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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-28600
CCC INFORMATION SERVICES GROUP INC.
(Exact name of registrant as specified in its charter)
DELAWARE 54-1242469
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
WORLD TRADE CENTER CHICAGO
444 MERCHANDISE MART
CHICAGO, ILLINOIS 60654
(Address of principal executive offices, including zip code)
(312) 222-4636
(Registrant's telephone number, including area code)
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 whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No __
As of October 29, 2003, 26,324,318 shares of CCC Information Services Group
Inc. common stock, par value $0.10 per share, were outstanding.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Consolidated Interim Statements of Operations. . . . . . . . . . . 1
Consolidated Interim Balance Sheets. . . . . . . . . . . . . . . . 2
Consolidated Interim Statements of Cash Flows. . . . . . . . . . . 3
Notes to Consolidated Interim Financial Statements . . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . 20
Item 4. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . . . . . 22
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . 22
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . 22
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 22
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . E-1
CCC INFORMATION SERVICES GROUP INC.
AND SUBSIDIARIES
CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------
2003 2002 2003 2002
----------------------------------------
Revenues. . . . . . . . . . . . . . . . . . . . . $48,621 $47,797 $144,450 $143,475
Expenses:
Production and customer support. . . . . . . . . 8,279 6,702 23,377 21,412
Commissions, royalties and licenses. . . . . . . 3,184 2,767 8,614 7,758
Selling, general and administrative. . . . . . . 16,699 19,635 52,415 58,370
Depreciation and amortization. . . . . . . . . . 1,944 2,295 5,888 7,147
Product development and programming. . . . . . . 7,838 7,242 23,690 21,222
Restructuring charges. . . . . . . . . . . . . . - 869 1,061 869
----------------------------------------
Total operating expenses. . . . . . . . . . . . . 37,944 39,510 115,045 116,778
Operating income. . . . . . . . . . . . . . . . . 10,677 8,287 29,405 26,697
Interest expense. . . . . . . . . . . . . . . . . (169) (160) (556) (556)
Other income, net . . . . . . . . . . . . . . . . 45 76 201 286
CCC Capital Trust minority interest expense . . . - (475) - (1,384)
Equity in income (loss) of ChoiceParts investment (150) 47 (144) (295)
----------------------------------------
Income before income taxes. . . . . . . . . . . . 10,403 7,775 28,906 24,748
Income tax provision. . . . . . . . . . . . . . . (4,052) (754) (11,090) (7,215)
----------------------------------------
Income from continuing operations . . . . . . . . 6,351 7,021 17,816 17,533
Income from discontinued operations,
net of income taxes . . . . . . . . . . . . . - 354 - 354
----------------------------------------
Net income. . . . . . . . . . . . . . . . . . . . $ 6,351 $ 7,375 $ 17,816 $ 17,887
========================================
PER SHARE DATA:
Income per common share- basic from:
Continuing operations . . . . . . . . . . . . . $ 0.24 $ 0.27 $ 0.68 $ 0.68
Discontinued operations . . . . . . . . . . . . $ - $ 0.01 $ - $ 0.01
----------------------------------------
Income per common share - basic . . . . . . . . . $ 0.24 $ 0.28 $ 0.68 $ 0.69
========================================
Income per common share- diluted from:
Continuing operations . . . . . . . . . . . . . $ 0.23 $ 0.26 $ 0.65 $ 0.65
Discontinued operations . . . . . . . . . . . . $ - $ 0.01 $ - $ 0.01
----------------------------------------
Income per common share - diluted . . . . . . . . $ 0.23 $ 0.27 $ 0.65 $ 0.66
========================================
Weighted average shares outstanding:
Basic. . . . . . . . . . . . . . . . . . . . . . 26,256 25,873 26,210 25,800
Diluted. . . . . . . . . . . . . . . . . . . . . 27,484 26,904 27,621 26,912
The accompanying notes are an integral part of these consolidated financial statements.
1
CCC INFORMATION SERVICES GROUP INC.
AND SUBSIDIARIES
CONSOLIDATED INTERIM BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2003 2002
---------------------------
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,691 $ 20,200
Short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,008 -
Accounts receivable (net of allowances of $2,845 and $2,313 at September 30,
2003 and December 31, 2002, respectively). . . . . . . . . . . . . . . . . . . . . . . 11,998 10,281
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,630 8,499
---------------------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,327 38,980
Property and equipment (net of accumulated depreciation of $35,209 and
$29,815 at September 30, 2003 and December 31, 2002, respectively) . . . . . . . . . . . 11,927 12,407
Intangible assets (net of accumulated amortization of $500 at September 30, 2003) . . . . . 2,367 -
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,545 4,896
Deferred income taxes (net of valuation allowance of $11,599 at September 30, 2003
and December 31, 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,869 10,454
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 479
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 685 627
---------------------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 85,862 $ 67,843
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,886 $ 8,424
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,902 25,441
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,615 2,568
Current portion of deferred revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,648 6,503
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225 488
---------------------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,276 43,424
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,217 3,235
---------------------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,493 46,659
---------------------------
Common stock ($0.10 par value, 40,000,000 shares authorized, 26,295,926
and 26,074,889 shares outstanding at September 30, 2003 and December 31,
2002, respectively). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,026 3,005
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130,608 128,766
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (45,062) (62,878)
Notes receivable from officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (1,506)
Treasury stock, at cost (4,094,665 common shares in treasury at
September 30, 2003 and December 31, 2002). . . . . . . . . . . . . . . . . . . . . . . . (46,203) (46,203)
---------------------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,369 21,184
---------------------------
Total liabilities and stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . $ 85,862 $ 67,843
===========================
The accompanying notes are an integral part of these consolidated financial statements.
2
CCC INFORMATION SERVICES GROUP INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2003 2002
--------------------------
Operating Activities:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,816 $ 17,887
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations, net of income taxes s . . . . . . . . . . - (354)
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,061 869
Equity in net losses of ChoiceParts . . . . . . . . . . . . . . . . . . . . . . 144 295
Depreciation and amortization of property and equipment . . . . . . . . . . . . 5,388 7,147
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . 500 -
CCC Capital Trust minority interest expense . . . . . . . . . . . . . . . . . . - 1,384
Deferred income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . 585 11,319
Compensation expense related to restricted stock. . . . . . . . . . . . . . . . 5 -
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 341
Changes in:
Accounts receivable, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . (658) (1,168)
Income tax receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265 (1,617)
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (393) (321)
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (58) 288
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (593) (1,594)
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,511) (1,763)
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,352 4,594
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . (62) -
Current portion of deferred revenues. . . . . . . . . . . . . . . . . . . . . . 934 (394)
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (949) (1,276)
--------------------------
Net cash provided by operating activities:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,906 35,637
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 10
--------------------------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . 19,906 35,647
--------------------------
Investing Activities:
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,828) (4,981)
Investment in affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . . - (275)
Acquisition of Comp-Est, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . (13,205) -
Purchase of short-term investments. . . . . . . . . . . . . . . . . . . . . . . (7,008) -
--------------------------
Net cash used for investing activities. . . . . . . . . . . . . . . . . . . . . . . (25,041) (5,256)
--------------------------
Financing Activities:
Principal repayments on long-term debt. . . . . . . . . . . . . . . . . . . . . - (28,500)
Proceeds from borrowings on long-term debt. . . . . . . . . . . . . . . . . . . - 22,000
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . 1,185 1,270
Proceeds from employee stock purchase plan. . . . . . . . . . . . . . . . . . . 294 284
Payment of principal and interest on notes receivable from officer. . . . . . . 1,506 -
CCC Capital Trust note interest payment . . . . . . . . . . . . . . . . . . . . - (1,103)
Principal repayments of capital lease obligations . . . . . . . . . . . . . . . (359) (310)
Principal repayments on short term note . . . . . . . . . . . . . . . . . . . . - (588)
--------------------------
Net cash provided by (used for) financing activities. . . . . . . . . . . . . . . . 2,624 (6,947)
--------------------------
Net (decrease) increase in cash and cash equivalents. . . . . . . . . . . . . . . . (2,509) 23,444
Cash and cash equivalents:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,200 766
--------------------------
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,691 $ 24,210
==========================
Supplemental Disclosure:
Cash paid:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 176 -
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,096 $ 7,411
The accompanying notes are an integral part of these consolidated financial statements.
3
CCC INFORMATION SERVICES GROUP INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND ORGANIZATION
CCC Information Services Group Inc. ("CCCG"), incorporated in Delaware in
1983 and headquartered in Chicago, Illinois, is a holding company, which
operates through its wholly-owned subsidiary, CCC Information Services Inc.
("CCC" and together with CCCG, collectively referred to as the "Company" or
"we"). We employed 872 full-time employees at September 30, 2003, compared to
824 at this time in 2002. We automate the process of evaluating and settling
automobile claims, which allows our customers to integrate estimate information,
labor time and cost, recycled parts and various other calculations derived from
our extensive databases, electronic images, documents and related information
into organized electronic workfiles. We develop, market and supply a variety of
automobile claim products and services which enable customers in the automobile
claims industry, including automobile insurance companies, collision repair
facilities, independent appraisers and automobile dealers, to manage the
automobile claims and vehicle restoration process. Our principal products and
services are Pathways collision estimating software, which provides our
customers with access to various automobile information databases and claims
management software and CCC Valuescope Claim Services, formerly known as our
Total Loss Valuation Service ("CCC Valuescope").
As of September 30, 2003, White River Ventures Inc. ("White River") held
approximately 33% of our outstanding common stock. In June 1998, White River
Corporation, the sole shareholder of White River, was acquired by Demeter
Holdings Corporation, which is solely controlled by the President and Fellows of
Harvard College, a Massachusetts educational corporation and title-holding
company for the endowment fund of Harvard University. Charlesbank Capital
Partners LLC serves as the investment manager with respect to the investment of
White River in the Company.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated interim financial statements as of and for
the nine months ended September 30, 2003 and 2002 are unaudited. We are of the
opinion that all material adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of our interim results of
operations and financial condition have been included. The results of operations
for any interim period should not be regarded as necessarily indicative of
results of operations for any future period. The consolidated interim financial
statements should be read in conjunction with our Annual Report on Form 10-K for
the year ended December 31, 2002 filed with the Securities and Exchange
Commission ("SEC").
Our consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). These accounting principles require that we make certain estimates,
judgments and assumptions. We believe that our estimates, judgments and
assumptions are reasonable based on information available at the time that these
estimates, judgments and assumptions are made. These estimates, judgments and
assumptions can affect the reported amounts of assets and liabilities as of the
date of the consolidated financial statements as well as the reported amounts of
revenue and expenses during the periods presented. To the extent that there are
material differences between these estimates and actual results, our
consolidated financial statements may be affected.
4
Earnings Per Share Information
Basic earnings per share ("EPS") excludes the dilutive effect of common
stock equivalents and is computed by dividing net income by the weighted-average
number of shares outstanding during the period. Diluted EPS includes the
dilutive effect of common share equivalents and is computed using the
weighted-average number of common and common stock equivalent shares outstanding
during the period. Common stock equivalents consist of stock options and certain
other equity instruments. Using the treasury method, for the three and nine
month periods ended September 30, 2003, options and warrants to purchase a
weighted average number of 705,544 and 434,280 shares of common stock,
respectively, were not included in the computations of diluted earnings per
share because the options' and warrants' exercise prices were greater than the
average market price of the common shares during the periods.
Stock-Based Compensation
We have elected to determine the value of stock-based compensation
arrangements under the provisions of Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" for our fixed stock option plan and
employee stock purchase plan and, accordingly, have not recognized compensation
cost in the accompanying consolidated statement of operations. Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based
Compensation" permits the use of either a fair value based method or the
intrinsic value method to measure the expense associated with stock-based
compensation arrangements.
In accordance with the interim disclosure provisions of SFAS No. 148,
"Accounting for Stock Based Compensation Transition and Disclosure-an Amendment
of SFAS No. 123", the pro forma effect on our net income had compensation
expense been recorded for the third quarter of fiscal 2003 and 2002,
respectively, as determined under the fair value method, is shown below (in
thousands, except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------
2003 2002 2003 2002
--------------------------------------------
Net income:
As reported. . . . . . . . . . $ 6,351 $ 7,021 $ 17,816 $ 17,533
Pro forma. . . . . . . . . . . $ 5,600 $ 6,397 $ 15,936 $ 15,915
Per share net income - basic:
As reported. . . . . . . . . . $ 0.24 $ 0.27 $ 0.68 $ 0.68
Pro forma. . . . . . . . . . . $ 0.21 $ 0.25 $ 0.61 $ 0.62
Per share net income - diluted:
As reported. . . . . . . . . . $ 0.23 $ 0.26 $ 0.65 $ 0.65
Pro forma. . . . . . . . . . . $ 0.20 $ 0.24 $ 0.58 $ 0.59
Assumptions used:
Volatility . . . . . . . . . . 73.5 % 74.2 % 73.5 % 74.2 %
Risk free rate . . . . . . . . 2.8 % 2.6 % 2.8 % 2.6 %
Expected option life . . . . . 5.5 yrs 5.5 yrs 5.5 yrs 5.5 yrs
Dividend yield . . . . . . . . - - - -
5
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model. The principal determinants of
option pricing are: fair market value of our common stock at the date of grant,
volatility, risk-free interest rate, expected option lives and dividend yields.
Weighted average assumptions employed by us are indicated above.
Goodwill
The excess of purchase price paid over the estimated fair value of
identifiable tangible and intangible net assets of acquired businesses is
capitalized and reviewed for impairment on at least an annual basis. In
addition, when events or changes in circumstances indicate that the carrying
value of such assets may not be recoverable, we perform an analysis of
undiscounted future cash flows to determine whether recorded amounts are
impaired. As of September 30, 2003, no such impairment existed.
The goodwill balance as of September 30, 2003 was $15.5 million. The
unamortized balance from the 1988 acquisition that included the CCC Valuescope
service is $4.9 million and the remaining balance of $10.6 million represents
the goodwill from the Comp-Est acquisition completed during February 2003. See
Note 3, "Acquisition".
Contingencies
In the normal course of business, we are subject to various proceedings,
lawsuits, claims and other matters. We believe the amounts provided in the
consolidated financial statements, as prescribed by GAAP, are adequate in light
of the probable and reasonably estimable liabilities. However, there can be no
assurances that the actual amounts required to discharge alleged liabilities
from various lawsuits, claims, legal proceedings and other matters will not
exceed the amounts reflected in the consolidated financial statements or will
not have a material adverse effect on the consolidated results of operations,
financial condition or cash flows. Any amounts of costs that may be incurred in
excess of those amounts provided as of September 30, 2003 cannot currently be
reasonably determined.
Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. ("FIN") . 46, "Consolidation of Variable Interest
Entities." This standard clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," and addresses
consolidation by business enterprises of variable interest entities (more
commonly known as Special Purpose Entities or SPE's). FIN 46 requires existing
unconsolidated variable interest entities to be consolidated by their primary
beneficiaries if the entities do not effectively disperse risk among the parties
involved. FIN 46 also enhances the disclosure requirements related to variable
interest entities.
The provisions of this interpretation were effective immediately for all
VIEs created after January 31, 2003. For VIEs created before February 1, 2003,
the interpretation was initially effective beginning on July 1, 2003 for
calendar-year companies. On October 9, 2003, however, the FASB issued FASB Staff
Position No. FIN 46-6 which deferred the effective date of FIN 46 for VIEs that
existed prior to February 1, 2003 until December 31, 2003 for calendar-year
companies. The FASB continues to deliberate FIN 46, including the impact of
kick-out rights to a decision maker. As of the date of this report, it is
unclear what effect, if any, the modifications will have onCCC's implementation
of FIN 46.
In April 2003, the FASB issued Statement No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities". This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This statement is effective for contracts entered into or modified
after September 30, 2003. The adoption of this statement is not expected to have
a significant effect on our results of operations or our financial position.
6
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. The effective date of
this Statement has been deferred.
NOTE 3 - ACQUISITION
On February 26, 2003, we acquired Comp-Est, Inc. ("Comp-Est") from the
Motor Information Systems Division of Hearst Business Publishing, Inc.
("Hearst"). Immediately prior to our acquisition of the assets of Comp-Est from
Hearst, Hearst acquired the selected net assets from Comp-Est pursuant to an
Option and Acquisition Agreement, dated February 6, 1998, by and among Hearst,
Comp-Est and the Comp-Est stockholders named therein. Comp-Est is based in
Columbus, Ohio and provides automotive estimating software applications to
primarily single-location repair facilities. With the acquisition, we gained
the opportunity to serve over 5,000 additional customers in one of the fastest
growing segments of the marketplace and can offer a broader suite of electronic
estimating and other tools to all types of collision-repair businesses.
The results of Comp-Est have been included in the consolidated financial
statements from the date of acquisition. Pro forma results of operations have
not been presented because the effects of the transaction were not material to
our results. The purchase price, including capitalized acquisition costs, of
approximately $13.4 million was paid in cash and was allocated to identifiable
assets and liabilities and to intangible assets at their estimated fair values
at the date of acquisition. The fair values of the intangible assets acquired
were based on independent appraisals.
The following table summarizes the estimated fair value of the assets
acquired and the liabilities assumed at the acquisition date (in thousands):
FEBRUARY 26,
2003
------------
Current assets. . . . . . . $ 246
Property and equipment. . . 86
Intangible assets . . . . . 2,867
Goodwill. . . . . . . . . . 10,649
------------
Total assets acquired . . 13,848
Current liabilities . . . . 450
------------
Net . . . . . . . . . . . $ 13,398
=============
Intangible assets include $1.9 million for customer relationships and $0.7
million for acquired software, both of which are being amortized on a
straight-line basis over a period of 3 years. Also included in intangible
assets, is a trademark valued at $0.3 million that is not being amortized.
7
NOTE 4 - SHORT-TERM INVESTMENTS
During the quarter ended September 30, 2003 we purchased short-term
investments, which are investments with maturities longer than 90 days but
shorter than 12 months. As of the end of the quarter the held-to-maturity
securities, recorded at cost, consisted of the following:
SEPTEMBER 30, DECEMBER 31,
2003 2002
----------------------------
Commercial paper. . . . . . . $ 5,008 $ -
Certificates of deposit . . . 2,000 -
----------------------------
Total . . . . . . . . . . . . $ 7,008 $ -
============================
NOTE 5 - INVESTMENT IN CHOICEPARTS
In 2000, we formed a new independent company, ChoiceParts, LLC
("ChoiceParts"), with Automatic Data Processing, Inc. ("ADP") and The Reynolds
and Reynolds Company. ChoiceParts operates an electronic parts exchange for the
auto parts marketplace for franchised auto retailers, collision repair
facilities and other parts suppliers. We have a 27.5% equity interest in
ChoiceParts, which is accounted for under the equity method. Based on the
nature of our investment, we have recorded a deferred income tax benefit on our
share of the losses.
Summary financial information for ChoiceParts is as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------------
2003 2002 2003 2002
---------------------------------------------
Revenues . . . . . . . . . . . $ 2,604 $ 3,518 $ 8,582 $ 10,786
=============================================
Income (loss) from operations. $ (298) $ 211 $ (294) $ (1,087)
=============================================
Net income (loss). . . . . . . $ (298) $ 221 $ (318) $ (1,065)
=============================================
NOTE 6 - OTHER CURRENT ASSETS
Other current assets consisted of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2003 2002
-----------------------------
Insurance reimbursement for litigation settlement. . . . . . . . $ 2,000 $ 2,000
Prepaid data royalties . . . . . . . . . . . . . . . . . . . . . 1,887 1,966
Prepaid equipment maintenance. . . . . . . . . . . . . . . . . . 1,101 911
Income tax receivable - research and experimentation credits . . 951 1,125
Prepaid insurance. . . . . . . . . . . . . . . . . . . . . . . . 707 673
Income tax receivable - State. . . . . . . . . . . . . . . . . . 458 549
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,526 1,275
-----------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,630 $ 8,499
=============================
8
In 2001, the Company recorded a charge of $4.3 million, net of an expected
insurance reimbursement of $2.0 million, in connection with a litigation
settlement. See Note 12, "Legal Proceedings" for discussion of the charge.
NOTE 7 - OTHER ASSETS
Other assets as of September 30, 2003 included approximately $0.3 million
of interest bearing demand notes. The notes were issued by a third party
software development company with which we are currently in discussions to
establish a formal research and development arrangement.
NOTE 8 - ACCRUED EXPENSES
Accrued expenses consisted of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2003 2002
----------------------------
Litigation settlements . . . $ 6,685 $ 7,074
Compensation . . . . . . . . 6,336 10,781
Health insurance . . . . . . 1,473 1,041
Sales tax. . . . . . . . . . 947 1,103
Professional fees. . . . . . 925 1,389
Restructuring charges. . . . 900 1,159
Office space expenses. . . . 687 693
Conferences. . . . . . . . . 362 422
Other, net . . . . . . . . . 1,587 1,779
----------------------------
Total. . . . . . . . . . . . $ 19,902 $ 25,441
============================
NOTE 9 - OTHER LIABILITIES
Other liabilities consisted of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2003 2002
---------------------------
Deferred rent . . . . $ 1,967 $ 1,987
Other, net. . . . . . 1,248 1,235
---------------------------
Total . . . . . . . . $ 3,215 $ 3,222
===========================
9
NOTE 10 - INCOME TAXES
During 2002, we filed amended returns to claim research and experimentation
tax credits. Included in other current assets as of September 30, 2003 is a
refund of $0.9 million of the expected credit as well as $0.5 million of
expected state tax refunds. During the second quarter of 2003, we received $0.2
million of the expected research and experimentation tax credit.
SEPTEMBER 30, DECEMBER 31,
2003 2002
-----------------------------
(IN THOUSANDS)
Income tax receivable . . . . . . . . . . . . . . $ 1,409 $ 1,674
Deferred income tax assets. . . . . . . . . . . . $ 21,468 $ 22,053
Valuation allowance . . . . . . . . . . . . . . . (11,599) (11,599)
-----------------------------
Total deferred income tax asset . . . . . . . . . 9,869 10,454
-----------------------------
Total income tax assets, current and non-current. $ 11,278 $ 12,128
=============================
Total current income taxes payable. . . . . . . . $ 3,615 $ 2,568
=============================
NOTE 11 - RESTRICTED STOCK
During the third quarter of 2003, the Company issued, as compensation, a
total of 8,000 shares of restricted stock, under the 2000 Stock Incentive Plan,
with a fair market value of $14.93 per share to two members of the Audit
Committee of the Board of Directors, each of whom received 4,000 shares. The
shares vest over a period of four years from issuance, although accelerated
vesting is provided in certain instances. Compensation expense related to
restricted stock awards is based upon market prices at the date of grant and is
charged to earnings on a straight-line basis over the period of restriction. A
third member of the audit committee will receive compensation in the form of
cash. Total compensation expense recognized for the quarter ended September 30,
2003, was approximately five thousand dollars.
NOTE 12 - LEGAL PROCEEDINGS
As disclosed in our Annual Report on Form 10-K for the year ended December
31, 2002, the Company has pending against it certain putative class action suits
and individual actions raising issues regarding the use of the Company's CCC
Valuescope valuation service by its insurance company customers. Many of these
lawsuits are brought by the same group of plaintiffs' attorneys. Set forth below
is a discussion of developments with respect to this litigation since the
discussion in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002, as well as the Company's Quarterly Reports on Form 10-Q for
the periods ended March 31, 2003, and June 30, 2003.
In GIBSON v. ORIONAUTO, GUARANTY NATIONAL INS. CO. and CCC INFORMATION
SERVICES INC., No. 99 CH 15082 (filed October 20, 1999 in the Circuit Court of
Cook County, Illinois), the plaintiff agreed to non-suit the case, and on
September 16, 2003, the court entered an agreed order dismissing the case
without prejudice.
In HUTCHINSON v. ALLSTATE INSURANCE COMPANY, BRANCH BANKING & TRUST
COMPANY, SADISCO CORPORATION and CCC INFORMATION SERVICES INC., Civil Action No.
02VS027697-C (filed January 18, 2002 in the State Court of Fulton County,
Georgia), on October 3, 2003, the court entered an order granting CCC's motion
to dismiss and dismissing the plaintiff's claims against CCC with prejudice.
10
In three separate putative class action cases pending before a single judge
of the State Court of Fulton County, Georgia, entitled McGOWAN v. PROGRESSIVE
CASUALTY INS. CO., PROGRESSIVE INS. CO., and CCC INFORMATION SERVICES INC., Case
No. 00VS006525 (filed June 16, 2000); DASHER v. ATLANTA CASUALTY CO. and CCC
INFORMATION SERVICES INC., Case No. 00VS006315 (filed June 16, 2000); and WALKER
v. STATE FARM MUTUAL AUTOMOBILE INS. CO. and CCC INFORMATION SERVICES INC., Case
No. 00VS007964 (filed August 2, 2000), on October 10, 2003, the court ordered
granted CCC's motion to dismiss and ordered that plaintiffs' claims against CCC
would be dismissed with prejudice.
In September of 2003, the group of plaintiffs' lawyers who previously filed
lawsuits against CCC in the Circuit Court of Madison County, Illinois, filed two
(2) additional putative class action lawsuits there. They are captioned as
follows: KMUCHA v. COLONIAL PENN INSURANCE a/k/a GE PROPERTY AND CASUALTY
INSURANCE COMPANY and CCC INFORMATION SERVICES INC., Case No. 03 L 1267 (filed
September 18, 2003); and JACKSON v. ATLANTA CASUALTY COMPANY and INFINITY
PROPERTY & CASUALTY CORPORATION and CCC INFORMATION SERVICES INC., Case No. 03
L 1266 (filed September 18, 2003). Each plaintiff alleges that his/her insurance
company, using a valuation prepared by CCC, offered an inadequate amount for
his/her automobile. Each plaintiff seeks to represent a nationwide class of the
customers of the insurance company that is the defendant in that case who,
during the period from September 18, 1993, up to the date of trial, had their
total loss claims settled using a valuation report prepared by CCC. Each
plaintiff asserts various common law and contract claims against the defendant
insurance companies and various common law claims against CCC. Each plaintiff
seeks an unspecified amount of compensatory and punitive damages, as well as an
award of attorney's fees and costs.
CCC intends to vigorously defend its interests in all of the
above-described lawsuits. Due to the numerous legal and factual issues that must
be resolved during the course of the litigation, CCC is unable to predict the
ultimate outcome of any of these actions. If CCC were held liable in any of the
actions (or otherwise concludes that it is in CCC's best interest to settle any
of them), CCC could be required to pay monetary damages (or settlement
payments). Depending upon the theory of recovery or the resolution of the
plaintiff's claims or contribution by CCC's customers in any of the actions,
these monetary damages (or settlement payments) could be substantial and could
have a material adverse effect on CCC's business, financial condition or results
of operations.
During the fourth quarter of 2001, the Company recorded a charge of $4.3
million, net of an expected insurance reimbursement of $2.0 million, as an
estimate of the amount that CCC will contribute toward an anticipated settlement
of potential claims arising out of approximately 30 percent of the Company's CCC
Valuescope transaction volume for the period covered by the lawsuits. As of
September 30, 2003, the Company believes that the charge recorded is an
appropriate estimate for the settlement of the claims covered by the anticipated
settlement. As additional information is gathered and the litigations (both
those covered by the anticipated settlement, as well as others) proceed, CCC
will continue to assess its potential impact.
11
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS REPORT CONTAINS STATEMENTS THAT CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 AND ARE SUBJECT TO THE SAFE
HARBOR PROVISIONS OF THOSE SECTIONS AND THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995. SOME OF THESE FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY THE
USE OF WORDS IN THE STATEMENTS SUCH AS "ANTICIPATE," "ESTIMATE," "EXPECT,"
"PROJECT," "INTEND," "PLAN," "BELIEVE," OR OTHER WORDS AND TERMS OF SIMILAR
MEANING. READERS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, INCLUDING
THOSE DESCRIBED IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER
31, 2002 AND OUR OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, AND
THAT ACTUAL RESULTS OR DEVELOPMENTS MAY DIFFER MATERIALLY FROM THOSE IN THE
FORWARD-LOOKING STATEMENTS. SPECIFIC FACTORS THAT MIGHT CAUSE ACTUAL RESULTS TO
DIFFER FROM OUR EXPECTATIONS INCLUDE, BUT ARE NOT LIMITED TO, COMPETITION IN THE
AUTOMOTIVE CLAIMS AND COLLISION REPAIR INDUSTRIES, THE ABILITY TO DEVELOP NEW
PRODUCTS AND SERVICES, THE ABILITY TO PROTECT TRADE SECRETS AND PROPRIETARY
INFORMATION, THE ABILITY TO GENERATE THE CASH FLOW NECESSARY TO MEET OUR
OBLIGATIONS, THE OUTCOME OF CERTAIN LEGAL PROCEEDINGS, AND OTHER FACTORS.
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH REFLECT MANAGEMENT'S ANALYSIS, JUDGMENT, BELIEF OR EXPECTATION
ONLY AS OF THE DATE HEREOF. WE HAVE BASED THESE FORWARD-LOOKING STATEMENTS ON
INFORMATION CURRENTLY AVAILABLE AND DISCLAIM ANY INTENTION OR OBLIGATION TO
UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENT.
GENERAL
Our products and services fall into five categories or "suites": Pathways,
CCC Valuescope Valuation Services, Workflow Products, Information Services
and Other Products and Services. Each of these products and services suites is
described below. For additional information regarding these suites and the
various products and services in each suite, please refer to the "Business"
section of our annual report on Form 10-K for the year ended December 31, 2002.
PATHWAYS. This suite consists of our collision estimating products,
including:
- Pathways Appraisal Solution (for insurance customers),
- Pathways Estimating Solution (for repair facility customers),
- Pathways Independent Appraiser Solution (for independent
appraisers),
- Pathways Digital Imaging, and
- Recycled Parts Service.
These products help our customers manage aspects of their day-to-day
automobile claim activities, including receipt of new assignments, preparation
of estimates, communication of status and completed activity and maintenance of
notes and reports. Pathways Digital Imaging allows our customers to digitally
photograph and transmit images of damaged vehicles to the Pathways estimate
workfile. Customers using Pathways with Recycled Parts Services also have access
to a database that provides local part availability and price information on
over 15 million available recycled or salvage parts. From the date of
acquisition, revenues from Comp-Est are also included in this suite.
CCC VALUESCOPE VALUATION SERVICES. Our CCC Valuescope Valuation Services
products are used primarily by automobile insurance companies in processing
claims involving vehicles that have been heavily damaged or stolen. In cases
where the insurance company declares a vehicle to be a "total loss" (typically
when the cost to repair exceeds 70% to 90% of a vehicle's value), CCC Valuescope
Valuation Services provides the insurer with the local market value of the
vehicle to assist the insurer in processing the claim. Commercial and
Recreational Vehicle Valuation Services is our CCC Valuescope Valuation Services
for specialty vehicles including trucks, semi-trailers, marine craft,
motorcycles, recreational vehicles and pre-fabricated housing.
12
WORKFLOW PRODUCTS. This suite includes the following products and services:
- EZNet Communications Network, a secure network that allows
clients to communicate estimates and claim information
electronically.
- Pathways Appraisal Quality Solution (QAAR Plus), which allows for
electronic audits of automobile repair estimates prepared by
direct repair facilities, independent appraisers and internal
insurance staff for quality control and for identification and
correction of errors or discrepancies prior to the completion of
repairs. In addition, Pathways Appraisal Quality Solution allows
automobile insurance companies to use available historical data
to track the performance of appraisers and provides a mechanism
to establish and monitor compliance with certain reinspection
objectives developed by the automobile insurance company.
- CCC Autoverse, our web-based open workflow solution that allows
for the exchange of claims information derived from using
Pathways products as well as other established collision
estimating systems that meet the Collision Industry Electronic
Commerce Association Estimating Management System standard. Our
CCC Autoverse products permit the free-flow of communication
between those who write damage estimates and the insurers who
process claims.
INFORMATION SERVICES. This suite includes ClaimScope Navigator, our
on-line, web-based information service that provides a comprehensive method to
create management reports comparing industry and company performance using
Pathways and CCC Valuescope data.
OTHER PRODUCTS AND SERVICES. Pathways Enterprise Solution is an automotive
repair shop management software system for multiple location collision repair
facilities that allows them to manage accounts, prepare employee schedules and
perform various other management functions. Pathways Professional Advantage,
similar to Pathways Enterprise Solution, is a shop management software system
for a single store location. Also included in this suite is our Computerized
Automobile Rental System and leasing of computer hardware.
REGULATION
On April 24, 2003, the California Department of Insurance formally adopted
new regulations, which, if implemented, would require the Company to change its
methodology for computing total loss valuations in California. These
regulations were scheduled to become effective on July 23, 2003, and the Company
was prepared to implement modifications to its methodology on that date so as to
be in compliance with the new regulations. On July 1, 2003, however, the
Personal Insurance Federation of California, the Association of California
Insurance Companies and the Surety Association of America filed a lawsuit in the
Superior Court of the State of California for the County of Los Angeles that,
among other things, seeks a declaration that the new regulations are not valid.
The Plaintiffs in the suit also seek a preliminary and permanent injunction
enjoining the implementation of those regulations. That case is captioned
PERSONAL INSURANCE FEDERATION OF CALIFORNIA, et al. v. JOHN GARAMENDI, INSURANCE
COMMISSIONER OF THE STATE OF CALIFORNIA, Case No. BC298284 (filed July 1, 2003).
CCC is not a party to the suit.
On July 22, 2003, the Court in the above-captioned action entered an order
preliminarily enjoining implementation and enforcement of the new California
regulations, pending a resolution of the case on the merits. Thus, the new
regulations did not go into effect on July 23, 2003. The Company is not able to
predict when the case will be resolved on the merits or whether the new
regulations will or will not take effect in whole or in part. In the event that
the new California regulations are eventually implemented, the Company will
modify its methodology to be in compliance with those regulations.
13
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of our financial condition and results
of operations are based upon our consolidated financial statements, which have
been prepared in accordance with generally accepted accounting principles in
the United States ("GAAP"). We review the accounting policies, including those
described in Note 2, "Summary of Significant Accounting Policies", we use in
reporting our financial results on a regular basis. The preparation of these
financial statements requires us to make estimates, assumptions and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses
and related disclosure of contingent assets and liabilities. On an on-going
basis, we evaluate our estimates, including those related to the items listed
below. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities. Actual results may differ from these estimates under
different assumptions or conditions. Our senior management has reviewed these
critical accounting policies and related disclosures with the Audit Committee of
the Board of Directors and our Disclosure Committee.
We have identified the policies below as critical to our business
operations and the understanding of our financial condition and results of
operations:
- Accounts receivable
- Income taxes
- Goodwill
- Software development costs
- Fair value of financial instruments
- Commitments and contingencies
For a detailed discussion of the application of these accounting policies,
see "Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations" in our Annual Report on Form 10-K for the year ended
December 31, 2002.
PREPARATION OF FINANCIAL INFORMATION
We believe that the application of accounting standards is as important as
the underlying financial data in reporting our financial position, results of
operations and cash flows. We also believe that our accounting policies are
prudent and provide a clear view of our financial performance. Our Disclosure
Committee, composed of senior management, including senior financial and legal
personnel, reviews our public disclosures and evaluates our disclosure controls
and procedures to help ensure the completeness and accuracy of our financial
results and disclosures. In addition, prior to the release of our financial
results, key members of management review the annual and quarterly results,
along with key accounting policies and estimates, with the Audit Committee of
our Board of Directors.
14
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003
COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 2002
Operating Income. Operating income increased quarter-over-quarter from 2002
to 2003 by $2.4 million, to $10.7 million, due to an increase in revenues of
$0.8 million and a decrease in operating expenses of $1.6 million. Operating
expenses for the quarter ended September 30, 2002 included a restructuring
charge of $0.9 million related to excess office space. Our operating margin
(operating income as a percentage of revenue) was 22.0%, for the quarter ended
September 30, 2003 compared to 17.3% for the same quarter in 2002, which
included the restructuring charge mentioned above.
Revenues. Revenues for each of our products and services suites are as
follows (dollars in thousands):
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
2003 2002
---------------------------------
Pathways. . . . . . . . . . $ 29,504 60.7% $ 29,419 61.5%
CCC Valuescope. . . . . . . 10,720 22.0 11,262 23.6
Workflow Products . . . . . 6,645 13.7 5,332 11.2
Information Services. . . . 445 0.9 288 0.6
Other Products and Services 1,307 2.7 1,496 3.1
---------------------------------
Total . . . . . . . . . . . $ 48,621 100.0% $ 47,797 100.0%
=================================
Revenues from our Pathways suite for the quarter ended September 30, 2003
were relatively flat compared to the third quarter of 2002. The automotive
channel continued to be the key growth driver in this suite for the quarter, as
first, CCC Pathways and digital imaging sales in this channel remained strong
and second, we are benefiting from our first quarter 2003 acquisition of
Comp-Est. The insurance channel revenue continued to be down versus the prior
year primarily due to lost volume from the same customer mentioned in the Form
10-Q for the quarter ended June 30, 2003. However, renewal rates remain strong
with our existing customers and we are seeing increased demand in the
mid-market.
Revenues from our vehicle valuation services, CCC Valuescope, decreased in
the third quarter of 2003 by $0.5 million, or 4.8%, compared to the third
quarter of last year. The year over year decline is primarily a result of lost
business, driven by a number of issues, including the decision by one of our
larger customers to transition most of its valuation services to an in-house
solution during late 2002.
Revenues from our workflow suite increased by $1.3 million, or 24.6%, over
the prior year. The adoption of CCC Autoverse continues to drive this suite's
growth. We continue to focus on the implementation and acceptance process with
our customers to help accelerate this suite's revenue growth.
The decrease in revenue from our other products and services of $0.2
million, or 12.6%, was mainly attributable to a decrease in the number of
hardware units leased as customers are opting to purchase their own hardware.
15
Operating Expenses. Operating expenses as a percentage of revenues are
summarized as follows (dollars in thousands):
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------
2003 2002
----------------------------------
Revenues. . . . . . . . . . . . . . . . . $ 48,621 100.0% $ 47,797 100.0%
Production and Customer Support . . . . . 8,279 17.0 6,702 14.0
Commissions, Royalties and Licenses . . . 3,184 6.6 2,767 5.8
Selling, General and Administrative . . . 16,699 34.3 19,635 41.1
Depreciation and Amortization . . . . . . 1,944 4.0 2,295 4.8
Product Development and Programming . . . 7,838 16.1 7,242 15.2
Restructuring Charges . . . . . . . . . . - - 869 1.8
----------------------------------
Total Operating Expenses $ 37,944 78.0% $ 39,510 82.7%
==================================
Production and Customer Support. Production and customer support expenses
increased by $1.6 million, or 23.5%, due to increased costs associated with the
Comp-Est business and investment in our technical support area to move to a
universal service representative model.
Commission, Royalties and Licenses. Commission, royalties and licenses
expenses increased by $0.4 million, or 15.1%, due to license fees related to the
Comp-Est revenues.
Selling, General and Administrative. Selling, general and administrative
expenses decreased by $2.9 million, or 15.0%, primarily as a result of our
continued focus on controlling expenses, specifically in the management
information systems area as well as certain incentive compensation costs tied to
business performance. We continued to take cost reduction initiatives in our
management information systems group, which included among other initiatives,
consolidation of our data center operations by entering into a new contract.
These savings were partially offset by operating expenses related to Comp-Est.
Depreciation and Amortization. Depreciation and amortization expenses
decreased by $0.4 million, or 15.3%, as a result of fewer investments in
internal-use software and customer leased computer equipment as well as using
fully amortized software.
Product Development and Programming. Product development and programming
expenses increased by $0.6 million, or 8.2%, due primarily to development
projects related to our existing workflow and information products, as well as
work being done under a new multi-customer contract.
Restructuring Charges. During the third quarter of 2002, the Company
recorded an additional charge of $0.9 million to revise the original expected
future sublease income from $3.2 million to $2.3 million as a result of the weak
conditions of the real estate market at that time. During the second quarter of
2003, the Company recorded a charge of $1.1 million to revise the expected
future sublease income from $2.3 million to $1.2 million as a result of entering
into a sublease agreement with a third party. The sublease is for the duration
of the existing term remaining on the current lease, which is through March 31,
2006.
Minority Interest Expense. The interest recorded for the third quarter of
2002 of $0.5 million was associated with the issuance, on February 23, 2001, of
the Trust Preferred Securities to Capricorn Investors III, L.P ("Capricorn").
The minority interest expense represented Capricorn's share of CCC Trust's
income. In October 2002, we purchased the outstanding Trust Preferred Securities
from Capricorn and, as a result, do not have any interest expense relating to
these securities beyond October 2002. Assuming the Trust Preferred Securities
had not been repurchased early, the following is our estimate (in thousands) of
the amount of minority interest expense that would have been incurred in the
years 2003 through the scheduled maturity date of the Trust Preferred Securities
in 2006:
16
REMAINING
TOTAL 2003 2004 2005 2006
----------------------------------------------
Interest expense savings. . . $ 6,051 $ 551 $ 2,392 $ 2,695 $ 413
==============================================
Income Taxes. Income taxes increased from a provision of $0.8 million for
the third quarter of 2002 to a provision of $4.1 million for the third quarter
of 2003 due to income before income taxes increasing quarter-over-quarter and a
$2.0 million research and experimentation tax credits being recorded in the
third quarter of 2002.
NINE MONTHS ENDED SEPTEMBER 30, 2003
COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2002
Operating Income. Operating income increased period over period from 2002
to 2003 by $2.7 million, to $29.4 million, due to an increase in revenues of
$1.0 million and a decrease in operating expenses of $1.7 million. Operating
expenses for the periods ended September 30, 2003 and September 30, 2002
included restructuring charges of $1.1 million and $0.9 million, respectively,
related to excess office space. Including the restructuring charges in both
periods, our operating margin (operating income as a percentage of revenue)
increased to 20.4%for the nine months ended September 30, 2003 compared to 18.6%
for the same period in 2002.
Revenues. Revenues for each of our products and services suites are as
follows (dollars in thousands):
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
2003 2002
-----------------------------------
Pathways. . . . . . . . . . $ 88,018 60.9% $ 87,131 60.7%
CCC Valuescope. . . . . . . 31,655 21.9 34,099 23.8
Workflow Products . . . . . 19,645 13.6 16,337 11.4
Information Services. . . . 1,239 0.9 858 0.6
Other Products and Services 3,893 2.7 5,050 3.5
-----------------------------------
Total . . . . . . . . . . . $ 144,450 100.0% $ 143,475 100.0%
===================================
Revenues from our Pathways suite increased for the nine months ended
September 30, 2003 by $0.9 million, or 1.0%, compared to the same period in
2002. The automotive channel continued to be the key growth driver in this suite
for the nine months ended September 30, 2003, as first, CCC Pathways and digital
imaging sales in this channel remained strong and second, we are benefiting from
our first quarter 2003 acquisition of Comp-Est. The insurance channel revenue
continued to be down versus the prior year primarily due to lost volume from the
same customer mentioned in the Form 10-Q for the quarter ended June 30, 2003.
However, renewal rates remain strong with our existing customers and we are
seeing increased demand in the mid-market.
Revenues from our CCC Valuescope suite decreased for the nine months ended
September 30, 2003 compared to the same period of 2002 by $2.4 million, or 7.2%.
The year over year decline is primarily a result of lost business, driven by a
number of issues, including the decision by one of our larger customers
to transition most of its valuation services to an in-house solution during late
2002. We have seen customers move to other providers for a variety of reasons,
including workflow issues, where certain customers using a competitive
estimating platform have decided to switch to the competitor's valuation
product. Revenues for this suite were also impacted by the downward industry
trends in claim volume experienced during the first half of the year, compared
to the prior year. However, the industry trends in claim volume have not had a
material impact on the third quarter of 2003 compared to 2002. In other cases,
regulatory issues have come into play, as well as industry consolidation of the
customer base. We have been proactive in addressing the regulatory concerns that
have arisen and in working with state regulators to resolve those concerns. We
also continue to pursue settlement of the outstanding litigation related to this
product.
17
Revenues from our workflow suite increased by $3.3 million, or 20.2%, from
the nine months ended September 30, 2002 to the same period of 2003. The
adoption of CCC Autoverse continues to drive this suite's growth. We continue to
focus on the implementation and acceptance process with our customers to help
accelerate this suite's revenue growth.
Revenues from our Information Services suite increased from the nine months
ended September 30, 2002 to the same period of 2003 by $0.4 million, or 44.4%,
due to an increased number of subscriptions and at a more favorable price.
The decrease in revenues from our other products and services of $1.2
million, or 22.9%, from the nine months ended September 30, 2002 to the same
period of 2003 was mainly attributable to a decrease in the number of hardware
units leased as customers are opting to purchase their own hardware.
Operating Expenses. Operating expenses as a percentage of revenues are
summarized as follows (dollars in thousands):
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
2003 2002
-----------------------------------
Revenues . . . . . . . . . . . . . . . . $ 144,450 100.0% $ 143,475 100.0%
Production and Customer Support. . . . . 23,377 16.2 21,412 14.9
Commissions, Royalties and Licenses. . . 8,614 6.0 7,758 5.4
Selling, General and Administrative. . . 52,415 36.3 58,370 40.7
Depreciation and Amortization. . . . . . 5,888 4.1 7,147 5.0
Product Development and Programming. . . 23,690 16.4 21,222 14.8
Restructuring Charges. . . . . . . . . . 1,061 0.7 869 0.6
-----------------------------------
Total Operating Expenses . . . . . . . . $ 115,045 79.7% $ 116,778 81.4%
===================================
Production and Customer Support. Production and customer support expenses
increased by $2.0 million, or 9.2%, due to increased costs associated with the
Comp-Est business and investment in our technical support area to move to a
universal service representative model.
Commission, Royalties and Licenses. Commission, royalties and licenses
expenses increased by $0.9 million, or 11.0 %, due to license fees related to
the Comp-Est revenues.
Selling, General and Administrative. Selling, general and administrative
expenses decreased by $6.0 million, or 10.2%, primarily as a result of our
continued focus on controlling expenses, specifically in the management
information systems area as well as certain incentive compensation costs tied to
business performance. We continued to take cost reduction initiatives in our
management information systems group, which included among other initiatives,
consolidation of our data center operations by entering into a new contract.
These savings were partially offset by operating expenses related to Comp-Est.
18
Depreciation and Amortization. Depreciation and amortization expenses
decreased by $1.3 million, or 17.6%, as a result of fewer investments in
internal-use software and customer leased computer equipment as well as using
fully amortized software.
Product Development and Programming. Product development and programming
expenses increased by $2.5 million, or 11.6%, due primarily to development
projects related to our existing workflow and information products, as well as
work being done under a new multi-customer contract.
Restructuring Charges. During the third quarter of 2003, the Company
recorded a final charge of $1.1 million to revise the original expected future
sublease income from $2.3 million to $1.2 million as a result of entering into a
sublease agreement with a third party. The sublease is for the duration of the
existing term remaining on the current lease, which is through March 31, 2006.
Minority Interest Expense. The interest recorded for the nine months ended
September 30, 2002 of $1.4 million was associated with the issuance, on February
23, 2001, of the Trust Preferred Securities to Capricorn Investors III, L.P
("Capricorn"). The minority interest expense represented Capricorn's share of
CCC Trust's income. In October 2002, we purchased the outstanding Trust
Preferred Securities from Capricorn and, as a result, do not have any interest
expense relating to these securities beyond October 2002. Assuming the Trust
Preferred Securities had not been repurchased early, the following is our
estimate (in thousands) of the amount of minority interest expense that would
have been incurred in the years 2003 through the scheduled maturity date of the
Trust Preferred Securities in 2006:
REMAINING
TOTAL 2003 2004 2005 2006
----------------------------------------------
Interest expense savings. . . $ 6,051 $ 551 $ 2,392 $ 2,695 $ 413
==============================================
Income Taxes. Income taxes increased from a provision of $7.2 million for
the nine months ended September 30, 2002 to $11.1 million for the nine months
ended September 30, 2003 as income before income taxes increased period over
period and a research and experimentation tax credits of $2.0 million being
recorded in 2002. Taking into account the tax credits, as a percentage of income
before income taxes, the provisions have remained stable at approximately 38%.
OUTLOOK
As part of our third quarter earnings release, we provided updated guidance
for the fourth quarter of 2003 and preliminary guidance for 2004.
Revenue growth for the fourth quarter is expected to be in the low-single
digit range versus the prior year, which would produce full year revenue growth
in the low-single digit range as well. Operating income for the fourth quarter
should be in-line with the third quarter performance, with operating income for
the full year 2003 being in the $39-$41 million range. The earnings per share
("EPS") target range for the full year is expected to be in the $0.89 to $0.91
per share range, using a fully diluted base of 27.6 million shares in our EPS
calculation. The range for EPS includes the impact of a $0.02 charge in the
second quarter of 2003 for excess real estate.
Organic revenue growth for 2004 is expected to be in the 3% to 5% range
with the Workflow Products suite being the main growth driver. In addition, we
anticipate strategic acquisitions in 2004 to further add to top line growth.
Earnings are anticipated to grow by 12% to 15% over 2003 results.
19
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2003, net cash provided by
operating activities was $19.9 million. Proceeds received from the repayment of
notes due from the Chief Executive Officer and Chairman of the Board were $1.5
million and proceeds received from the exercise of stock options were $1.2
million. We used $13.2 million to complete the acquisition of Comp-Est during
the first quarter of 2003, $7.0 million to purchase short-term investments and
$4.8 million for the purchase of equipment and software.
Our principal liquidity requirements consist of our operating activities,
including product development, our investments in capital equipment and other
business development activities. Although not currently in a working capital
deficit position, we would maintain the ability to operate with a working
capital deficit as we receive substantial payments from our customers for our
services in advance of recognizing the revenues and the costs incurred to
provide such services. We invoice each customer one month in advance for the
following month's Pathways service. As such, we typically receive cash from our
customers prior to recognizing the revenue and incurring the expense for the
services provided. These amounts are reflected as deferred revenue in the
consolidated balance sheet until these amounts are earned and recognized as
revenue. Management believes that cash flows from operations and the available
borrowing capacity under our credit facility will be sufficient to meet our
liquidity needs for the foreseeable future. There can be no assurance, however,
that we will be able to satisfy our liquidity needs in the future without
engaging in financing activities beyond those described above.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Our contractual obligations under capital leases and operating leases are
as follows (in thousands):
REMAINING
TOTAL 2003 2004 2005 2006 2007 THEREAFTER
------------------------------------------------------------------
Capital leases . . . $ 287 129 158 - - - -
Operating leases . . $ 33,799 3,437 12,257 10,542 2,668 2,529 2,366
------------------------------------------------------------------
Total. . . . . . . . $ 34,086 $ 3,566 $ 12,415 $ 10,542 $ 2,668 $ 2,529 $ 2,366
==================================================================
In addition to the initial contribution paid to acquire the interest in
ChoiceParts, we initially committed to fund an additional $5.5 million to
ChoiceParts based on our pro-rata ownership percentage. Approximately $1.7
million of the original commitment was still outstanding as of September 30,
2003 and there are no specific plans to fund this commitment at this time.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not believe our financial results are affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in
foreign markets.
20
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's reports
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to the Company's management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow for timely decisions
regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and management is required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures. Also, the Company has an investment in an unconsolidated entity.
As the Company does not control or manage this entity, its disclosure controls
and procedures with respect to such entity are necessarily substantially more
limited than those it maintains with respect to its consolidated subsidiaries.
As of September 30, 2003, the end of the quarter covered by this report,
the Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and the Company's Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on the foregoing, the Company's Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective at the reasonable assurance level.
There has been no change in the Company's internal controls over financial
reporting during the Company's most recent fiscal quarter that has materially
affected, or is reasonable likely to materially affect, the Company's internal
controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information provided in Note 12 to the financial statements contained
in Part I of this Form 10-Q is incorporated herein by reference.
On April 22, 2003, the Company filed a patent infringement lawsuit against
Mitchell International, Inc. in the United States District Court for the
Northern District of Illinois (Eastern Division). In the complaint CCC alleges
that Mitchell is infringing CCC's patent entitled "system and method for
managing insurance claim processing", U.S. Patent No. 5,950,169 (the "'169
Patent"). The '169 Patent includes coverage for the parts comparison feature in
CCC Pathways collision estimating software.
In addition to a judicial determination that Mitchell infringed the '169
Patent, CCC is seeking preliminary and permanent injunctions enjoining Mitchell
from further acts of infringement of the '169 Patent, triple monetary damages
for willful infringement, disgorgement of all profits resulting from the
infringement of the '169 Patent and attorneys fees.
On July 3, 2003, Mitchell filed an answer to the lawsuit, denying that it
is infringing the '169 Patent. Mitchell also seeks a declaration from the Court
that the '169 Patent is invalid.
Discovery in the case is in its very early stages and a trial date has not
yet been set for the matter by the Court.
21
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
11 Statement Re: Computation of Per Share Earnings
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certifications of Chief Executive and Financial
Officers
(b) Reports on Form 8-K:
We filed a Current Report on Form 8-K on September 3, 2003 to
report the issuance of a press release naming a new member to our
board of directors.
We filed a Current Report on Form 8-K on July 23, 2003 to report
the issuance of a press release commenting on the second fiscal
quarter ended June 30, 2003.
22
SIGNATURES
Pursuant to the requirements 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.
Date: October 29, 2003 CCC Information Services Group Inc.
By: /s/ Githesh Ramamurthy
-----------------------
Name: Githesh Ramamurthy
Title: Chairman and
Chief Executive Officer
By: /s/ Reid E. Simpson
-----------------------
Name: Reid E. Simpson
Title: Executive Vice President and
Chief Financial Officer
23
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------------- ------
11 Computation of Per Share Earnings E-2
31.1 Rule 13a-14(a) Certification of Chief Executive Officer E-3
31.2 Rule 13a-14(a) Certification of Chief Financial Officer E-4
32.1 Section 1350 Certifications of Chief Executive and Financial Officers E-5
E-1