals. H-8. ROYALTY-FREE LICENSE In consideration of the sum to be paid to the contractor under this contract, the contractor hereby agrees and does grant, convey, and reserves to the United States of America a nonexclusive, irrevocable, world wide, royalty-free license in all written material, published, printed, presented or used in connection with the contract, in which the contractor presently holds a copyright or in the future shall obtain a copyright therein or in which he has the right to issue royalty-free licenses thereto. H-9. CONFORMITY TO LAWS AND REGULATIONS The contractor shall be responsible for assuring that employees assigned to this contract comply, while overseas with the applicable laws and regulations of that country. In addition, the contractor shall be responsible for assuring that the contractor's employees comply with military rules and regulations when employed in areas under the jurisdiction of the Commander-in-Chief of the applicable theater. In the event that a contractor's employee is barred from continuing to perform under the contract for failure to comply with the laws rules and regulations described in the foregoing paragraph, any costs incurred by the contractor as a result of the removal of the employee or the substitution of a replacement employee shall not be allowed. The disallowed costs include relocation costs incurred by the contractor to furnish a substitute employee for the overseas assignment unless the contractor is obliged in accordance with FAR 31-205-35(d) or under the terms of this contract to refund or credit to the Government the relocation costs originally incurred to furnish the removed employee for the overseas assignment. H-10. COMPUTER PROGRAMMERS AND SYSTEMS ANALYSTS (a) The Department of Labor has determined that computer programmers and systems analysts are not in the learned professions for purposes of an exemption from the Service Contract Labor Standards Act, 41 U.S.C. Sections 351-358, as amended. This determination is published at 29 C.F.R. Section 541.302(h). (b) Therefore, the Service Contract Act must be included in this contract unless the contractor can provide signed certifications and supporting evidence acceptable to the Contracting Officer that all computer programmers and systems analysts (including trainees) whose services will be acquired under this contract are either: (i) Engaged in managerial and administrative duties which qualify them for exemption under 29 C.F.R. 541.1 or 541.2, or (ii) High salaried professional employees as defined in 29 C.F.R. 541.315. (A) Compensated on a salary or fee basis at a rate of at least $250 per week exclusive of board, lodging, or other facilities, and (B) Whose primary duty consists of the performance of work requiring knowledge of an advanced type in a field of science or learning which includes work requiring the constant exercise of discretion and judgment. H-11. SOFTWARE RIGHTS a. All software to be provided under this contract shall be delivered with unlimited rights in accordance with the provisions of DoD FAR Supplement 252.227.7013, 252.227.7018 and 252.227.7029. b. If at any time during the term of the contract, the Contractor determines that it is more advantageous to the Government to incorporate a package, subroutine or module that can not be provided to the Government with unlimited rights into the system, the Contractor shall notify the Contracting Officer in writing. Such notification shall include as a minimum, the name of the item to be furnished with Restricted Rights and cost saving or other benefits accruing to the Government. c. If the Contractor and the Government mutually agree to incorporate such software package, subroutine or module into the system, the Government requires that it be given as a minimum the following rights: (i) Use computer software with the computer for which or with which it was acquired, including use at any Government installation to which the computer may be transferred by the Government: (ii) Use computer software with a backup computer if the computer for which or with which it was acquired is inoperative: (iii) Copy computer programs for safekeeping (archives) or backup purposes; (iv) Modify computer software, or combine it with other software, subject to the provision that those portions of the derivative software incorporating restricted rights software are subject to the same restricted rights. The contract shall be modified to set forth the software restrictions and rights of the Government. The contractor shall not incorporate such software without a written modification to the contract. d. If the Contractor includes any software packages, routines or modules developed at the Contractor's expense in the system without identifying it to the Contracting Officer, all such software shall be considered delivered with "unlimited rights". If the program maintenance of the system is dependent on the source code of any such software, the contractor shall provide the source code and rights to the source code for the life of the system at the time the software and documentation is delivered to the Government. H-12. SPECIAL ACCESS AND COMPETITIVE PROCUREMENT a. Proprietary Data of Third Parties. In the event the Contractor requests access to proprietary data of other companies to conduct studies and research under the contract, it will enter into agreements with the supplying companies to protect such data from unauthorized use or disclosure so long as such data remains proprietary. These agreements shall be made available to the Government upon request of the Contracting Officer. b. Proprietary Data Furnished by the Government. In the event the contractor is given access by the Government to the proprietary data of the Government or proprietary data of third parties possessed by the Government, the Contractor hereby agrees to protect such data from unauthorize use or disclosure so long as such data remains proprietary. H-13. KEY PERSONNEL The Contractor shall notify the Contracting Officer prior to making any changes in key personnel. Key personnel are defined as follows: a. personnel identified in the proposal as key individuals to be assigned for participation in the performance of the contract; b. personnel whose resumes were submitted with the proposal; or c. individuals which are designated as key personnel by agreement of the Government and the Contractor during negotiations. The Contractor must demonstrate that the qualifications of prospective personnel are equal to or better than the qualifications of the personnel being replaced. Notwithstanding any of the foregoing provisions, key personnel shall be furnished unless the Contractor has demonstrated to the satisfaction of the COR that the qualifications of the proposed substitute personnel are equal to or better than the qualifications of the personnel being replaced. H-14. CONTRACTOR VISITS The Contracting Officer's Representative (COR) will approve and coordinate all Contractor visits to a sponsor's agency and other DoD agencies necessary for performance under this contract. All security visit requests shall be submitted to the COR for approval. SECTION I - GENERAL PROVISIONS I-1. CLAUSES INCORPORATED BY REFERENCE (JUN 1988) FAR 52.252-2 This contract incorporates one or more clauses by reference, with the same force and effect as if they were given in full text. Upon request, the Contracting Officer will make their full text available. I. FEDERAL ACQUISITION REGULATION (48 CFR CHAPTER 1) CLAUSES Title Date Reference Definitions SEP 1991 52.202-1 Officials Not to Benefit APR 1984 52.203-1 Gratuities APR 1984 52.203-3 Covenant Against Contingent Fees APR 1984 52.203-5 Restrictions on Subcontractor Sales to JUL 1985 52.203-6 the Government Anti-Kickback Procedures OCT 1988 52.203-7 Price or Fee Adjustment for Illegal or SEP 1990 52.203-10 Improper Activity Limitations on Payments to Influence JAN 1990 52.203-12 Certain Federal Transactions Procurement Integrity - Service SEP 1990 52.203-13 Contracting Protecting the Government's Interest JUN 1991 52.209-06 When Subcontracting with Contractors Debarred, Suspended, or Proposed for Debarment Examination of Records by Comptroller FEB 1993 52.215-1 General Audit - Negotiation FEB 1993 52.215-2 Price Reduction for Defective Cost or JAN 1991 52.215-22 Pricing Data Subcontractor Cost or Pricing Data DEC 1991 52.215-24 Integrity of Unit Prices APR 1991 52.215-26 Termination of Defined Benefit Pension SEP 1989 52.215-27 Plans Facilities Capital Cost of Money SEP 1987 52.215-30 Waiver of Facilities Capital Cost of SEP 1987 52.215-31 Money Order of Precedence JAN 1986 52.215-33 Reversion of Adjustment of Plans for JUL 1991 52.215-39 Postretirement Benefits Other than Pension Allowable Cost and Payment JUL 1991 52.216-7 Fixed Fee APR 1984 52.216-8 Option to Extend Service AUG 1989 52.217-8 Utilization of Small Business Concerns FEB 1990 52.219-8 and Small Disadvantages Business Concerns Small Business and Small Disadvantages JAN 1991 52.219-9 Business Subcontracting Plan Utilization of Women-Owned Small AUG 1986 52.219-13 Businesses Liquidated Damages - Small Businesses AUG 1989 52.219-16 Subcontracting Plan Utilization of Labor Surplus Area APR 1984 52.220-3 Concerns Labor Surplus Area Subcontracting APR 1984 52.220-4 Program Notice to the Government of Labor APR 1984 52.222-1 Disputes Payment for Overtime Premiums (zero) JUL 1990 52.222-2 Convict Labor APR 1984 52.222-3 Equal Opportunity - Alternate I APR 1984 52.222-26 Equal Opportunity Preaward Clearance APR 1984 52.222-28 of Subcontracts Notification of Visa Denial APR 1984 52.222-29 Affirmative Action for Special APR 1984 52.222-35 Disabled and Vietnam Era Veterans Affirmative Action for Handicapped APR 1984 52.222-36 Workers Employment Reports on Special Disabled JAN 1988 52.222-37 Veterans and Veterans of the Vietnam Era Service Contract Act of 1965, As MAY 1989 52.222-41 Amended Statement of Equivalent Rates for MAY 1989 52.222-42 Federal Hires Service Contract Act (SCA) Minimum MAY 1989 52.222-47 Wages and Fringe Benefits Clean Air and Water APR 1984 52.223-2 Drug-Free Workplace JUL 1990 52.223-6 Privacy Act Notification APR 1984 52.224-1 Privacy Act APR 1984 52.224-2 Restrictions on Certain Foreign MAY 1992 52.225-11 Purchases Authorization and Consent APR 1984 52.227-1 Notice and Assistance Regarding Patent APR 1984 52.227.2 and Copyright Infringement Patent Indemnity APR 1984 52.227-3 Insurance - Liability to Third Persons APR 1984 52.228-7 Consistency in Cost Accounting AUG 1992 52.230-4 Practices Cost Accounting Standards AUG 1992 52.230-2 Administration of Cost Accounting AUG 1992 52.230-5 Standards Disclosure and Consistency of Cost AUG 1992 52.230-3 Accounting Practices Limitation on Withholding of Payments APR 1984 52.232-9 Interest JAN 1991 52.232-17 Limitation of Cost APR 1984 52.232-20 Assignment of Claims JAN 1986 52.232-23 Prompt payment APR 1989 52.232-25 Electronic Funds Transfer Payment APR 1989 52.232-28 Methods Disputes MAR 1994 52.233-1 Protest After Award - Alternate I JUN 1985 52.233-3 Protection of Government Buildings, APR 1984 52.237-2 Equipment, and Vegetation Continuity of Services JAN 1991 52.237-3 Notice of Intent to Disallow Costs APR 1984 52.242-1 Bankruptcy APR 1991 52.242-13 Changes - Cost-Reimbursement - APR 1984 52.243-2 Alternate I Subcontracts (Cost-Reimbursement and APR 1985 52.244-2 Letter Contracts) - Alternate I Competition in Subcontracting APR 1984 52.244-5 Government Property (Cost- JAN 1986 52.245-5 Reimbursement, Time-and-Material, or Labor-Hour Contracts) Government Property Furnished "As Is" APR 1984 52.245-19 Limitation of Liability-Services APR 1984 52.246-25 Preference For U.S.-Flag Air Carriers APR 1984 52.247-63 Preference For Privately Owned U.S.- APR 1984 52.247-64 Flag Commercial Vessels Alt I Value Engineering MAR 1989 52.248-1 Termination (Cost-Reimbursement) MAY 1986 52.249-6 Excusable Delays APR 1984 52.249-14 Government Supply Sources APR 1984 52.251-1 II. DOD FEDERAL ACQUISITION REGULATION SUPPLEMENT (48 CFR CHAPTER 1) CLAUSES Title Date Reference Statutory Prohibition on Compensation DEC 1991 252.203-7000 to Department of Defense Employees Special Prohibition on Employment APR 1993 252.203-7001 Display of DOD Hotline Poster DEC 1991 252.203-7002 Control of Government Personnel Work APR 1992 252.204-7003 Product Provision of Information to DEC 1991 252.205-7000 Cooperative Agreement Holders Acquisitions From Subcontractors DEC 1991 252.209-7000 Subject to On-Site Inspection Under the Intermediate-Range Nuclear Forces (INF) Treaty Pricing Adjustments DEC 1991 252.215-7000 Availability of Contractor Records DEC 1991 252.215-7001 Cost Estimating Systems Requirements DEC 1991 252.215-7002 Small Business and Small Disadvantaged MAY 1994 252.219-7003 Business Subcontracting Plan (DOD Contracts) Incentive for Subcontracting With DEC 1991 252.219-7005 Small Businesses, Small Disadvantaged Businesses, Historically Black Colleges and Universities, and Minority Institutions Rights in Technical Data and Computer OCT 1988 252.227-7013 Software Termination AUG 1994 252.227-7003 Restrictive Markings on Technical Data OCT 1988 252.227-7018 Identification of Restricted Rights. APR 1988 252.227-7019 Computer Software Identification of Technical Data APR 1988 252.227-7029 Technical Data - Withholding of OCT 1988 252.227-7030 Payment Data Requirements OCT 1988 252.227-7031 Validation of Restrictive Markings on APR 1988 252.227-7037 Technical Data Supplemental Cost Principles DEC 1991 252.231-7000 Penalties for Unallowable Costs MAY 1994 252.231-7001 Certification of Claims and Requests MAY 1994 252.233-7000 for Adjustment or Relief Identification of Uncompensated APR 1994 252.237-7019 Overtime Ordering from Government Supply DEC 1991 252.242-7000 Sources Notification of Substantial Impact on DEC 1991 252.249-7001 Employment Ordering from Government Supply DEC 1991 252.251-7000 Sources I-2. OPTION TO EXTEND THE TERM OF THE CONTRACT (MAR 1989) FAR 52.217- 9 (a) The Government may extend the term of this contract by written notice to the Contractor within 30 days provided, that the Government shall give the Contractor a preliminary written notice of its intent to extend at least 60 days before the contract expires. The preliminary notice does not commit the Government to an extension. (b) If the Government exercises this option, the extended contract shall be considered to include this option provision. (c) The total duration of this contract, including the exercise of any options under this clause, shall not exceed 60 months. I-3. ORDERING (APR 1984) FAR 52.216-18 (a) Any supplies and services to be furnished under this contract shall be ordered by issuance of delivery orders by the individuals or activities designated in the Schedule. Such orders may be issued from the effective date of the contract through the end of the contract term including all option periods exercised by the Government. (b) All delivery orders are subject to the terms and conditions of this contract. In the event of conflict between a delivery order and this contract, the contract shall control. (c) If mailed, a delivery order is considered "issued" when the Government deposits the order in the mail. Orders may be issued orally or by written telecommunications only if authorized in the schedule. I-4. DELIVERY-ORDER LIMITATIONS (APR 1984) 52.216-19 (a) Minimum order. When the Government requires supplies or services covered by this contract in an amount of less than the stated minimum, the Government is not obligated to purchase, nor is the Contractor obligated to furnish, those supplies or services under the contract. (b) Maximum order. The Contractor is not obligated to honor - (1) Any order for a single task less than $100,000.00. (2) Any order for a combination of tasks in excess of $150,000.00. (3) A series of orders from the same ordering office within (N/A) days that together call for quantities exceeding the limitation in subparagraph (1) or (2) above. (c) If this is a requirement contract (i.e., includes the Requirements clause at subsection 52.216-21 of the Federal Acquisition Regulation (FAR)), the Government is not required to order a part of any one requirement from the Contractor if that requirement exceeds the maximum-order limitations in paragraph (b) above. (d) Notwithstanding paragraphs (b) and (c) above, the Contractor shall honor any order exceeding the maximum order limitations in paragraph (b), unless that order (or orders) is returned to the ordering office within five (5) days after issuance, with written notice stating the Contractor's intent not to ship the item (or items) called for and the reasons. Upon receiving this notice, the Government may acquire the supplies or services from other sources. I-5. INDEFINITE QUANTITY (APR 1984) 52.216-22 (a) This is an indefinite-quantity contract for the supplies or services specified, and effective for the period stated, in the Schedule. The quantities of supplies and services specified in the Schedule are estimates only and are not purchased by this contract. (b) Delivery or performance shall be made only as authorized by orders issued in accordance with the Ordering clause. The Contractor shall furnish to the Government, when and if ordered, the supplies or services specified in the Schedule up to and including the quantity designated in the Schedule as the "maximum". The Government shall order at least the quantity of supplies or services designated in the Schedule as the "minimum". (c) Except for any limitations on quantities in the Delivery-Order Limitations clause or in the Schedule, there is no limit on the number of orders that may be issued. The Government may issue orders requiring delivery to multiple destinations or performance at multiple locations. (d) Any order issued during the effective period of this contract and not completed within that period shall be completed by the Contractor within the time specified in the order. The contract shall govern the Contractor's and Government's rights and obligations with respect to that order to the same extent as if the order were completed during the contract's effective period; provided, that the Contractor shall not be required to make any deliveries under this contract after the end of the contract term to include the end of the last option period exercised by the Government. I-6. WARRANTY EXCLUSION AND LIMITATION OF DAMAGES (OCT 90 FIRMR) (201-39.5202-6) Except as expressly set forth in writing in this agreement and except for the implied warranty of merchantability, there are no warranties expressed or implied. In no event will the contractor be liable to the Government for consequential damages as defined in the Uniform Commercial Code, section 2/715, in effect in the District of Columbia as of January 1, 1973, i.e., -- Consequential damages resulting from the seller's breach include -- (a) Any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and (b) Injury to person or property proximately resulting from any breach of warranty. I-7. PROCUREMENT AUTHORITY (OCT 90 FIRMR) (201-39.5202-3) This acquisition is being conducted under an Agency Procurement Request (APR) of April 1, 1992, submitted by the Office of the Assistant Secretary of Defense for Health Affairs for delegation of GSA's exclusive procurement authority for FIP resources, in accordance with FIRMR 201- 20.205-3 and Bulletin C-5. The specific GSA DPA number is KMA-92-0311. I-8. PRIVACY OR SECURITY SAFEGUARDS (OCT 90 FIRMR) (201-39.5202-5) (a) The details of any safeguards the contractor may design or develop under this contract are the property of the Government and shall not be published or disclosed in any manner without the Contracting Officer's express written consent. (b) The details of any safeguards that may be revealed to the contractor by the Government in the course of performance under this contract shall not be published or disclosed in any manner without the Contracting Officer's express written consent. (c) The Government shall be afforded full, free, and uninhibited access to all facilities, installations, technical capabilities, operations, documentation, records, and data bases for the purpose of carrying out a program of inspection to ensure continued efficacy and efficiency of safeguards against threats and hazards to data security, integrity, and confidentiality. (d) If new or unanticipated threats or hazards are discovered by either the Government or the contractor, or if existing safeguards have ceased to function, the discoveror shall immediately bring the situation to the attention of the other party. Mutual agreement shall then be reached on changes or corrections to existing safeguards, or institution of new safeguards, with final determination of appropriateness being made by the Government. The Government's liability is limited to an equitable adjustment of cost for such changes or corrections, and the Government shall not be liable for claims of loss of business, damage to reputation, or damages of any other kind arising from discovery of new or unanticipated threats or hazards, or any public or private disclosure thereof. I-9. AVAILABILITY OF THE "FEDERAL ADP AND TELECOMMUNICATIONS STANDARDS INDEX" (OCT 90 FIRMR) (201-39.5202-2) Copies of the "Federal ADP and Telecommunications Standards Index" can be purchased from the U.S. Government Printing Office, Superintendent of Documents, Washington, DC 20402. I-10. REQUIREMENT FOR CERTIFICATION OF PROCUREMENT INTEGRITY - MODIFICATION (NOV 1990) FAR 52.203-9 (1) I _______________ [Name of Certifier] am the officer or employee responsible for the preparation of this modification proposal and hereby certify that, to the best of my knowledge and belief, with the exception of any information described in this certification, I have no information concerning a violation or possible violation of subsection 27(a), (b), (d), or (f) of the Office of the Federal Procurement Policy Act, as amended* (41 U.S.C. 423), (hereinafter referred to as "the Act"), as implemented in the FAR, occurring during the conduct of this procurement _________________________________ (contract and modification number). (2) As required by subsection 27(e)(1)(B) of the Act, I further certify that to the best of my knowledge and belief, each officer, employee, agent, representative, and consultant of _____________________ [Name of Offeror] who has participated personally and substantially in the preparation or submission of this proposal has certified that he or she is familiar with, and will comply with, the requirements of subsection 27(a) of the Act, as implemented in the FAR, and will report immediately to me any information concerning a violation or possible violation of subsections 27(a), (b), (d), or (f) of the Act, as implemented in the FAR, pertaining to this procurement. (3) Violations or possible violations: (Continue on plain bond paper if necessary and label Certificate of Procurement Integrity - Modification (Continuation Sheet), ENTER "NONE" IF NONE EXISTS) _________________________________________________________________ _________________________________________________________________ ______________________________ [Signature of the Officer or employee responsible for the modification proposal and date] [Typed name of the officer or employee responsible for the modification proposal] *Subsections 27(a), (b), and (d) are effective on December 1, 1990. Subsection 27(f) is effective on June 1, 1991. THIS CERTIFICATION CONCERNS A MATTER WITHIN THE JURISDICTION OF AN AGENCY OF THE UNITED STATES AND THE MAKING OF A FALSE, FICTITIOUS, OR FRAUDULENT CERTIFICATION MAY RENDER THE MAKER SUBJECT TO PROSECUTION UNDER TITLE 18, UNITED STATES CODE, SECTION 1001. (End of certification) I-11. PREFERENCE FOR LABOR SURPLUS AREA CONCERNS (APR 1984) 52.220-1 (a) This acquisition is not a set-aside for labor surplus area (LSA) concerns. However, the offeror's status as such a concern may affect (1) entitlement to award in case of tie offers, or (2) offer evaluation in accordance with the Buy American clause of this solicitation. In order to determine whether the offeror is entitled to a preference under (1) or (2) above, the offeror must identify below, the LSA in which the costs to be incurred on account of manufacturing or production (by the offeror or the first-tier subcontractors) amount to more than 50% of the contract price. __________________________________________________________________________ __________________________________________________________________________ _______________________________________________ (b) Failure to identify the locations as specified above will preclude consideration of the offeror as an LSA concern. If the offeror is awarded a contract as an LSA concern and would not have otherwise qualified for award, the offeror shall perform the contract or cause the contract to be performed in accordance with the obligations of an LSA concern. (End of Provision) SECTION J - LIST OF DOCUMENTS, EXHIBITS, AND OTHER ATTACHMENTS J-1. Attachments 1. Department of Labor Wage Determination Attachment 1 REGISTRATION OF WAGE U.S. DEPARTMENT OF LABOR DETERMINATIONS UNDER EMPLOYMENT STANDARDS THE SERVICE CONTRACT ACT ADMINISTRATION by direction of the Secretary WAGE AND HOUR DIVISION of Labor WASHINGTON, D.C. 20210 Alan L. Moss Division of Wage Determination No.: 94-2103 Director Wage Revision No.: 3 Determinations Date of Last Revision: 12/13/94 State(s): Dist. of Col., Maryland, Virginia Area: MARYLAND COUNTIES OF CALVERT, CHARLES, FREDERICK, MONTGOMERY, PRINCE GEORGE'S, ST. MARY'S. VIRGINIA COUNTIES OF ALEXANDRIA, ARLINGTON, FAIRFAX, FALLS CHURCH, FAUQUIER, KING GEORGE, LOUDOUN, PRINCE WILLIAM, STAFFORD. ** Fringe Benefits Required For All Occupations Included in This Wage Determination Follow The Occupational Listing** OCCUPATION CODE AND TITLE MINIMUM HOURLY WAGE ADMINISTRATIVE SUPPORT AND CLERICAL: 1011 Accounting Clerk I $ 8.50 1012 Accounting Clerk II $ 9.99 1013 Accounting Clerk III $ 11.52 1014 Accounting Clerk IV $ 13.84 1030 Court Reporter $ 13.22 1050 Dispatcher, Motor Vehicle $ 13.85 1060 Document Preparation Clerk $ 9.60 1090 Duplicating Machine Operator $ 9.60 1110 Film/Tape Librarian $ 12.88 1115 General Clerk I $ 7.13 1116 General Clerk II $ 8.39 1117 General Clerk III $ 9.60 1118 General Clerk IV $ 12.01 1120 Housing Referral Assistant $ 14.56 1131 Key Entry Operator I $ 9.56 1132 Key Entry Operator II $ 10.49 1191 Order Clerk I $ 11.26 1192 Order Clerk II $ 12.44 1220 Order Filler $ 12.08 1261 Personnel Assistant $ 8.98 (Employment) I 1262 Personnel Assistant $ 10.38 (Employment) II 1263 Personnel Assistant $ 12.54 (Employment) III 1264 Personnel Assistant $ 14.22 (Employment) IV 1270 Production Control Clerk $ 14.56 1290 Rental Clerk $ 12.08 1300 Scheduler, Maintenance $ 12.08 1311 Secretary I $ 12.08 1312 Secretary II $ 13.22 1313 Secretary III $ 14.56 1314 Secretary IV $ 16.13 1315 Secretary V $ 18.52 1320 Service Order Dispatcher $ 12.08 1341 Stenographer I $ 13.26 1342 Stenographer II $ 14.87 01400 Supply Technician $ 16.13 01420 Survey Worker (Interviewer) $ 13.22 01460 Switchboard Operator-Receptionist $ 10.03 01531 Travel Clerk I $ 7.36 01532 Travel Clerk II $ 7.95 01533 Travel Clerk III $ 8.52 01551 Typist I $ 9.58 01552 Typist II $ 10.15 01611 Word Processor I $ 10.15 01612 Word Processor II $ 12.05 01613 Word Processor III $ 14.25 AUTOMATIC DATA PROCESSING: 03010 Computer Data Librarian $ 11.36 03041 Computer Operator I $ 11.36 03042 Computer Operator II $ 12.73 03043 Computer Operator III $ 14.68 03044 Computer Operator IV $ 16.18 03045 Computer Operator V $ 17.12 030471 Computer Programmer I 1/ $ 15.74 03072 Computer Programmer II 1/ $ 17.68 03073 Computer Programmer III 1/ $ 20.40 03064 Computer Programmer IV 1/ $ 23.03 03101 Computer Systems Analyst I 1/ $ 20.02 03102 Computer Systems Analyst II 1/ $ 23.41 03103 Computer Systems Analyst III 1/ $ 27.66 03160 Peripheral Equipment Operator $ 11.36 AUTOMOTIVE SERVICE: 05005 Automobile Body Repairer, $ 17.57 Fiberglass 05010 Automotive Glass Installer $ 15.72 05040 Automotive Worker $ 15.72 05070 Electrician, Automotive $ 16.66 05100 Mobile Equipment Servicer $ 13.79 05130 Motor Equipment Metal Mechanic $ 17.57 05160 Motor Equipment Metal Worker $ 15.72 05190 Motor Vehicle Mechanic $ 17.57 05220 Motor Vehicle Mechanic Helper $ 12.79 05250 Motor Vehicle Upholstery Worker $ 14.78 05280 Motor Vehicle Wrecker $ 15.72 05310 Painter, Automotive $ 16.66 05340 Radiator Repair Specialist $ 15.72 05370 Tire Repairer $ 13.79 05400 Transmission Repair Specialist $ 17.57 FOOD PREPARATION AND SERVICE: 07010 Baker $ 10.77 07041 Cook I $ 9.50 07042 Cook II $ 10.77 07070 Dishwasher $ 6.96 07100 Food Service Worker $ 6.96 07130 Meat Cutter $ 10.77 07250 Waiter/Waitress $ 7.51 FURNITURE MAINTENANCE AND REPAIR: 09010 Electrostatic Spray Painter $ 16.66 09040 Furniture Handler $ 12.13 09070 Furniture Refinisher $ 16.66 09100 Furniture Refinisher, Helper $ 12.79 09110 Furniture Repairer, Minor $ 14.78 09130 Upholsterer $ 16.66 GENERAL SERVICES AND SUPPORT: 11030 Cleaner, Vehicles $ 6.96 11060 Elevator Operator $ 6.96 11090 Gardener $ 9.50 11121 Housekeeping Aide I $ 6.44 11122 Housekeeping Aide II $ 7.26 11150 Janitor $ 6.96 11180 Laborer $ 9.71 11210 Laborer, Grounds Maintenance $ 7.51 11240 Maid or Houseman $ 6.14 11270 Pest Controller $ 10.16 11300 Refuse Collector $ 6.96 11360 Window Cleaner $ 7.51 HEALTH: 12010 Ambulance Driver $ 9.44 12040 Emergency Medical Technician $ 9.19 12070 Licensed Practical Nurse $ 9.19 12100 Medical Assistant $ 8.21 12130 Medical Laboratory Technician $ 8.21 12160 Medical Record Clerk $ 8.21 12190 Medical Record Technician $ 11.38 12220 Nursing Assistant $ 7.32 12250 Pharmacy Technician $ 10.24 12280 Phlebotomist $ 8.21 12311 Registered Nurse I $ 11.38 12312 Registered Nurse II $ 13.93 12313 Registered Nurse II, Specialist $ 13.93 12314 Registered Nurse III, $ 16.85 12315 Registered Nurse III, Anesthetist $ 16.85 12316 Registered Nurse IV $ 20.19 INFORMATION AND ARTS: 13002 Audiovisual Librarian $ 16.30 13011 Exhibits Specialist I $ 14.54 13012 Exhibits Specialist II $ 18.27 13013 Exhibits Specialist III $ 20.24 13041 Illustrator I $ 14.54 13042 Illustrator II $ 18.27 13043 Illustrator III $ 20.24 13050 Library Technician $ 14.54 13071 Photographer I $ 12.95 13072 Photographer II $ 14.54 13073 Photographer III $ 18.27 13074 Photographer IV $ 20.24 13075 Photographer V $ 22.26 LAUNDRY, DRY CLEANING, PRESSING: 15010 Assembler $ 5.69 15030 Counter Attendant $ 5.69 15040 Dry Cleaner $ 7.36 15070 Finisher, Flatwork, Machine $ 5.69 15090 Presser, Hand $ 5.69 15100 Presser, Machine, Dry Cleaning $ 5.69 15130 Presser, Machine, Shirts $ 5.69 15160 Presser, Machine, Wearing Apparel, $ 5.69 Laundry 15190 Sewing Machine Operator $ 7.95 15220 Tailor $ 8.52 15250 Washer, Machine $ 6.26 MACHINE TOOL OPERATION AND REPAIR: 19010 Machine-tool Operator (Toolroom) $ 16.66 19040 Tool and Die Maker $ 20.29 MATERIALS HANDLING AND PACKING: 21010 Fuel Distribution System Operator $ 14.80 21020 Material Coordinator $ 14.64 21030 Material Expediter $ 14.64 21040 Material Handling Laborer $ 10.01 21071 Forklift Operator $ 10.93 21100 Shipping/Receiving Clerk $ 11.78 21130 Shipping Packer $ 9.27 21150 Stock Clerk $ 9.27 21210 Tools and Parts Attendant $ 12.73 21400 Warehouse Specialist $ 11.25 MECHANICS AND MAINTENANCE AND REPAIR: 23010 Aircraft Mechanic $ 17.57 23040 Aircraft Mechanic Helper $ 12.79 23060 Aircraft Servicer $ 14.78 23070 Aircraft Worker $ 15.72 23100 Appliance Mechanic $ 16.66 23120 Bicycle Repairer $ 13.79 23125 Cable Splicer $ 17.57 23130 Carpenter, Maintenance $ 16.66 23140 Carpet Layer $ 16.66 23160 Electrician Maintenance $ 17.57 23181 Electronics Technician, Maintenance $ 13.01 I 23182 Electronics Technician, Maintenance $ 16.79 II 23183 Electronics Technician, Maintenance $ 19.56 III 23260 Fabric Worker $ 11.51 23290 Fire Alarm System Mechanic $ 17.57 23310 Fire Extinguisher Repairer $ 13.79 23340 Fuel Distribution System Mechanic $ 17.57 23370 General Maintenance Worker $ 10.53 23400 Heating, Refrigeration and Air $ 17.57 Conditioning Mechanic 23430 Heavy Equipment Mechanic $ 17.57 23460 Instrument Mechanic $ 17.57 23500 Locksmith $ 16.66 23530 Machinery Maintenance Mechanic $ 17.57 23550 Machinist, Maintenance $ 17.57 23580 Maintenance Trades Helper $ 12.79 23640 Millwright $ 17.57 23700 Office Appliance Repairer $ 16.66 23740 Painter, Aircraft $ 16.66 23760 Painter, Maintenance $ 16.66 23790 Pipefitter, Maintenance $ 17.57 23800 Plumber, Maintenance $ 16.66 23820 Pneudraulic Systems Mechanic $ 17.57 23850 Rigger $ 17.57 23870 Scale Mechanic $ 15.72 23890 Sheet-metal Worker, Maintenance $ 17.57 23910 Small Engine Mechanic $ 15.72 23930 Telecommunications Mechanic I $ 17.57 23940 Telecommunications Mechanic II $ 18.50 23950 Telephone Lineman $ 17.57 23960 Welder, Combination, Maintenance $ 17.57 23965 Well Driller $ 17.57 23970 Woodcraft Worker $ 17.57 23980 Woodworker $ 14.80 PERSONAL NEEDS: 24570 Child Care Attendant $ 6.57 25600 Chore Aide $ 6.14 24630 Homemaker $ 9.11 PLANT AND SYSTEM OPERATION: 25010 Boiler Tender $ 17.57 25040 Sewage Plant Operator $ 16.66 25070 Stationary Engineer $ 17.57 25190 Ventilation Equipment Tender $ 12.79 25210 Water Treatment Plant Operator $ 16.66 PROTECTIVE SERVICE: 27004 Alarm Monitor $ 11.20 27010 Court Security Officer $ 14.23 27040 Detention Officer $ 14.23 27070 Firefighter $ 13.16 27101 Guard I $ 8.50 27102 Guard II $ 11.20 27130 Police Officer $ 15.74 TECHNICAL: 29010 Air Traffic Control Specialist, $ 21.91 Center 29011 Air Traffic Control Specialist, $ 15.11 Station 29012 Air Traffic Control Specialist, $ 16.64 Terminal 29020 Archeological Technician $ 18.27 29030 Cartographic Technician $ 18.27 29040 Civil Engineering Technician $ 18.27 29061 Drafter I $ 10.35 29062 Drafter II $ 12.95 29063 Drafter III $ 14.54 29064 Drafter IV $ 18.27 29070 Embalmer $ 18.40 29081 Engineering Technician I $ 11.03 29082 Engineering Technician II $ 13.03 29083 Engineering Technician III $ 15.61 29084 Engineering Technician IV $ 17.14 29085 Engineering Technician V $ 22.31 29086 Engineering Technician VI $ 23.60 29090 Environmental Technician $ 18.27 29210 Laboratory Technician $ 14.68 29240 Mathematical Technician $ 18.27 29330 Mortician $ 18.40 29390 Photooptics Technician $ 18.27 29480 Technical Writer $ 14.54 29620 Weather Observer, Senior 2/ $ 17.68 29621 Weather Observer, Combiner 2/ Upper $ 14.68 Air and Surface Programs 29622 Weather Observer, Upper Air 2/ $ 14.68 TRANSPORTATION/MOBILE EQUIPMENT OPERATION: 31030 Bus Driver $ 13.24 31100 Driver Messenger $ 9.47 31200 Heavy Equipment Operator $ 18.66 31290 Shuttle Bus Driver $ 10.42 31300 Taxi Driver $ 9.47 31361 Truckdriver, Light Truck $ 10.42 31362 Truckdriver, Medium Truck $ 13.24 31363 Truckdriver, Heavy Truck $ 14.49 36364 Truckdriver, Tractor-Trailer $ 16.93 MISCELLANEOUS: 99005 Aircraft Quality Control Inspector $ 18.12 99020 Animal Caretaker $ 8.18 99030 Cashier $ 5.64 99040 Child Care Center Clerk $ 9.14 99050 Desk Clerk $ 8.19 99260 Instructor $ 18.40 99300 Lifeguard $ 5.97 99350 Park Attendant (Aide) $ 7.35 99400 Photofinishing Worker $ 6.57 99500 Recreation Specialist $ 13.35 99510 Recycling Worker $ 8.84 99610 Sales Clerk $ 5.85 99630 Sports Official $ 5.85 99658 Survey Party Chief $ 9.50 99659 Surveying Technician $ 8.19 99660 Surveying Aide $ 5.36 99690 Swimming Pool Operator $ 10.77 99720 Vending Machine Attendant $ 8.84 99730 Vending Machine Repairer $ 10.77 99740 Vending Machine Repairer Helper $ 8.84 ** Fringe Benefits Required For All Occupations Included In This Wage Determination ** HEALTH & WELFARE: $0.90 per hour or $36.00 per week or $156.00 per month. VACATION: Two weeks paid vacation after 1 year of service with a contractor or successor; 3 weeks after 5 years; 4 weeks after 15 years. Length of service includes the whole span of continuous service with the present contractor or successor, wherever employed, and with the predecessor contractor in the performance of similar work at the same Federal facility. (Reg. 4.173) HOLIDAYS: Minimum of ten paid holidays per year: New Year's Day, Martin Luther King Jr.'s Birthday, Washington's Birthday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving Day, and Christmas Day. (A contractor may substitute for any of the named holidays another day off with pay in accordance with a plan communicated to the employees involved.) (See 29 CFR 4.174) Does not apply to employees employed in a bona fide executive, administrative, or professional capacity as defined and delineated in 29 CFR 541. (See 29 CFR 4.156) NIGHT PAY & SUNDAY PAY: If you work at night as a part of a regular tour of duty, you will earn a NIGHT DIFFERENTIAL and receive an additional 10% of basic pay for any hours worked between 6 p.m. and 6 a.m. If you are a full-time employee (40 hours a week) and Sunday is part of your regularly scheduled workweek, you are paid at your rate of basic pay plus a Sunday premium of 25% of your basic rate for each hour of Sunday work which is not overtime (i.e. occasional work on Sunday outside the normal tour of duty is considered overtime work). ** UNIFORM ALLOWANCE ** If employees are required to wear uniforms in the performance of this contract (either by the terms of the Government contract, by the employer, by the state or local law, etc.), the cost of furnishing such uniforms and maintaining (by laundering or dry cleaning) such uniforms is an expense that may not be borne by an employee where such cost reduces the hourly rate below that required by the wage determination. The Department of Labor will accept payment in accordance with the following standards as compliance: The contractor or subcontractor is required to furnish all employees with an adequate number of uniforms without cost or to reimburse employees for the actual cost of the uniforms. In addition, where uniform cleaning and maintenance is made the responsibility of the employee, all contractors and subcontractors subject to this wage determination shall (in the absence of a bona fide collective bargaining agreement providing for a different amount, or the furnishing of contrary affirmative proof as to the actual cost), reimburse all employees for such cleaning and maintenance at a rate of $4.25 per week (or $.85 cents per day). However, in those instances where the uniforms furnished are made of "wash and wear" materials, may be routinely washed and dried with other personal garments, and do not require any special treatment such as dry cleaning, daily washing, or commercial laundering in order to meet the cleanliness or appearance standards set by the terms of the Government contract, by the contractor, by law, or by the nature of the work, there is no requirement that employees be reimbursed for uniform maintenance costs. ** NOTES APPLYING TO THIS WAGE DETERMINATION ** Source of Occupational Titles and Descriptions: The duties of employees under job titles listed are those described in the "Service Contract Act Directory of Occupations," Fourth Edition, January 1993, as amended by First Supplement December 1993, unless otherwise indicated. This publication may be obtained from the Superintendent of Documents, at 202-783-3238, or by writing to the Superintendent of Documents, U.S. Government Printing Office, Washington, D.C. 20402. Copies of specific job descriptions may also be obtained from the appropriate contracting officer. REQUEST FOR AUTHORIZATION OF ADDITIONAL CLASSIFICATION AND WAGE RATE {Standard Form 1444 (SF 1444)} Conformance Process: The contracting officer shall require that any class of service employee which is not listed herein and which is to be employed under the contract (i.e., the work to be performed is not performed by any classification listed in the wage determination), be classified by the contractor so as to provide a reasonable relationship (i.e., appropriate level of skill comparison) between such unlisted classifications and the classifications listed in the wage determination. Such conformed classes of employees shall be paid the monetary wages and furnished the fringe benefits as are determined. Such conforming process shall be initiated by the contractor prior to the performance of contract work by such unlisted class(es) of employees. The conformed classification, wage rate, and/or fringe benefits shall be retroactive to the commencement date of the contract. {See Section 4.6 (C) (vi)} When multiple wage determinations are included in a contract, a separate SF 1444 should be prepared for each wage determination to which a class(es) is to be conformed. The process for preparing a conformance request is as follows: 1) When preparing the bid, the contractor identifies the need for a conformed occupation(s) and computes a proposed rate(s). 2) After contract award, the contractor prepares a written report listing in order proposed classification title(s), a Federal grade equivalency (FGE) for each proposed classification(s), job description(s), and rationale for proposed wage rate(s), including information regarding the agreement or disagreement of the authorized representative of the employees involved, or where there is no authorized representative, the employees themselves. This report should be submitted to the contracting officer no later than 30 days after such unlisted class(es) of employees performs any contract work. (3) The contracting officer reviews the proposed action and promptly submits a report of the action, together with the agency's recommendations and pertinent information including the position of the contractor and the employees, to the Wage and Hour Division, Employment Standards Administration, U.S. Department of Labor, for review. (See section 4.6(o)(2) of Regulations 29 CFR Part 4). (4) Within 30 days of receipt, the Wage and Hour Division approves, modifies, or disapproves the action via transmittal to the agency contracting officer, or notifies the contracting officer that additional time will be required to process the request. (5) The contracting officer transmits the Wage and Hour decision to the contractor. (6) The contractor informs the affected employees. Information required by the Regulations must be submitted on SF 1444 or bond paper. When preparing a conformance request, the "Service Contract Act Directory of Occupations" (the Directory) should be used to compare job definitions to insure that duties requested are not performed by a classification already listed in the wage determination. Remember, it is not the job title, but the required tasks that determine whether a class is included in an established wage determination. Conformances may not be used to artificially split, combine, or subdivide classifications listed in the wage determination. APPENDIX B Billing Instructions Items invoiced under this Agreement shall include only those allowable actual and necessary costs incurred in allocable performance of the work plus the fee agreed upon in this Agreement. No item contained in these billing instructions is intended to be in conflict with the terms or conditions negotiated in the prime contract or this Agreement, nor shall they be construed to constitute such change. Any monetary constraints or limitations specified in this Agreement shall prevail over any conflicting instructions provided herein. I. Invoice Submission A. Invoices should be submitted on Subcontractor's letterhead, and include the signature and title of an appropriate official, certifying allocability and allowability of such cost. Each Task Order shall be invoiced and supported as a separate subcontract. B. An original and two copies of the invoice should be submitted on a monthly basis and should reference the UHC subcontract number. C. The time period for which costs are being invoiced must be specified on the invoice. If more than one period is covered in a single invoice, the support document must detail each period separately. D. Invoices for this subcontract shall be submitted to: United HealthCare Corporation P. O. Box 1459 Minneapolis, Minnesota 55440-1459 Attn: Kim Coran MN008-W189 (612) 936-1114 Fax # (612) 936-7404 II. Invoice Preparation Invoices should be itemized as specified below. Columns for "Current" and "Cumulative" costs, by category, should be provided. For TASK ORDER TYPE, cost based contracts, it will be necessary to receive supporting information which provides "Current" and "Cumulative" expenditures by category FOR EACH TASK. Invoices shall be itemized using one or more of the categories listed below, as specifically described in each Task Order. A. Direct Labor for professional staff should include the employee name, number of hours charged, the unloaded hourly rate and the total labor charge. Clerical and/or support labor may be grouped as one line. Direct costs including all categories for which reimbursement has been claimed shall reflect the actual hours worked or materials delivered to this subcontract. B. Indirect Costs. Overhead costs and G & A costs shall be separately identified and the rate and the total for each shall be specified. Subcontractor shall identify the base(s) to which these indirect costs apply. C. Other Direct Costs should include commercial items, materials and supplies and all other items that the Subcontractor normally treats as other direct costs. Identify these costs by major classifications or categories such as office supplies, telephone, etc. and include any applicable indirect costs in the appropriate indirect cost line. D. Travel, as authorized by Article 6.1 of this Agreement, shall include the name of each traveler and the origin and destination for each trip, the dates of each trip, and the total cost (transportation and subsistence) for each trip. All travel costs must be itemized in this fashion, along with the appropriate subtotals and totals. Whenever appropriate, for example when travel or subsistence has been invoiced, receipts must be on file in Subcontractor's records and be available upon demand for cost or compliance audits. E. Fee, if invoiced, should be billed based on labor and overhead costs incurred. Any invoice requesting payment which contains items questioned by UHC's Project Manager may be approved with the payment deferred for the items questioned, until such time as the Parties have discussed and resolved the questioned items. Any such deferment shall be preceded by notice to the Subcontractor. APPENDIX C DELIVERY ORDER AND TASK ORDER ADDENDUM TO THE SUBCONTRACT BETWEEN UNITED HEALTHCARE CORPORATION AND NATIONAL RESEARCH CORPORATION This Addendum to the Subcontract Between United HealthCare Corporation (UHC) and National Research Corporation is effective May 9, 1997, and is as follows: 1. The attached documents are hereby incorporated into the Agreement: a. Delivery Order No. 0005 issued by the Department of Defense to UHC on March 7, 1997; and b. Task Order No. 0005 (4/97 revision). UNITED HEALTHCARE CORPORATION NATIONAL RESEARCH CORPORATION By /s/ Ken H. Roche By /s/ Michael Hays Title CEO, Applied Healthcare Title CEO Date 5-13-97 Date 5-9-97 APPENDIX C-1 AMENDMENT OF SOLICITATION/MODIFICATION OF CONTRACT 1. Contract ID Code [Blank] 2. Amendment/Modification No. 000501 3. Effective Date 03/04/97 4. Requisition/Purchase Reg. No. [Blank] 5. Project No. (If applicable) [Blank] 6. Issued By Code W74V8H DEFENSE SUPPLY SERVICE - WASHINGTON 5200 Army Pentagon Room 10245 Pentagon Washington, D.C. 20310-5200 Faye D. Harler FDH (703) 681-9534 7. Administered By (If other than Item 6) DCMAO TWIN CITIES 3001 Metro Drive Bloomington, MN 55425-1573 8. Name and Address of Contractor Vendor ID: 00011849 UNITED HEALTHCARE CORPORATION 9900 Bren Road East Minnetonka, MN 55343 9A. Amendment of Solicitation No. [Blank] 9B. Dated (See Item 11) [Blank] 10A. Modification of Contract/Order No. DASW01-95-D-0029 0005 10B. Dated (See Item 13) 12/19/96 11. This Item Only Applies to Amendments of Solicitations The above numbered solicitation is amended as set forth in Item 14. The hour and date specified for receipt of Offers is extended, is not extended. Offers must acknowledge receipt of this amendment prior to the hour and date specified in the solicitation or as amended, by one of the following methods: (a) By completing Items 8 and 15, and returning ___ copies of the amendment; (b) By acknowledging receipt of this amendment on each copy of the offer submitted; or (c) By separate letter or telegram which includes a reference to the solicitation and amendment numbers. FAILURE OF YOUR ACKNOWLEDGMENT TO BE RECEIVED AT THE PLACE DESIGNATED FOR THE RECEIPT OF OFFERS PRIOR TO THE HOUR AND DATE SPECIFIED MAY RESULT IN REJECTION OF YOUR OFFER. If by virtue of this amendment you desire to change an offer already submitted, such change may be made by telegram or letter, provided each telegram or letter makes reference to the solicitation and this amendment, and is received prior to the opening hour and date specified. 12. Accounting and Appropriation Data (If required) No Change 13. THIS ITEM APPLIES ONLY TO MODIFICATIONS OF CONTRACTS/ORDERS, IT MODIFIES THE CONTRACT/ORDER NO. AS DESCRIBED IN ITEM 14. A. This change order is issued pursuant to: (Specify authority) The changes set forth in Item 14 are Made in the Contract Order No. in Item 10A. B. The above numbered contract/order is modified to reflect the administrative changes (such as changes in paying office, appropriation date, etc.) set forth in Item 14, pursuant to the authority of Far 43.103(b). X C. This supplemental agreement is entered into pursuant to authority of: D. Other (specify type of modification and authority) E. IMPORTANT: Contractor [X]is not is required to sign this document and return ___ copies to the issuing office. 14. Description of Amendment/Modification (Organized by UCF section headings, including solicitation/contract subject matter where feasible.) Delivery order noted above it. Blk #10A is hereby modified to update the statement of work to more accurately reflect the Government's requirement and extend the period of performance thru 30 JUN 97 at no additional cost to the Government. The revised SOW is attached. There are no other changes to the terms and conditions of this delivery order as a result of this modification. 15A. Name and Title of Signer (Type or print) [Blank] 15B. Contractor/Offeror [Blank] 15C. Date Signed [Blank] 16A. Name and Title of Contracting Officer (Type or print) Gregory J. Nowak GJN 16B. United States of America By (Signature of Contracting Officer) 16C. Date Signed 7 MAR 97 D/SIDDOMS Lot III Task Statement #1 for United HealthCare Corporation Contact Number WP-95-0029 Delivery Order Number 0005 Customer Satisfaction Survey I. Introduction United HealthCare Corporation's technical approach will meet the requirements and objectives of the Customer Satisfaction Survey project as defined by the Department of Defense (DoD). We will conduct an Outpatient Satisfaction Survey on all the bedded Military Treatment Facilities (MTFs) and freestanding clinics in the United States, including Alaska and Hawaii. The list of participating facilities and clinics will be provided to United HealthCare by Health Affairs. The scope of task statement #1 amounts to approximately * MTFs and * clinics. The specifics of our approach to the outpatient satisfaction surveys are outlined below. _______________ * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the SEC pursuant to Rule 406. - We will design and mail a survey to a sample of patients seen in the month of January and investigate satisfaction with specific patient visits. Respondents will reply directly to United HealthCare. We will process the reply forms and prepare reports for each clinic and aggregate the reports for higher headquarters levels: Air Force Major Air Commands (MAJCOMs), Navy Health Services Support Organization (HSOs), Army Regional Medical Commands (RMCs), MTFs, Lead Agents, Surgeon Generals and Health Affairs. Fundamental unit of analysis of the study is the individual clinic which delivered the care. The sample will be restricted to those beneficiaries who actually used the direct care system, specifically those who received care at a U.S. DoD treatment facility between January 1 and 31. The reports under task statement #1 will include survey results and data comparing military satisfaction with civilian benchmark measures. II. Analysis Approach for Specific Tasks for Task Statement #1 The following tasks pertain to the project. A. Task 1 -- Devise sample methodology We will devise weighted sample methodology which includes all clinics with more than * monthly patient visits at all U.S. MTFs and freestanding outpatient facilities. Sample size should be sufficient to insure +/- *% to *% margin of sampling error. This is approximately * surveys per * clinics for a total estimate of * surveys. _______________ * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the SEC pursuant to Rule 406. B. Task 2 -- Develop survey instrument We will develop a * item survey instrument with validated and reliable questions focusing on patient satisfaction with their clinic visit and with their experience obtaining that appointment. Questions will be consistent with questions in the Annual Health Care Survey of DoD beneficiaries. The initial survey design will be reviewed within the Military Health Services System (MHSS) and the finalized instrument will be returned to United HealthCare within three weeks post submission of the draft version. We anticipate few changes to the questionnaire once it is in use. _______________ * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the SEC pursuant to Rule 406. C. Task 3 -- Develop individual reports We will develop a one-page, graphical, standard individual clinic report format to be reviewed and finalized within the MHSS. Individual clinic reports will be aggregated for higher level of management (MTFs, Air Force Commands, Army Commands, Navy Commands, Service Surgeon Generals, Lead Agents, and Health Affairs). Reports will indicate name of facility/clinic surveyed and the sample size. The reports will compare the facility/clinic against (1) other clinics within the same MTF, (2) overall MHSS wide averages, and (3) civilian Health Maintenance Organizations (HMOs). The reports will present scores from individual questions, composite scale scores and overall ratings, such as likelihood to recommend hospital/clinic. D. Task 4 -- Develop Survey Procedures Guide We will develop a Customer Satisfaction Survey Procedures Guide detailing how each MTF should gather data on all patient visits in qualifying clinics in the Composite Health Care System, and how to forward the data to Fort Detrick. We will conduct a site visit at Andrews Air Force Base. We will devise the most appropriate means for forwarding data from the MTFs to Ft. Detrick and from Fort Detrick to UHC (i.e., asking Ft. Detrick to mail a tape/CD ROM, encrypted File Transfer Protocol, or other means consistent with the Privacy Act). If data for the previous month are not received by the 13 of February 1997, we will follow up with the CHCS Host point of contact (POC) until 18 of February 1997. We will provide two conference call training sessions for CHCS POCs. These sessions will provide an opportunity for CHCS POCs to ask questions about the procedure guide and the process for extracting and forwarding data. In order to facilitate timely production of the survey and report processes, it will not be possible to include any MTFs for which we have not received data by the 18th of February 1997 in the initial analysis. Information that the MTF must forward to United HealthCare must include, at a minimum, Initial Entry Number of IEN (sequential appointment number), patient social security number (encrypted if preferred), patient name (first, middle initial, last name), patient address (apartment # if any, street address, city, state, zip code), sponsor name (last, first, middle initial) if patient is a minor, sponsor address (if different from patient address), patient's date of birth, gender, rank, Family Member Prefix (beneficiary category), name of MTF, name of clinic, branch of MTF (Army, Navy, Air Force), region number or lead agent (1-13), name of clinic, MEPRS code, name of provider (first, middle initial, last), type of provider (physician, nurse practitioner, etc.), date of visit (ambulatory visit with past 30 days), and type of visit (acute, chronic, routine). In order to perform a statistically sound analysis, it is necessary that data from both the Composite Health Care System (CHCS) and the Ambulatory Data System (ADS) be combined to provide a data pool from which a random sample can be drawn. CHCS and ADS data will be sent from each participating MTF to Ft. Detrick separately. Customer Service Division (CSD), Corporate Executive Information Systems will merge and manipulate Composite Health Care System and Ambulatory Data System data into one file on the FT Detrick mainframe. CSD will run a program to select only the MTFs (using DMIS ID number) and clinics (using MEPRS code) that were pre-identified for participation in this study. CSD will also run a program to eliminate all mental health and substance abuse patient visits and to eliminate records of patients 17 years or younger who visited an OB/GYN clinic. Further, CSD will, under the Medical Command's direction, store and transmit the final data set to an agreed upon medium and provide any further analysis of the collected data beyond what UHC provides. Directorate of Information Management (DOIM), Fort Detrick will provide data storage and processing space on the main frame computer and will assist in problems that may arise pertaining to usage of the mainframe. CHCS data (as the primary data source) will be supplemented whenever possible by data from the Ambulatory Data System (ADS) according to one of three scenarios. The link is the DMIS ID-IEN combination. 1) Both CHCS data and ADS data on the same appointment exist - When CSD merges CHCS and ADS data sets, patient records will be updated to reflect name of provider patient actually saw and whether patient kept appointment. (This will ensure that the survey questionnaire correctly identifies the person who provided the care and that the patient kept his/her appointment). 2) CHCS data exists but there is no corresponding ADS data - This will occur frequently until ADS is deployed throughout the MHSS. UHC will use CHCS data for sampling and mailing. 3) CHCS data does not exist by ADS data does - This will occur infrequently, most likely for "walk-in" visits which were not properly input after the fact into CHCS. UHC will sample from ADS data only when it is sufficiently complete; otherwise UHC will ignore the ADS data. E. Task 5 -- Reproduce customized surveys We will reproduce customized surveys including the name of the MTF, name of the clinic, and date of the patient's visit. In order to maximize the customer response, all patient identifying data will be included on a cover letter from the Assistant Secretary of Defense (Health Affairs) and not on the questionnaire. We will purge all patient identifying data (social security numbers, name, address) from our records following the *. _______________ * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the SEC pursuant to Rule 406. F. Task 6 -- Mail surveys *. We will use first class mail insuring that maximum U.S. Postal Service discounts are obtained via appropriate sorting, bundling and bar coding. _______________ * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the SEC pursuant to Rule 406. G. Task 7 -- Process completed surveys and maintain data We will process the completed surveys after they are returned. We will be prepared to maintain at least five years of data, and maintain all data in standard data format, such as SAS or SPSS portable. We will provide copies of the raw patient response data in SPSS-Portable via CD ROMs to selected Health Affairs (HA), Service Surgeons General (SG), Lead Agent (LA), Air Force Command, Navy Command and Army Command personnel for individual analyses at the end of the initial project phase. H. Task 8 -- Forward written comments to MTFs We will forward written comments directly to the MTFs. No analysis of comments is required. Survey forms will include a statement informing the respondents that their comments will be forwarded through channels to the local MTFs. I. Task 9 -- Generate and mail reports We will generate reports based on January 1997 data and mail the reports directly to * MTFs, * Air Force Commands, * MEDCOM Commands, * Navy Commands, * Lead Agents, * Military Department Surgeons General and * OSD Health Affairs by * . The reports will show trending information, and include appropriate benchmarks with civilian HMOs. We will provide copies of the raw patient response data in Excel via 3.5 diskettes to each MTF. Each MTF mailing will include an MTF report, the individual clinic reports for that MTF, the written comments on a 3.5 diskette (readable in Excel), and the raw patient response data in Excel on a 3.5 diskette. Each mailing for the higher headquarters levels will include their respective report and a CD ROM of raw patient response data (i.e., Lead Agent 1 will receive the report analyzing performance of MTFs in Region 1 plus a CD ROM with raw patient response data in SPSS-Portable for all MTFs). _______________ * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the SEC pursuant to Rule 406. J. Task 10 -- Provide operational items We will provide all labor, postage, processing and computing, and work facilities. III. Period of Performance The period of performance for this delivery order is from award date to 30 June 1997. Reports will be forwarded within * after the end of the contract period. _______________ * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the SEC pursuant to Rule 406. IV. Schedule and Deliverables The following table details estimated completion of tasks and deliverables. Due dates are stated in terms of work days following award (DFA). Deliverables Copies Due Date * Kick-off meeting Attendees + 10 * Site Visits * Draft Survey Questionnaire 10 for HA * Draft Sampling Plan 10 for HA * Draft Analysis Plan/Report 10 for HA * Layout Draft MTF Procedure Guide 10 for HA * * Final MTF Procedure Guide 2 each for * HA/LA/MTF Final/Approved Questionnaire 10 for HA * Final/Approved Sampling Plan 10 for HA * Final/Approved Analysis 10 for HA * Plan/Report Layout * Receipt of data from MTFs * Draw samples & mail surveys * Send reminder note to * nonrespondents Terminate collection period & * process replies * Forward required reports * directly to: Report of MTF Performance (1) 10 to HA * overall Report of MTF Performance by (3) 10 to each SG * Service SG Report of MTF Performance by 10 to each LA * (13) Lead Agent Report of MTF Performance by (7) 5 to ea. Cmd * MAJCOM Report of MTF Performance by (7) 5 to ea. Cmd * MEDCOM Report of MTF Performance by (3) 5 to ea. Cmd * Navy HSO Report of Individual (130) MTF 10 to each MTF * Results Report by (2100) Individual 1 to each * Clinics clinic * Due dates are based on number of work days. ** Ability to meet dates is contingent on receiving all, complete data from MTFs by * HA = Health Affairs SG = Surgeon General LA = Lead Agent _______________ * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the SEC pursuant to Rule 406. V. Delivery Order Management Kathia Kennedy will be the United HealthCare Delivery Order Manager. She will provide technical management and liaison services with the government to ensure that all requirements are met. Ms. Kennedy reports to Ms. Lori McDougal, who serves as the United HealthCare-D/SIDDOMS Lot III Contract Manager. VI. Level of Effort One work day is defined as 8 hours; one work week is defined as 40 hours. A. Staffing Staff Labor Category Hours Pat Venus Expert * Jane Heinen Expert * Lori McDougal Program Manager * Kathia Kennedy Task Manager * Danni Luo Sr. Systems * Analyst Stacy Hakanson Sr. Systems * Analyst TBD Systems Analyst * Pam Oleson-Kremer Systems Analyst * TBD Clerical * ----- TOTAL DIRECT LABOR HOURS * _______________ * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the SEC pursuant to Rule 406. VII. Place of Performance The place of performance for this delivery order will be at designated United HealthCare and subcontractor's facilities. VIII. Proprietary Information Statement The government will retain rights to all intellectual property produced in the course of developing, deploying, conducting and reporting the survey. We will negotiate agreements with commercial system vendors relating to non-disclosure of vendor-proprietary information. The subcontractor, National Research Corporation (NRC), will provide the Healthcare Market Guide Report Card Series benchmark data and the Report Card System software for Government use to compare performance against civilian benchmarks. This information was developed exclusively at private expense and is confidential and proprietary to National Research Corporation. National Research Corporation grants the Government only Limited right to this information and retains the rights to license the information and does not transfer any ownership rights of the benchmark data or the Report Card System software. National Research Corporation also retains all rights to the original format of the questionnaire, including the original questions, and original format of the Action Plan Report Card, which were developed exclusively at private expense, and is granting only the rights to the modified versions of these documents that were prepared specifically for this project. IX. Security Requirements Classified materials or locations are not associated with this order. APPENDIX C-2 UNiTEDhealthcare DASW01-95-0029 Issued By: United HealthCare Corporation PO Box 1459 MN08-W125 Minneapolis, MN 55440-1459 Subcontract Task Order No. 0005 (4/97 Revision) This is Subcontract Task Order No. 0005, issued to National Research Corporation, for assistance in performance of Prime Contract Delivery Order No. 0005. The following specifications are material to performance and delivery under this work assignment: a) Description of the work to be performed The Subcontractor, NRC, shall provide services in accordance with the Technical Proposal titled "Customer Satisfaction Survey", a copy of which is in possession of both parties. NRC, with input from UHC and the DoD, will be responsible for design of the survey instrument and design of the reporting format for all levels. NRC provides all materials and performs all activities related to the mailing, processing of the surveys and reporting of results. NRC's involvement includes: - the use of NRC's personalized 11"x17" survey (approximately * questions) with integrated cover letter and one common logo for all MTFs. Survey instrument should focus on patient satisfaction with their clinic visit and with their experience obtaining that appointment. - Electronic data entry using image scanners. _______________ * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the SEC pursuant to Rule 406. - * First class mail is to be used insuring that maximum U.S. Postal Service discounts are obtained via appropriate sorting, bundling and bar coding. - * - * - Development of a one-page, graphical, standard individual clinic report format to be reviewed and finalized within the MHSS. Individual clinic reports will be aggregated for higher level of management (MTFs, Air Force Command, Navy Commands, Army Commands, Service Surgeon Generals, Lead Agents, and Health Affairs). Reports will indicate name of facility/clinic surveyed and the sample size. The reports will compare the facility/clinic against other clinics within the same community hospital or MTF, overall MHSS wide averages, and civilian HMOs. The reports will present scores from individual questions, composite scales scores and overall ratings, such as likelihood to recommend hospital/clinic. Individual reports will show trending information. - Integration of local benchmark data from the 1996 NRC Healthcare Market Guide Report Card Series. - NRC will reproduce customized surveys including the name of the MTF, name of the clinic, and date of the patient's visit. NRC will purge all patient/sponsor identifying data (IEN, social security numbers, name, address) from the records following the reminder postcard mailing. - NRC will process the complete surveys after they are returned. NRC will be prepared to maintain at least five years of data, and maintain all data in standard data format, such as SAS or SPSS portable. NRC will provide copies of the raw patient response data in SPSS-Portable via CD ROMs to selected Health Affairs (HA), Service Surgeon Generals (SG), Lead Agent (LA), MAJCOM, Navy Command and MEDCOM personnel for individual analyses at the end of the initial project phase. NRC will provide one additional copy of all raw patient response data in SPSS-Portable via CD ROM to UHC. - NRC will provide copies of the raw patient response data in Excel via 3.5" diskettes. Each MTF mailing will include an MTF report, the individual clinic reports for that MTF, the written comments, and the raw patient response data in Excel on a 3.5" diskette and forward to UHC. Key Personnel - David Johnson, David Copper, Jonathan Boumstein, Dennis Vollenweider, Robert Bergman, Michael Hayes and Marvin Lambie. _______________ * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the SEC pursuant to Rule 406. b) Period of Performance - From Date of Award to 30 June 1997. c) Project Management - Kathia Kennedy will be the UHC Project Manager and point of contact for this delivery order. d) Schedule of Deliverables - Draft of Survey Questionnaire and Analysis Plan/Report Layout. Due Date: * - Final/Approved Questionnaire and Sampling Plan Due Date: Award + * - Final/Approved Analysis Plan/Report Layout Due Date: * - One page Action Plan reports for the following: * Individual Clinic Reports (1 copy each); * MTF Reports (10 copies each); * Service Branch Reports (10 copies each); * Regional Reports (10 copies each); * Air Force Command Reports (5 copies each); * Army Command Reports (5 copies each); * Navy Command Reports (5 copies each); * Overall Summary Report (10 copies each). Number of individual clinic and MTF reports are based upon quantity of valid records received from MTFs. Due Date: * - Copies of the raw patient response data in Excel via 3.5" diskettes. Each MTF mailing will include an MTF report, the individual clinic reports for that MTF, the written comments, and the raw patient response data in Excel on a 3.5" diskette and forward to UHC. Due Date: * - Reporting of the raw patient response data in a SPSS portable database file to all higher levels in CD ROM (i.e., Air Force Commanders, Army Commanders, Navy Commanders, Surgeon Generals, Lead Agents and Health Affairs). Provide one copy of CD ROM to UHC, as well. Due Date: * - Mailing of actual written comments to UHC, sorted by MTF, at the end of the project. Due Date: * _______________ * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the SEC pursuant to Rule 406. - All deliverables will be shipped directly to UHC for delivery to the DoD. Article 4, Reports and Deliverables, of the Subcontract should be referenced for all other reporting requirements of this task order. e) Other Direct Costs/Travel - A maximum of * initial surveys (based upon quantity of valid records received from MTFs) mailed out, which includes questionnaire design/formatting; report design/formatting; outgo and return postage; labor; printing of initial questionnaires, reminder postcards, outgo envelopes, return envelopes; image scanning of returned questionnaires; and reporting of the results on hard copy - *. - Written comments sorted by MTF (approximately * comments at $* ) - $* Replacement surveys sent upon request by respondent (approximately * replacement surveys at $*) - $* - Raw patient response data in Excel to all * MTFs and SPSS portable files to all higher levels - $* - NRC Healthcare Market Guide Report Card Series - $* - Travel includes one person to Washington, D.C. for Delivery Order Kick-Off Meeting plus two people to the Washington, D.C. area to participate in site visits - $*. Total allowable costs not to exceed $*. For computational purposes, the direct labor portion of NRC's commercial pricing method is *%. f) Billing Instructions Billing instructions for this task order shall be as stated in Appendix B of the Subcontract except that Subcontractor may only utilize the "commercial pricing" option under Item C of Section II (Other Direct Costs) upon providing verification to UHC of their commercial market pricing comparisons to validate that equal or better pricing is offered to UHC/DOD than to their best client (other than UHC/DOD). In such a case, "Invoice Preparation" as stated in Section II of Appendix B will be substituted with the following: Other Direct Costs should include all items other than travel costs and should be identified, by line item, on a per unit basis consistent with the Subcontractor's cost proposal for this effort. NRC will provide auditable documentation verifying the number of surveys mailed out and processed, as well as any other documentation applicable to billing amounts. Proof of surveys mailed will be provided in the form of receipts(s) from the United States Postal Service. _______________ * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the SEC pursuant to Rule 406. APPENDIX D DELIVERY ORDER AND TASK ORDER ADDENDUM TO THE SUBCONTRACT BETWEEN UNITED HEALTHCARE CORPORATION AND NATIONAL RESEARCH CORPORATION This Addendum to the Subcontract Between United HealthCare Corporation (UHC) and National Research Corporation is effective May 29, 1997, and is as follows: 1. The attached documents are hereby incorporated into the Agreement: a. Delivery Order No. 0007 issued by the Department of Defense to UHC on May 29, 1997; and b. Task Order No. 0007. UNITED HEALTHCARE CORPORATION NATIONAL RESEARCH CORPORATION By: /s/ Ken H. Roche By: /s/ Michael Hays Title: CEO-AHI Title: CEO Date: 6-18-97 Date: 6-20-97 D/SIDDOMS LOT III Task Statement #2 for United HealthCare Corporation Contact Number DASW01-95-D-0029 Delivery Order Number 0007 Customer Satisfaction Survey I. Introduction United HealthCare Corporation's technical approach will meet the requirements and objectives of the Customer Satisfaction Survey project as defined by the Department of Defense (DoD). We do conduct an Outpatient Satisfaction Survey on all the bedded Military Treatment Facilities (MTFs) and freestanding clinics in the United States, including Alaska and Hawaii. The list of participating facilities and clinics will be provided to United HealthCare by Health Affairs. The scope of work amounts to approximately * MTFs and * clinics. The specifics of our approach to the outpatient satisfaction surveys are outlined below. - We will design and mail a survey to a sample of patients seen each month beginning in May and investigate satisfaction with specific patient visits. Respondents will rely directly to United HealthCare. We will process the reply forms and prepare reports for each clinic and aggregate the reports for higher headquarters levels: Air Force Major Air Commands (MAJCOMS), Navy Health Services Support Organizations (HSOs), Army Regional Medical Commands (RMCs), MTFs, Lead Agents, Surgeon Generals and Health Affairs. Fundamental unit of analysis of the study is the individual clinic which delivered the care. (Deadlines falling on non-business days throughout this document shall be extended until the next business day(s)). - The sample will be restricted to those beneficiaries who actually used the direct care system, specifically those who received care at a CONUS MTF within the last 30 days. The survey will focus on satisfaction with the services received. Survey results will be reported on a monthly basis to the clinic/MTF and on a quarterly basis to higher headquarters. This survey will replace most of the ad hoc satisfaction surveys currently being done locally at MTFs. _______________ * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the SEC pursuant to Rule 406. II. Analysis Approach for Specific Tasks The following tasks pertain to the project. A. Task 1 -- Review sample methodology We will review the same methodology based on results of March 1997 mailing. Survey population includes patients seen at specified clinics at CONUS MTFs and freestanding outpatient facilities with more than * monthly patient visits (approximately * clinics). A+/- *% margin of sampling error at each clinic is the desired margin of error; however, the sample size may vary depending on funds available. This amounts to approximately * completed surveys per * clinics or approx. * total surveys each month, or approximately * completed surveys per * clinics, or approx. * total surveys, for each of the three rolling months reporting period. Health Affairs will provide a spreadsheet listing of all participating MTFs and their respective clinics by number of monthly outpatient visits, DMIS, MEPRS, CHCS & ADS code listings. B. Task 2 -- Review survey instrument We will review the design of the survey based on March 1997 mailing. The proposed final design will be reviewed within the Military Health Services System (MHSS) and a finalized instrument returned to the United HealthCare within two weeks post submission of the proposed version. We anticipate few changes to the questionnaire once it is in use. C. Task 3 -- Review individual reports We will review the one-page, graphical, individual clinic report format. Individual clinic reports must be aggregated for higher levels of management: Health Affairs (HA), Service Surgeons General (SGs) and Lead Agents (LA), Intermediate Commands and MFT Commanders. Reports will indicate name of facility/clinic surveyed and the sample size. The reports will compare the facility/clinic against: (1) other clinics within the same MTF, (2) overall MHSS wide averages, and (3) civilian Health Maintenance Organizations (HMOs). The reports will present scores from individual questions, composite scale scores and overall satisfaction ratings. _______________ * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the SEC pursuant to Rule 406. D. Task 4 -- Review the procedures guide We will review the Customer Satisfaction Survey Data Extraction Procedures Guide based on results of March 1997 mailing, and only make changes if necessary. We will redistribute the Guide via postal mail or E-mail (where possible) to CHCS Information Systems officers and by postal mail to MTF Commanders. E. Task 5 -- Review the process of transferring MTF data We will review the patient data fields and means of data transfer from the MTFs to the Ft. Detrick mainframe used in March 1997 mailing. Monthly throughout the contract period, we will follow up with individual MTFs which do not forward their patient appointment data (for the previous month) by the 10th of a month. These follow- up efforts will be conducted until Close of Business on the 10th of each month which shall be the cut off date for MTFs to respond. Health Affairs will provide current addresses for all participating MTFs as well as current and accurate list of CHCS Points of Contact names, addresses and commercial phone numbers. Information that the MTFs must forward to United HealthCare must include, at a minimum, Initial Entry Number of IEN (sequential appointment number) patient social security number (encrypted if preferred), patient name (first, middle initial, last name), patient address (apartment # if any, street address, city, state, zip code), sponsor name (last, first, middle initial) if patient is a minor, sponsor address (if different from patient address), sponsor social security number, patient's date of birth, gender, rank, Family Member Prefix (beneficiary category), name of MTF, name of clinic, branch of MTF (Army, Navy, Air Force), region number of lead agent (1-13), name of clinic, MEPRS code, name of provider (first, middle initial, last), type of provider (physician, nurse practitioner, etc.), date of visit (ambulatory visit with past 30 days), and type of visit (acute, chronic, routine). In order to perform a statistically sound analysis, it is necessary that data from both the Composite Health Care System (CHCS) and the Ambulatory Data System (ADS) be combined to provide a data pool from which a random sample can be drawn. CHCS and ADS data will be sent from each participating MTF to Ft. Detrick separately. Customer Service Division (CSD), Corporate Executive Information Systems (CEIS) will match and merge Composite Health Care System (CHCS) data (as the initial primary data source) with data from the Ambulatory Data System (ADS). The CHCS and ADS data will be separately available monthly at the Ft. Detrick computer system. This data will be merged into one file on the Fort Detrick mainframe. The basis of the match will be DMIS ID CODE and Initial Entry Number (IEN). In addition to combining the CHCS and ADS data, CSD will remove specified clinics and individuals from the sampling frame. For example, CSD will run a program to select only the MTFs (using DMIS ID number) and clinics (using MEPRS code) and were pre- identified for participating in this study. CSD will also run a program to eliminate all mental health and substance abuse patient visits and to eliminate records of patients 17 years or younger who visited an OB/GYN clinic. Further, CSD will, under the Medical Command's direction, store and transmit the final data set to an agreed upon medium and provide any further analysis of the collected data. Directorate of Information Management (DOIM), Fort Detrick will provide data storage and processing space on the main frame computer and will assist in problems that may arise pertaining to usage of the mainframe. CHCS data (as the primary data source) will be supplemented whenever possible by data from the Ambulatory Data System (ADS) according to one of three scenarios. Again, the link is the DMIS ID-IEN combination. 1) Both CHCS data and ADS data on the same appointment exist - When CSD merges CHCS and ADS data sets, patient records will be updated to reflect name of provider patient actually saw and whether patient kept the appointment. This will ensure that the survey questionnaire correctly identifies the person who provided the care and that the patient kept his/her appointment. 2) CHCS data exists but there is no corresponding ADS data - This will occur frequently until ADS is deployed throughout the MHSS. UHC will use CHCS data for sampling and mailing. 3) CHCS data does not exist but ADS data does - This will occur infrequently, most likely for "walk-in" visits which were not properly input after the fact into CHCS. UHC will sample from ADS data only when it is sufficiently complete; otherwise we will ignore the ADS data. When ADS is fully deployed, CHCS information will no longer be used in the operation of the Customer Satisfaction Survey. F. Task 6 -- Pull random sample From this universe of patients, we will conduct a random sampling of patient data and generate a list of sample patients who will ultimately receive the questionnaire. The basis of the larger universe is * percent of the original patient data (appointment data with IENs that end in "1" or "5"). A magnetic tape (CD ROM) containing the sampled data will be transferred via overnight delivery from Ft. Detrick to United HealthCare. _______________ * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the SEC pursuant to Rule 406. G. Task 7 -- Reproduce customized surveys We will reproduce the customized cover letters and questionnaires including name of the MTF, name of the clinic, date of patient's visit and provider's name. In order to maximize customer response, all patient identifying data will be included on a cover letter/tear sheet from the Assistant Secretary of Defense (Health Affairs) and appropriate Service Surgeon General and not on the questionnaire. We will comply with all provisions of the Privacy Act in designing, mailing and processing patient questionnaires. Number of surveys mailed (and resulting margin of sampling error) will be closely coordinated with the Task Manager so that budget ceiling is not exceeded. H. Task 8 -- Mail surveys * We will use first class mail insuring that maximum U.S. Postal Service discounts are obtained via appropriate sorting, bundling and bar coding. We will purge all patient identifying data (such as social security numbers, IENs patient and sponsor name and street address) from our records immediately after reminder postcards are mailed. Upon request, we will forward replacement surveys to respondents who have either lost or discarded the original survey. I. Task 9 -- Process completed surveys and maintain data We will process the completed surveys after they are returned. We will be prepared to maintain at least five years of raw patient response data (excluding written comments data) in standard format (such as SAS or SPSS-portable). J. Task 10 -- Forward written comments to MTFs We will forward written comments directly to MTFs by detaching patient comments found on separate sheets of paper. No analysis of comments is required. Questionnaires will include a statement informing the respondent that the written comments will be forwarded to the Commanding Officer of the MTF that provided the care. K. Task 11 -- Generate and mail paper reports There are six types of paper reports: Individual clinic reports which compare the results of each clinic against all other clinics within the same MTF, all other peer clinics within MHSS, and civilian benchmark data. Timing: clinics paper reports are produced monthly. _______________ * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the SEC pursuant to Rule 406. Individual MTF reports which compare the results of each MTF against all same-Service MTFs, MHSS wide averages and local civilian benchmark data. Timing: MTF paper reports are produced monthly. Surgeons General reports for each of the three Services which compare the aggregate results for all same-Service MTFs (Army, Navy or Air Force) against MHSS wide averages and local civilian benchmark data. Timing: Service SG paper reports are produced quarterly. Region/Lead Agent reports which compares the aggregate results of all MTFs within each region against MHSS wide averages and local civilian benchmark data. Timing: Region/LA paper reports are produced quarterly. Intermediate Command reports under each of the services which compares the aggregate results of each of the Intermediate Commands against all same-service MTFs, MHSS wide averages and local civilian benchmark data. Intermediate Commands include six Army Regional Medical Commands (Northwest RMC, North Atlantic RMC, Southeast RMC, Great Plains RMC, Southwest RMC, and Pacific RMC), three Navy Health Services Support Organizations (Norfolk HSO, San Diego HSO, and Jacksonville HSO), and five Air Force Major Air Commands (AETC, AMC, ACC, AFMC, and AFSPC). Timing: Intermediate Command paper reports are produced quarterly. Military Health Services System report which compares the aggregate results of all MHSS MTFs against national civilian benchmark data. Timing: MHSS paper reports are produced quarterly. We will generate paper reports on the clinics and MTFs based on three previous months of appointment data and mail reports directly to the MTF Commanders or other designated individual in each MTF. Reports will show trading information and include appropriate comparisons/benchmarks with civilian Health Maintenance Organizations. The "rolling" three-month averages are required to maintain statistical significance. Within * business/work days of the end of a quarter, we will prepare quarterly paper reports aggregating the MTFs under their jurisdictions to Intermediate Commands, Lead Agents, Service Surgeons General and OSD Health Affairs. _______________ * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the SEC pursuant to Rule 406. L. Task 12 -- Generate and mail electronic reports There are five types of electronic papers: Raw patient response data in Excel on a 3.5" diskette for each MTF. A different diskette will be created for each MTF and include only data for that MTF. Data will be sorted by date of appointment. Timing: On a quarterly basis, we will forward a raw patient response data for that quarter in Excel format on a 3.5" diskette to the MTF Commander. Raw patient response data on a CD ROM for each of the Intermediate Commands. Each CD ROM will include data for all MHSS MTFs. For great readability, data will be sorted by each Intermediate Command and by date of appointment. Timing: Raw patient response data on a CD ROM are produced semi- annually. Raw patient response data on a CD ROM for each Lead Agent. Each CD ROM will include data for all MHSS MTFs. For greater readability, data will be sorted by each region and by date of appointment. Timing: Raw patient response data on a CD ROM are produced semi- annually. Raw patient response data on a CD ROM for each of the Service Surgeons General. Each CD ROM will include data for all MHSS MTFs. For greater readability, data will be sorted by each of the three services and by date of appointment. Timing: Raw patient response data on a CT ROM are produced semi- annually. Raw patient response data on a CD ROM for Health Affairs. Each CD ROM will include data for all MHSS MTFs and by date of appointment. Timing: Raw patient response data on a CD ROM are produced semi- annually. Semi-annually, we forward Intermediate Commands, Lead Agents, Service Surgeons General and Health Affairs CD-ROMs containing the entire MHSS raw response data file so that each respective Headquarters can analyze its own data and easily make comparisons of its data against other MHSS organizations. Formats shall be, at a minimum, SPSS- Portable and/or flat ASCII. M. Task 13 -- Provide benchmark data n) Annually, the contractor shall make available to the Immediate Commands, Lead Agents, Surgeons General and Health Affairs CD-ROM copies of benchmark data set. Cost for benchmark data are not included in this phase of the project. N. Task 14 -- Provide operational items We will provide all labor, postage, processing and computing, and work facilities. III. Period of Performance The period of performance for this delivery order is from award date to 30 November 1997. Six survey "cycles" will be executed throughout the contract period. A cycle shall be defined as monitoring and facilitating the transfer of CHCS and ADS data from MTFs to the Ft. Detrick mainframe. Each cycle includes the following time frames: 1. Transfer of CHCS and ADS data = * days (beginning on * of each month) 2. Follow-up period with MTFs = * days (until * of each month - time overlaps with step 1) 3. Combine CHCS and ADS data & draw random sample = * days 4. Receive data from Ft. Detrick = * 5. Send & download data file = * work days 6. Conduct quality checks on the data = * work days 7. Conduct sampling/print checks = * days 8. Print/mail questionnaires = * work days (time overlaps with step 7) 9. Print/mail reminder postcards = * work days 10. Field time for surveys = * days 11. Produce reports = * days (begins one day after cut-off date) _______________ * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the SEC pursuant to Rule 406. IV. Schedule and Deliverables The following table details estimated completion of tasks and deliverables. Due dates are stated in terms of work days. Deliverables Copies Due Date* Review of Survey Questionnaire 10 for HA * Review of Sampling Plan 10 for HA * Review of Analysis Plan/Report Layout 10 for HA * Final MTF Procedures Guides (if 1 per * necessary) recipients PAPER REPORTS Directly forward required reports (i.e. do not send them to Health Affairs for review): Summary of MTF Performance, 10 to HA Quarterly (see 1) overall Summary of MTF Performance, by 10 to each SG Quarterly (see 1) Service SG Summary within Intermediate 5 to each CMD Quarterly (see 1) Command Summary of MTF Performance, by 10 for each to LA Quarterly (see 1) Lead Agent Individual MTF summary 10 to each MTF Monthly (see 2) Summary of Individual Clinic 1 to each clinic Monthly (see 2) * Ability to meet dates is contingent on receiving all and complete data from MTFs by the * of each month post the month of appointment data. NOTE 1 -- Quarterly reports to Intermediate Command, SG, LA, and HA are due * following the end of the quarter: * quarter reports due on * * quarter reports are due on * NOTE 2 -- Monthly MTF and clinic reports will begin once two months of appointment data is collected and analyzed. Monthly reports are due by the * of the * month following the appointment (* if the * is a non- business day): * * * * * _______________ * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the SEC pursuant to Rule 406. ELECTRONIC REPORTS; All raw response data must be segregated by month. Patient identifiable data has been purged in Task 4h. QUARTERLY -- MTFs receive Excel spreadsheets on 3.5" diskettes with that MTF's data SEMI-ANNUALLY -- Intermediate Commands and above receive CD ROMs with ALL MHSS data ANNUALLY -- Intermediate Commands and above receive the civilian benchmark data set V. Delivery Order Management Kathia Kennedy will be the United HealthCare Delivery Order Manager. She will provide technical management and liaison services with the government to ensure that all requirements are met. Ms. Kennedy reports to Ms. Lori McDougal, who serves as the United HealthCare- D/SIDDOMS Lot III Contract Manager. VI. Level of Effort One work day is defined as 8 hours; one work week is defined as 40 hours. A. Staffing Staff Labor Category Hours Pat Venus Expert * Jane Heinen Expert * Steve Wickstrom Expert * Lori McDougal Program Manager * Kathia Kennedy Task Manager * Cyndy Taylor Task Manager * Kevin Den Hartog Sr. Systems Analyst * Yingjia Shen Sr. Systems Analyst * Ruth Tauer Systems Analyst * John Gall Systems Analyst * TBD Clerical * TOTAL DIRECTOR LABOR HOURS * _______________ * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the SEC pursuant to Rule 406. VII. Proprietary Information Statement The government will retain rights to all intellectual property produced in the course of developing, deploying, conducting and reporting the survey. We will negotiate agreements with commercial system vendors relating to non-disclosure of vendor-proprietary information. The subcontractor, National Research Corporation (NRC), will provide the HealthCare Market Guide Report Card Series benchmark data and the Report Card System software for Government use to compare performance against civilian benchmarks. This information was developed exclusively at private expense and is confidential and proprietary to National Research Corporation. National Research Corporation grants the Government only Limited right to this information and retains the rights to license the information and does not transfer any ownership rights of the benchmark data or the Report Card System software. National Research Corporation also retains all rights to the original format of the questionnaire, including the original questions, and original format of the Action Plan Report Card, which were developed exclusively at private expense, and is granting only the rights to the modified versions of these documents that were prepare specifically for this project. VIII. Security Requirements Classified materials or locations are not associated with this order. IX. Place of Performance The place of performance for this delivery order will be a designated United HealthCare and subcontractor's facilities. ORDER FOR SUPPLIES OR SERVICES (Contractor must submit four copies of invoice.) Public reporting burden for this collection of information is estimates to average 1 hour per response, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Send comments regarding this burden estimate or any other aspect of this collection of information including suggestions for reducing this burden, to Department of Defense, Washington Headquarters Services, Directorate for Information Operations and Reports, 1215 Jefferson Davis Highway, Suite 1204, Arlington, VA 22202-4302, and to the Office of Management and Budget, Paperwork Reduction Project (0704-0187), Washington, DC 20503. PLEASE DO NOT RETURN YOUR FORM TO EITHER OF THESE ADDRESSES. SEND YOUR COMPLETED FORM TO THE PROCUREMENT OFFICIAL IDENTIFIED IN ITEM 6. 1. Contract/Purch Order No. DASW01-95-D-0029 2. Delivery Order No. 0007 3. Date of Order 97MAY29 4. Requisition/Purch Request No. HT0003-7077-0331 5. Priority [Blank] 6. Issues By Code - W74V8H DEFENSE SUPPLY SERVICE - WASHINGTON 5200 Army Pentagon Room 1D245 Pentagon Washington, D.C. 20310-5200 Faye D. Harler FDH (703) 681-9534 7. Administered by (If other than 6) Code - S2401A DCMAO Twin Cities 3001 Metro Drive Bloomington, MN 55425-1573 8. Delivery FOB DEST 9. Contractor - Vender Id: 00011849 Code - 02XQ3 FACILITY CODE [_] United Healthcare Corporation 9900 Bren Road East Minnetonka, MN 55143 10. Deliver to FOB Point By (Date) 97NOV30 11. Mark if Business Is [Blank] 12. Discount Terms 0% 00 Days Net 030 13. Mail Invoices To See Block 15 14. Ship To Code - [Blank] DASW0195D0029 15. Payment Will Be Made By Code - S2603A DFAS COLUMBUS CENTER Gateway Contract Acctg Div P. O. Box 192251 Columbus, OH 43218-2251 16. Type of Order Delivery - This delivery order is issues on another Government agency or in accordance with and subject to terms and conditions of above numbered contract. 17. Accounting and Appropriation Data/Local Use AA:9770130.1884 8623 2522 (APC: 95L5) 012123 DRAC 70331 Award Oblig Amt US$ 1,774,241.00 18. Item No. [Blank] 19. Schedule of Supplies/Service The Contractor shall provide services from date of award thru 30 NOV 97 on "Customer Satisfaction Survey" in accordance with proposal dated 13 MAY 97 incorporated herein by reference. SEE CONTINUATION SHEET 20. Quantity Ordered/Accepted [Blank] 21. Unit [Blank] 22. Unit Price [Blank] 23. Amount [Blank] 24. United States of America By: Joyce G. Ellis Contracting/Ordering Officer 25. Total $1,774,241.00 26. Quantity in Column 20 Has Been [Blank] 27. Ship No. [Blank] 28. D.O. Voucher No. [Blank] 29. Differences [Blank] 30. Initials [Blank] 31. Payment [Blank] 32. Paid By [Blank] 33. Amount Verified Correct For [Blank] 34. Check Number [Blank] 35. Bill of Lading No. [Blank] 36. I certify this account is correct and proper for payment [Blank] 37. Received At [Blank] 38. Received By [Blank] 39. Date Received (YYMMMDD) [Blank] 40. Tot. Containers [Blank] 41. S/R Account Number [Blank] 42. S/R Voucher No. [Blank] DASW01-95-D-0029 2 of 2 UNITED HEALTHCARE CORPORATION Schedule of Item No. Supplies/Service Quantity U/I Unit Price Amount 0008 DO #7 1.00 EA * * Total Estimated Cost, Fixed Fee, and Total Estimated Cost-Plus-Fixed Fee is as follows: Estimate Cost: $* Fixed Fee: * Total Est CPFF: $* _______________ * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the SEC pursuant to Rule 406. APPENDIX D-2 UNITED HEALTHCARE DASW01-95-0029 Issued by: UnitedHealthCare Corporation PO Box 1459 MN008-W125 Minneapolis, MN 55440-1459 Subcontract Task Order No. 0007 This Subcontract Task Order No. 0007, issued to National Research Corporation, for assistance in performance of Prime Contract Delivery Order No. 0007. The following specifications are material to performance and delivery under this work assignment: a) Description of the work to be performed The Subcontractor, NRC, shall provide services in accordance with the Technical Proposal titled "Customer Satisfaction Survey", a copy of which is in possession of both parties. NRC, with input from UHC and the DoD, will be responsible for design/formatting of the survey instrument and design/formatting of the reporting format for all levels. NRC provides all materials and performs all activities related to the mailing, processing of the surveys and reporting of results. NRC's involvement includes: - The use of NRC's personalized 11"x17" survey (approximately 15 to 25 questions) with integrated cover letter and one common logo for all MTFs. Survey instrument should focus on patient satisfaction with their clinic visit and with their experience obtaining that appointment. - Electronic data entry using image scanners. - * First class mail is to be used insuring that maximum U.S. Postal Service discounts are obtained via appropriate sorting, bundling and bar coding. - * - * - Development of a one-page, graphical, standard individual clinic report format to be reviewed and finalized within the MHSS. Individual clinic reports will be aggregated for higher level of management (MTFs, Air Force Command, Navy Commands, Army Commands, Service Surgeon Generals, Lead Agents, and Health Affairs). Reports will indicate name of facility/clinic surveyed and the sample size. The reports will compare the facility/clinic against other clinics within the same community hospital or MTF, overall MHSS wide averages, and civilian HMOs. The reports will present scores from individual questions, composite scales scores and overall ratings, such as likelihood to recommend hospital/clinic. Individual reports will show trading information. NRC will mail these reports directly to the MTF Commanders and designated higher levels. - Integration of local benchmark data from the 1996 NRC Healthcare Market Guide Report Card Series. _______________ * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the SEC pursuant to Rule 406. - NRC will reproduce customize surveys including the name of the MTF, name of the clinic, and date of the patient's visit. NRC will purge all patient/sponsor identifying data (IEN, social security numbers, name, address) from the records following the reminder postcard mailing. - NRC will process the completed surveys after they are returned. NRC will be prepared to maintain at least five years of data, and maintain all data in standard data format, such as SAS or SPSS portable. NRC will provide and mail copies of the raw patient response data in SPSS-Portable via CD ROMs to selected Health Affairs (HA), Service Surgeon Generals (SG), Lead Agent (LA), MAJCOM, Navy Command and MEDCOM personnel for individual analyses at the end of the initial project phase. NRC will provide one additional copy of all raw patient response data in SPSS-Portable via CD ROM to UHC. - NRC will provide and mail copies of the raw patient response data in Excel via 3.5" diskettes to the MTF Commanders. Each MTF mailing will include an MTF report, the individual clinic reports for that MTF, the written comments, and the raw patient response data in Excel on a 3.5" diskettes and forward to UHC. Key Personnel - David Johnson, David Copper, Jonathan Boumstein, Dennis Vollenweider, Robert Bergman, Michael Hayes and Marvin Lambie. b) Period of Performance - From Date of Award to 30 November 1997. c) Project Management - Kathia Kennedy will be the UHC Project Manager and point of contact for this delivery order. d) Schedule of Deliverables - Review of Survey Questionnaire, Report Layout and Sampling Plan. Provide 10 copies of questionnaire and report formats to Health Affairs and one copy of each to UHC. Due Date: Award + *. - Provide one page Action Plan reports for the following: Maximum of * Individual Clinic Reports (1 copy each); * MTF Reports (10 copies each); * Service Branch Reports (10 copies each); * Regional Reports (10 copies each); * Air Force Command Reports (5 copies each); * Army Command Reports (5 copies each); * Navy Command Reports (5 copies each); * Overall Summary Report (10 copies each). Number of individual clinic and MTF reports are based upon quantity of valid records received from MTFs. Frequency of paper reports: Clinic Reports Monthly MTF Reports Monthly Reports by Service SG Quarterly Report by Intermediate Commands Quarterly Reports by Region Quarterly Overall Summary Report Quarterly _______________ * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the SEC pursuant to Rule 406. Due Date: Every effort should be made to provide paper reports by the end of second month following the appointment month * Monthly Reports due on * * Monthly Reports due on * * Monthly Reports due on * * Monthly Reports due on * * Monthly Reports due on * * Quarterly Reports are due on * * Quarterly Reports are due on * - Copies of the raw patient response data in Flat SCII Text via 3.5" diskettes with weights. Each MTF mailing will include an MTF report, the individual clinic reports for that MTF, the written comments, and the raw patient response data in Flat ASCII Text on a 3.5" diskettes and forward to MTF commanders directly. Frequency: Quarterly Due Dates: First Quarterly Reports are due on * Second Quarterly Reports are due on * - Reporting to the raw patient response data in a SPSS portable database file to all higher levels in CD ROM (i.e. Air Force Commanders, Army Commanders, Navy Commanders, Surgeon Generals, Lead Agents and Health Affairs). Provide one copy of CD ROM to UHC, as well. Frequency: Semi annually Due Dates: CD ROMS are due on * _______________ * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the SEC pursuant to Rule 406. - Mailing of actual written comments to UHC, sorted by MTF, at the end of the project. Due Date: Monthly, along with Action Plan Reports. Article 4, Reports and Deliverables, of the Subcontract should be referenced for all other reporting requirements of this task order. e) Other Direct Costs/Travel - A maximum of * monthly surveys or a total of * surveys (based upon quantity of valid records received from MTFs) mailed out, which includes questionnaire formatting; report formatting; outgo and return postage; labor; printing of initial questionnaires, reminder postcards, outgo envelopes, return envelopes, image scanning of returned questionnaires; and reporting of the results on hard copy - *. - Replacement surveys sent upon request by respondent (approximately * replacement surveys at $* ) - $* - Management of project and sampling - $* - Cost for reporting (* reports @ $*) - $* - Handling of written comments (estimated at *% of total returns (*) @ $*) - $* - Raw patient response data in Excel to all * MTFs and SPSS portable files to all higher levels - $* - Diskettes for MTFs ($* x 2) and all MHSS on CD-ROM ($* x 1) - $* - Costs to have NRC ship reports to * hospitals ($* x 5) - $* _______________ * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the SEC pursuant to Rule 406. - Costs to have NRC ship reports to * upper level departments ($*) - $* - Total allowable costs not to exceed $*. f) Billing Instructions Billing instructions for this task order shall be as stated in Appendix B of the Subcontract except that Subcontractor may only utilize the "commercial pricing" option under Item C of Section II (Other Direct Costs) upon providing verification to UHC of their commercial market pricing comparisons to validate that equal or better pricing is offered to UHC/DOD than to their best client (other than UHC/DOD). In such a case, "Invoice Preparation" as stated in Section II of Appendix B will be substituted with the following: Other Direct Costs should include all items other than travel costs and should be identified, by line item, on a per unit basis consistent with the Subcontractor's cost proposal for this effort. NRC will provide auditable documentation verifying the number of surveys mailed out and processed, as well as any other documentation applicable to billing amounts. Proof of surveys mailed will be provided in the form of receipt(s) from the United States Postal Service. _______________ * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the SEC pursuant to Rule 406. EX-23.2 7 Exhibit (23.2) ACCOUNTANTS' CONSENT We consent to the use of our reports included herein and to the reference of our firm under the heading "Experts" in the prospectus. KPMG Peat Marwick LLP Lincoln, Nebraska September 12, 1997 EX-27 8 FDS
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF NATIONAL RESEARCH CORPORATION AS OF AND FOR THE PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 3,622 307 2,226 55 0 7,382 1,005 515 7,883 4,551 0 0 0 6 2,942 7,883 0 5,314 0 2,327 1,391 0 0 1,670 0 1,670 0 0 0 1,670 0 0 THE REGISTRATION STATEMENT ONLY REFLECTS PRO FORMA EARNINGS PER SHARE.
EX-99 9 Exhibit (99) September 15, 1997 National Research Corporation 1033 "O" Street Lincoln, NE 68508 Gentlemen: Immediately prior to the effective date of National Research Corporation's Registration Statement on Form S-1 relating to the proposed initial public offering of shares of its common stock, $.001 par value ("Common Stock"), I will become a director of National Research Corporation (the "Company"). Consequently, I hereby consent to the use of my name and all references to, and information about, me contained in the Company's Registration Statement on Form S-1 and the accompanying Prospectus for the purpose of registering under the Securities Act of 1933, as amended, shares of Common Stock to be offered to the public. I also hereby consent to the use of this letter as an exhibit to said Registration Statement. Very truly yours, /s/ Patrick E. Beans Patrick E. Beans -----END PRIVACY-ENHANCED MESSAGE-----