NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
Summary of Significant Accounting Policies
Description of Business and Basis of Presentation
National Research Corporation (“NRC” or the “Company”) is a leading provider of analytics and insights that facilitate revenue growth, patient, employee and customer retention and patient engagement for healthcare providers, payers and other healthcare organizations. The Company’s ten largest clients accounted for 22%, 20%, and 19% of the Company’s total revenue in 2012, 2011, and 2010, respectively.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiary. All significant intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 revenue and expenses during the reporting period. Actual results could differ from those estimates.
Translation of Foreign Currencies
The Company’s Canadian subsidiary uses as its functional currency the local currency of the country in which it operates. It translates its assets and liabilities into U.S. dollars at the exchange rate in effect at the balance sheet date. It translates its revenue and expenses at the average exchange rate during the period. The Company includes translation gains and losses in accumulated other comprehensive income (loss), a component of shareholders’ equity. Gains and losses related to transactions denominated in a currency other than the functional currency of the countries in which the Company operates and short-term intercompany accounts are included in other income (expense) in the consolidated statements of income. Since the undistributed earnings of the Company’s foreign subsidiaries are considered to be indefinitely reinvested, the components of accumulated other comprehensive income (loss) have not been tax effected.
Revenue Recognition
The Company derives a majority of its operating revenue from its annually renewable services, which include performance measurement and improvement services, healthcare analytics and governance education services. The Company provides these services to its clients under annual client service contracts, although such contracts are generally cancelable on short or no notice without penalty. The Company also derives some revenue from its custom and other research projects.
Services are provided under subscription-based service agreements. The Company recognizes subscription-based service revenue over the period of time the service is provided. Generally, the subscription periods are for twelve months and revenue is recognized equally over the subscription period.
Certain contracts are fixed-fee arrangements with a portion of the project fee billed in advance and the remainder billed periodically over the duration of the project. Revenue and direct expenses for services provided under these contracts are recognized under the proportional performance method. Under the proportional performance method, the Company recognizes revenue based on output measures or key milestones such as survey set-up, survey mailings, survey returns and reporting. The Company measures its progress based on the level of completion of these output measures and recognizes revenue accordingly. Management judgments and estimates must be made and used in connection with revenue recognized using the proportional performance method. If management made different judgments and estimates, then the amount and timing of revenue for any period could differ materially from the reported revenue.
The Company also derives revenue from hosting arrangements where our propriety software is offered as a service to our customers through our data processing facilities. The Company’s revenue also includes software-related revenue for software license revenue, installation services, post-contract support (maintenance) and training. Software-related revenue is recognized in accordance with the provisions of Accounting Standards Codification (“ASC”) 985-605,
Software-Revenue Recognition.
Hosting arrangements to provide customers with access to the Company’s propriety software are marketed under long-term arrangements generally over periods of one to three years. Under these arrangements, the customer is not provided the contractual right to take possession of the licensed software at any time during the hosting period without significant penalty, and the customer is not provided the right to run the software on their own hardware or contract with another party unrelated to us to host the software. Upfront fees for setup services are typically billed for our hosting arrangements, however, these arrangements do not qualify for separation from the ongoing hosting services due to the absence of standalone value for the set-up services. Therefore, we account for these arrangements as service contracts and recognize revenue ratably over the hosting service period when all other conditions to revenue are met. Other conditions that must be met before the commencement of revenue recognition include achieving evidence of an arrangement, determining that the collection of the revenue is probable, and determining that fees are fixed and determinable.
The Company’s software arrangements typically involve the sale of a time-based license bundled with installation services, post-contract support (“PCS”) and training. License terms range from one year to three years, and require an annual fee for bundled elements of the arrangement. PCS is also contractually provided for a period that is co-terminus with the term of the time-based license. The Company’s installation services are not considered to be essential to the functionality of the software license. The Company does not achieve vendor-specific objective evidence (“VSOE”) of the fair value of the undelivered elements of its software arrangements (primarily PCS) and, therefore, these arrangements are accounted for as a single unit of accounting with revenue recognized ratably over the minimum bundled PCS period.
The Company’s revenue arrangements (not involving software elements) may include multiple elements. In assessing the separation of revenue for elements of such arrangements, we first determine whether each delivered element has standalone value based on whether we, or other vendors, sell the services separately. We also consider whether there is sufficient evidence of the fair value of the elements in allocating the fees in the arrangement to each element. Revenue allocated to an element is limited to revenue that is not subject to refund or otherwise represent contingent revenue.
On January 1, 2011, the Company prospectively adopted Accounting Standard Update (“ASU”) 2009-13,
Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (ASU 2009-13).
For arrangements entered into or materially modified beginning January 1, 2011, we allocated revenue to arrangements with multiple elements based on relative selling price using a selling price hierarchy. The selling price for a deliverable is based on its VSOE if it exists, otherwise third-party evidence of selling price. If neither exists for a deliverable, the best estimate of the selling price is used for that deliverable based on list price, representing a component of management’s market strategy, and an analysis of historical prices for bundled and standalone arrangements.
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on specific account analysis and on the Company’s historical write-off experience. The Company reviews the allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectability and provisions are made for accounts not specifically reviewed. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
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.
For costs of software developed for internal use, the Company expenses computer software costs as incurred in the preliminary project stage, which involves the conceptual formulation, evaluation and selection of technology alternatives. Costs incurred related to the design, coding, installation and testing of software during the application project stage are capitalized. Costs for training and application maintenance are expensed as incurred. The Company has capitalized approximately $636,000, $840,000 and $900,000, of internal and external costs incurred for the development of internal-use software for the years ended December 31, 2012, 2011, and 2010, respectively, with such costs classified as property and equipment.
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. The Company uses the straight-line method of depreciation and amortization over estimated useful lives of three to ten years for furniture and equipment, three to five years for computer equipment, three to five years for capitalized software, and seven to forty years for the Company’s office building and related improvements.
Leases are categorized as operating or capital at the inception of the lease. Assets under capital lease obligations are reported at the lower of fair value or the present value of the aggregate future minimum lease payments at the beginning of the lease term. The Company depreciates capital lease assets without transfer-of-ownership or bargain-purchase-options using the straight-line method over the lease terms, excluding any lease renewals, unless the lease renewals are reasonably assured. Capital lease assets with transfer-of-ownership or bargain-purchase-options are depreciated using the straight-line method over the assets’ estimated useful lives.
Impairment of Long-Lived Assets
Long-lived assets, such as property and equipment and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. No impairments were recorded during the years ended December 31, 2012, 2011, or 2010.
Among others, management believes the following circumstances are important indicators of potential impairment of such assets and as a result may trigger an impairment review:
|
●
|
Significant underperformance in comparison to historical or projected operating results;
|
|
●
|
Significant changes in the manner or use of acquired assets or the Company’s overall strategy;
|
|
●
|
Significant negative trends in the Company’s industry or the overall economy;
|
|
●
|
A significant decline in the market price for the Company’s common stock for a sustained period; and
|
|
●
|
The Company’s market capitalization falling below the book value of the Company’s net assets
.
|
Goodwill and Intangible Assets
Intangible assets include customer relationships, trade names, non-compete agreements and goodwill. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company reviews intangible assets with indefinite lives for impairment annually as of October 1 and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.
When performing the impairment assessment, the Company will first assess qualitative factors to determine whether it is necessary to recalculate the fair value of the intangible assets with indefinite lives. If the Company believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of the indefinite-lived intangibles is less than their carrying amount, the Company calculates the fair value using a market approach. If the carrying value of intangible assets with indefinite lives exceeds their fair value, then the intangible assets are written-down to their fair values. The Company did not recognize any impairments related to long-lived assets during 2012, 2011, or 2010.
Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. All of the Company’s goodwill is allocated to its reporting units, which are the same as its operating segments. Goodwill is reviewed for impairment at least annually, as of October 1, and whenever events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable.
The Company reviews for goodwill impairment by first assessing qualitative factors to determine whether any impairment may exist. If the Company believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative two-step test is required; otherwise, no further testing is required. Under the first step of the quantitative test, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed. If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the entity must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the fair value of that goodwill. The fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation and the residual fair value after this allocation is the fair value of the reporting unit goodwill.
In instances when a step two is required, the fair value of the reporting unit is determined using an income approach and comparable market multiples. Under the income approach, there are a number of inputs used to calculate the fair value using a discounted cash flow model, including operating results, business plans, projected cash flows and a discount rate. Discount rates, growth rates and cash flow projections are the most sensitive and susceptible to change as they require significant management judgment. Discount rates are determined by using a weighted average cost of capital, which considers market and industry data. Operational management develops growth rates and cash flow projections for each reporting unit considering industry and Company-specific historical and projected information. Terminal value rate determination follows common methodology of capturing the present value of perpetual cash flow estimates beyond the last projected period assuming a constant weighted average cost of capital and low long-term growth rates. Under the market approach, the Company considers its market capitalization, comparisons to other public companies’ data, and recent transactions of similar businesses within the Company’s industry.
No impairments were recorded during the years ended December 31, 2012, 2011 or 2010. The most recent quantitative analysis was performed as of October 1, 2011. That analysis indicated that the fair value of our reporting units, including goodwill, was significantly in excess of their carrying values. The Company performed a qualitative analysis as of October 1, 2012 which did not indicate that it was more likely than not that the carrying values of the reporting units exceeded fair value.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. 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 basis 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. The Company uses the deferral method of accounting for its investment tax credits related to state tax incentives. During the years ended December 31, 2012, 2011 and 2010, the Company recorded income tax benefits relating to these tax credits of $289,000, $229,000, and $251,000, respectively.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
The Company had an unrecognized tax benefit at December 31, 2012, and 2011, of $224,000 and $266,000, respectively, excluding interest of $11,000 and $43,000, respectively, and no penalties. Of this amount, $224,000 and $266,000 at December 31, 2012 and 2011, respectively, represents the net unrecognized tax benefits that, if recognized, would favorably impact the effective income tax rate. The Company accrues interest and penalties related to uncertain tax position in the statements of income as income tax expense. The Company is not subject to tax examinations for years prior to 2009 in the U.S. and 2008 in Canada.
Share-Based Compensation
The Company measures and recognizes compensation expense for all share-based payments. The compensation expense is recognized based on the grant-date fair value of those awards. All of the Company’s existing stock option awards and non-vested stock awards have been determined to be equity-classified awards.
Amounts recognized in the financial statements with respect to these plans:
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
Amounts charged against income, before income tax benefit
|
|
$
|
388
|
|
|
$
|
763
|
|
|
$
|
779
|
|
Amount of related income tax benefit
|
|
|
153
|
|
|
|
302
|
|
|
|
309
|
|
Total net income impact
|
|
$
|
235
|
|
|
$
|
461
|
|
|
$
|
470
|
|
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents were $7.5 million and $7.9 million as of December 31, 2012, and 2011, respectively, consisting primarily of money market accounts and funds invested in commercial paper. At certain times, cash equivalent balances may exceed federally insured limits.
Fair Value Measurements
The Company’s valuation techniques are based on maximizing observable inputs and minimizing the use of unobservable inputs when measuring fair value. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect the Company’s market assumptions. The inputs are then classified into the following hierarchy: (1) Level 1 Inputs—quoted prices in active markets for identical assets and liabilities; (2) Level 2 Inputs—observable market-based inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities in active markets, quoted prices for similar or identical assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data; (3) Level 3 Inputs—unobservable inputs.
The following details the Company’s financial assets and liabilities within the fair value hierarchy at December 31, 2012 and 2011:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(In thousands)
|
|
As of December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
$
|
5,245
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
5,245
|
|
Commercial Paper
|
|
$
|
2,242
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
2,242
|
|
Total
|
|
$
|
7,487
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
7,487
|
|
As of December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
$
|
3,243
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
3,243
|
|
Commercial Paper
|
|
$
|
4,659
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
4,659
|
|
Total
|
|
$
|
7,902
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
7,902
|
|
The Company's long-term debt is recorded at historical cost. The fair value of long-term debt is classified in Level 2 of the fair value hierarchy and was estimated based primarily on estimated current rates available for debt of the same remaining duration and adjusted for nonperformance and credit. The following are the carrying amount and estimated fair values of long-term debt:
|
|
December 31
, 2012
|
|
|
December 31,
2011
|
|
|
|
(In thousands)
|
|
Total carrying amount of long-term debt
|
|
$
|
12,436
|
|
|
$
|
14,486
|
|
Estimated fair value of long-term debt
|
|
$
|
12,490
|
|
|
$
|
14,498
|
|
The Company believes that the carrying amounts of accounts receivable, accounts payable, and accrued expenses approximate their fair value. All non-financial assets that are not recognized or disclosed at fair value in the financial statements on a recurring basis, which includes goodwill and non-financial long-lived assets, are measured at fair value in certain circumstances (for example, when there is evidence of impairment). As of December 31, 2012 and 2011, there was no impairment related to property and equipment, goodwill and other intangible assets.
Contingencies
From time to time, the Company is involved in certain claims and litigation arising in the normal course of business. Management assesses the probability of loss for such contingencies and recognizes a liability when a loss is probable and estimable. At December 31, 2012, the Company was not engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material effect on the Company.
Earnings Per Share
Net income per share has been calculated and presented for “basic” and “diluted” per share data. Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding. Diluted income per share is computed by dividing net income by the weighted average number of common shares adjusted for the dilutive effects of options and restricted stock. At December 31, 2012, 2011, and 2010, the Company had 30,820, 119,569 and 384,652 options, respectively, which have been excluded from the diluted net income per share computation because the exercise price exceeds the fair market value.
The weighted average shares outstanding were calculated as follows:
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
Common stock
|
|
|
6,775
|
|
|
|
6,672
|
|
|
|
6,637
|
|
Dilutive effect of options
|
|
|
164
|
|
|
|
158
|
|
|
|
87
|
|
Dilutive effect of restricted stock
|
|
|
12
|
|
|
|
12
|
|
|
|
12
|
|
Weighted average shares used for dilutive per share information
|
|
|
6,951
|
|
|
|
6,842
|
|
|
|
6,736
|
|
There are no reconciling items between the Company’s reported net income and net income used in the computation of basic and diluted income per share.
Segment Information
The Company has eight operating segments that are aggregated into one reporting segment because they have similar economic characteristics and meet the other aggregation criteria from the Financial Accounting Standards Board (“FASB”) guidance on segment disclosure. The eight operating segments are as follows: NRC Picker U.S. and NRC Picker Canada, which each offer renewable performance tracking and improvement services, custom research, subscription-based educational services and a renewable syndicated service; Ticker, which offers stand-alone market information as well as a comparative performance database to allow 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; Payer Solutions, which offers functional disease-specific and health status measurement tools; The Governance Institute (“TGI”), which offers subscription-based governance information and educational conferences designed to improve the effectiveness of hospital and healthcare systems by continually strengthening their healthcare boards, medical leadership and management performance in the United States; My InnerView (“MIV”), which provides quality and performance improvement solutions to the senior care industry; Outcome Concept Systems, Inc. (“OCS”), a provider of clinical, financial and operational benchmarks and analytics to home care and hospice providers; and Illuminate, a patient outreach and discharge program designed to facilitate service and clinical recovery within the critical hours after a patient is discharged from a healthcare setting within the acute care, skilled nursing, physician and home health environments.
Adoption of New Accounting Pronouncements
In June 2011, the FASB issued ASU No. 2011-05,
Presentation of Comprehensive Income
, which amends ASC 220,
Comprehensive Income
, by requiring all non-owner changes in shareholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance was effective retrospectively for fiscal years and interim periods within those years beginning after December 15, 2011. In December 2011, the FASB issued ASU No. 2011-12,
Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05
, which defers certain portions of ASU No. 2011-05 indefinitely and will be further deliberated by the FASB at a future date. The Company adopted the requirements of ASU 2011-05 and ASU 2011-12 by presenting a Consolidated Statement of Comprehensive Income immediately following the Consolidated Statement of Income. There was no other impact on the Company’s consolidated financial statements.
In September 2011, the FASB issued ASU No. 2011-08,
Intangibles — Goodwill and Other
. ASU No. 2011-08 allows entities to first assess qualitatively whether it is necessary to perform the two-step goodwill impairment test. If an entity believes, as a result of its qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative two-step goodwill impairment test is required. An entity has the unconditional option to bypass the qualitative assessment and proceed directly to performing the quantitative goodwill impairment test. The Company adopted the requirements of ASU 2011-08 and performed the qualitative assessment when performing the annual goodwill assessment in the fourth quarter of 2012. The adoption of this standard did not have a material effect on the Company’s consolidated financial statements.
In July 2012, the FASB issued ASU No. 2012-02,
Testing Indefinite-Lived Intangible Assets for Impairment.
Similar to the guidance in ASU 2011-08 for goodwill, ASU No. 2012-02 allows entities to first perform a qualitative assessment of its indefinite-lived intangible assets. The Company is not required to perform further analysis, unless, based on the qualitative assessment, the Company concludes that it is more likely than not that the indefinite-lived intangible assets are impaired. The Company has the option to bypass the qualitative assessment and perform the quantitative assessment. The Company adopted the requirements of ASU No. 2012-02 and performed the qualitative assessment when performing its annual assessment of indefinite-lived intangible assets in the fourth quarter of 2012. The adoption of this standard did not have a material effect on the Company’s consolidated financial statements.
On August 3, 2010, the Company acquired all of the issued and outstanding shares of stock and stock rights of OCS, a provider of clinical, financial and operational benchmarks and analytics to home care and hospice providers. The acquisition provides the Company with an entry in the home health and hospice markets through OCS’s customer relationships with home healthcare and hospice providers and expands the Company's service offerings across the continuum of care. Goodwill related to the acquisition of OCS primarily relates to intangible assets that do not qualify for separate recognition including the depth and knowledge of management. Cash consideration paid at closing was
$15.3 million, net of $1.0 million cash received. The following table summarizes the purchase allocation of fair value of the assets acquired and liabilities assumed at the acquisition date.
Amount of Identified Assets Acquired and Liabilities Assumed
|
|
Weighted-Average Life
(years)
|
|
|
|
|
Current Assets
|
|
|
|
|
$
|
3,615
|
|
Property and equipment
|
|
|
|
|
|
1,632
|
|
Customer relationships
|
|
|
10
|
|
|
|
2,330
|
|
Trade name
|
|
|
5
|
|
|
|
330
|
|
Non-compete Agreements
|
|
|
3
|
|
|
|
430
|
|
Goodwill
|
|
|
|
|
|
|
13,502
|
|
Total acquired assets
|
|
|
|
|
|
|
21,839
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
6,310
|
|
Long-term liabilities
|
|
|
|
|
|
|
260
|
|
Total liabilities assumed
|
|
|
|
|
|
|
6,570
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
|
|
|
$
|
15,269
|
|
The identifiable intangible assets are being amortized over their estimated useful lives and have a total weighted average amortization period of 8.5 years. The excess of purchase price over the fair value of net assets acquired was recorded as goodwill. The goodwill and identifiable intangible assets are non-deductible for tax purposes. No residual value was estimated for intangible assets.
The consolidated financial statements as of December 31, 2012, 2011 and 2010, and for the years then ended, include amounts acquired from, as well as the results of operations of, OCS from August 3, 2010, forward. Results of operations for the year ended December 31, 2010, include revenue of $3.0 million and operating income of $221,000 attributable to OCS since its acquisition. Acquisition-related costs included in selling, general and administrative expenses for the year ended December 31, 2010, approximated $312,000. The following unaudited pro forma information for the Company has been prepared as if the acquisition of OCS had occurred on January 1, 2009. The information is based on the historical results of the separate companies and may not necessarily be indicative of the results that could have been achieved or of results that may occur in the future. The pro forma adjustments include the impact of depreciation and amortization of property and equipment and intangible assets acquired, interest expense on the acquisition debt and income tax benefits for tax effects of the foregoing adjustments to depreciation, amortization and interest expense.
|
|
December 31,
2010
|
|
|
|
(in thousands)
|
|
Revenue
|
|
$
|
67,341
|
|
|
|
|
|
|
Net income
|
|
$
|
7,664
|
|
|
|
|
|
|
Net income per share – basic
|
|
$
|
1.15
|
|
|
|
|
|
|
Net income per share – diluted
|
|
$
|
1.14
|
|
(3)
Property and Equipment
At December 31, 2012, and 2011, property and equipment consisted of the following:
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Furniture and equipment
|
|
$
|
3,797
|
|
|
$
|
3,667
|
|
Computer equipment and software
|
|
|
17,647
|
|
|
|
15,866
|
|
Building
|
|
|
9,322
|
|
|
|
9,271
|
|
Land
|
|
|
425
|
|
|
|
425
|
|
|
|
|
31,191
|
|
|
|
29,229
|
|
Less accumulated depreciation and amortization
|
|
|
18,698
|
|
|
|
15,616
|
|
Net property and equipment
|
|
$
|
12,493
|
|
|
$
|
13,613
|
|
Depreciation and amortization expense related to property and equipment, including assets under capital lease, for the years ended December 31, 2012, 2011, and 2010 was $3.4 million, $3.5 million, and
$3.4 million, respectively.
Property and equipment included the following amounts under capital lease:
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Furniture and equipment
|
|
$
|
514
|
|
|
$
|
527
|
|
Computer equipment and software
|
|
|
47
|
|
|
|
47
|
|
|
|
|
561
|
|
|
|
574
|
|
Less accumulated amortization
|
|
|
196
|
|
|
|
117
|
|
Net assets under capital lease
|
|
$
|
365
|
|
|
$
|
457
|
|
(4)
Goodwill and Intangible Assets
Goodwill and intangible assets consisted of the following at December 31, 2012:
|
|
Useful Life
|
|
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
|
(In years)
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Goodwill
|
|
|
|
|
$
|
57,799
|
|
|
|
|
|
$
|
57,799
|
|
Non-amortizing intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite trade name
|
|
|
|
|
|
1,191
|
|
|
|
|
|
|
1,191
|
|
Amortizing intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer related
|
|
5
|
-
|
15
|
|
|
|
10,521
|
|
|
|
6,709
|
|
|
|
3,812
|
|
Non-competes
|
|
|
3
|
|
|
|
|
430
|
|
|
|
346
|
|
|
|
84
|
|
Trade names
|
|
5
|
-
|
10
|
|
|
|
1,902
|
|
|
|
1,195
|
|
|
|
707
|
|
Total amortizing intangibles
|
|
|
|
|
|
|
|
12,853
|
|
|
|
8,250
|
|
|
|
4,603
|
|
Total intangible assets other than goodwill
|
|
|
|
|
|
|
$
|
14,044
|
|
|
$
|
8,250
|
|
|
$
|
5,794
|
|
Goodwill and intangible assets consisted of the following at December 31, 2011:
|
|
Useful Life
|
|
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
|
(In years)
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Goodwill
|
|
|
|
|
$
|
57,730
|
|
|
|
|
|
$
|
57,730
|
|
Non-amortizing intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite trade name
|
|
|
|
|
|
1,191
|
|
|
|
|
|
|
1,191
|
|
Amortizing intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer related
|
|
5
|
-
|
15
|
|
|
|
10,513
|
|
|
|
5,789
|
|
|
|
4,724
|
|
Non-competes
|
|
|
3
|
|
|
|
|
430
|
|
|
|
203
|
|
|
|
227
|
|
Trade names
|
|
5
|
-
|
10
|
|
|
|
1,902
|
|
|
|
971
|
|
|
|
931
|
|
Total amortizing intangibles
|
|
|
|
|
|
|
|
12,845
|
|
|
|
6,963
|
|
|
|
5,882
|
|
Total intangible assets other than goodwill
|
|
|
|
|
|
|
$
|
14,036
|
|
|
$
|
6,963
|
|
|
$
|
7,073
|
|
The following represents a summary of changes in the Company’s carrying amount of goodwill for the years ended December 31, 2012, and 2011 (in thousands):
Balance as of December 31, 2010
|
|
$
|
55,133
|
|
MIV contingent consideration earned
|
|
|
2,550
|
|
OCS correcting entries
|
|
|
106
|
|
Foreign currency translation
|
|
|
(59
|
)
|
Balance as of December 31, 2011
|
|
$
|
57,730
|
|
Foreign currency translation
|
|
|
69
|
|
Balance as of December 31, 2012
|
|
$
|
57,799
|
|
Correcting entries related to the OCS acquisition were made in 2011 for adjustments needed in the purchase price allocation. Those entries decreased accrued expenses by $49,000, increased the valuation allowance for deferred tax asset by $155,000, and increased goodwill by $106,000. The effects of these errors were not material to any previously reported periods.
The agreement under which the Company acquired MIV in 2008 provided for contingent earn-out payments over three years based on growth in revenue and earnings. The 2010 and 2009 earn-out payments paid in February 2011 and 2010 were $1.6 million and $172,000, respectively, net of closing valuation adjustments, and were recorded as additions to goodwill. In April 2011, the Company reached an agreement which limited the final earn-out payment associated with the MIV acquisition at approximately $2.6 million. Of this amount, $2.4 million was paid during April 2011 and a final payment of $117,000 was paid in September 2011, which were recorded as additions to goodwill.
Aggregate amortization expense for customer related intangibles, trade names and non-competes for the years ended December 31, 2012, 2011 and 2010 was $1.3 million, $1.6 million, and $1.3 million, respectively. Estimated amortization expense for the next five years is: 2013—$954,000; 2014—$842,000; 2015—$789,000; 2016—$597,000; 2017—$531,000: thereafter $890,000.
(5)
Income Taxes
For the years ended December 31, 2012, 2011, and 2010, income before income taxes consists of the following:
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
U.S. Operations
|
|
$
|
19,836
|
|
|
$
|
16,017
|
|
|
$
|
11,353
|
|
Foreign Operations
|
|
|
2,371
|
|
|
|
2,143
|
|
|
|
1,962
|
|
|
|
$
|
22,207
|
|
|
$
|
18,160
|
|
|
$
|
13,315
|
|
Income tax expense consisted of the following components:
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Federal
:
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
5,488
|
|
|
$
|
4,018
|
|
|
$
|
3,450
|
|
Deferred
|
|
|
1,140
|
|
|
|
1,170
|
|
|
|
458
|
|
Total
|
|
$
|
6,628
|
|
|
$
|
5,188
|
|
|
$
|
3,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
684
|
|
|
$
|
606
|
|
|
$
|
477
|
|
Deferred
|
|
|
(6
|
)
|
|
|
(1
|
)
|
|
|
28
|
|
Total
|
|
$
|
678
|
|
|
$
|
605
|
|
|
$
|
505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
787
|
|
|
$
|
609
|
|
|
$
|
275
|
|
Deferred
|
|
|
(954
|
)
|
|
|
194
|
|
|
|
128
|
|
Total
|
|
$
|
(167
|
)
|
|
$
|
803
|
|
|
$
|
403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,139
|
|
|
$
|
6,596
|
|
|
$
|
4,816
|
|
The difference between the Company’s income tax expense as reported in the accompanying consolidated financial statements and the income tax expense that would be calculated applying the U.S. federal income tax rate of 35% for 2012 and 2011 and 34% for 2010 on pretax income was as follows:
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
Expected federal income taxes
|
|
$
|
7,772
|
|
|
$
|
6,356
|
|
|
$
|
4,527
|
|
Foreign tax rate differential
|
|
|
(203
|
)
|
|
|
(145
|
)
|
|
|
(59
|
)
|
U.S. tax graduated rates
|
|
|
11
|
|
|
|
(99
|
)
|
|
|
--
|
|
State income taxes, net of federal benefit and state tax credits
|
|
|
552
|
|
|
|
522
|
|
|
|
257
|
|
Federal tax credits
|
|
|
(282
|
)
|
|
|
(132
|
)
|
|
|
(110
|
)
|
Uncertain tax positions
|
|
|
(73
|
)
|
|
|
9
|
|
|
|
72
|
|
Deferred tax adjustment due to
change in state tax law
|
|
|
(661
|
)
|
|
|
--
|
|
|
|
138
|
|
Other
|
|
|
23
|
|
|
|
85
|
|
|
|
(9
|
)
|
Total
|
|
$
|
7,139
|
|
|
$
|
6,596
|
|
|
$
|
4,816
|
|
Deferred tax assets and liabilities at December 31, 2012 and 2011, were comprised of the following:
|
|
2012
|
|
|
2011
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
86
|
|
|
$
|
108
|
|
Accrued expenses
|
|
|
356
|
|
|
|
345
|
|
Share based compensation
|
|
|
859
|
|
|
|
1,449
|
|
Capital loss carryforward
|
|
|
1,132
|
|
|
|
1,268
|
|
Net operating loss
|
|
|
170
|
|
|
|
719
|
|
Tax credit carryforward
|
|
|
319
|
|
|
|
--
|
|
Gross deferred tax assets
|
|
|
2,922
|
|
|
|
3,889
|
|
Less Valuation Allowance
|
|
|
(1,138
|
)
|
|
|
(1,352
|
)
|
Deferred tax assets
|
|
|
1,784
|
|
|
|
2,537
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
324
|
|
|
|
142
|
|
Property and equipment
|
|
|
1,790
|
|
|
|
2,505
|
|
Intangible assets
|
|
|
6,415
|
|
|
|
6,506
|
|
Other
|
|
|
235
|
|
|
|
184
|
|
Deferred tax liabilities
|
|
|
8,764
|
|
|
|
9,337
|
|
Net deferred tax liabilities
|
|
$
|
(6,980
|
)
|
|
$
|
(6,800
|
)
|
At December 31, 2012 and 2011, net deferred tax assets of $547,000 and $789,000 respectively were included in current deferred income taxes. At December 31, 2012 and 2011, net deferred tax liabilities of $7.5 million and $7.6 million, respectively were included in long term deferred income taxes. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers projected future taxable income, carry-back opportunities, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, the Company believes it is more likely than not that it will realize the benefits of these deductible differences, net of the valuation allowance recorded. The net impact on income tax expense related to changes in the valuation allowance for 2012, 2011, and 2010, were $214,000, $0 and $2,000, respectively.
The Company has domestic capital loss carryforwards of $3.1 million at December 31, 2012. An additional $76,000 of carryforwards expired in 2012. The total $3.1 million of the capital loss carryforwards relate to the pre-acquisition periods of acquired companies and are due to expire in 2014. The Company has provided a $1.1 million valuation allowance against the tax benefit associated with the capital loss carryforwards.
The undistributed foreign earnings of the Company’s foreign subsidiary of approximately $8.8 million are considered to be indefinitely reinvested. Accordingly, no provision for U.S. federal and state income taxes or foreign withholding taxes has been provided for such undistributed earnings. The Company estimated at December 31, 2012, that an additional tax liability of $732,000 would become due if repatriation of undistributed earnings would occur.
The unrecognized tax benefit at December 31, 2012, was $224,000, excluding interest of $11,000 and no penalties. The full unrecognized tax benefits, if recognized, would favorably impact the effective income tax rate. The Company believes it is reasonably possible that the total amount of unrecognized tax benefits could continue to decrease during the next 12 months due to the expiration of the U.S. federal statute of limitations associated with certain other tax positions. The Company accrues interest and penalties related to uncertain tax position in the statements of income as income tax expense.
The change in the unrecognized tax benefits for 2012 and 2011 is as follows:
|
|
(In thousands)
|
|
Balance of unrecognized tax benefits at December 31, 2010
|
|
$
|
269
|
|
Reductions due to lapse of applicable statue of limitations
|
|
|
(38
|
)
|
Additions based on tax positions of prior years
|
|
|
3
|
|
Additions based on tax positions related to the current year
|
|
|
32
|
|
Balance of unrecognized tax benefits at December 31, 2011
|
|
$
|
266
|
|
|
|
|
|
|
Reductions due to lapse of applicable statue of limitations
|
|
|
(117
|
)
|
Additions based on tax positions of prior years
|
|
|
84
|
|
Reductions based on tax positions of prior years
|
|
|
(9
|
)
|
Additions based on tax positions related to the current year
|
|
|
--
|
|
Balance of unrecognized tax benefits at December 31, 2012
|
|
$
|
224
|
|
The Company files a U.S. federal income tax return, various state jurisdictions and a Canada federal and provincial income tax return. The 2009 to 2012 U.S. federal and state returns remain open to examination. The 2008 to 2012 Canada federal and provincial income tax returns remain open to examination.
Notes payable consisted of the following:
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Revolving credit note with U.S. Bank, subject to borrowing base, matures June 30, 2013, maximum available
$6.5 million
|
|
$
|
--
|
|
|
$
|
--
|
|
Note payable to U.S. Bank refinanced as of July 2010 for $6.9 million, interest at a 3.79% fixed rate, 35 monthly principal and interest payments of $80,104, final balloon payment of interest and principal due
July 31, 2013
|
|
|
5,143
|
|
|
|
5,951
|
|
Note payable to U.S. Bank for $10 million, interest at a fixed rate of 3.79%, 35 monthly principal and interest payments of $121,190, final balloon payment of interest and principal due July 31, 2013
|
|
|
7,293
|
|
|
|
8,535
|
|
Total notes payable
|
|
|
12,436
|
|
|
|
14,486
|
|
Less current portion
|
|
|
12,436
|
|
|
|
1,861
|
|
Note payable, net of current portion
|
|
$
|
--
|
|
|
$
|
12,625
|
|
On December 19, 2008, the Company borrowed $9.0 million under a term note to partially finance the acquisition of MIV. In July 2010, the Company refinanced the existing term loan with a $6.9 million fixed rate term loan. The new term loan is payable in 35 monthly installments of $80,104 with a balloon payment of $4.8 million for the remaining principal balance and interest due on July 31, 2013. Borrowings under the term note bear interest at an annual rate of 3.79%.
On July 31, 2010, the Company borrowed $10.0 million under a fixed rate term note to partially finance the acquisition of OCS. The term loan is payable in 35 monthly installments of $121,190 with a balloon payment of $6.7 million for the remaining principal balance and interest due on July 31, 2013. Borrowings under the term note bear interest at an annual rate of 3.79%.
The Company expects to refinance the term notes prior to July 31, 2013. If, however, the notes cannot be extended, the Company believes it has adequate cash flows from operations to meet its debt and capital needs.
The Company entered into a revolving credit note in 2006. The maximum aggregate amount available under the revolving credit note was originally $3.5 million, but an addendum to the note in March 2008 changed the amount to $6.5 million. The revolving credit note was renewed in June 2012 to extend the term to June 30, 2013. The Company may borrow, repay and re-borrow amounts under the revolving credit note from time to time until its maturity on June 30, 2013.
The term notes and revolving credit note are secured by certain of the Company’s assets, including the Company’s land, building, accounts receivable and intangible assets. The term notes and the revolving credit note contain various restrictions and covenants applicable to the Company, including requirements that the Company maintain certain financial ratios at prescribed levels and restrictions on the ability of the Company to consolidate or merge, create liens, incur additional indebtedness or dispose of assets. As of December 31, 2012, the Company was in compliance with these restrictions and covenants.
The maximum aggregate amount available under the revolving credit note of $6.5 million is subject to a borrowing base equal to 75.0% of the Company’s eligible accounts receivable. Borrowings under the renewed revolving credit note bear interest at a variable annual rate, with three rate options at the discretion of management as follows: (1) 2.5% plus the daily reset one-month LIBOR rate or (2) 2.2% plus the one-, two-, three-, six- or twelve-month LIBOR rate, or (3) the bank’s Money Market Loan Rate. The rate at December 31, 2012 was 2.71%. As of December 31, 2012, the revolving credit note did not have a balance. According to borrowing base requirements, the Company had the capacity to borrow $6.5 million as of December 31, 2012.
The aggregate maturities of the notes payable of $12.4 million are due in 2013.
(7)
Share-Based Compensation
The Company measures and recognizes compensation expense for all share-based payments based on the grant-date fair value of those awards. All of the Company’s existing stock option awards and non-vested stock awards have been determined to be equity-classified awards.
In August 2001, the Board of Directors adopted, and on May 1, 2002, the Company’s shareholders approved, the National Research Corporation 2001 Equity Incentive Plan (“2001 Equity Incentive Plan”). The 2001 Equity Incentive Plan provides for the granting of stock options, stock appreciation rights, restricted stock, performance shares and other share-based awards and benefits up to an aggregate of 600,000 shares of the Company’s common stock. Options granted may be either nonqualified or incentive stock options. Options vest over one to five years following the date of grant and option terms are generally five to ten years following the date of grant. At December 31, 2012, there were 38,897 shares available for issuance pursuant to future grants under the 2001 Equity Incentive Plan. The Company has accounted for grants of 561,103 options and restricted stock under the 2001 Equity Incentive Plan using the date of grant as the measurement date for financial accounting purposes.
The National Research Corporation 2004 Non-Employee Director Stock Plan (the “2004 Director Plan”) is a nonqualified plan that provides for the granting of options with respect to 550,000 shares of the Company’s common stock. The 2004 Director Plan provides for grants of nonqualified options to each director of the Company who is not employed by the Company. On the date of each annual meeting of shareholders of the Company, options to purchase 12,000 shares of the Company’s common stock are granted to directors that are re-elected or retained as a director at such meeting. Options vest one year following the date of grant and option terms are generally ten years following the date of grant, or three years in the case of termination of the outside director’s service. At December 31, 2012, there were 133,000 shares available for issuance pursuant to future grants under the 2004 Director Plan. The Company has accounted for grants of 417,000 options under the 2004 Director Plan using the date of grant as the measurement date for financial accounting purposes.
In February 2006, the Board of Directors adopted, and on May 4, 2006, the Company’s shareholders approved the National Research Corporation 2006 Equity Incentive Plan (the “2006 Equity Incentive Plan”). The 2006 Equity Incentive Plan provides for the granting of options, stock appreciation rights, restricted stock, performance shares and other share-based awards and benefits up to an aggregate of 600,000 shares of the Company’s common stock. Options granted may be either incentive stock options or nonqualified stock options. Vesting terms vary with each grant and option terms are generally five to ten years. Options vest over one to five years following the date of grant and options terms are generally five to ten years following the date of grant. At December 31, 2012, there were 373,933 shares available for issuance pursuant to future grants under the 2006 Equity Incentive Plan. The Company has accounted for grants of 226,067 options and restricted stock under the 2006 Equity Incentive Plan using the date of grant as the measurement date for financial accounting purposes.
The Company granted options to purchase 79,630, 166,008 and 273,812 shares of the Company’s common stock during the years ended December 31, 2012, 2011, and 2010, respectively. Options to purchase shares of common stock are typically granted with exercise prices equal to the fair value of the common stock on the date of grant. The Company does, in certain limited situations, grant options with exercise prices that exceed the fair value of the common shares on the date of grant. The fair value of stock options granted was estimated using a Black-Scholes valuation model with the following assumptions:
|
2012
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected dividend yield at date of grant
|
2.63
|
to
|
3.98%
|
|
2.00
|
to
|
2.55%
|
|
2.86
|
to
|
3.09%
|
Expected stock price volatility
|
29.10
|
to
|
31.70%
|
|
28.70
|
to
|
32.00%
|
|
28.40
|
to
|
31.20%
|
Risk-free interest rate
|
0.56
|
to
|
1.15%
|
|
1.70
|
to
|
2.14%
|
|
1.55
|
to
|
2.56%
|
Expected life of options (in years)
|
4
|
to
|
6
|
|
4
|
to
|
6
|
|
4
|
to
|
6
|
The risk-free interest rate assumptions were based on the U.S. Treasury yield curve in effect at the time of the grant. The expected volatility was based on historical monthly price changes of the Company’s stock based on the expected life of the options at the date of grant. The expected life of options is the average number of years the Company estimates that options will be outstanding. The Company considers groups of associates that have similar historical exercise behavior separately for valuation purposes.
The following table summarizes stock option activity under the Company’s 2001 and 2006 Equity Incentive Plans and the 2004 Director Plan for the year ended December 31, 2012:
|
|
Number of
Options
|
|
|
Weighted Average Exercise
Price
|
|
|
Weighted Average Remaining Contractual
Terms (Years)
|
|
|
Aggregate Intrinsic
Value
(In thousands)
|
|
Outstanding at beginning of period
|
|
|
769,401
|
|
|
$
|
25.73
|
|
|
|
|
|
|
|
Granted
|
|
|
79,630
|
|
|
$
|
45.28
|
|
|
|
|
|
|
|
Exercised
|
|
|
(262,101
|
)
|
|
$
|
22.77
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(131,012
|
)
|
|
$
|
27.47
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
455,918
|
|
|
$
|
30.34
|
|
|
|
6.38
|
|
|
$
|
10,877
|
|
Exercisable at end of period
|
|
|
208,423
|
|
|
$
|
24.19
|
|
|
|
4.74
|
|
|
$
|
6,254
|
|
The weighted average grant date fair value of stock options granted during the years ended
December 31, 2012, 2011, and 2010, was $8.49, $7.43 and $4.48, respectively. The total intrinsic value of stock options exercised during the years ended December 31, 2012, 2011, and 2010, was $6.6 million, $1.0 million and $192,000, respectively. Th
e total intrinsic value of stock options vested during the years ended December 31, 2012, 2011, and 2010 was $2.6 million, $1.6 million, and $1.0 million, respectively.
As of December 31, 2012, the total unrecognized compensation cost related to non-vested stock option awards was approximately $787,000, which was expected to be recognized over a weighted average period of 2.60 years.
Cash received from stock options exercised for the years ended December 31, 2012, 2011, and 2010 was $1.3 million, $568,000, and $274,000, respectively. The actual tax benefit realized for the tax deduction from stock options exercised was $2.0 million, $350,000 and $43,000, for the years ended December 31, 2012, 2011, and 2010, respectively.
During 2012, 2011, and 2010, the Company granted 7,823, 39,501 and 9,238 non-vested shares of common stock under the 2006 Equity Incentive Plan. As of December 31, 2012, the Company had 20,203 non-vested shares of common stock outstanding under the Plan. These shares vest over one to five years following the date of grant and holders thereof are entitled to receive dividends from the date of grant, whether or not vested. The fair value of the awards is calculated as the fair market value of the shares on the date of grant. The Company recognized $74,000, $143,000 and $108,000 of non-cash compensation for the years ended December 31, 2012, 2011, and 2010, respectively, related to this non-vested stock.
The following table summarizes information regarding non-vested stock granted to associates under the 2001 and 2006 Equity Incentive Plans for the year ended December 31, 2012:
|
|
Shares Outstanding
|
|
|
Weighted Average Grant Date Fair
Value Per Share
|
|
Outstanding at beginning of period
|
|
|
30,002
|
|
|
$
|
30.57
|
|
Granted
|
|
|
7,823
|
|
|
$
|
38.35
|
|
Forfeitures
|
|
|
(11,181
|
)
|
|
$
|
32.31
|
|
Vested
|
|
|
(6,441
|
)
|
|
$
|
24.22
|
|
Outstanding at end of period
|
|
|
20,203
|
|
|
$
|
34.65
|
|
As of December 31, 2012, the total unrecognized compensation cost related to non-vested stock awards was approximately $480,000 and is expected to be recognized over a weighted average period of 3.50 years.
(8)
Restructuring and Severance Costs
The Company records restructuring liabilities that represent charges incurred in connection with consolidations, including operations from acquisitions. These charges consist primarily of severance costs. Severance charges are based on various factors including the employee’s length of service, contract provisions, and salary levels. Expense for one-time termination benefits are accrued over each individual’s service period. The Company records the expense using its best estimate based upon detailed analysis. Although significant changes are not expected, actual costs may differ from these estimates.
As part of the Company’s ongoing plans to improve the efficiency and effectiveness of its operations, the Company announced plans to centralize MIV and OCS functions in Lincoln and Seattle and eliminate certain costs of the Wausau operation (the “2010 Restructuring Plan”). The Company incurred aggregate costs of $143,000 for one-time termination benefits related to 14 associates, which were included in selling, general and administrative expenses in the year ended December 31, 2010. The Company paid $106,000 in 2010 and the remaining $37,000 was paid in 2011.
In 2011, the Company vacated its office in Wausau, Wisconsin, and reached agreements to terminate the operating lease for its Wausau office and other services. As a result, the Company made lump-sum payments totaling $280,000, which were included in selling, general and administrative expenses in 2011.
In connection with the acquisition of OCS, the Company reduced headcount from acquisition date levels. OCS had pre-existing arrangements for severance with its associates at the date of acquisition. Total severance related to 26 OCS associates approximated $347,000, including $333,000 of severance accruals included in the liabilities assumed at acquisition. The Company recorded additional severance costs of $14,000 in 2010. The Company paid $333,000 in 2010 and the remaining $14,000 was paid in 2011.
The following table reconciles the beginning and ending restructuring costs included in accrued wages, bonus and profit-sharing:
|
|
2010 Restructuring Plan One-time Termination
Benefits
|
|
|
2010 Restructuring Plan Contract
Terminations
|
|
|
OCS
One-time Termination
Benefits
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
|
Balance, Restructuring liability
at December 31, 2009
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
Severance assumed in OCS acquisition
|
|
|
--
|
|
|
|
--
|
|
|
|
333
|
|
|
|
333
|
|
Accrual for severance and employee related costs
|
|
|
143
|
|
|
|
--
|
|
|
|
14
|
|
|
|
157
|
|
Payments
|
|
|
(106
|
)
|
|
|
--
|
|
|
|
(333
|
)
|
|
|
(439
|
)
|
Balance, Restructuring liability
at December 31, 2010
|
|
$
|
37
|
|
|
$
|
--
|
|
|
$
|
14
|
|
|
|
$ 51_
|
|
Accrual for Contract Terminations
|
|
|
--
|
|
|
|
280
|
|
|
|
--
|
|
|
|
280
|
|
Payments
|
|
|
(37
|
)
|
|
|
(280
|
)
|
|
|
(14
|
)
|
|
|
(331
|
)
|
Balance, Restructuring liability at December 31, 2011 and 2012
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--_
|
|
(9)
Leases
The Company leases printing equipment in the United States, and office space in Canada, California and Washington. The Company also leased office space in Wisconsin through February 2011. The Company recorded rent expense in connection with its operating leases of $715,000, $986,000, and $691,000 in 2012, 2011, and 2010, respectively. The Company also has capital leases for production, mailing and computer equipment.
Payments under non-cancelable operating leases and capital leases are:
As of December 31,
|
|
Capital
Leases
|
|
|
Operating
Leases
|
|
|
|
(In thousands)
|
|
2013
|
|
$
|
135
|
|
|
$
|
687
|
|
2014
|
|
|
135
|
|
|
|
591
|
|
2015
|
|
|
102
|
|
|
|
584
|
|
2016
|
|
|
8
|
|
|
|
341
|
|
2017
|
|
|
--
|
|
|
|
233
|
|
Total minimum lease payments
|
|
|
380
|
|
|
|
|
|
Less: Amount representing interest
|
|
|
53
|
|
|
|
|
|
Present value of minimum lease payments
|
|
|
327
|
|
|
|
|
|
Less: Current maturities
|
|
|
102
|
|
|
|
|
|
Capital lease obligations, net of current portion
|
|
$
|
225
|
|
|
|
|
|
(10)
Related Party
A Board member of the Company also serves as an officer of Ameritas Life Insurance Corp. In connection with the Company’s regular assessment of its insurance-based associate benefits and the costs associated therewith, in 2007 the Company began purchasing dental insurance for certain of its associates from Ameritas Life Insurance Corp. and, in 2009, the Company also began purchasing vision insurance for certain of its associates from Ameritas Life Insurance Corp. The total value of these purchases was $198,000, $166,000 and $146,000 in 2012, 2011 and 2010 respectively.
The Company leased office space for OCS from EPIC Property Management LLC from August 2010 through June 2011. A former owner of OCS and an associate of the Company during the lease term was a co-owner of EPIC Property Management LLC. The total of the rental and utility payments under the lease for the year ended December 31, 2011, was $103,000 and for the year ended December 31, 2010, was $84,000.
Michael Hays, our Chief Executive Officer, is a director and owner of 14% of the equity interests of Nebraska Global Investment Company LLC. In 2012, the Company purchased certain technology consulting and software development services from Nebraska Global Investment Company LLC. The total value of these purchases was $55,000. The Company did not
have any transactions
with Nebraska Global Investment Company LLC during 2011 or 2010.
(11)
Associate Benefits
The Company sponsors a qualified 401(k) plan covering substantially all associates with no eligibility service requirement. Under the 401(k) plan, the Company matches 25.0% of the first 6.0% of compensation contributed by each associate. Employer contributions, which are discretionary, vest to participants at a rate of 20% per year. The Company contributed $236,000, $182,000 and $168,000 in 2012, 2011 and 2010, respectively, as a matching percentage of associate 401(k) contributions.
(12)
Segment Information
The Company has eight operating segments that are aggregated into one reporting segment because they have similar economic characteristics and meet the other aggregation criteria. Included in the table below is certain entity-wide information regarding the Company’s revenue and assets by geographic area:
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
79,895
|
|
|
$
|
70,074
|
|
|
$
|
58,598
|
|
Canada
|
|
|
6,526
|
|
|
|
5,693
|
|
|
|
4,800
|
|
Total
|
|
$
|
86,421
|
|
|
$
|
75,767
|
|
|
$
|
63,398
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
72,817
|
|
|
$
|
75,355
|
|
|
|
|
|
Canada
|
|
|
3,414
|
|
|
|
3,184
|
|
|
|
|
|
Total
|
|
$
|
76,231
|
|
|
$
|
78,539
|
|
|
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
87,670
|
|
|
$
|
90,253
|
|
|
|
|
|
Canada
|
|
|
12,376
|
|
|
|
10,423
|
|
|
|
|
|
Total
|
|
$
|
100,046
|
|
|
$
|
100,676
|
|
|
|
|
|