-----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, Slf/BohsesYTv4D23pt+fUQnj8wonwPJgKzU+72QdkCSoLxZcjEHyQiIbd6inkRP ysB3Z7c9mtC8m1Vh6c7Hnw== 0000897069-98-000161.txt : 19980326 0000897069-98-000161.hdr.sgml : 19980326 ACCESSION NUMBER: 0000897069-98-000161 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980325 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL RESEARCH CORP CENTRAL INDEX KEY: 0000070487 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-TESTING LABORATORIES [8734] IRS NUMBER: 470634000 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-29466 FILM NUMBER: 98572739 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 10-K405 1 NATIONAL RESEARCH CORPORATION UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission file number: 0-29466 NATIONAL RESEARCH CORPORATION (Exact name of registrant as specified in its charter) Wisconsin 47-0634000 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1033 "O" Street Lincoln, Nebraska 68508 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (402) 475-2525 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of Class Common Stock, $.001 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of the voting stock held by nonaffiliates of the registrant at February 27, 1998: $19,633,294. Number of shares of the registrant's common stock outstanding at February 27, 1998: 7,305,000 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for 1998 Annual Meeting of Shareholders (to be filed with the Commission under Regulation 14A within 120 days after the end of the registrant's fiscal year and, upon such filing, to be incorporated by reference into Part III) PART I Item 1. Business General National Research Corporation ("NRC" or the "Company") believes it is a leading provider of ongoing survey-based performance measurement, analysis and tracking services to the healthcare industry. The Company believes it has achieved this leadership position based on its over 17 years of industry experience and its relationships with many of the industry's largest payers and providers. 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 been at the forefront of 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 17 years ago as a Nebraska corporation (the Company reincorporated in Wisconsin in September 1997), NRC has focused on the information needs of the healthcare industry. The Company offers three primary types of information services: renewable performance tracking services, a renewable syndicated service and custom research. During 1997, NRC provided services to more than 225 healthcare organizations, including health maintenance organizations ("HMOs"), integrated healthcare systems, medical groups and industry regulatory bodies. The Company gathered and analyzed over 1,250,000 completed surveys for these clients in 1997. The Company's clients include the United States Department of Defense (the Company is a named subcontractor to the primary contractor with this client), HealthSouth Corporation, BJC Health System and Mayo Clinic. 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. 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 been at the forefront of 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. The NRC Listening System (the "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 NRC Healthcare Market Guide (the "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 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. Growth Strategy The Company believes that it can continue to grow 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, (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. Services The Company's three primary types of information services 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 81% and 76% of the Company's total revenues in 1997 and 1996, respectively. This performance tracking program efficiently coordinates and centralizes an organization's 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 some 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, the contents of which are selected from the Company's library of questions after a client's needs are determined, 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 Service. The Company's renewable nationally syndicated service, the NRC Healthcare Market Guide, serves as a stand- alone market information and competitive intelligence source as well as a comparative performance database. This service accounted for 11% and 10% of the Company's total revenues in 1997 and 1996, respectively. 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 which are customized to meet individual client's specific information needs. Among the data featured are benchmarks specific to the National Committee for Quality Assurance ("NCQA") standardized Health Plan Employer Data and Information Set Member Satisfaction Survey that compare health plans on a local, state and/or national level. Similarly, the service'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 service'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 customized version of the Market Guide they purchase 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 8% and 14% of the Company's total revenues in 1997, and 1996, respectively. Clients The Company's ten largest clients in both 1997 and 1996 accounted for 64% of the Company's total revenues in those years. The Company's largest client, Kaiser Permanente-Northern California Region ("Kaiser"), accounted for 31% and 40% of the Company's total revenues in 1997 and 1996, respectively. On December 1, 1997, Kaiser informed the Company of its decision to select another organization to perform its performance measurement studies for 1998. The United States Department of Defense, through a primary contractor, United Healthcare Corporation, accounted for 15% of total revenues in 1997. Overall, the Company served more than 225 healthcare organizations in 1997. 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 over 9 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 in 1998 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 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 (Health Care Financing Administration, The Joint Commission on Accreditation of Healthcare Organizations 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 Institution. 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 and in-person sales presentations) and the closing of the sale. The Company's sales cycle varies depending on the particular 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, to a certain degree, currently competes with, and 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, 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. 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 patients; 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. Employees As of December 31, 1997, the Company employed a total of 74 persons on a full-time basis. In addition, as of such date the Company had 130 part-time associates primarily in its survey operations, representing approximately 93 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. Executive Officers of the Registrant The following table sets forth certain information, as of March 15, 1998, regarding the executive officers of the Company: Name Age Positions Michael D. Hays 43 President, Chief Executive Officer and Director Jona S. Raasch 39 Vice President and Chief Operations Officer Patrick E. Beans 40 Vice President, Treasurer, Chief Financial Officer, Secretary and Director Sharon Flaherty 50 Vice President - Sales, Marketing and Client Services Michael D. Hays has served as President and Chief Executive Officer and as a director since he founded the Company in 1981. Prior thereto, Mr. Hays served for seven years as a Vice President and a director of SRI Research Center, Inc. (n/k/a the Gallup Organization). Jona S. Raasch has served as Vice President and Chief Operations Officer since September 1988. Prior to joining the Company, Ms. Raasch held various positions with A.C. Nielsen. Patrick E. Beans has served as Vice President, Treasurer and Chief Financial Officer since August 1997, as Secretary since September 1997, as a director since October 1997 and as the principal financial officer since he joined the Company in August 1994. 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. Executive officers of the Company are elected by, and serve at the discretion of, the Company's Board of Directors. There are no family relationships between any directors or executive officers of NRC. Item 2. Properties 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 expires on December 31, 1999. Item 3. Legal Proceedings The Company is not subject to any material pending litigation. Item 4. Submission of Matters to a Vote of Security Holders On October 3, 1997, the shareholders of the Company, by unanimous written consent in lieu of a special meeting, approved the National Research Corporation Director Stock Plan. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters (a) The Company's Common Stock, $.001 par value ("Common Stock"), is traded on the Nasdaq National Market under the symbol "NRCI." The following table sets forth the range of high and low closing sales prices for the Common Stock for the period from October 10, 1997, the date of the initial public offering of the Common Stock, through December 31, 1997: High Low Fourth quarter ended December 31, 1997 23 4-7/8 On March 10, 1998, there were approximately 18 shareholders of record for the Common Stock. 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 (which was done concurrently with the Company's initial public offering of the Common Stock), the Company made distributions of $2,230,730 to its existing shareholders. The Company will not make any additional distributions of this kind in the future. (b) The Company's Registration Statement on Form S-1 (Registration No. 333-33273) (the "Registration Statement") relating to the offer and sale (the "Offering") of an aggregate of 2,415,000 shares of Common Stock was declared effective by the Securities and Exchange Commission on October 9, 1997. Of the 2,415,000 shares of Common Stock registered under the Registration Statement, 1,250,000 shares were sold by the Company and 1,165,000 shares (including 315,000 shares sold pursuant to the exercise of an over-allotment option granted to the underwriters) were sold by a certain shareholder of the Company, Michael D. Hays (the "Selling Shareholder"). During the period covered by this report, all of the shares of Common Stock registered were sold in the Offering at a price of $15.00 per share, for an aggregate price of $18,750,000 and $17,475,000 for the shares of Common Stock sold by the Company and the Selling Shareholder, respectively. After deducting the underwriting discount of $1.05 per share, the Selling Shareholder received net proceeds equal to $16,251,750 and the Company received net proceeds equal to $17,437,500 less expenses of $596,411 incurred in connection with the Offering. The entire net proceeds to the Company of $16,841,089 are currently being held in temporary investments of United States government securities with maturities of two years or less. Item 6. Selected Financial Data The selected statement of income data for the years ended December 31, 1997, 1996, 1995 and 1994 and the balance sheet data at December 31, 1997, 1996 and 1995 are derived from, and are qualified by reference to, the audited financial statements of the Company included elsewhere in this Annual Report on Form 10-K. The selected statement of income data for the year ended December 31, 1993 and the balance sheet data at December 31, 1994 and 1993 are derived from unaudited financial statements not included herein.
Year Ended December 31, 1997 1996 1995 1994 1993 (In thousands, except per share data) Statement of Income Data: Revenues: Renewable performance tracking services . . . . . . . . . . $13,188 $9,569 $6,839 $4,420 $507 Renewable syndicated service . . . . . . . . . . . . . . . 1,758 1,276 493 652 435 Custom and other research . . . . . . . . . . . . . . . . . 1,338 1,755 1,585 1,683 1,869 ------- ------- ------ ------ ----- Total revenues . . . . . . . . . . . . . . . . . . . . . 16,284 12,600 8,917 6,755 2,811 Operating expenses: Direct expenses . . . . . . . . . . . . . . . . . . . . . . 7,178 5,685 3,495 2,967 1,083 Selling, general and administrative . . . . . . . . . . . . 3,980 3,060 2,364 2,044 1,167 Depreciation and amortization . . . . . . . . . . . . . . . 159 173 119 86 50 Special compensation charge . . . . . . . . . . . . . . . . 1,740 - - - - ------- ------- ------ ------ ----- Total operating expenses . . . . . . . . . . . . . . . . 13,057 8,918 5,978 5,097 2,300 ------- ------- ------ ------ ----- Operating income . . . . . . . . . . . . . . . . . . . . . . 3,227 3,682 2,939 1,658 511 Other income and expenses, net . . . . . . . . . . . . . . . 367 152 108 46 12 ------- ------- ------ ------ ----- Income before income taxes . . . . . . . . . . . . . . . . . 3,594 3,834 3,047 1,704 523 Provision for income taxes . . . . . . . . . . . . . . . . . 376 - - 114 9 Pro forma income taxes(1) . . . . . . . . . . . . . . . . . . 804 1,534 1,219 583 - ------- ------- ------ ------ ----- Pro forma net income(1) . . . . . . . . . . . . . . . . . . . $2,414 $2,300 $1,828 $1,007 $ 514 ======= ======= ====== ====== ===== Pro forma net income per share - basic and diluted(1) . . . . . . . . . . . . . . . . . . . . . . $ 0.37 $ 0.37 ======= ======= Weighted average shares outstanding - basic and diluted(2) . . . . . . . . . . . . . . . . . . 6,440 6,185 December 31, 1997 1996 1995 1994 1993 (In thousands) Balance Sheet Data: Working capital . . . . . . . . . . . . . . . . . . . . . . . $17,681 $2,018 $1,534 $1,358 $54 Total assets . . . . . . . . . . . . . . . . . . . . . . . . 22,563 6,153 4,996 3,539 1,368 Total debt . . . . . . . . . . . . . . . . . . . . . . . . . - - - 9 54 Total shareholders' equity . . . . . . . . . . . . . . . . . 18,121 2,079 1,830 1,623 290 _____________________ (1) From 1984 through July 31, 1994, the Company was a C Corporation. From August 1, 1994 through October 13, 1997, the Company was 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 from January 1, 1997 to October 13, 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. (2) Includes 129,812 shares of Common Stock which, had they been issued (at $13.95 per share, the initial public offering price less the underwriting discount), would have generated cash sufficient to fund the portion of the estimated S Corporation distributions and special (cash) compensation expense that are in excess of the Company's 1996 net income. See Note 1 to the Company's Financial Statements.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Special Note Regarding Forward-Looking Statements Certain matters discussed below in this Annual Report on Form 10-K are "forward-looking statements" intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement includes phrases such as the Company "believes," "expects" or other words of similar import. Similarly, statements that describe the Company's future plans, objectives or goals are also forwarding-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which could cause actual results or outcomes to differ materially from those currently anticipated. Factors that could affect actual results or outcomes include, without limitation, the Company's reliance on a limited number of key clients for the majority of its revenues, the Company's dependence on performance tracking contract renewals, fluctuations in the Company's operating results related to the Market Guide, increased competition, changes in conditions affecting the healthcare industry, the Company's ability to manage its growth and to successfully integrate any possible future acquisitions and the Company's ability to provide timely and accurate performance tracking and market research to its clients. Shareholders, potential investors and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included are only made as of the date of this Annual Report on Form 10-K and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Overview The Company believes it is a leading provider of ongoing survey-based performance measurement, analysis and tracking services to the healthcare industry. The Company offers three primary types of information services: renewable performance tracking services, a renewable syndicated service and custom research. 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 (i.e., revenues generated pursuant to a service whose nature contemplates continued renewals) because of the Company's increasing focus on its renewable services. The Company's renewable performance tracking service, the 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 and that provide for a customer specific study which is conducted via a series of surveys and delivered via a series of updates or reports, the timing and frequency of which vary by contract (such as monthly or weekly). These contracts are generally cancelable on short or no notice without penalty and, since progress on these contracts can be tracked and regular updates and reports are made, clients are entitled to any work-in-process but are obligated to pay for all services performed through cancellation. Typically, these contracts are fixed fee arrangements and 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 service, the 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. Market Guide services are generally provided pursuant to contracts which have durations of four to six months and that provide for the receipt of survey results that are customized to meet an individual client's specific information needs. Typically, these contracts are not cancelable by clients, clients receive no rights in the comprehensive healthcare database which results from this survey, other than the right to use the customized reports purchased pursuant thereto, and 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 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. Results of Operations The following table sets forth, for the periods indicated, selected financial information derived from the Company's financial statements, 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. In December 1997, the Company's largest client, Kaiser, which accounted for 31% of the Company's total revenues in 1997, informed the Company of its decision to select another organization to perform its performance measurement studies for 1998. Due to the Company's loss of Kaiser as a client, operating results may be negatively impacted, particularly in the short-term. The discussion that follows the table should be read in conjunction with the Company's financial statements.
Percentage of Total Revenues Percentage Increase Year Ended December 31, (Decrease) 1996 1997 over over 1997 1996 1995 1996 1995 Revenues: Renewable performance tracking services......... 81.0% 75.9% 76.7% 37.8% 39.9% Renewable syndicated service.................... 10.8 10.1 5.5 37.7 158.7 Custom and other research....................... 8.2 14.0 17.8 (23.7) 10.8 ----- ----- ----- Total revenues.......................... 100.0 100.0 100.0 29.2 41.3 ===== ===== ===== Operating expenses: Direct expenses................................. 44.1 45.1 39.2 26.3 62.7 Selling, general and administrative............. 24.4 24.3 26.5 30.1 29.4 Depreciation and amortization................... 1.0 1.4 1.3 (8.2) 45.4 Special compensation charge..................... 10.7 - - 100.0 - ----- ----- ----- Total operating expenses................ 80.2 70.8 67.0 46.4 49.2 ----- ----- ----- Operating income.................................. 19.8% 29.2% 33.0% (12.4)% 25.3% ===== ===== =====
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Total revenues. Total revenues increased 29.2% in 1997 to $16.3 million from $12.6 million in 1996. Revenues from the Company's renewable performance tracking services increased 37.8% in 1997 to $13.2 million from $9.6 million in 1996 due primarily to the addition of new clients and, to a lesser extent, an increase in the scope of existing tracking projects. Revenues from the Company's renewable syndicated service increased 37.7% to $1.8 million in 1997 from $1.3 million in 1996. Such increase reflects the addition of new syndicated service clients. The Company's custom research revenue decreased 23.7% to $1.3 million in 1997 from $1.8 million in 1996. The decrease reflects the Company's primary focus on the other services provided by the Company. Direct expenses. Direct expenses increased 26.3% to $7.2 million in 1997 from $5.7 million in 1996. The increase in direct expenses was due to increases in postage expenses of $630,000, printing expenses of $161,000 and labor and payroll expenses of $642,000. Direct expenses decreased as a percentage of total revenues to 44.1% in 1997 from 45.1% in 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 during 1997. Selling, general and administrative expenses. Selling, general and administrative expenses increased 30.1% to $3.9 million in 1997 from $3.1 million in 1996. This increase was primarily due to an increase of $443,000 associated with the expansion of the Company's sales and marketing work force, an increase of $126,000 in expenses related to enhancements to the Company's dynamic questionnaire production software and an increase of $68,000 in profit sharing expense. Selling, general and administrative expenses increased as a percentage of revenues to 24.4% in 1997 from 24.3% in 1996. Depreciation and amortization. Depreciation and amortization expense decreased 8.2% to $159,000 in 1997 from $173,000 in 1996 but remained relatively constant as a percentage of revenues at 1.0% and 1.4% in 1997 and 1996, respectively. Provision for income taxes. The provision for income taxes totaled $376,000 for 1997, plus pro forma income taxes for 1997 of $803,000, for total income taxes for 1997 of $1,179,000 (32.8% effective tax rate), which included a $258,000 nonrecurring income tax benefit created by the termination of the Company's S Corporation status in October 1997 in connection with the Company's initial public offering. Without the nonrecurring income tax benefit, total income taxes for 1997 would have been $1,437,000 (39.9% effective tax rate), which compared to a $1,534,000 pro forma income tax expense for 1996 (40.0% effective tax rate). 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, to a lesser extent, the addition of new clients and an increase in the number of new projects for existing clients. Revenues from the Company's renewable syndicated service 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. Liquidity and Capital Resources The Company's principal source of funds historically has been cash flow from its operations. The Company's cash flow has been sufficient to provide funds for working capital and capital expenditures. The cash flow of the Company and its cash position was enhanced by the issuance of common stock in the Company's initial public offering during 1997. As of December 31, 1997, the Company had cash and cash equivalents of $4.7 million and working capital of $17.7 million. During 1997, the Company generated $1.5 million of net cash from operating activities as compared to $6.3 of net cash generated during 1996. The decrease in cash flow was due, in part, 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 the growth in accounts receivable, unbilled revenues and deferred revenues. The decrease in operating cash flow was also due to the special compensation charge in the fourth quarter of $1.7 million in connection with the Company's initial public offering. Net cash used in investing activities was $12.1 million for 1997 and $1.2 million for 1996. The 1997 increase in cash used by investing was primarily due to the purchasing of investments available-for-sale, which was offset by an investment of $341,000 in furniture, computer equipment and production equipment to meet the expansion of the Company's business. The 1996 use of cash was primarily a result of an increase in investments available-for-sale and an investment of $272,000 in furniture, computer equipment and production equipment. The Company's investments available- for-sale consist principally of United States government securities with maturities of two years or less. Net cash provided by financing activities was $12.5 million for 1997, compared to net cash used of $3.3 million in 1996. Net cash provided by financing activities for 1997 was the result of the Company's receipt of approximately $16.8 million of net proceeds from its initial public offering. The primary use of cash for financing activities was S Corporation distributions to shareholders of $4.3 million and $3.3 million for 1997 and 1996, respectively. The Company has budgeted approximately $400,000 for expenditures in 1998, to be funded through cash generated from operations. The Company expects that capital expenditures during 1998 will be primarily for telecommunications equipment, computer hardware, product 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 December 31, 1997 and 1996, the Company had $2.3 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 December 31, 1997 and 1996, the Company had $560,000 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. On October 16, 1997, the Company completed the initial public offering of shares of its Common Stock, resulting in net proceeds to the Company of approximately $16.8 million. The Company believes the net proceeds of 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. Year 2000 The Company has completed an assessment and developed plans to address issues related to the impact of the year 2000 on its computer systems. Financial and operational systems have been assessed, and initial plans have been developed to address the requirements. Many of the software programs used by the Company are already compliant with the requirements of year 2000 processing. The remaining systems are currently being upgraded to new vendor versions which, in addition to providing increased functionality, will address the year 2000 issue. All of these upgrades are expected to be completed prior to any anticipated impact of the year 2000 on the Company's operations. The financial impact of upgrading software is not expected to be material to the Company's consolidated financial position, results of operations or cash flow. Accounting Pronouncements Statements of Financial Accounting Standards ("SFAS") 130, Reporting Comprehensive Income, and SFAS 131, Disclosures about Segments of an Enterprise and Related Information, were issued in June, 1997. SFAS 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in financial reports issued to shareholders. It also established standards for related disclosures about products and services, geographic areas and major customers. Both SFAS 130 and SFAS 131 are effective for periods beginning after December 15, 1997. The Company anticipates adopting these accounting pronouncements in 1998; however, management believes that they will not have a significant impact on the Company's financial statements. SFAS 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, was issued in February 1998 and is effective for fiscal years beginning after December 15, 1997. SFAS 132 revises disclosure requirements for pension and other postretirement benefits plans. The Company does not expect any impact on its financial statements due to SFAS 132 because the Company does not sponsor defined benefit or other postretirement benefits covered by this accounting standard. Item 7A. Quantitative and Qualitative Disclosure About Market Risk. Not applicable. Item 8. Financial Statements and Supplementary Data Quarterly Financial Data (Unaudited) Selected quarterly financial information for the fiscal years ended December 31, 1997 and 1996 is as follows (in thousands, except per share data):
Quarter Ended Dec. Sept. June Mar. Dec. Sept. June Mar. 31, 30, 30, 31, 31, 30, 30, 31, 1997 1997 1997 1997 1996 1996 1996 1996 Revenues: Renewable performance tracking services . . . . $3,800 $3,433 $3,083 $2,871 $2,936 $2,320 $2,191 $2,122 Renewable syndicated services . . . . . . . . . 462 852 103 341 252 923 19 82 Custom and other research . . . . . . . . . . . 341 446 324 228 459 397 452 447 ------- ------- ------ ------- ------- ------ ------ ------- Total revenues . . . . . . . . . . . . . . . 4,603 4,731 3,510 3,440 3,647 3,640 2,662 2,651 Direct expenses . . . . . . . . . . . . . . . . . 1,840 2,327 1,618 1,393 1,432 1,926 1,195 1,132 Selling, general and administrative . . . . . . . 1,149 995 886 951 1,064 677 659 660 Depreciation and amortization . . . . . . . . . . 37 43 37 42 60 41 36 36 Special compensation charge . . . . . . . . . . . 1,740 -- -- -- -- -- -- -- ------- ------- ------ ------- ------- ------ ------ ------- Operating income (loss) . . . . . . . . . . . . . (163) 1,366 969 1,054 1,091 996 772 823 Other income and expenses, net . . . . . . . . . 215 55 52 45 45 32 38 37 Provision for income taxes . . . . . . . . . . . 376 -- -- -- -- -- -- -- Pro forma income taxes (benefit)(1) . . . . . . . (613) 568 408 440 455 411 324 344 ------- ------- ------ ------- ------- ------ ------ ------- Pro forma net income(1) . . . . . . . . . . . . . $ 289 $ 853 $ 613 $ 659 $ 681 $ 617 $ 486 $ 516 ======= ======= ====== ======= ======= ====== ====== ======= Pro forma net income per share - basic and diluted(1) . . . . . . . . . . . . . . . . $ 0.04 $ 0.14 $ 0.10 $ 0.11 $.011 $0.10 $ 0.08 $ 0.08 Weighted average shares outstanding - basic and diluted(2) . . . . . . . . . . . . . 7,195 6,185 6,185 6,185 6,185 6,185 6,185 6,185 _______________________ (1) From August 1, 1994 through October 13, 1997, the Company was an S Corporation and, accordingly, was not subject to Federal and state income taxes for any of the quarterly periods presented, except from October 14, 1997 to December 31, 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. (2) Includes 129,812 shares of Common Stock which, had they been issued (at $13.95 per share, the initial public offering price less the underwriting discount), would have generated cash sufficient to fund the portion of the estimated S Corporation distributions and special (cash) compensation expense that are in excess of the Company's 1996 net income. See Note 1 to the Company's Financial Statements.
INDEPENDENT AUDITORS' REPORT The Board of Directors National Research Corporation: We have audited the accompanying balance sheets of National Research Corporation as of December 31, 1997 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, 1997. 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, 1997 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, 1997, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Lincoln, Nebraska February 6, 1998 NATIONAL RESEARCH CORPORATION Balance Sheets December 31, 1997 and 1996 Assets 1997 1996 Current assets: Cash and cash equivalents . . . . . . . $ 4,688,352 $ 2,782,212 Investments in marketable debt securities . . . . . . . . . . . . . 13,220,553 1,476,965 Trade accounts receivable, less allowance for doubtful accounts of $62,808 and $45,000 in 1997 and 1996, respectively . . . . . . . 3,094,772 1,216,812 Unbilled revenues . . . . . . . . . . . 559,856 282,358 Prepaid expenses and other . . . . . . 184,156 46,022 Deferred income taxes . . . . . . . . . 127,225 - ----------- ----------- Total current assets . . . . . . . . 21,874,914 5,804,369 ----------- ----------- Property and equipment: Furniture and equipment . . . . . . . . 382,654 291,514 Computer equipment . . . . . . . . . . 681,563 481,055 ----------- ----------- 1,064,217 772,569 Less accumulated depreciation and amortization . . . . . . . . . . . . . 544,262 434,937 ----------- ----------- Net property and equipment . . . . . 519,955 337,632 ----------- ----------- Deferred income taxes . . . . . . . . . . 155,775 - Other . . . . . . . . . . . . . . . . . . 12,482 10,657 ----------- ----------- Total assets . . . . . . . . . . . . $22,563,126 $6,152,658 =========== =========== Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued expenses . . . . . . . . . . . . . . $615,930 $494,614 Accrued wages, bonuses and profit sharing . . . . . . . . . . . . . . . 1,161,917 764,784 Dividends payable . . . . . . . . . . . - 359,384 Income taxes payable . . . . . . . . . 118,000 - Billings in excess of revenues earned . . . . . . . . . . . . . . . . 2,297,751 2,168,026 ----------- ----------- Total current liabilities . . . . . 4,193,598 3,786,808 Bonuses and profit sharing accruals . . . 248,684 286,443 ----------- ----------- Total liabilities . . . . . . . . . 4,442,282 4,073,251 ----------- ----------- Shareholders' equity: Preferred stock, $.01 par value; authorized 2,000,000 shares no shares issued and outstanding . . . . . . . . - - Common stock, $.001 par value; authorized 20,000,000 shares, issued and outstanding 7,305,000 and 6,055,000 in 1997 and 1996, respectively . . . . . . 7,305 6,055 Additional paid-in capital . . . . . . 16,839,839 - Retained earnings . . . . . . . . . . . 1,273,700 2,073,352 ----------- ----------- Total shareholders' equity . . . . . 18,120,844 2,079,407 ----------- ----------- Commitments and contingencies Total liabilities and shareholders' equity . . . . . . . . . . . . . . . $22,563,126 $6,152,658 =========== ========== See accompanying notes to financial statements. NATIONAL RESEARCH CORPORATION Statements of Income Years ended December 31, 1997, 1996 and 1995 1997 1996 1995 Revenues: Renewable performance tracking services . . . . $ 13,187,685 $ 9,568,915 $ 6,839.410 Renewable syndicated service 1,757,691 1,276,423 493,416 Custom and other research . 1,338,757 1,754,895 1,584,533 ----------- ----------- ---------- Total revenues . . . . . 16,284,133 12,600,233 8,917,359 ----------- ----------- ---------- Operating expenses: Direct expenses . . . . . . 7,178,408 5,685,200 3,494,706 Selling, general and administrative . . . . . 3,980,316 3,060,189 2,364,269 Depreciation and amortization 159,013 173,148 119,093 Special compensation charge 1,740,000 - - ---------- ---------- --------- Total operating expenses 13,057,737 8,918,537 5,978,068 ---------- ---------- --------- Operating income . . . . 3,226,396 3,681,696 2,939,291 ---------- ---------- --------- Other income: Interest income . . . . . . 366,978 125,948 106,300 Other, net . . . . . . . . 55 26,484 1,651 ---------- ---------- --------- Total other income . . . 367,033 152,432 107,951 ---------- ---------- --------- Income before income taxes . . . . . . . . 3,593,429 3,834,128 3,047,242 Provision for income taxes 376,000 - - ---------- ---------- --------- Net income . . . . . . . $ 3,217,429 $ 3,834,128 $ 3,047,242 Pro forma information: Net income . . . . . . . . $ 3,217,429 $ 3,834,128 $ 3,047,242 Pro forma income taxes . . 803,463 1,533,651 1,218,897 ---------- ---------- ---------- Pro forma net income . . $ 2,413,966 $ 2,300,477 $ 1,828,345 ========== ========== ========== Pro forma net income per share - basic and diluted . . . . . $ 0.37 $ 0.37 ========== ========== See accompanying notes to financial statements. NATIONAL RESEARCH CORPORATION Statements of Shareholders' Equity For the three years ended December 31, 1997
Additional Preferred Common Paid-in Retained Stock Stock Capital Earnings Total 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 Issuance of 1,250,000 shares of common stock, net of offering expenses . . . . . . . . . . . . . . - 1,250 16,839,839 - 16,841,089 Net income . . . . . . . . . . . . . . - - - 3,217,429 3,217,429 Dividends declared, $.55 per share . . - - - (4,017,081) (4,017,081) ------ -------- ---------- ---------- ----------- Balances at December 31, 1997 . . . . . $ - $ 7,305 $ 16,839,839 $ 1,273,700 $ 18,120,844 ====== ======== ========== ========= =========== See accompanying notes to financial statements.
NATIONAL RESEARCH CORPORATION Statements of Cash Flows Years ended December 31, 1997, 1996 and 1995
1997 1996 1995 Cash flows from operating activities Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,217,429 $ 3,834,128 $ 3,047,242 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 159,013 173,148 119,093 Loss on sale of property and equipment . . . . . . . . . . . . . . . - 32,837 - Change in assets and liabilities: Trade accounts receivable . . . . . . . . . . . . . . . . . . . . . (1,877,960) 1,695,310 (2,355,788) Unbilled revenues . . . . . . . . . . . . . . . . . . . . . . . . . (277,498) (185,024) (97,334) Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . (139,959) (21,412) 1,278 Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . (283,000) - - Accounts payable and accrued expenses . . . . . . . . . . . . . . . 121,316 134,626 128,422 Accrued wages, bonuses and profit sharing . . . . . . . . . . . . . 359,374 402,788 449,724 Billings in excess of revenues earned . . . . . . . . . . . . . . . 129,725 279,872 488,969 Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . 118,000 - - Increase in cash surrender value of life insurance . . . . . . . . . - - (27,211) ---------- --------- --------- Net cash provided by operating activities . . . . . . . . . . 1,526,440 6,346,273 1,754,395 ---------- --------- --------- Cash flows from investing activities: Purchases of property and equipment . . . . . . . . . . . . . . . . . . (341,339) (272,235) (160,923) Purchases of securities available-for-sale . . . . . . . . . . . . . . (13,553,644) (4,154,720) (1,503,726) Proceeds from the maturities of securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . 1,810,058 3,265,000 1,650,000 ---------- --------- --------- Net cash used in investing activities . . . . . . . . . . . . (12,084,925) (1,161,955) (14,649) ---------- --------- --------- Cash flows from financing activities: Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,376,464) (3,336,906) (2,709,572) Payments on capital leases . . . . . . . . . . . . . . . . . . . . . . - - (12,301) Proceeds from issuance of common stock . . . . . . . . . . . . . . . . 16,841,089 - - Payments to acquire common stock . . . . . . . . . . . . . . . . . . . - - (29,106) ---------- --------- ---------- Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . 12,464,625 (3,336,906) (2,750,979) ---------- --------- --------- Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . 1,906,140 1,847,412 (1,011,233) Cash and cash equivalents at beginning of period . . . . . . . . . . . . 2,782,212 934,800 1,946,033 --------- --------- ---------- Cash and cash equivalents at end of period . . . . . . . . . . . . . . . $ 4,688,352 $ 2,782,212 $ 934,800 --------- --------- ---------- Supplementary information Cash paid for: Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ - $ 431 ======== ========= ========= Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 541,000 $ - $ - ======== ========= ========= 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.
NATIONAL RESEARCH CORPORATION Notes to Financial Statements (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 to the healthcare industry. The Company provides market research services to hospitals and insurance companies on an unsecured credit basis. One client accounted for 31.1%, 40.4% and 43.7% of total revenues in 1997, 1996 and 1995, respectively. This client canceled its contract for performance measurement studies in December of 1997. Another client accounted for 13.6% of total revenues in 1995. A third client accounted for 15.1% of the total revenues in 1997. The Company operates in a single industry segment. Basis of Presentation Pro Forma Net Income and Net Income Per Share - Pro forma net income and pro forma 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. Pro forma income per share has been calculated following the adoption of Statement of Financial Accounting Standards (SFAS) 128, Earnings per Share, which has changed the method for calculating income per share. SFAS 128 requires the presentation of "basic" and "diluted" income per share data on the face of the income statement. Prior period income per share data has been restated in accordance with SFAS 128. Pro forma income per share is computed by dividing net income by the weighted average number of common shares and common equivalent shares outstanding during each period. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 98, weighted average shares outstanding for 1997 and 1996 include the pro forma effect of shares that would have had to have been issued (at $13.95 per share, the initial public offering price less the underwriting discount expense) to generate sufficient cash to fund the portion of the approximately $5.6 million of S Corporation distributions and special (cash) compensation expense that are in excess of the net income for the year ended December 31, 1996. The weighted average shares outstanding is calculated as follows: Year ended Year ended December 31, December 31, 1997 1996 Common stock . . . . . . . . . . . . . 6,309,728 6,055,000 Dilutive effect of assumed initial public offering shares for distribution . . . . . . . . . . . . . 129,812 129,812 --------- --------- Weighted average common shares - Basic . . . . . . . . . . . 6,439,540 6,184,812 Dilutive effect of options issued . . . 694 -- --------- --------- Weighted average common shares and common share equivalents - Diluted . . . . . . . . . . . . . 6,440,234 6,184,812 ========= ========= There are no reconciling items between the Company's reported pro forma net income and pro forma net income used in the computation of basic and diluted income per share. 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. Revenue Recognition The Company derives a substantial majority of its operating revenues from its annually renewable services, which include the NRC Listening System ("Renewable Performance Tracking Services") and the NRC Healthcare Market Guide ("Renewable Syndicated Service"). 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) biannual 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. These services typically include a series of surveys and deliverable reports in which the timing and frequency vary by contract. Progress on a contract can be tracked reliably and customers are obligated to pay as services are performed. 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. The Company recognizes revenue on a completed contract basis for its Renewable Syndicated Service contracts with its principal customers. Characteristics of these contracts include durations of four to six months, progress to completion cannot be reasonably defined, and various intermediate steps in the process overlap in stages of progress for different contracts. The Company defers direct costs of preparing the survey data for the Renewable Syndicated Service. The Company recognizes revenues and related direct costs for its Renewable Syndicated Service upon delivery to its principal customers. Customers have no obligation to pay for these services until the services are delivered. The Company generates additional revenues from incidental customers subsequent to the completion of each edition. Revenues and costs for these services are recognized as the customization services are performed and completed. 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 five to seven years. The Company uses accelerated methods of depreciation and amortization over estimated useful lives of five to seven years for furniture and fixtures and three to five years for computer equipment. Marketable Securities All marketable securities held by the Company at December 31, 1997 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 the 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. The Company terminated its S Corporation election on October 13, 1997. Therefore, no provision or liability for federal income taxes has been included in these financial statements for the period from January 1, 1997 through October 13, 1997 and for the years ended December 31, 1996 and 1995. Income taxes have been provided on the Company's taxable income from October 14, 1997 through December 31, 1997. Upon the termination of its S Corporation election, the Company adopted the asset and liability method of accounting for income taxes of Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. (See also note 3.) Under that method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances, if any, are established when necessary to reduce deferred tax assets to the amount that is more likely than not to be realized. Stock Option Plans The Company recognizes stock-based compensation expense for its stock option plans using the intrinsic value method. Under that method, no compensation expense is recorded if the exercise price of the employee stock options equals or exceeds the market price of the underlying stock on the date of grant. For disclosure purposes, pro forma net income and income per share are provided as if the fair value method had been applied. 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 of available-for-sale securities by major security type is shown below. Amortized cost approximates fair value. December 31, Debt securities: 1997 1996 Obligations of U.S. government agencies . . . . . . . . . . . $13,219,350 $1,475,752 Other . . . . . . . . . . . . . . 1,203 1,213 ---------- --------- Total . . . . . . . . . . . . $13,220,553 $1,476,965 ========== ========= There were no sales of marketable securities in advance of schedule maturities of available-for-sale marketable debt securities during 1997, 1996 or 1995. All marketable debt securities have stated maturities of two years or less. (3) Income Taxes and Pro Forma Income Taxes Income tax expense (benefit) for the period of October 14, 1997 through December 31, 1997 consisted of the following components: Current Deferred Total Federal . . . . . . . . . . . . $553,000 $(237,000) $316,000 State . . . . . . . . . . . . . 106,000 (46,000) 60,000 -------- --------- -------- Total . . . . . . . . . . . $659,000 $(283,000) $376,000 ======== ========= ======== Income tax expense for the period of October 14, 1997 through December 31, 1997 is based on taxable income of approximately $1,592,500. The difference between the Company's income tax expense as reported in the accompanying financial statements for 1997 and that which would be calculated applying the U.S. Federal income tax rate of 34% on pretax income is as follows: Expected Federal income taxes . . . . . . . . . . . . . . . . $541,500 State income taxes, net of federal benefit . . . . . . . . . 70,100 Deferred tax benefits recognized upon termination of the Company's S Corporation election . . . . . . . . . . (258,000) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,400 -------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . $376,000 ======== Deferred tax assets at December 31, 1997, were comprised of the following: Deferred tax assets: Allowance for doubtful accounts . . . . . . . . . . . . . $24,500 Accrued expenses . . . . . . . . . . . . . . . . . . . . 102,725 Bonus and profit sharing accruals . . . . . . . . . . . . 155,775 ------- Total deferred tax assets . . . . . . . . . . . . . . . $283,000 ======= The Company did not record a valuation allowance for its deferred tax assets because management believes that it is more likely than not that the Company will generate sufficient taxable income to fully realize these deferred tax benefits. The accompanying statements of income reflect a provision for income taxes on a pro forma basis, at a combined rate of 40% (Federal statutory rate of 34% plus estimated state rate, net of federal benefit of 6%) 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: Years ended December 31, 1997 1996 1995 Federal . . . . . $642,770 $1,226,921 $975,118 State . . . . . . 160,693 306,730 243,779 -------- ---------- ---------- Pro forma income taxes . . . . . . $803,463 $1,533,651 $1,218,897 ======== ========== ========== (4) Common Stock During 1997, the Company reincorporated in Wisconsin and paid a stock dividend of approximately 239.5-to-1, the effects of which were given retroactive effect in the accompanying financial statements. In connection with the reincorporation, the Company also increased its authorized common stock from 100,000 shares to 20,000,0000 shares and authorized up to 2,000,0000 shares of undesignated preferred stock. In August 1997, the Company decided to pay special cash bonuses aggregating $1,740,000 to two executive officers prior to the termination of its S Corporation status, with such bonuses intended to fund the purchase of Company shares by such individuals in an initial public offering ("IPO") of the Company's common stock. The related special compensation expense of $1,740,000 was recognized by the Company in the fourth quarter of 1997, concurrent with the completion of the IPO. The special compensation expense reduced the amount otherwise available for distribution to the Company's shareholders prior to the termination of its S Corporation status. On October 9, 1997, the Company completed its IPO by issuing 1,250,000 shares of common stock at a price of $15 per share. Net proceeds of $16,841,089 were realized by the Company after deducting the underwriting discount and offering expenses. (5) Stock Option Plans In August 1997, the Board of Directors adopted and the Company's shareholders approved the National Research Corporation 1997 Equity Incentive Plan (the "Equity Incentive Plan"). The Equity Incentive Plan provides for the granting of options to purchase up to an aggregate of 730,000 shares of the Company's common stock through the date of the Company's annual meeting of shareholders in the year 2001. Options granted may be either nonqualified or incentive stock options. Vesting terms vary with each grant, and option terms are five years. At December 31, 1997, there were approximately 562,870 shares available for issuance pursuant to future grants under the Equity Incentive Plan. In October 1997, the Board of Directors adopted and the Company's shareholders approved the National Research Corporation Director Stock Plan (the "Director Plan"). As amended in December 1997, the Director Plan provides for formula grants of nonqualified options to each director of the Company who is not an employee of the Company. On the date of each annual meeting of shareholders of the Company, each such director, if reelected or retained as a director at such meeting, is granted an option to purchase 1,000 shares of the Company's common stock. Option exercise prices equal the fair market value of the Company's common stock on the date of grant. Options vest one year following the date of grant and may be exercisable for a period of up to 10 years following the date of grant. No options have been granted under the Director Plan. At December 31, 1997, there were 30,000 shares available for issuance pursuant to future grants under the Director Plan. Options to purchase 168,843 shares of common stock were granted concurrent with the completion of the Company's IPO with exercise prices equal to the IPO price of $15 per share. No compensation expense was recorded on this grant. Had compensation cost for the Equity Incentive Plan been determined using the fair value method, the Company's net income and net income per share would have been reduced to the pro forma amounts indicated below: 1997 Pro forma: Net income, as reported . . . . . . . . . . . . . . . . $2,414 Net income, adjusted for the fair value method . . . . 2,332 Income per share, as reported (1) . . . . . . . . . . . $0.37 Income per share, adjusted for the fair value method (1) . . . . . . . . . . . . . . . . . . . . . 0.36 (1) Amounts are the same for both basic and diluted income per share. The weighted average fair value of options granted in 1997 was $6.16. These pro forma amounts may not be representative of future disclosures since the estimated fair value of stock options is amortized to expense over the vesting period, and additional options may be granted in future years. The fair value for these options was estimated at the date of grant using the Black-Scholes model with the following assumptions: Expected dividend yield at date of grant . . . . . 0 Expected stock price volatility . . . . . . . . . . 45% Risk-free interest rate in 1997 . . . . . . . . . . 6.00% Expected life of options . . . . . . . . . . . . . 3.75 The following information relates to options to purchase common stock under the Equity Incentive Plan for the year ended December 31, 1997: Weighted Average Options Exercise Price Granted . . . . . . . . . . . . . . . $168,843 $15 Forfeited . . . . . . . . . . . . . . (1,713) 15 -------- -------- Options outstanding, December 31, 1997 167,130 15 ======== ======== Exercisable . . . . . . . . . . . . . -- $15 ======== ======== (6) 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 was $253,034, $183,118 and $168,417 during 1997, 1996 and 1995, respectively, and is included in selling, general and administrative expenses in the statements of income. On January 9, 1998, the Company executed a new lease commitment for its existing office space which requires minimum rental payments of $199,311 in 1998 and $182,279 in 1999. (7) 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 other nonqualified profit sharing plans. Employer contributions, which are discretionary, vest to participants at a rate of 20% per year. Total profit sharing expense was $97,402, $75,229 and $48,989 in 1997, 1996 and 1995, respectively. The Company also 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 $607,877, $552,832 and $468,052 in 1997, 1996 and 1995, respectively. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant The information required by this Item with respect to directors and Section 16 compliance is included under the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance", respectively, in the Company's definitive Proxy Statement for its 1998 Annual Meeting of Shareholders ("Proxy Statement") and is hereby incorporated herein by reference. Information with respect to the executive officers of the Company appears in Part I, page 7 of this Annual Report on Form 10-K. Item 11. Executive Compensation The information required by this Item is included under the captions "Board of Directors-Director Compensation" and "Executive Compensation" in the Proxy Statement and is hereby incorporated herein by reference; provided, however, that the subsection entitled "Executive Compensation- Report on Executive Compensation" shall not be deemed to be incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this Item is included under the caption "Principal Shareholders" in the Proxy Statement and is hereby incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information required by this Item is included under the captions "Certain Transactions" and "Executive Compensation-Compensation Committee Interlocks and Insider Participation" in the Proxy Statement and is hereby incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1. Financial statements - The financial statements listed in the accompanying index to financial statements and financial statement schedules are filed as part of this Annual Report on Form 10-K. 2. Financial statement schedules - The financial statement schedules listed in the accompanying index to financial statements and financial statement schedules are filed as part of this Annual Report on Form 10-K. 3. Exhibits - The exhibits listed in the accompanying index to exhibits are filed as part of this Annual Report on Form 10-K. (b) Reports on Form 8-K On December 3, 1997, the Company filed a Current Report on Form 8-K, dated December 1, 1997, to report (under Item 5 of Form 8-K) the issuance of a press release announcing that the Company's largest client, Kaiser, informed the Company of its decision to select another organization to perform its performance measurement studies for 1998. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 25th day of March, 1998. NATIONAL RESEARCH CORPORATION By /s/ Michael D. Hays Michael D. Hays President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Michael D. Hays President, Chief Executive March 25, 1998 Michael D. Hays Officer and Director (Principal Executive Officer) /s/ Patrick E. Beans Vice President, Treasurer, March 25, 1998 Patrick E. Beans Secretary, Chief Financial Officer and Director (Principal Financial and Accounting Officer) /s/ John N. Nunnelly Director March 25, 1998 John N. Nunnelly /s/ Paul C. Schorr, III Director March 25, 1998 Paul C. Schorr, III INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE Page in this Form 10-K Independent Auditor's Report 17 Balance Sheets as of December 31, 1997 and 1996 18 Statements of Income for each of the years in the three-year period ended December 31, 1997 19 Statements of Shareholders' Equity for each of the years in the three-year period ended December 31, 1997 20 Statements of Cash Flows for each of the three years in the period ended December 31, 1997 21 Notes to Financial Statements 22-28 Independent Auditor's Report on Financial Statement Schedule 32 Financial Statement Schedule: II - Valuation and Qualifying Accounts 33 All other financial statement schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedules, or because the information required is included in the consolidated financial statements and notes thereto. INDEPENDENT AUDITOR'S REPORT ON FINANCIAL STATEMENT SCHEDULE The Board of Directors National Research Corporation: Under date of February 6, 1998, we reported on the balance sheets of National Research Corporation as of December 31, 1997 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, 1997, which are included in the Form 10-K. In connection with our audits of the aforementioned financial statements, we also audited the related financial statement schedule in the Form 10-K. 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 February 6, 1998 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, 1995 . . . . . . . $10,000 $24,100 $ 9,100 $25,000 Year Ended December 31, 1996 . . . . . . . 25,000 30,764 10,764 45,000 Year Ended December 31, 1997 . . . . . . . 45,000 35,000 17,192 62,808 See accompanying independent auditors' report.
EXHIBIT INDEX Exhibit Number Exhibit Description (3.1) Articles of Incorporation of National Research Corporation, as amended to date [Incorporated by reference to Exhibit (3.1) to National Research Corporation's Form S-1 Registration Statement (Registration No. 333-33273)] (3.2) By-Laws of National Research Corporation, as amended to date [Incorporated by reference to Exhibit (3.2) to National Research Corporation's Form S-1 Registration Statement (Registration No. 333-33273)] (10.1)* National Research Corporation 1997 Equity Incentive Plan [Incorporated by reference to Exhibit (10.2) to National Research Corporation's Form S-1 Registration Statement (Registration No. 333-33273)] (10.2)* National Research Corporation Director Stock Plan, as amended to date (10.3)* Employment Memorandum, dated as of July 15, 1994, from National Research Corporation to Patrick E. Beans [Incorporated by reference to Exhibit (10.5) to National Research Corporation's Form S-1 Registration Statement (Registration No. 333-33273)] (10.4)* Employment Agreement, dated as of December 1, 1996, between National Research Corporation and Sharon Flaherty [Incorporated by reference to Exhibit (10.6) to National Research Corporation's Form S-1 Registration Statement (Registration No. 333-33273)] (10.5)+ Subcontract, dated as of May 9, 1997, as amended, between National Research Corporation and United HealthCare Corporation [Incorporated by reference to Exhibit (10.7) to National Research Corporation's Form S-1 Registration Statement (Registration No. 333- 33273)] (10.6)+ Delivery Order and Task Order Addendum to the Subcontract between United HealthCare and National Research Corporation, dated as of December 23, 1997, between National Research Corporation and United HealthCare Corporation (10.7) Lease, dated as of January 9, 1998, between National Research Corporation and Gold's Limited Partnership (27) Financial Data Schedule (EDGAR version only) (99) Proxy Statement for the 1998 Annual Meeting of Shareholders [The Proxy Statement for the 1998 Annual Meeting of Shareholders will be filed with the Securities and Exchange Commission under Regulation 14A within 120 days after the end of the Company's fiscal year. Except to the extent specifically incorporated by reference, the Proxy Statement for the 1998 Annual Meeting of Shareholders shall not be deemed to be filed with the Securities and Exchange Commission as part of this Annual Report on Form 10-K.] _______________ * A management contract or compensatory plan or arrangement. + 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 24b-2 under the Securities Exchange Act of 1934, as amended. The redacted material is being filed separately with the Securities and Exchange Commission. EX-10.2 2 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 ("Outside Director") shall be eligible to receive shares of Common Stock under the Plan. 5. Director Grants. On the date of the Company's 1998 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 Grant Date, or if no such sale shall have been made on that day, on the last preceding day on which there was such a sale. 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. 6. Restrictions on Transfer. 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, the number and kind of shares subject to outstanding options and the exercise price of outstanding options 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, to the extent that the Plan is intended to qualify as a "formula plan" under Rule 16b-3 under the Securities Exchange Act of 1934, as interpreted, 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 1972, 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 Administrator 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 October 3, 1997. The Plan shall terminate on such date as may be determined by the Board. EX-10.6 3 APPENDIX E DELIVERY ORDER AND TASK ORDER ADDENDUM TO THE SUBCONTRACT BETWEEN UNITED HEALTHCARE AND NATIONAL RESEARCH CORPORATION This Addendum to the Subcontract Between United HealthCare (UHC) and National Research Corporation is effective 11/14/97, and is as follows: 1. The attached document is hereby incorporated into the Agreement: a. Delivery Order No. 0011 - Order for Supplied or Services issued by the Department of Defense to UHC on 12-19-97 b. Task Order No. 0011 issued by United HealthCare UNITED HEALTHCARE NATIONAL RESEARCH CORPORATION By /s/ By /s/ Patrick E. Beans Title Vice President Title Vice President, Chief Financial Officer Date 12-19-97 Date 12-23-97 D/SIDDOMS Lot III Contact Number DASW01-95-D-0029 Delivery Order Number 0011 Customer Satisfaction Survey I. Introduction United HealthCare'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 pre-selected bedded MTFs and freestanding clinics in Europe and 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 in the United States and Europe combined. 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 in the previous month and investigate satisfaction with specific patient visits. Respondents will reply directly to United HealthCare. We will process the reply forms and prepare one- page reports for each medical treatment facility and aggregate the reports for higher headquarters levels: Service Intermediate Commands, Regional Lead Agents, Surgeon General sand Health Affairs. Fundamental unit of analysis 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 MTFs within the last 30 days. The survey will focus on satisfaction with the services received. Survey results will be reported on a monthly basis. This survey will replace most of the ad hoc satisfaction surveys currently being done locally at MTFs. - We will prepare a one-page standardized report on customer satisfaction for each clinic aggregated to the individual MTF, Intermediate Command, Service Surgeon General (SG), Lead Agent (LA) and OSD Health Affairs (HA) levels. Emphasis will be placed on continued improvement to streamline procedures so processing is achieved with a minimum impact on MTF routines within prescribed schedules. - We will provide data comparing military satisfaction with civilian benchmark measures. Intermediate Commands are defined as Army Regional Medical Commands (RMCs), Navy Health Services Support Organizations (HSOs) and Air Force Major Commands (MAJCOMs). -------------------- * 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 24b-2. II. Analysis Approach for Specific Tasks The following tasks pertain to the project. A. Task 1 -- Review sample methodology We will review the sample methodology based on results of TASK TWO mailing. Survey population includes patients seen at all clinics at U.S> and European 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. The maximum survey mailings anticipated each month are * in the United States (based on Task Two results) and * in Europe; anticipated response rate is approximately *%. This amounts to approximately * completed surveys per * clinics or approx. * completed surveys each month. Health Affairs will provide United HealthCare with a spreadsheet listing all participating MTFs and their respective clinics by number of monthly outpatients visits, DMIS, MEPRS, CHCS & ADS code listings. B. Task 2 -- 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 MTF Commanders, and include copies of subordinate reports as detailed in the attachment. Reports will indicate name of facility/clinic being surveyed and the sample size. The reports will trend the facility/clinic against (1) itself; (2) other clinics within the same MTF; (3) overall MHS wide averages, and (4) civilian Health Maintenance Organizations (HMOs) benchmarks. The reports will present scores from individual questions, composite scale scores and overall satisfaction ratings. We will prepare an Excel spreadsheet, which includes tabular data for all levels of reports. This file will be sent with routine report package to all levels. ________________________ * 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 24b-2. C. Task 3 -- Review electronic report submission We will research and develop methods to record and transmit reports and supporting spreadsheets electronically using the Health Affairs Web site or other secure transmission methods. The purpose of this exercise is to evaluate the feasibility and benefits of distributing the final reports via electronic means in place of the current paper report formats. A proposal outlining the results of the assessment as well as a description of required tasks/costs for implementing the changes will be presented to Health Affairs for review. Upon review, if electronic distribution of reports is deemed more cost effective and efficient, actual implementation of changes and steps to replace hard copy mailings will be further tasked under separate technical proposal. D. Task 4 -- Develop electronic summary report Based on the outcome of Task 3, we will work with Health Affairs to design an electronic summary report for the Web site. The report format will be finalized and submitted electronically to Health Affairs for review and approval. E. Task 5 -- Review the procedures guide We will review the Customer Satisfaction Survey Data Extraction Procedures Guide when necessary to document current guidance and extract/transfer software if changes are made during this period. If changes are made, we will redistribute the guide via postal mail, fax or e-mail (where possible) to information systems officers and by postal mail to MTF Commanders and Health Affairs. An updated contact list of information system officers with correct postal and e-mail addresses, commercial phone numbers and fax numbers will be provided to United HealthCare by Health Affairs. A separate procedures guide will be provided to information systems officers at MTFs located outside the continental United States (OCONUS): We will distribute the guide via fax or e-mail (where possible) to the appropriate information systems officers. A contact list of information system officers at each European MTFs will be provided by Health Affairs. List must contain most current postal and e-mail addresses, commercial phone numbers and fax numbers. F. Task 6 -- 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 and continue to offer improvement suggestions. Expansion of survey to branch/satellite clinics will be as directed by the task manager to ensure budget is not exceeded. Cut off for MTFs to respond is *. Data that the MTFs must forward to United HealthCare via Ft. Detrick will include, at a minimum, Initial Entry Number or 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 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). ------------------ * 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 24b-2. G. Task 7 -- CHCS/ADS data merge 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) that 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 MHS. UCH 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 become the secondary data collection system in the operation of the Customer Satisfaction Survey. H. Task 8 -- Pull random sample From this universe of patients, we will conduct a random ] of patient data and generate a list of patients who will ultimately receive the questionnaire. The basis of the larger universe is *% of the original patient data (appointment data with *). A magnetic tape (CD ROM) containing the sampled data will be transferred via overnight delivery from Ft. Detrick to United HealthCare. When patient information is available, the contractor will identify and eliminate patients who have been surveyed in the prior month. I. Task 9 -- Reproduce customized surveys We will reproduce the customized cover letter sand 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. J. Task 10 -- Mail surveys in United States * We will use first class mail insuring that maximum U.S. Postal Service discounts are obtained via appropriate sorting, bundling and bar coding. - Prior to "System of Record Notice" Processing as directed by Task Manager, we will purge all patient and provider identifying data from our records (including social security numbers, provider names, patient and sponsor names and street addresses, and IENs) *. We will not maintain database which tracks if patients have or have not responded to a questionnaire. We will purge all provider specific identification from the data file at the same time the patient identifiers are purged. We also will not maintain a response database that includes provider identification. - After "System of Record Notice" process is complete, as notified by the Task Manager, we will maintain a temporary data file to indicate if a patient has received or responded to a questionnaire for the purposes of determining if a * is necessary and to identify individuals who should be eliminated from subsequent month's sample. We will purge all patient-specific data *. We will retain provider name, rank and specialty information in the response database. ------------------------ * 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 24b-2. K. Task 11 -- Process completed surveys and maintain data We will input answers from the completed surveys into a data file after they are returned within the designated response period. We will be prepared to maintain at least five years of raw patient response data (excluding written comments data) in standard format (such as DBF); paper survey form responses will be destroyed after information has been entered into the computer and quality checks are complete (no more than 10 days after data is entered). L. Task 12 -- Forward written comments to MTFs We will forward written comments directly to MTFs by detaching patient comments found on separate sheets of paper and will not retain any forms of these comments. 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. Those written comments made by individuals where the appropriate MTF cannot be identified will be forwarded to the Task Manager. M. Task 13 -- Generate and mail paper reports We will generate paper reports based on * of appointment data and mail reports directly to MTF Commanders or other designated individual in each MTF. For example, in *, we will report on * U.S. appointment data. For European survey efforts, in *, we will report on * appointment data. Reports for U.S. MTFs will show trending information and include appropriate comparisons/benchmarks with civilian Health Maintenance Organizations. Reports for European MTFs will show trending information and only include comparisons against MHS averages. The "rolling" * averages are required to maintain statistical significance. We will implement actions, to include added clinics or MTFs and/or specific increased mailings, to boost response rates that consistently lag below*%. _____________________ * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separate;y with the SEC pursuant to Rule 24b-2. We will prepare paper reports aggregating the MTFs under their jurisdictions to Intermediate Commands, Lead Agents, Service Surgeons General and OSD Health Affairs, see attachment which details reports to be sent to each activity. N. Task 14 -- Generate and mail electronic reports We will provide a spreadsheet file monthly with response rate information to the Task Manager 5 days after survey response cut off date. File to include military Service, Region, Intermediate Command, DMIS ID, MTF name, clinic name and MEPRS code, appointment month and year, number of surveys mailed, number surveys that were undeliverable, number of surveys received, and response rate percentage. We will provide a spreadsheet file monthly to Health Affairs and the Service Surgeons General with MTF level response distribution for each question. We will forward an Excel format diskette or CD ROM (depending on size of files) to OSD Health Affairs along with quarterly raw response date (DBF format) and reports which includes tabular data (including referenced benchmark numbers) contained on all reports. We will also forward raw response data for that quarter in Excel format on diskette to the MTF Commander. No raw data files will include provider names or specialties until "System of Record Notice" is processed, as notified by the Task Manager. Once approval is issued, provider information will be included only on the MTF data files and the central contractor data files. These files and diskettes will be marked "Sensitive - For Official Use Only", and be protected in accordance with the Privacy Act. O. Task 15 -- Research/Implementation of expansion to European MTFs MTFs located in Europe will be included in the survey efforts post a three-month development period. The number of MTFs outside the United States is estimated at *, with a total of approximately * clinics. Scope may include approximately 10 European nations. Due to unique differences in the processes for these MTFs, they will be processed separately and an additional 30 days may be added to the scheduled delivery. Reports will trend the clinic against itself and other clinics in that MTF, as well as against overall European Region and overall MHS comparisons. During the development period, we will investigate the system capabilities and assess the technical processes for transferring data from the European MTFs to Ft. Detrick. We will compare the data formats required for European MTF systems to the US files in order to develop a separate procedures guide for these European MTFs. We will select at least two MTFs to test the data transfer process prior to distribution of the procedures guide. Health Affairs will provide United HealthCare with a final list of all participating Region 13 clinics that meet the survey criteria (clinics with * or more outpatient visits per month), as well as contact names and phone numbers/e-mail addresses for each of the CHCS/ADS system site representatives at each MTF. ____________________ * 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 24b-2. During the development period, we will test and finalize the process for distributing surveys to sample members in Europe. Health Affairs will designate a European MTF to serve as the centralized distribution point for mailing the surveys to sample members. Health Affairs will provide names, phone/fax number and e-mail addresses of designated contacts in the European MTF. Surveys for European mailing will be printed, sorted, placed in envelopes, and boxed in the United States. Box of ready-to-mail surveys (minus postage, which is to be provided by the government) will be shipped to designated contact(s) at European MTF. Contact(s) will mail surveys to European sample and collect returned surveys. Box of completed surveys will be shipped to subcontractor in the United States. During this time, we will also investigate other options for mailing and distribution the surveys along with associated postal costs. This exercise includes an assessment of using "business reply" type envelopes in Europe to increase number of returned surveys. Actual implementation of survey efforts in Europe will become operational upon completion of the development/testing period. P. Task 16 -- Research of expansion to Latin America and Asia We will investigate and test procedure options to incorporate all remaining MTFs in Latin America and Asia, which meet the survey criteria (clinics with * or more outpatient visits per month). Health Affairs will provide United HealthCare with a final list of all participating MTFs and clinics in Latin American and Asia, as well as contact names and phone numbers/.e-mail addresses for each of the CHCS/ADS system site representatives at each MTF. Q. Task 17 -- Provide benchmark data Annually, the contractor shall make available to the Intermediate Commands, Lead Agents, Surgeons General and Health Affairs CD-ROM copies of the benchmark data set. R. Task 18 -- Provide operational items We will provide labor, postage, processing and computing, and work facilities for mailing efforts to MTFs within the United States. ------------------------ * 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 24b-2. III. Period of Performance The Period of Performance for this delivery order is from 13 Nov 97 (per verbal approval to proceed) to 31 Jan 99 -- * survey "cycles" to be executed throughout the contact period for US survey efforts. * survey "cycles" to be executed throughout the contract period for European survey efforts. A cycle begins with the last day of an appointment month (=A). A cycle is defined as monitoring and facilitating the transfer of CHCS and * 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 24b-2. * 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 24b-2. ADS data from MTFs to the Ft. Detrick mainframe (A-* days), combining the CHCS and ADS data and drawing the random sample (A + *), mailing questionnaires to patients A + *), receiving completed surveys back from patients (A + *), and preparing and distributing the various reports (A + *). IV. Schedule and Deliveries The following table details estimated completion of tasks and deliverables. Due dates are stated in terms of work days. Deliverable # of copies Due Date Draft OCONUS Procedures Guide 2 ea for all * Final OCONUS Procedures Guide 2 ea for all * Webpage (electronic) Summary Report 1 for HA * Monthly Survey Reports (See Attached) See attachment See Attachment Deadlines falling on non-business days throughout this document shall be extended until the next business day(s). PAPER REPORTS: Monthly reports are due * days following the last day of the appointment month (i.e.--* appointments due *) for US survey efforts. For European MTFs, reports are due * following the last day of the appointment month. Note: Ability to meet dates is contingent on receiving all and complete data from MTFs by the * post the month of appointment data. ----------------------- * 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 24b-2. Reports on U.S. MTFs (* data collection cycles and * reporting periods) * reports are due on * * reports are due on * * reports are due on * * reports are due on * * reports are due on * * reports are due on * * reports are due on * * reports are due on * * reports are due on * * reports are due on * * reports are due on * Reports on Europe MTFs (* data collection cycles and * reporting periods) * reports are due on * * reports are due on * * reports are due on * * reports are due on * * reports are due on * * reports are due on * * reports are due on * ELECTRONIC REPORTS: All raw response data must be segregated by month. Patient identifiable data has been purged in Task 10. MONTHLY -- Spreadsheets, database files with reports and raw data, distributed as defined in attachment. 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 Labor Category Hours Expert * Program Manager * Task Manager * Sr. Systems Analyst * Systems Analyst * 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 24b-2. 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 right 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. VIII. Security Requirements Classified materials or locations are not associated with this order. All data, which could be construed as being covered by the Privacy Act, will be protected accordingly and is releasable only to organizations within the Department of Defense as designated by the Task Manager. Media with Privacy Act information including result data will be stored in cabinets or storage areas when not being used and are placed in a locked container or space within a building that is secured after hours. Only authorized personnel who have received Privacy Act training are permitted access to information in the system. IX. Place of Performance The place of performance for this delivery order will be at designated United HealthCare and subcontractor's facilities. APPENDIX E-1 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. 0011 3. Date of Order 97DEC19 4. Requisition/Purch Request No. HT0003-7311-2002 5. Priority S10 6. Issued By Code - W74V8H DEFENSE SUPPLY SERVICE - WASHINGTON 5200 Army Pentagon Room 1D245 Pentagon Washington, D.C. 20310-5200 Kathy Jones XOJ (703) 681-6372 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) [Blank] 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:9780130.1884 8623 2522 (APC: 95L5) 012123 DRAC 82002 Award Oblig Amt US$ 3,286,164.00 18. Item No. [Blank] 19. Schedule of Supplies/Service Contractor shall provide services for the tasking "Customer Satisfaction Survey". Svcs shall be IAW task statement and accepted change per UHC's tech/cost proposal dtd Dec 9, 1997, copies of which are in possession of both parties. Verbal authorization to commence work on 14 Nov 97. Period of performance is 14 Nov through 30 Oct 98. SEE CONTINUATION SHEET 20. Quantity Ordered/Accepted [Blank] 21. Unit [Blank] 22. Unit Price [Blank] 23. Amount [Blank] 24. United States of America By: Angela R. Harris Contracting/Ordering Officer 25. Total $3,286,164.00 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] APPENDIX E-2 UNITEDhealthcare DASW01-95-0029 Issued By: United HealthCare P.O. Box 1459 MN008-W125 Minneapolis, MN 55440-1459 Subcontract Take Order No. 0011 This is Subcontract Take Order No. 0011, issued to National Research Corporation, for assistance in performance of Prime Contract Delivery Order No. 0011. 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 UCH 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 * 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. --------------------- * 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 24b-2. - 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. - * - * - * -------------------- * 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 24b-2. - 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 levels of management (MTFs, Air Force Command, Navy Commands, Army Commands, Service Surgeon Generals, Lead Agents and Health Affairs) and include copies of subordinate reports as detailed in the attachment. Reports will indicate name of facility/clinic surveyed and the sample size. The reports will compare the facility/clinic against itself from the last reporting period 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. NRC will mail these reports directly to the MTF Commanders and designated higher levels. An excel spreadsheet will be provided to Health Affairs which contains tabular data provided in all levels of reports; this file will be sent with routine report package to Health Affairs. - Integration of local benchmark data from the 1997 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 and provider identifying data (IEN, social security numbers, name, address, provider ssn, provider names) from the records *. --------------------- * 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 24b-2. - NRC will process the completed surveys after they are turned. NRC will be prepared to maintain at least five years of data, and maintain all data in standard data format, such as SAS, DBT or SPSS portable. NRC will provide and mail copies of the raw patient response data in DBF file format, Adobe files of each applicable report, and a means score spreadsheet of the applicable reports via CD ROM to selected Health Affairs (HA), Service Surgeons General (SG), Lead Agent (LA), MAJCOM, Navy Command and MEDCOM personnel for individual analyses at the end of each survey cycle period. NRC will provide one additional copy of all raw patient response data in DBF file format via CD ROM to UHC. - NRC will provide and mail copies of the raw patient response data in Excel, Adobe files of the MTF report and corresponding clinic reports and a means score spreadsheet for that MTF and each of its respective clinics 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" diskette and forward to UHC. - NRC will assist (where necessary) in the development of methods for electronic submission of monthly reports and designing an electronic summary report for the Health Affairs Web site. No raw data files will include provider names or provider specialty information until "System Notice" is approved, as notified by the Task Manager. Once approval is issued, provider information will be included ONLY on the MTF data files. Key Personnel - David Johnson, David Copper, Jonathan Boumstein, Michael Ackland, Robert Bergman, Michael Hayes and Marvin Lambie. b) Period of Performance - From Date of 14 November 1997 to 10/30/98. c) Project Management - Kathia Kennedy will be the UHC Project Manager and point of contact for this delivery order. d) Schedule of Deliverables - Provide one page Action Plan reports for the following: Maximum of * Individual Clinic Reports in any * period (* copy each); * MTF Reports (* copies each); * Service Branch Reports (* copies each); * Regional Reports (* copies each); * Air Force Command Reports (* copies each); * Army Command Reports (* copies each); * Navy Command Reports (* copies each); * Overall U.S. Summary Report (* copies each). Number of individual clinic and MTF reports are based upon quantity of valid records received from 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 24b-2. - For European region, provide one page Action Plan reports for the following: Maximum of * Individual Clinic Reports (* copy each); * MTF Reports (* copies each); * Service Branch Reports (* copies each); * Regional Report (* copies each); * Air Force Command Report (* copies each); * Army Command Report (* copies each); * Navy Command Report (* copies each); * Overall Europe Summary Report (* 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 * MTF Reports * Reports by Service SG * Reports by Intermediate Commands * Reports by Region * Overall Summary Report * Due Date: Monthly reports are due * following the last day of the appointment month (i.e.--* appointments due *) for US survey efforts. For European MTFs, reports are due *s following the last day of the appointment month. Note: Ability to meet dates is contingent on receiving all and complete data from MTFs by the * post the month of appointment data. Reports on U.S. MTFs (* data collection cycles and * reporting periods) * reports are due on * * reports are due on * * reports are due on * * reports are due on * * reports are due on * * reports are due on * * reports are due on * * reports are due on * * reports are due on * * reports are due on * * reports 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 24b-2. Reports on Europe MTFs (* data collection cycles and * reporting periods) * reports are due on * * reports are due on * * reports are due on * * reports are due on * * reports are due on * * reports are due on * * reports are due on * - Copies of the raw patient response data in Flat ASCII Text via 3.5" diskettes with weights. MTF mailing will include an MTF report, the individual clinic reports for that MTF, the written comments, the raw patient response data in Flat ASCII Text, an Adobe file of MTF report and corresponding clinic reports, and a means score spreadsheet for that MTF and each of the Clinics on a 3.5" diskette and forward to MTF commanders directly. Frequency: * Due dates: same as above ---------------------- * 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 24b-2. - Reporting of the raw patient response data in DBT format file to all higher levels in CD ROM (i.e., Air Force Commanders, Army Commanders, Navy Commanders, Surgeon Generals, Lead Agents and Health Affairs). CD ROM will also contain Adobe files of applicable high level reports and corresponding breakout reports and a means score spreadsheet containing the same applicable information. Provide one copy of the HA CD ROM to UHC, as well. Frequency: * Due dates: same as above - Mailing of actual written comments to UHC, sorted by MTF, at the end of the project. Due Date: *, 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 See attachment - Phase III Pricing. - Total allowable costs not to exceed *. --------------------- * 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 24b-2. 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. Phase III Pricing - Revised UHC-DoD PRICING SPECS 766A * ____________________ * 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 24b-2. EX-10.7 4 GOLD'S GALLERIA OFFICE LEASE This lease is entered into as of the 9th day of January, 1998, by and between GOLD'S LIMITED PARTNERSHIP (Landlord) and NATIONAL RESEARCH CORPORATION, INC. (Tenant). 1. SUMMARY. 1.1 Approximate Usable Space: 22,720 square feet. 1.2 The Premises are known as Suite 400, 405 and 420 and are located on the 4th floor(s) of the Building. 1.3 Term: 2 years. 1.4 Target Commencement Date: January 1, 1998. 1.5 Basic Monthly Rental: $18,028.65. 1.6 Base Year: 1997 1.7 Tenants Percentage: 9.4434% 1.8 Security Deposit: $10,000 carried over from 11/10/86. 2. PREMISES. Landlord hereby leases to Tenant, and Tenant hereby hires from Landlord, those certain Premises (the "Premises") comprising approximately the Rentable Space set forth in Section 1.1 above, described in Section 1.2 above and shown on Exhibit A attached hereto and incorporated herein by this reference, together with the right, in common with the others, to the use of all common entrance ways, lobbies, elevators, ramps, drives, stairs and similar access and service ways and common areas in and adjacent to the building of which the Premises are part. The Premises are situated on the floor(s) set forth in Section 1.2 above of that certain building commonly know as Gold's Galleria (the "Building"), located in the City of Lincoln, County of Lancaster, State of Nebraska. Said leasing and hiring is conditioned upon and is subject to all of the terms, covenants and conditions hereof. 3. TERM. 3.1 Term. This lease shall be for the term set forth in Section 1.3 above and shall begin on the Commencement Date, as that term is defined in Section 3.2 below, unless terminated earlier in accordance with the provisions hereinafter set forth. 3.2 Commencement Date. The Commencement Date of this Lease shall be the earliest of (a) the date on which construction of the Tenant improvements provided for in the Office Finish Specifications attached hereto as Exhibit B is completed; (b) the date on which Tenant takes possession of the Premises; (c) the date which is ten (10) days from the date on which Landlord tenders possession of the Premises to Tenant. When determined, the parties shall confirm in writing the exact Commencement Date, the date on which the term of this Lease commenced, the actual number of square feet of Rentable Space contained in the Premises and the rental herefore. 3.3 Possession. The parties shall endeavor to cause the Commencement Date to occur on or before the Target Commencement Date set forth in Section 1.4 above. If Landlord, for any reason whatsoever, cannot deliver possession of the Premises to Tenant on or before the Target Commencement Date, this Lease shall not be void or voidable, nor shall Landlord or its agent be liable to Tenant for any loss or damage resulting therefrom; provided, however, Tenant shall not be liable for any rent until Landlord delivers possession of the Premises to Tenant. If Landlord tenders possession of the Premises to Tenant prior to the target Commencement Date and Tenant chooses to accept such possession, then the term of this Lease and Tenant's obligations hereunder shall commence on the date that Tenant accepts such possession. Any failure to deliver possession on the Target Commencement Date or delivery of possession prior to the Target Commencement Date shall not in any way affect the expiration date hereof. 4. RENTAL. 4.1 Basic Monthly Rental. Subject to the adjustments provided for herein, Tenant shall pay to Landlord on or before the first day of each calendar month during the term of this Lease, a Basic Monthly Rental for the Premises in the amount set forth in Section 1.5 above, which Basic Monthly Rental shall be payable in advance, without deduction or offset of any kind and without notice or demand, in lawful money of the United States of America at Landlord's address given in Section 20.11 below, or at such other place or to such other person as Landlord may designate from time to time by written notice. If this Lease commences or ends on a day other than the first day of a calendar month, then the rental for such partial month shall be prorated based on a 30-day month. 4.2 Payment of First Month's Rent. Article 4.2 has been intentionally omitted. 4.3 Operating Expenses. 4.3.1 Increases in Operating Expenses. In addition to the Basic Monthly Rental, Tenant shall pay to Landlord, in the manner provided below, Tenant's proportionate share of increases in Operating Expenses (as defined in Section 4.3.4 below) over the Base Year specified in Section 1.6 hereof. 4.3.2 Estimated Operating Expenses. Landlord shall at the commencement of this Lease and by each December 15 during the term of this Lease deliver to Tenant a statement of the estimated increase in Operating Expenses for the calendar year immediately following the date of such statement over the Operating Expenses incurred for the Base Year specified in Section 1.6 hereof. Landlord's failure to deliver to Tenant such statement by such date, however, shall not constitute a bar to Landlord's recovery of Operating expenses as herein provided. Commencing with January 1 of the calendar year following the date of such statement, Tenant shall pay to Landlord with each payment of the Basic Monthly Rental a sum equal to the product of the estimated increase in Operating Expenses for such a calendar year multiplied by the Tenant's Percentage set forth in Section 1.7 above. 4.3.3 Actual Operating Expenses. Landlord shall by April 30 of each year during the term of this Lease deliver to Tenant a statement of the actual increase in Operating Expenses for the preceding calendar year over the Operating Expenses incurred for the Base Year specified in Section 1.6 hereof, but Landlord's failure to deliver such statement by such date shall not constitute a bar to Landlord's recovery of Operating Expenses as herein provided. If the actual increase in Operating Expenses for such calendar year shall exceed the estimated increase in Operating Expenses for such calendar year, Tenant shall pay to Landlord an amount equal to the product of such excess multiplied by Tenant's Percentage set forth in Section 1.7 above. If the actual increase in Operating Expenses for such calendar year shall be less than the estimated increase in Operating Expenses for such calendar year, then Tenant shall receive a credit against future rentals payable by Tenant in an amount equal to the product of the excess of estimated increase in Operating Expenses over actual Operating Expenses multiplied by the Tenant's Percentage specified in Section 1.7 above. 4.3.4 Operating Expenses Defined. The term Operating Expenses as used herein shall include all costs to Landlord and not reimbursed by Tenants of operating, maintaining and managing the Building. By way of illustration but not limitation, Operating Expenses shall include the cost or changes for the following items: heat, light, water, power and steam, waste disposal, plumbing, janitorial services, pest control, window cleaning, air conditioning, maintenance of elevators, materials and supplies, equipment and tools, service agreements on equipment, fire and other casualty insurance, public liability and property damage insurance, rental interruption insurance, Direct Taxes (as defined in Section 4.3.5 hereof), licenses, permits and inspections, wages and salaries, employee benefits and payroll taxes, workers' compensation insurance, accounting and legal expenses, management fees, and the cost of contesting the validity or applicability of any governmental enactment's which may affect Operating Expenses. In determining the amount of Operating Expenses for years other than the Base Year, (a) if less than 100% of the Rentable Space contained in the building shall have been occupied by Tenants and fully used by them at any time during the year, Operating Expenses shall be deemed of the purposes of this Section 4.3 to be an amount equal to the like Operating Expenses which would normally be expected to be incurred had such occupancy been 100% and had such full utilization been made during the entire year, or (b) if Landlord is not furnishing any particular work or service (the cost of which if performed by Landlord would constitute an Operating cost) to a Tenant who has undertaken to perform such work or service in lieu of the performance thereof by Landlord, Operating Expenses shall be deemed for the purposes of this Section 4.3 to be increased by an amount equal to the additional Operating Expenses which would reasonably have been incurred during such period by Landlord if it had, at its own expense, furnished such work or service to such Tenant. 4.3.5 Direct Taxes Defined. For purposes of Section 4.3.4 hereof, the term Direct Taxes shall include any real property taxes on the Building, the land on which the Building is situated, and the various estates in the Building and the land. Direct Taxes shall also include all personal property taxes levied on property used by Landlord in the operation of the Building; taxes of every kind and nature whatsoever levied and assessed in lieu of or in substitution for existing or additional real or personal property taxes on said Building, land or personal property; and the cost to Landlord of contesting the amount or validity or applicability of any of the aforementioned taxes. Net recoveries through protest, appeals or other actions taken by Landlord in its discretion, after deduction of all costs and expenses, including without limitation counsel and other fees, shall be deducted from Direct Taxes for the year of receipt. 4.3.6 Definition of Lease Year. The term "Lease Year" as used in this Lease means: (a) In reference to the first Lease Year, the period from the Commencement Date to the last day of the calendar month which is one year after the Commencement Date. (b) In reference to any succeeding Lease year, a full year commencing on the day following the first Lease Year or any anniversary thereof and running to the next succeeding anniversary day. 5. SECURITY DEPOSIT. Upon the execution of this Lease, Tenant shall deposit with Landlord the amount set forth in Section 1.8 above as a security deposit (the "Security Deposit") for the faithful performance of all of the terms, covenants and conditions of this Lease. If Tenant defaults with respect to any provision of this Lease, Landlord may use, apply or retain all or any part of the Security Deposit (a) for the payment of any rent or any other amount which Landlord may spend or become obligated to spend by reason of Tenant's default, (b) to repair damages to the Premises, (c) to clean the Premises, and (d) to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of the Security Deposit is so used or applied, Tenant shall within five (5) days after written demand therefor, deposit cash with Landlord in an amount sufficient to restore the Security Deposit to it's original amount, and Tenant's failure to do so shall be a material breach of this Lease. Landlord shall not be required to keep Security Deposit separate from its general funds, and Tenant shall not be entitled to interest on such deposit. If Tenant shall fully and faithfully perform every provision of this Lease to be performed by it, Landlord or Landlord's successor shall return the Security Deposit or any balance thereof to Tenant not more than thirty (30) days following the expiration of the term hereof. Landlord may, but need not, either (i) deliver the Security Deposit or any balance thereof to the purchaser or other successor of Landlord's interest in the Premises in the event that such interest be sold or otherwise transferred, or (ii) deliver such funds to Tenant. Upon any transfer of Landlord's interest in the Premises, or upon Landlord's delivery to Tenant of the Security Deposit or any balance thereof, Landlord shall be discharged from any further liability with respect to the Security Deposit. This provision shall also apply to any subsequent transferors of Landlord's interest in the Premises. 6. USES. 6.1 Permitted Uses. The Premises shall be used solely for general office purposes and for no other purpose without the prior written consent of Landlord. Tenant shall not do or suffer anything to be done in or about the Premises, nor shall Tenant bring or allow anything to be brought into the Premises, which will in any way increase the rate of any fire insurance or other insurance upon the Building or its contents, cause a cancellation of said insurance or otherwise affect said insurance in any manner. Tenant shall not do or suffer anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other occupants of the Building or injure or annoy said occupants, nor shall Tenant use or suffer the Premises to be used for any immoral, unlawful or objectionable purpose. In no event shall Tenant cause or suffer to be caused any nuisance in or about the Premises, and no loud- speakers or similar devices shall be used without the prior written approval of Landlord. Tenant further agrees not to commit or suffer to be committed any waste in or upon the Premises. The provisions of this paragraph are for the benefit of Landlord only and shall not be construed to be for the benefit of any tenant or occupant of the Building. 6.2 Compliance with Law. Tenant shall not do or suffer anything to be done in or about the Premises which will in any way conflict with any law, statute, ordinance or other governmental rule, regulation or requirement now in force or which may hereafter be enacted or promulgated. At its sole cost and expense, Tenant shall promptly comply with all said governmental measures and also with the requirements of any board of fire underwriters or other similar body now or hereafter constituted to deal with the condition, use or occupancy of the Premises, excluding structural changes not related to or affected by Tenant's alterations, additions or improvements. The judgment of any court of competent jurisdiction or the admission of Tenant in any judicial action, regardless of whether Landlord is a party thereto, that Tenant has violated any of the said governmental measures or requirements shall be conclusive of that fact as between Landlord and Tenant. 7. SERVICES AND UTILITIES. 7.1 Services Provided. Tenant shall pay for all water, heat, air conditioning, lighting, electricity and other utilities furnished to the Premises. If the Premises are not separately metered, Tenant shall pay for utilities furnished to the Premises on the basis of monthly statements prepared by Landlord. Subject to payment as aforesaid any provided that Tenant is not in default under the terms and conditions of this Lease, and subject to the provisions elsewhere herein contained and to the rules and regulations of the Building, Landlord agrees to furnish the Premises with: (a) water and electricity suitable in Landlord's judgment for general office purposes, including the operation of desktop office machines and ordinary copy machines; (b) heat and air conditioning during ordinary business hours of generally recognized business days (but exclusive, in any event, of weekends and legal holidays) in an amount reasonably required in Landlord's judgment for the comfortable occupation of the Premises; and (c) daily janitorial service during the times and in the manner that such services are, in Landlord's judgment, customarily furnished in comparable office buildings in the downtown Lincoln area. Landlord shall be under no obligation to provide additional or after-hours heating or air conditioning, but if Landlord elects to provide such services at Tenant's request, Tenant shall pay to Landlord the cost of such services as determined by Landlord's accountants plus a reasonable charge (not to exceed 10% of the cost of such services) for Landlord's additional overhead expense. Tenant agrees to keep all draperies closed when desirable to conserve energy because of the sun's position and Tenant further agrees at all times to cooperate fully with Landlord and to abide by all the regulations and requirements which Landlord may prescribe from time to time for the proper functioning and protection of the heating, ventilating and air conditioning system(s). 7.2 Prohibited Installations. Without the prior written consent of Landlord, Tenant shall not: (a) install or use any apparatus or device in the Premises, including, without limitation, electronic data processing machines and punch card machines using electrical current in excess of 220 watts or 110 volts or which will in any way increase the amount of electricity, water, compressed air or other resource usually supplied for use of the Premises as general office space; or (b) connect any apparatus or device with electrical current (except through existing electrical outlets) or with water pipes or air pipes for the purpose of using additional electrical current or water or air. If Tenant shall require electricity, water, compressed air or any other resource in excess of that usually furnished to the Premises for use as general office space, Tenant shall first procure the consent of Landlord for such additional use, and Landlord shall have the right to withhold its consent or to cause a special meter to be installed in the Premises so as to measure the additional amount of the resource being consumed by Tenant. Tenant shall pay to Landlord the cost of any meters and their installation and maintenance, any additional cost incurred by Landlord in accounting for the resources consumed, and for the amount of the additional resources consumed at the rates charged by the local public utility or agency furnishing the same. 7.3 Heat Generating Equipment. Whenever heat generating machines or equipment or lighting other than Building standard lights are used in the Premises by Tenant which affect the temperature otherwise maintained by the air conditioning system, Landlord shall have the right to install supplementary air conditioning units in the Premises. The cost thereof, including installation and operating and maintenance, shall be paid by Tenant. 7.4. Interruption of Services. Landlord shall use reasonable efforts to remedy any interruption in the furnishing of services and utilities. However, Landlord shall not be liable for any failure to provide for any reduction in any of the above services or utilities if such failure or reduction is caused by the making of repairs or improvements to the Premises or to the Building, the installation of equipment, the elements, labor disturbances of any character, or any other accidents or conditions whatsoever beyond the reasonable control of Landlord, or rationing or restrictions on the use of said services and utilities due to energy shortages or other causes, whether or not any of the above result from acts or omissions of Landlord. Furthermore, Landlord shall be entitled to cooperate voluntarily in a reasonable manner with the efforts of national, state or local governmental bodies or utilities suppliers in reducing energy or other resources consumption. 7.5 Additional Rent. Any sums payable under this Section 7 shall be considered additional rent and may be added to any installment of rent thereafter becoming due, and Landlord shall have the same remedies for a default in payment of such sum as for a default in the payment of rent. 8. TAXES PAYABLE BY TENANT. Tenant shall pay before delinquency any and all taxes levied or assessed and which become payable by Landlord or Tenant during the term of this Lease, whether or not now customary or within the contemplation of the parties hereto, which are based upon, measured by or otherwise calculated with respect to (a) the gross or net rental payable under this Lease, including, without limitation, any gross receipts tax levied by any taxing authority, or any other gross income tax or excise tax levied by any taxing authority with respect to the receipt of the rental payable hereunder; (b) the value of Tenant's equipment, furniture, fixtures or other personal property located in the Premises; (c) the possession, lease, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion thereof; (d) the value of any leasehold improvements, alterations or additions made in or to the Premises, regardless of whether title to such improvements, alterations or additions shall be in Tenant or Landlord; or (e) this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises. 9. ALTERATIONS. Tenant shall not make or suffer to be made any alterations, additions or improvements to the Premises or any part thereof which affect the structure of the Building, building services, the peaceful enjoyment of other occupants of the Building or otherwise affect space other than the Premises and shall not, without obtaining Landlord's prior written consent, make or suffer to be made any other alterations, additions or improvements to the Premises, including the attachment of any fixtures or equipment. When applying for such consent, Tenant shall, if requested by Landlord, furnish complete plans and specifications for such alterations, additions or improvements. All alterations, additions and improvements to the Premises shall, at Landlord's option, either (a) be made by Landlord for Tenant's account and, within (10) days from receipt of a written statement from Landlord, Tenant shall reimburse Landlord for all costs thereof, including without limitation a reasonable charge for Landlord's overhead expenses; or (b) be made by Tenant at Tenant's sole cost and expenses, and any contractor selected by Tenant to do such work must first be approved in writing by Landlord. All alterations, additions, fixtures and improvements, including without limitation all improvements made pursuant to Exhibit B attached hereto and incorporated herein by references, whether temporary or permanent in character, made in or upon the Premises either by Landlord or Tenant, shall at once become part of the realty and belong to Landlord and, at the end of the term hereof, shall remain on the Premises without compensation of any kind to Tenant. Moveable furniture and equipment shall remain the property of Tenant. 10. REPAIR. Landlord agrees to make all necessary repairs to the exterior walls, exterior doors, exterior windows, exterior corridor windows, and corridors of the Building. Landlord agrees to keep the Building housing the Premises in a safe, clean, neat and attractive condition. Landlord agrees to keep all Building equipment such as elevators, plumbing, heating, ventilating, air conditioning and similar equipment in good repair, but Landlord shall not be liable or responsible for breakdowns or temporary interruptions in service where reasonable efforts are used to restore service. Landlord agrees to make repairs, if necessary, to interior walls, floors, glass, and ceilings installed by Landlord and resulting from any defects in construction. Landlord agrees to make the original installation of all light bulbs, fluorescent and incandescent, and starters therefor, which are required for the Premises at the inception of this Lease. Tenant agrees that it will make all repairs to the Premises not required above to be made by Landlord and to do all redecorating, remodeling, alteration and painting required by it during the term of the lease and Tenant will pay for any repairs to the Premises or the Building containing the Premises made necessary by any negligence or carelessness of Tenant or its employees or persons permitted in the Building by Tenant and will maintain the leased Premises in a safe, clean, neat and sanitary condition. Tenant agrees to replace and pay for all light bulbs, fluorescent and incandescent, and starters therefor, as the same need to be replaced in the Premises during the term of this Lease. There shall be no allowance to Tenant for inconvenience or injury to business arising from the making of any repairs to the Premises or the Building. 11. DAMAGE BY FIRE OR CASUALTY. If the Premises or the Building are damaged by fire or other casualty, Landlord shall forthwith repair the same, provided such repairs can be made forty-five (45) days from the date of such damage under the laws and regulations of the federal, state, county and municipal authorities having jurisdiction thereof. In such event, this Lease shall remain in full force and effect except that, if the damage is not the result of the negligence, passive or active, or willful misconduct of Tenant or its agents or invitees, Tenant shall be entitled to a proportionate reduction of rent while such repairs to be made hereunder by Landlord are being made. Said Proportionate reduction shall be based upon the extent to which the making of such repairs to be made hereunder by Landlord shall interfere with the business carried on by Tenant in the Premises. Within fifteen (15) days from the date of such damage, Landlord shall notify Tenant whether or not such repairs can be made within forty- five (45) days from the date of such damage and Landlord's determination thereof shall be binding on Tenant. If such repairs cannot be made within forty-five (45) days from the date of such damage, Landlord shall have the option, exercisable at any time within thirty (30) days of the date of such damage either to (a) notify Tenant of Landlord's intention to repair such damage, in which event this Lease shall continue in full force and effect and the rent shall be reduced as provided herein; or (b) notify Tenant of Landlord's election to terminate this Lease of a date specified in such notice, which date shall be not less than thirty (30) nor more than ninety (90) days after such notice in given. In the event that such notice to terminate is given by Landlord, this Lease shall terminate on the date specified in such notice. In case of such termination, if the damage giving rise to such termination is not the result of the negligence, passive or active, or willful misconduct of Tenant or its agents or invitees, the rent shall be reduced by a proportionate amount based upon the extent to which said damage interfered with the business carried on by Tenant in the Premises, and the Tenant shall pay such reduced rent up to the date of termination. Landlord shall refund to Tenant, if Tenant is not then in default, any rent previously paid for any period of time subsequent to such date of termination. The repairs to be made hereunder by Landlord shall not include, and Landlord shall not be required to repair, any damage by fire or other cause to the property of Tenant or any repairs or replacements of any paneling, decorations, railing, floor coverings, or any alterations, additions, fixtures or improvements installed on the Premises by or at the expense of Tenant. 12. LIENS. Tenant shall not permit any mechanic's, materialmen's, or other liens to be asserted against the real property of which the Premises form a part nor against Tenant's leasehold interest in the Premises arising directly or indirectly from any act or activity of Tenant. Landlord shall have the right at all reasonable times to post and keep posted on the Premises any notices which it deems necessary for protection from such lines. If any such liens are filed, Landlord may, without waiving its rights and remedies based on such breach by Tenant and without releasing Tenant from any obligations, cause such liens to be released by any means Landlord shall deem proper, including, without inquiring into the validity thereof, payment in satisfaction of the claim giving rise to such lien or the posting of a bond therefor. Tenant shall pay to Landlord at once, without notice or demand, any sum paid by Landlord to remove such liens, together with interest thereon from the date of payment at the Permitted Rate (as defined in Section 20.22 hereof). 13. INDEMNIFICATION. As a material part of the consideration for this Lease, Tenant hereby assumes all risks and waives all claims against Landlord for any damage to any property or any injury to or death of any person in or about the Premises or the Building arising at any time and from any cause whatsoever other than solely by reason of the negligent or willful act of Landlord, or its agents, employees or contractors. Tenant also agrees to indemnify, defend and hold Landlord harmless from and against any and all claims or liability for any injury or damage to any person or property whatsoever: (a) occurring in, on or about the Premises or any part thereof, and (b) occurring in, on or about any facilities (including, without limitation to the generality of the term "facilities", stairways, passageways, hallways, sidewalks and parking areas) the use of which Tenant may have in conjunction with other Tenants of the Building, when such injury or damage shall be caused in part or in whole by the act, neglect, fault, or omission of any duty with respect to the same, by Tenant, its agents, servants, employees, or invitees. Tenant further agrees to indemnify, defend and hold Landlord harmless from and against any and all claims by or on behalf of any person, firm or corporation arising from the conduct or management of any work or thing whatsoever done by Tenant in or about or from transactions of Tenant concerning the Premises, and will further indemnify, defend and hold Landlord harmless from and against any and all claims arising from any breach of default on the part of Tenant in the performance of any covenant or agreement on the part of Tenant to be performed pursuant to the terms of this Lease, or arising from any act or negligence of Tenant, or any of its agents, contractors, servants, employees or licensees, and from and against all costs, counsel fees, expenses and liabilities incurred in connection with any such claim or action or proceeding brought thereon. Furthermore, in case any action or proceeding brought against Landlord by reason of any such claims or liability, Tenant shall defend such action or proceeding at Tenant's sole expense by counsel satisfactory to Landlord. The provisions of this survive the expiration or termination of this Lease with respect to any claims or liability occurring prior to such expiration or termination. 14. INSURANCE. 14.1 Required Insurance. Tenant shall, at its sole cost and expense, procure, maintain and keep in force during the term of this Lease a policy or policies of comprehensive general liability insurance, including public liability and property damage, on an "occurrence basis" against claims for "personal injury" including without limitation bodily injury, death or property damage occurring on, in or about the Premises, or arising from or connected with the use, conduct or operation of Tenant's business or interest, in an amount of not less than $1,000,000 with respect to personal injury or death of one or more persons and to damage to property. Said policy or policies shall: (a) name Landlord and Landlord's lender(s) as additional insured; (b) be issued by an insurance company which is acceptable to Landlord and licensed to do business in the State of Nebraska; and (c) provide that said insurance shall not be canceled or modified unless thirty (30) days prior written notice shall have been given to Landlord and Landlord's lender(s). Said policy or policies or certificates thereof shall be delivered to Landlord by Tenant upon commencement of the term of this Lease and upon each renewal of said insurance. 14.2 Waiver of Subrogation. Landlord and Tenant hereby waive and release any right that each may have against the other on account of any loss or damage arising in any manner which is covered by a policy of insurance that does not provide for loss of or reduction in insurance coverage on account of such waiver. The parties shall each cause their respective insurance companies to waive any rights or subrogation that such companies may have against Landlord or Tenant, as the case may be. All such policies of insurance shall contain, if obtainable, an endorsement or agreement by the insurer that any loss shall be payable in accordance with the terms of such policy notwithstanding any act or negligence of Tenant which might otherwise result in forfeiture of said insurance and the further agreement of the insurer waiving all right of setoff, counterclaim or deductions against Tenant and Landlord. 15. ASSIGNMENT, SUBLETTING AND RECAPTURE. 15.1 Landlord's Consent. Tenant shall not sell, assign, encumber or transfer by operation of law or otherwise this Lease or any interest herein, sublet the Premises or any part thereof, or suffer any other person to occupy or use the Premises or any portion thereof, without prior written consent of Landlord as provided herein, nor shall Tenant permit any lien to be placed on Tenant's interest by operation of law. Landlord's consent to the sale, assignment, encumbrance, subletting, occupation, lien or other transfer shall not release Tenant from any of Tenant's obligations hereunder or be deemed to be a consent to any subsequent occurrence. Any sale, assignment, encumbrance, subletting, occupation, lien or other transfer of this lease which does not comply with the provisions of this Section 15 shall be void. 15.2 Assignment by Operation of Law. For purposes of Section 15.1, each of the following acts shall be considered an assignment by operation of law; 15.2.1 If a Tenant is or becomes bankrupt or insolvent, makes an assignment for the benefit of creditors, or institutes a proceeding under the Bankruptcy Act in which Tenant is the bankrupt; or, if Tenant is a partnership or consists of more than one person or entity, if any partner of the partnership or other person or entity is or becomes bankrupt or insolvent, or makes an assignment for the benefit of creditors; 15.2.2 If a writ of attachment or execution is levied on this Lease; or 15.2.3 If, in any proceeding or action to which Tenant is a party, a receiver is appointed with authority to take possession of the Premises. An assignment by operation of law shall constitute a default by Tenant and Landlord shall have the right to elect to terminate this Lease, in which case this Lease shall not be treated as an asset of Tenant. If a writ of attachment or execution is levied on this Lease, Tenant shall have ten (10) days in which to cause the attachment or execution to be removed. If any involuntary proceeding in bankruptcy is brought against Tenant, or if a receiver is appointed, Tenant shall have thirty (30) days in which to have the involuntary proceeding dismissed or the receiver removed. 15.3 Recapture. Tenant shall, by written notice, advise Landlord of its desire from and after a stated date (which shall not be less than thirty (30) days or more than ninety (90) days after the date of Tenant's notice), to sell or assign all or any portion of Tenant's interest in this Lease, or to sublet or otherwise transfer the Premises or any portion thereof for all or any part of the term hereof. In such event Landlord shall have the right, to be exercised by giving written notice to Tenant no more than thirty (30) days after receipt of Tenant's notice, to terminate this Lease as to the portion of the Premises described in Tenant's notice and such notice shall, if given, terminate this Lease with respect to the portion of the Premises therein described as of the date stated in Tenant's notice. Said notice by Tenant shall state the name and address of the proposed subtenant, assignee or transferee, as the case may be, and shall be accompanied by a true and complete copy of the proposed sublease, assignment or other instrument of transfer, as the case may be, with said notice. If said notice shall specify all of the Premises and Landlord shall give said termination notice with respect thereto, this Lease shall terminate on the date stated in Tenant's notice. If, however, this Lease shall terminate pursuant to the foregoing with respect to less than all of the Premises, the rent and the Operating Expenses, as defined and reserved hereinabove, shall be adjusted on a prorata basis to the number of square feet retained by Tenant, and this Lease as so amended shall continue thereafter in full force and effect. 15.4 No Release from Liability. Any subletting, assignment or other transfer hereunder by Tenant shall not result in Tenant being released or discharged from any liability under this Lease. As a condition to Landlord's prior written consent as provided for in this Section 15, the subtenant, assignment or transferee shall agree in writing to comply with and be bound by all of the terms, covenants, conditions, provisions and agreements of this Lease, and Tenant shall deliver to Landlord, promptly after execution, an executed copy of each sublease, assignment or other instrument of transfer and an agreement of said compliance by each sub-lessee, assignee or transferee. 16. DEFAULT; REMEDIES. 16.1 Events of Default. The occurrence of any of the following shall constitute a material default and breach of this Lease by Tenant ("Event of Default"): 16.1.1 Any failure by Tenant to pay the Basic Monthly rental or to make any other payment when and as required to be made by Tenant hereunder. 16.1.2 The abandonment or vacation of the Premises by Tenant for a period exceeding thirty (30) days. 16.1.3 Any failure by Tenant to observe and perform any other provisions of this Lease to be observed or performed by Tenant, where such failure continues for ten (10) days after written notice thereof by Landlord to Tenant; provided, however, that if the nature of such default is such that the same cannot reasonably be cured within such ten (10) day period. Tenant shall not be deemed to be in default if Tenant shall within such period commence such cure and thereafter diligently prosecute the same to completion. 16.1.4 The failure by Tenant on three (3) or more occasions to pay the Basic Monthly Rental or to make any other payment as and when due or to observe and perform any other provision of this Lease where, because of such failure, Landlord shall have initiated eviction proceedings, by which term the parties refer to the giving or serving of any notice or other condition precedent to the bringing of an action to evict Tenant. This default shall not be curable. 16.2. Damages Upon Termination. Upon the occurrence of an event of Default, then in addition to any other remedies available to Landlord at law or in equity, Landlord shall have the immediate option to terminate this lease and all rights of Tenant hereunder by giving written notice of such intention to terminate. In the event that Landlord shall elect to so terminate this Lease, Landlord shall be entitled to recover from Tenant: 16.2.1 The worth at the time of award of any unpaid rent which had been earned at the time of such termination; plus 16.2.2 The worth at the time of award of the amount of the unpaid rent which would have been earned after termination until the time of award; 16.2.3 The worth at the time of award of the amount of the unpaid rent for the balance of the term after the time of award; plus 16.2.4 Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform his obligations under this Lease or which in the ordinary course of things would be likely to result therefrom. As used in Sections 16.2.1 and 16.2.2 above, the "worth at the time of award" is computed by allowing interest at the Permitted Rate. As used in Section 16.2.3 above, the "worth at the time of award" is computed by discounting such amount at a discount rate equal to six percent (6%) per annum. 16.2.5 In the event Landlord's remedies are pursued at law, Tenant hereby waives its right to a trail by jury if such legislation is applicable to commercial disputes and defaults. 16.3 Reentry by Landlord. In the event of any such default by Tenant, Landlord shall also have the right, with or without terminating this Lease, to reenter the Premises and remove all persons and property from the Premises; such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of the Tenant. 16.4 Recovery of Rental. In the event of any such default by Tenant, if Landlord shall elect not to terminate this Lease as provided in Section 16.2 above, Landlord may from time to time, without terminating this Lease, recover all rental as it becomes due. 16.5 Reentry and Reletting. No reentry or taking possession of the Premises by Landlord pursuant to Section 16.3 or 16.4 above shall be construed as an election to terminate this Lease unless a written notice of such intention be given to Tenant or unless the termination thereof be decreed by a court of competent jurisdiction. Notwithstanding a reletting without termination by Landlord because of any default by Tenant, Landlord may at any time after such reletting elect to terminate this Lease for any such default. 17. EMINENT DOMAIN. If more than thirty-five percent (35%) of the floor area of the Premises shall be taken or appropriated under the power of eminent domain or conveyed in lieu thereof, either party shall have the right to terminate this Lease at its option. If any part of the Building, whether or not the Premises are included, or any part of the land on which the Building is located, or any interest in either of them, shall be taken or appropriated under the power of eminent domain or conveyed in lieu thereof, Landlord may terminate this Lease at its option. In either of such events, Landlord shall receive (and Tenant shall assign to Landlord upon demand from Landlord) any income, rent, award or any interest therein which may be paid in connection with the exercise of such power of eminent domain, and Tenant shall have no claim against Landlord for any part of any sum paid by virtue of such proceedings, whether or not attributable to the value of the unexpired term of this Lease. If a part of the Premises shall be so taken or appropriated or conveyed and neither party hereto shall elect to terminate this lease and the Premises have been damaged as a consequence of such partial taking or appropriation or conveyance, Landlord shall, to the extent of the net award received by Landlord, restore the remaining part of the Premises at Landlord's cost and expense; provided, however, that Landlord shall not be required to repair or restore any injury or damage to the property of Tenant or to make any repairs or restorations of any alterations, additions, fixtures, or improvements installed on the Premises by or at the expense of Tenant. Thereafter, the rent to be paid under this Lease for the remainder of its term shall be proportionately reduced, such reduction to be based upon the ratio of floor area taken to the total floor area of the Premises. 18. HOLDING OVER. 18.1 With Landlord's Consent. Any holding over after the expiration of the term of this Lease with the prior written consent of Landlord shall be a tenancy from month to month. The terms, covenants and conditions of such tenancy shall be the same as provided herein, except that the Basic Monthly Rental shall be one-hundred fifty percent (150%) of the basic Monthly Rental in effect on the date of such expiration, subject to adjustment as provided in Section 4 herein. Acceptance by Landlord of rent after such expiration shall not result in any other tenancy or any renewal of the term of this Lease, and the provision of this Section 18 are in addition to and do not affect Landlord's right of reentry or other rights provided under this Lease or by applicable law. 18.2 Without Landlord's Consent. If Tenant, without Landlord's prior written consent, shall retain possession of the Premises or any part thereof following the expiration or sooner termination of this Lease for any reason, then Tenant shall be guilty of unlawful detainer, and the acceptance of rent by Landlord shall not convert such unlawful detainer into a valid month-to-month or other tenancy, and nothing contained in this Section 18 shall waive Landlord's right of reentry or any other right. In the event of such unlawful detainer, Tenant agrees that Landlord shall have suffered damages for each day of such retention in an amount equal to at least six and sixty-seven one hundredths percent (6.67%) of the amount of the Basic Monthly Rental in effect for the last month prior to the date of such expiration or termination, but such agreement shall not limit Landlord in its proof of additional damages. Further, in the event of such unlawful detainer, Tenant shall also indemnify and hold Landlord harmless from any loss or liability resulting from delay by Tenant in surrendering the Premises, including, without limitation, any claims made by any succeeding Tenant or purchaser of the Building founded on such delay. Alternatively, if Landlord gives notice to Tenant of Landlord's election thereof, such holding over shall constitute a renewal of this Lease for a period from month-to-month or for one year, whichever shall be specified in such notice. 19. SUBORDINATION. Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, this Lease shall be subject and subordinate at all times to: (a) all ground leases or underlying leases which may now exist or hereafter be executed affecting the Building or the land upon which the Building is situated or both, and (b) the lien of any mortgage or deed of trust which may now exist or hereafter be executed in any amount for which said Building, land, ground leases or underlying leases, or any part thereof, or Landlord's interest or estate in any of said items, is specified as security. Notwithstanding the foregoing, Landlord shall have the right to subordinate or cause to be subordinated any such ground leases or underlying leases or any such liens to this Lease. In the event that any ground lease or underlying lease terminates for any reason or any mortgage or deed of trust is foreclosed or a conveyance in lieu of foreclosure is made for any reason, Tenant shall, notwithstanding any subordination, attorn to and become the Tenant of the successor in interest to Landlord, at the option of such successor in interest. Tenant covenants and agrees to execute and deliver, upon demand by Landlord and in the form requested by Landlord, any additional documents evidencing or further affecting the priority or subordination of this Lease with respect to any such ground lease or underlying leases of the lien of any such mortgage or deed of trust. Tenant hereby irrevocably appoints Landlord as attorney-in-fact of Tenant to execute, deliver and record any such documents in the name of and on behalf of Tenant. 20. MISCELLANEOUS 20.1 Rules and Regulations. Tenant shall faithfully comply with the rules and regulations set forth in Exhibit C attached hereto and incorporated herein by reference, together with all modifications and additions thereto adopted by Landlord from time to time in writing. Landlord shall not be responsible for the nonperformance by any other tenant or occupant of the Building of any of said rules and regulations. 20.2 Landlord's Reserved Rights. Landlord, for itself and its representative, may enter upon the Premises and exercise the following rights without notice and without liability to Tenant for damage or injury to property, person or business and without affecting an eviction of disturbance of Tenant's use or possession of giving rise to any claim for set-off or abatement of rent: (a) To change the name or street address of the Building. (b) To install and maintain signs on the exterior of the Building. (c) To have access to all mail chutes according to the rules of the United States Post Office Department. (d) At any reasonable time or times, to decorate, and to make at its own expense repairs, alterations, additions and improvements, structural or otherwise, in or to the Premises, the Building or part thereof, and any adjacent building, land, street, alley, and during such operations to take into and through the Premises or any part of the Building all materials required, and to temporarily close or suspend operation of entrances, doors, corridors, elevators or other facilities. (e) To have pass keys to the Premises. (f) To designate all sources furnishing sign manufacturing, painting and lettering on the Premises. (g) To exhibit the Premises to others at reasonable times upon reasonable notice. (h) To take any and all reasonable measures, including inspections or the making of repairs, alterations, additions, and improvements to the Premises or to the Building necessary or desirable for the safety, protection, operation or preservation of the Premises or the Building. Provided, however, if the Premises are rendered wholly or partially untenantable for Landlord's exercise of any or all of the foregoing rights, the rent herein reserved shall be abated in proportion to the part of the Premises which becomes untenantable. 20.3 Landlord's Right to Cure Default. All covenants and agreements to be kept or performed by Tenant under the terms of this Lease shall be performed by Tenant at Tenant's sole cost and expense and without any reduction of rent. If Tenant shall be in default on its obligations under this Lease to pay any sum of money other than rental or to perform any other act hereunder, and if such default is not cured within the applicable grace period provided in Section 16.1 hereof, if any, Landlord may, but shall not be obligated to, make any such payment or perform any such act on Tenant's part without waiving its right based upon any default of Tenant and without releasing Tenant from any obligations hereunder. All sums so paid by Landlord and all incidental costs, together with interest thereon at the Permitted Rate from the date of such payment or the incurrence of such cost by Landlord, whichever occurs first, shall be paid to Landlord on demand. In the event of nonpayment by Tenant, Landlord shall have, in addition to any other rights or remedies hereunder, the same rights and remedies as in the case of default by Tenant for nonpayment of rent. 20.4 Surrender of Premises. A voluntary surrender or other surrender of this Lease by Tenant or the mutual cancellation of the Lease shall not work a merger. At the option of Landlord, however, any surrender or mutual cancellation of this Lease may terminate any existing sublease or sub-tenancies or may operate as an assignment to Landlord of any such sublease or sub-tenancies. 20.5 Sale by Landlord. In the event that Landlord sells or conveys the Premises, Landlord shall be released from any liability arising thereafter based upon any of the terms, covenants, or conditions, express or implied, contained in this Lease. In such event, Tenant agrees to look solely to Landlord's successor in interest for any liability under this Lease. If any security has been given by Tenant to secure the faithful performance of any of the covenants of this Lease, Landlord may retain said security with Landlord's successor becoming responsible to Tenant for said security or may transfer or deliver said security to Landlord's successor in interest and, in either event, Landlord shall be discharged from any further liability with regard to said security. Except as set forth in this paragraph, this Lease shall not be affected by any sale or conveyance of the Premises by Landlord, and Tenant agrees to attorn to Landlord's successor in interest. 20.6 Estoppel Certificate. Within ten (10) days following any written request which Landlord may make from time to time, Tenant shall execute and deliver to Landlord a statement certifying: (a) the Commencement Date of this Lease, (b) the fact that this Lease is unmodified and in full force and effect (or, if there have been modifications thereto, that this Lease is in full force and effect, as modified, and stating the date and nature of such modification), (c) the date to which the rent and other sums payable under this Lease have been paid, (d) the fact that there are no current defaults under this Lease by either Landlord or Tenant except as specified in Tenant's statement, and (e) such other matters as may be requested by Landlord. Landlord and Tenant intend that any statement delivered pursuant to this paragraph may be relied upon by any mortgagee, beneficiary, purchaser or prospective purchaser of the Building or any interest therein. 20.7 Light and Air. Tenant covenants and agrees that no diminution of light, air or view by any structure which may hereafter be erected (whether or not by Landlord) shall entitle Tenant to any reduction of rent under this Lease, result in any liability of Landlord to Tenant, or in any other way affect this Lease. 20.8 Late Charge. Tenant recognizes that late payment of any rent or other sum due hereunder from Tenant to Landlord will result in administrative expense and loss of interest to Landlord, the extent of which additional expense and loss of interest is extremely difficult and economically impractical to ascertain. Tenant therefore agrees that if rent or any other payment due hereunder from Tenant to Landlord remains unpaid ten (10) days after said amount is due, the amount of such unpaid rent or other payment shall be increased by a late charge to be paid Landlord by Tenant in an amount equal to the grater of Fifty and no/100 Dollars ($50.00) or six percent (6%) or the amount not timely paid. Tenant agrees that such amount is a reasonable estimate of such loss and expense and may be charged by Landlord to defray such loss and expense. The amount of the late charge to be paid Landlord by Tenant on any unpaid rent or other payment shall be reassessed and added to Tenant's obligation for each successive monthly period accruing after the date of which the late charge is initially imposed. The provisions of this section in no way relieve Tenant of the obligation to pay rent or other payments on or before the date on which they are due, nor do the terms of this section in any way affect Landlord's remedies pursuant to Section 16 of this Lease in the event said rent or other payment is unpaid after the date due. 20.9 Waiver. If either Landlord or Tenant waives the performance of any term, covenant or condition contained in this Lease, such waiver shall not be deemed to be a waiver of the term, covenant or condition itself or a waiver of any subsequent breach of the same or any other term, covenant or condition contained herein. Furthermore, the acceptance of rent by Landlord shall not constitute a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, regardless of Landlord's knowledge of such preceding breach at the time Landlord accepted such rent. Failure by Landlord to enforce any of the terms, covenants or conditions of this Lease for any length of time shall not be deemed to waive or to decrease the right of Landlord to insist thereafter upon strict performance by Tenant. Waiver by Landlord of any term, covenant or condition contained in this Lease may only be made by a written document signed by Landlord. 20.20 Attorney's Fees. In the event that any action or proceeding is brought to enforce any term, covenant or condition in this Lease on the part of Landlord or Tenant, the prevailing party in such litigation shall be entitled to reasonable attorney's fees, if permitted by the Nebraska Statutes, in amount to be fixed by the court in such action or proceeding. 20.11 Notices. All notices and demands which are required or permitted to be given by either party to the other under this Lease shall be written and shall be delivered personally or sent by certified or registered mail, postage prepaid, addressed, in the case of Tenant, to the Premises, or to such other places as Tenant may from time to time designate by written notice, and in the case of Landlord, addressed to Landlord at Suite 636, 1033 "O" Street, Lincoln, Nebraska, 68508, or to such other place as Landlord may from time to time designate by written notice. All such notices and demands sent by mail shall be presumed to have been received by the addressee three (3) days after posting in the United States mail. 20.12 Landlord's Option to Relocate Tenant. At any time after Tenant's execution of this Lease, if the Premises covered by this Lease contain less than 2,500 square feet, Landlord shall have the right, upon providing Tenant thirty (30) days notice in writing, to provide and furnish Tenant with space elsewhere in the building of approximately the same size as the Premises. Landlord shall arrange for and pay the costs of moving Tenant to such new space. In the event Landlord moves Tenant to such new space, then this Lease and each and all of the terms and covenants and conditions hereof shall remain in full force and effect and thereupon be deemed applicable to such new space except that a revised Exhibit A shall become part of this Lease and shall reflect the location of the new space. Should Tenant refuse to permit Landlord to move Tenant to such new space at the end of said thirty (30) day period, Landlord shall have the right to terminate this lease by ten (10) days notice to such effect govern to Tenant in writing, which termination shall be effective upon the expiration of such ten (10) day period. 20.13 Defined Terms and Headings. The words "Landlord" and "Tenant" as used herein shall include the plural as well as the singular. Words used in masculine gender include the feminine and neuter, where applicable. If there is more than one Tenant, the obligations imposed under this Lease upon Tenant shall be joint and several. The headings and titles to the sections and subsections of this Lease are used for convenience only and shall have no effect upon the construction of interpretation of the Lease. 20.14 Time. Time is of the essence of this Lease and all of its provisions. If, however, the date of which any act or occurrence required or permitted to occur herein, or if the last day upon which any condition may be satisfied, shall be a Saturday, Sunday or legal holiday, such day or date shall be deemed to have been set for the next immediately following such Saturday, Sunday or legal holiday. 20.15 Successors and Assigns. Subject to the provisions of Section 15 hereof, the terms, covenants and conditions contained herein shall be binding upon and inure to the benefit of the heirs, successors, executors, administrators and assigns of the parties hereto. 20.16 Entire Agreement. This Lease, together with its exhibits, contains all of the agreements of the parties hereto and supersedes any prior or contemporaneous negotiations or agreements. There have been no representations made by Landlord or its agents or understandings made between the parties other than those set forth in this Lease and its exhibits. This lease may not be modified except by an instrument executed by the party to be charged. 20.17 Severability. The invalidity of any provision of this Lease as determined by a court of competent jurisdiction shall in no way affect the validity of any other provision hereof. 20.18 Representations. If Tenant is a corporation, each individual executing this Lease on behalf of said corporation represents and warrants that he is duly authorized in accordance with a duly adopted resolution of the Board of Directors of said corporation or in accordance with the bylaws of said corporation, that this Lease is binding upon said corporation in accordance with its terms. If Tenant is a corporation, it shall, within fourteen (14) days after execution of this Lease, deliver to Landlord a certified copy of a resolution of the Board of Directors of said corporation authorizing or ratifying the execution of this Lease. 20.19 Applicable Law. This Lease shall in all respects be governed by the laws of the State of Nebraska. 20.20 Rentable Space. The Rentable Space of the Premises and other areas shall be measured in accordance with the American Standard Method of floor Measurement for Office Buildings as revised and approved on August 14, 1972, by the Building Owners and Managers Association International. 20.21 Tenant's Percentage. The Tenant's Percentage set forth in Section 1.7 above shall be equal to the ratio that the Rentable Space contained in the Premises bears to the total Rental Space for the Building. 20.22 Permitted Rate. As used herein, the term "Permitted Rate" shall mean the interest rate that is equal to sixteen percent (16%) per annum, but if the maximum lawful rate of interest that may be charged by Landlord shall be ascertainable and shall be less than sixteen percent (16%) per annum, the term "Permitted Rate" shall mean the rate of interest that is equal to such maximum lawful rate of interest. 21. ADDITIONAL PROVISIONS 1.5.1. Basic Monthly Rental. Effective January 1, 1998 Tenant's Basic Monthly Rental shall be credited One Thousand Four Hundred Nineteen Dollars and 37/100 cents ($1,419.37) per month through December, 1998. Effective January 1, 1999 Tenant's Basic Monthly Rental shall be credited Two Thousand Eight Hundred Thirty Eight Dollars and 74/100 cents ($2,838.74) per month through December 31, 1999. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the date first above written. NATIONAL RESEARCH CORPORATION, GOLD'S LIMITED PARTNERSHIP INC. (TENANT) (LANDLORD) BY: /s/ Patrick Beans BY: JRM Nebraska Management & Patrick Beans Leasing Corp., Its Managing Agent ITS: Chief Financial Officer BY: /s/ Catherine A. Johnson Catherine A. Johnson, Its' Vice President EXHIBIT "A" GOLD'S GALLERIA - FOURTH LEVEL EXHIBIT "B" OFFICE FINISH SPECIFICATIONS Notwithstanding anything to the contrary contained herein; Tenant agrees to accept the Premises in its' present condition. EXHIBIT "C" OFFICE LEASE RULES & REGULATIONS 1. No sign, placard, picture, advertisement, name or notice shall be installed or displayed on any part of the outside or inside of the Building without the prior written consent of the Landlord. Landlord shall have the right to remove, at Tenant's expense and without notice, any sign installed or displayed in violation of this rule. All approved signs or lettering on doors and walls shall be printed, painted, affixed or inscribed at the expense of Tenant by a person chosen by Landlord. 2. Any curtain, blinds, shades or screens attached to or hung in or used in connection with any window or door of the Premises must be first approved by the Landlord and the Landlord shall furnish guidelines for the color, texture and fabric of such items. No awning shall be permitted on any part of the Premises. Landlord shall have the right to remove, at Tenant's expense and without notice, any such items installed in violation of this rule. Tenant shall not place anything against glass partitions or doors or windows which may appear unsightly from outside the Premises. All first floor exterior windows of occupied tenant spaces will have off white vertical blinds installed on them. This will help to conserve energy and provide a uniform appearance from the building exterior. Any first or second floor interior window within tenant spaces which abuts directly against the common area corridors shall have off white vertical blinds installed on them. This will provide a uniform appearance from the common area. Any side light widow on an occupied suite entry way on first or second floor shall have off white horizontal mini blinds installed on them. All blinds are to be installed at the Tenant's expense. 3. Tenant shall not obstruct any sidewalks, halls, passages, exits, entrances, elevators, escalators or stairways of the Building. The halls, passages, exits, entrances, shopping malls, elevators, escalators, and stairways are not for the general public, and Landlord shall in all cases retain the right to control and prevent access thereto of all persons whose presence in the judgment of Landlord would be prejudicial to the safety, character, reputation and interest of the Building and its Tenant, provided that nothing herein contained shall be construed to prevent such access to persons with whom any Tenant normally deals in the ordinary course of its business, unless such persons are engaged in illegal, immoral or unsafe activities. No Tenant and no employee or invitee of any Tenant shall go upon the roof of the Building. 4. The directory of the Building will be provided exclusively for the display of the name and location of Tenant only and Landlord reserves the right to exclude any other name therefrom. 5. All cleaning and janitorial services for the Building and the Premises shall be provided exclusively through Landlord, and, except with the written consent of Landlord, no person or persons other than those approved by Landlord shall be employed by Tenant or permitted to enter the Building for the purpose of cleaning the same. Tenant shall not cause unnecessary labor by carelessness or indifference to the good order and cleanliness of the Premises and the Building. 6. Landlord shall not in any way be responsible to any Tenant for any loss of property on the Premises, however occurring, or for any damage to any Tenant's property by the janitor or any other employee or any other person. 7. Landlord will furnish Tenant free of charge with two keys to each door lock in the Premises. Landlord may make a reasonable charge, for any additional keys, and Tenant shall not alter any lock or install a new or additional lock or bolt on any door of its Premises. Tenant upon the termination of its tenancy shall deliver to Landlord the keys to all doors which have been furnished to Tenant and all duplicates thereof, and in the event of loss of any keys so furnished, shall pay Landlord therefor. 8. If Tenant requires telegraphic, telephonic, burglar alarm or similar services, it shall first obtain, and comply with Landlord's instructions in their installation. 9. The freight elevator shall be available for use by all Tenants in the Building, subject to such reasonable scheduling as Landlord in its discretion shall deem appropriate and no equipment, materials, furniture, packages, supplies, merchandise or other property will be received in the Building or carried in the elevators except between such hours and in such elevators as may be designated by Landlord. 10. Tenant shall not place a load upon any floor of the Premises which exceeds the load per square foot which such floor was designed to carry and which is allowed by law. Landlord shall have the right to prescribe the weight, size and position of all equipment, materials, furniture or other property brought into the Building. Heavy objects shall, if considered necessary by Tenant, stand on such platforms as determined by Landlord to be necessary to properly distribute the weight. Business machines and mechanical equipment belonging to Tenant which cause noise or vibration that may be transmitted to the structure of the Building or to any space therein to such a degree as to be objectionable to Landlord or to any Tenants in the Building shall be placed and maintained by Tenant, at Tenant's expense, on vibration eliminators or other devices sufficient to climate noise or vibrations. The persons employed to move such equipment or other property from any case, and all damage done to the Building by maintaining or moving such equipment or other property shall be repaired at the expense of Tenant. 11. Tenant shall not use or keep in the Premises any kerosene, gasoline or inflammable or combustible fluid or material other than limited quantities necessary for the operation or maintenance of office equipment. Tenant shall not use or permit to be used in the Premises any foul or noxious gas or substance, or permit or allow the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors, or vibrations, nor shall Tenant bring into or keep about the Premises any birds or animals. 12. Tenant shall not use any method of heating or air conditioning other than that supplied by Landlord. 13. Tenant shall not waste electricity, water or air conditioning and agrees to cooperate fully with Landlord to assure the most effective operation of the Building's heating and air conditioning, and shall refrain from attempting to adjust any controls other than room thermostats installed for Tenant's use. Tenant shall keep corridor doors closed. 14. Landlord reserves the right, exercisable without liability to Tenant, to change the name and street address of the Building. 15. Landlord reserves the right to exclude from the building between the hours of 6 p.m. and 7 a.m. the following day, or such other hours as may be established from time to time by Landlord, and on Sundays and legal holidays any person unless that person is known to the person or employee in charge of the building and has a pass or is properly identified. Tenant shall be responsible for all persons for whom it requests passes and shall be liable to Landlord for all acts of such person. Landlord shall not be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. Landlord reserves the right to prevent access to the Building in case of invasion, mob, riot, public excitement or other commotion by closing the doors or by other appropriate action. 16. Tenant shall close and lock the doors of the Premises and entirely shut off all water faucets or other water apparatus and electricity, gas or aid outlets before Tenant and its employees lease the Premises. Tenant shall be responsible for any damage or injuries sustained by other Tenant or occupants of the Building or by Landlord for noncompliance with this rule. 17. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed, no foreign substance of any kind whatsoever shall be thrown therein, and the expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the Tenant who, or whose employees or invitees, shall he caused it. 18. Tenant shall not sell, or permit the sale at retail of newspapers, magazines, periodicals, theater tickets or any other goods or merchandise to the general public in or on the Premises. Tenant shall not use the Premises for any business or activity other than that specifically provided for in such Tenant's lease. 19. Tenant shall not install any radio or television antenna, loudspeaker or other device on the roof or exterior walls of the Building. Tenant shall not use the Premises for any business or activity other than that specifically provided for in such Tenant's lease. 20. Tenant shall not mark, drive nails, screw or drill into partitions, woodwork or plaster, except for wall hangings and pictures, or in any way deface the Premises or any part thereof. Landlord reserves the right to direct electricians as to where and how telephone and telegraph wires are to be introduces to the Premises. Tenant shall not cut or bore holes for wires. Tenant shall not affix any floor covering to the floor of the Premises in any manner except as approved by Landlord. Tenant shall repair any damage resulting from noncompliance with this rule. 21. Tenant shall not install, maintain or operate upon the Premises any vending machine without the written consent of Landlord. 22. Canvassing, soliciting and distribution of handbills or other written material, and peddling in the Building are prohibited, and each Tenant shall cooperate to prevent same. 23. Landlord reserves the right to exclude or expel from the Building any person who, in Landlord's judgment, is intoxicated or under the influence of liquor or drugs who is in violation of any of the rules and regulations of the Building. 24. Tenant shall store all its trash and garbage within its Premises. Tenant shall not place in any trash box or receptacle any material which cannot be disposed of in the ordinary and customary manner of trash and garbage disposal. All garbage and refuse disposal shall be made in accordance with directions issued from time to time by the Landlord. 25. The Premises shall not be used for the storage of merchandise held for sale to the general public, or for lodging or for manufacturing of any kind, nor shall the Premises be used for the improper, immoral, or objectionable purposes. No cooking shall be done or permitted by any Tenant on the Premises, except that use by the Tenant of Underwriters' Laboratory approved equipment for brewing coffee, tea, hot chocolate and similar beverages shall be permitted, provided that such equipment and use is in accordance with all applicable federal, state, and city laws, codes, ordinances, rules and regulations. 26. Tenant shall not use in any space or in the public halls of the Building any hand trucks except those equipped with rubber tires and side guards or such other material handling equipment as Landlord may approve. Tenant shall not bring and other vehicles of any kind into the Building. 27. Without the written consent of Landlord, Tenant shall not use the name of the Building in connection with or in promoting or advertising the business of Tenant except as Tenant's address. 28. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency. 29. Tenant assumes any and all responsibility for protecting its Premises from theft, robbery and pilferage, which includes keeping doors locked and other means of entry to the Premises closed. 30. The requirement of Tenant will be attended to only upon appropriate application to the office of the Building by an authorized individual. Employees of Landlord shall not perform any work or do anything outside of their regular duties unless under special instructions from Landlord, and no employee of Landlord will admit any person (Tenant or otherwise) to any office without specific instructions from Landlord. 31. Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular Tenant or Tenants, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of any other Tenant or Tenants, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all of the Tenants in the Building. 32. These Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the terms, covenants, agreements and conditions of any lease of the Premises in the Building. 33. Landlord reserves the right to make such other and reasonable rules and regulations as in its judgment may from time to time be needed for safety and security, for care and cleanliness of the Building and for the preservation of good order therein. Tenant agrees to abide by all such rules and regulation hereinafter stated and any additional rules and regulations which are adopted. 34. Terms defined in the Lease to which these Rules and Regulations are attached shall have the same meanings herein. 35. Tenant shall be responsible for the observance of all of the foregoing rules by Tenant's employers, agents, clients, customers, invitees and guests. ACKNOWLEDGEMENT FOR PARTNERSHIP LANDLORD STATE OF NEBRASKA ) ) ss. COUNTY OF LANCASTER ) On the ___________ day of _____________________________, 19___ before me came _________________________________, to me known, who being by me duly sworn, did depose and say, that he/she resides at ____________________________ ____________________________________; that he/she is a ______________________________ of _____________________________, the Landlord described in and which executed the foregoing Lease; and that he/she was authorized by the Landlord to sign thereon and to bind the Landlord. Notary Public ACKNOWLEDGEMENT FOR INDIVIDUAL TENANTS STATE OF NEBRASKA ) ) ss. COUNTY OF LANCASTER ) On the ___________ day of _____________________________, 19___ before me came _________________________________, to me known, who being by me duly sworn, did depose and say, that he/she resides at ____________________________ ____________________________________; and that he/she executed the foregoing instrument for the purpose therein contained. Notary Public STATE OF NEBRASKA ) ) ss. COUNTY OF LANCASTER ) On the ___________ day of _____________________________, 19___ before me came _________________________________, to me known, who being by me duly sworn, did depose and say, that he/she resides at ____________________________ ____________________________________; and that he/she executed the foregoing instrument for the purpose therein contained. Notary Public GUARANTEE OF OFFICE LEASE WHEREAS a certain Office Lease ("Lease") dated November 24, 1997 has been, or will be, executed by and between GOLD'S LIMITED PARTNERSHIP, therein and herein referred to as "Landlord", and NATIONAL RESEARCH CORPORATION and herein referred to as "Tenant", covering the following described Premises and Building in the City of Lincoln, County of Lancaster, State of Nebraska. Description of Premises: 1033 "O" Street Description of Building: Gold's Galleria WHEREAS Landlord under the Lease requires as a condition to its execution of the Lease that the undersigned guarantee the full performance of the obligations of Tenant under the Lease; and WHEREAS the undersigned is desirous that Landlord enter into the Lease with Tenant, NOW, THEREFORE, in consideration of the execution of the Lease by Landlord, the undersigned hereby unconditionally guarantees the full performance of each and all of the terms, covenants and conditions of the Lease to be kept and performed by Tenant, including without limitation the payment of all rent and other charges to accrue thereunder. The undersigned further agrees as follows: 1. That this covenant and agreement on its part shall continue in favor of Landlord notwithstanding any extension, modification, or alteration of the Lease entered into by and between the parties thereto, or their successors or assigns, or notwithstanding any assignment of the Lease, with or without the consent of Landlord, and no extension, modification, alteration or assignment of the Lease shall in any manner release or discharge the undersigned, and the undersigned hereby consents to any such extension, modification, alteration or assignment. 2. This Guarantee will continue unchanged by any bankruptcy, reorganization or insolvency of the Tenant or any successor or assignee thereof or by any disaffirmance or abandonment by a trustee of Tenant. 3. Landlord may, without notice, assign this Guarantee in whole or in part and no assignment or transfer of the Lease shall operate to extinguish or diminish the liability of the undersigned hereunder. 4. The liability of the undersigned under this Guarantee shall be primary and that in any right of action which shall accrue to Landlord under the Lease, Landlord may, at its option proceed against the undersigned without having commenced any action, or having obtained any judgment against Tenant. 5. To pay Landlord's reasonable attorneys' fees and all costs and other expenses incurred in any collection or attempted collection or in any negotiations relative to the obligations hereby guaranteed or enforcing this Guarantee against the undersigned, individually or jointly. 6. That it does hereby waive notice of any demand by Landlord, as well as any notice of default in the payment of rent or any other amounts contained or reserved in the Lease. The use of the singular herein shall include the plural. The obligation of two or more parties shall be joint and several. The terms and provisions of this Guarantee shall be binding upon and inure to the benefit of the respective successors and assigns of the parties herein named. IN WITNESS WHEREOF, the undersigned has caused this Guarantee to be executed as of the date set forth on page 1 of the Lease. Guarantor (Corporate): Witness By:__________________________ President Witness Attest:______________________ Secretary Guarantor (Partnership): Witness By: _________________________ General Partner Witness By: _________________________ General Partner Guarantor (Individual(s)): Witness By: _________________________ Witness By: _________________________ EX-27 5
5 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 4,688 13,220 3,158 63 0 21,875 1,064 544 22,563 4,194 0 0 0 7 18,114 22,563 0 16,284 0 7,178 5,879 0 0 3,226 376 3,217 0 0 0 3,217 0 0 The Statement of Income only reflects proforma earnings per share.
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