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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 June 30, 2004
[ ] 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 July 22, 2004, 26,739,725 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 . . . . 21
Item 4. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 22
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. . . . . . . . 23
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 24
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . 26
CCC INFORMATION SERVICES GROUP INC.
AND SUBSIDIARIES
CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------------
2004 2003 2004 2003
-------------------------------------
Revenues . . . . . . . . . . . . . . . . . $49,473 $48,097 $99,076 $95,829
Expenses:
Production and customer support . . . . . 7,807 7,754 16,156 15,098
Commissions, royalties and licenses . . . 3,145 3,013 6,319 5,430
Selling, general and administrative . . . 19,105 17,150 37,035 35,716
Depreciation and amortization . . . . . . 1,805 2,014 3,908 3,944
Product development and programming . . . 8,089 8,156 16,126 15,852
Restructuring charges . . . . . . . . . . 886 1,061 886 1,061
-------------------------------------
Total operating expenses . . . . . . . . . 40,837 39,148 80,430 77,101
Operating income . . . . . . . . . . . . . 8,636 8,949 18,646 18,728
Interest expense . . . . . . . . . . . . . (126) (165) (272) (387)
Other income, net. . . . . . . . . . . . . 80 67 167 156
Equity in income of ChoiceParts investment 94 12 203 6
-------------------------------------
Income before income taxes . . . . . . . . 8,684 8,863 18,744 18,503
Income tax provision . . . . . . . . . . . (3,341) (3,369) (7,194) (7,038)
-------------------------------------
Net income . . . . . . . . . . . . . . . . $ 5,343 $ 5,494 $11,550 $11,465
=====================================
PER SHARE DATA:
Income per common share:
Basic . . . . . . . . . . . . . . . . . . $ 0.20 $ 0.21 $ 0.43 $ 0.44
=====================================
Diluted . . . . . . . . . . . . . . . . . $ 0.19 $ 0.20 $ 0.41 $ 0.41
=====================================
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . 26,643 26,224 26,558 26,187
Diluted . . . . . . . . . . . . . . . . . 27,824 27,630 27,875 27,682
The accompanying notes are an integral part of these consolidated financial
statements.
CCC INFORMATION SERVICES GROUP INC.
AND SUBSIDIARIES
CONSOLIDATED INTERIM BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2004 2003
-------------------------
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 37,747 $ 20,755
Short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 7,004
Accounts receivable (net of allowances of $2,600 and $2,943 at June 30, 2004
and December 31, 2003, respectively) . . . . . . . . . . . . . . . . . . . . . . 14,174 10,247
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,632 8,369
-------------------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,553 46,375
Property and equipment (net of accumulated depreciation of $36,964 and
$36,211 at June 30, 2004 and December 31, 2003, respectively). . . . . . . . . . 12,357 12,776
Intangible assets (net of accumulated amortization of $1,141 and $713 at June 30,
2004 and December 31, 2003, respectively). . . . . . . . . . . . . . . . . . . . . 1,726 2,153
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,747 15,747
Deferred income taxes (net of valuation allowance of $11,599 at June 30, 2004
and December 31, 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,734 9,127
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 468 265
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 292
-------------------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 99,706 $ 86,735
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,822 $ 5,937
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,226 16,522
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 1,602
Deferred revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,883 7,930
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 97
-------------------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,960 32,088
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,029 3,064
-------------------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,989 35,152
-------------------------
Commitments and contingencies
Preferred stock ($1.00 par value, 100 shares authorized, issued and outstanding). . - -
Common stock ($0.10 par value, 40,000,000 shares authorized, 26,735,699 and
26,376,839 shares outstanding at June 30, 2004 and December 31, 2003,
respectively). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,070 3,034
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135,138 131,590
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25,288) (36,838)
Treasury stock, at cost (4,094,665 common shares in treasury at
June 30, 2004 and December 31, 2003) . . . . . . . . . . . . . . . . . . . . . . (46,203) (46,203)
-------------------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,717 51,583
-------------------------
Total liabilities and stockholders' equity. . . . . . . . . . . . . . . . . . . . . $ 99,706 $ 86,735
=========================
The accompanying notes are an integral part of these consolidated financial
statements.
CCC INFORMATION SERVICES GROUP INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
2004 2003
-------------------
Operating Activities:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,550 $ 11,465
Adjustments to reconcile net income to net cash provided by operating activities:
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 886 1,061
Equity in net income of ChoiceParts . . . . . . . . . . . . . . . . . . . . . . (203) (6)
Depreciation and amortization of property and equipment . . . . . . . . . . . . 3,481 3,658
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . 428 286
Deferred income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . 393 359
Compensation expense related to issuance of restricted stock. . . . . . . . . . 23 -
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 65
Changes in:
Accounts receivable, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,928) (574)
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (224) (713)
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170 156
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 885 (2,607)
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,165) (6,744)
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (934) 1,108
Deferred revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (47) 720
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 (62)
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,035) (725)
------------------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . 10,436 7,447
------------------
Investing Activities:
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,089) (1,939)
Maturity of short-term investments. . . . . . . . . . . . . . . . . . . . . . . 7,004 -
Acquisition of Comp-Est, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . - (13,205)
------------------
Net cash provided by (used for) investing activities. . . . . . . . . . . . . . . . 3,915 (15,144)
------------------
Financing Activities:
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . 2,583 855
Proceeds from employee stock purchase plan. . . . . . . . . . . . . . . . . . . 216 190
Payment of principal and interest on notes receivable from officer. . . . . . . - 1,506
Principal repayments of capital lease obligations . . . . . . . . . . . . . . . (158) (235)
------------------
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . 2,641 2,316
------------------
Net increase (decrease) in cash and cash equivalents. . . . . . . . . . . . . . . . 16,992 (5,381)
Cash and cash equivalents:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,755 20,200
------------------
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $37,747 $ 14,819
==================
Supplemental Disclosure:
Cash paid:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 123
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,213 5,572
The accompanying notes are an integral part of these consolidated financial
statements.
CCC INFORMATION SERVICES GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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"). CCC and CCCG are collectively referred to herein as the "Company" or
"we." We employed 813 full-time employees at June 30, 2004, compared to 840 at
this time in 2003. 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 claim and vehicle restoration process. Our principal products and
services are CCC Pathways collision estimating software ("CCC Pathways"), which
provides our customers with access to various automobile information databases
and claims management software, and CCC Valuescope Claim Services ("CCC
Valuescope"), which is used by automobile insurance companies and independent
appraisers in processing claims involving private passenger vehicles that have
been heavily damaged or stolen.
As of June 30, 2004, 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 six months ended June 30, 2004 and 2003 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, 2003 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.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less at the date of purchase to be cash
equivalents. All cash equivalents are carried at cost, which approximates fair
value. Any realized gains or losses are shown in the accompanying consolidated
statements of operations in other income or expense.
Revenue Recognition
Revenues are recognized after services are provided, when persuasive
evidence of an arrangement exists, the fee is fixed and determinable and when
collection is probable. Revenue is deferred until all of the above-mentioned
criteria are met. Revenues are reflected net of customer allowances, which are
based on the application of a predetermined percentage.
Goodwill
Under the provisions of SFAS No. 141 "Business Combinations" the purchase
method of accounting is used for all business combinations. The purchase method
of accounting requires that the excess of purchase price paid over the estimated
fair value of identifiable tangible and intangible net assets of acquired
businesses be recorded as goodwill.
Under the provisions of SFAS No. 142 "Goodwill and Intangible Assets" (SFAS
142), goodwill is no longer amortized. Under SFAS 142, goodwill is reviewed for
impairment on at least an annual basis, when events or changes in circumstances
indicate that the carrying value of such assets may not be recoverable.
Recoverability of goodwill is evaluated using a two-step process. The first
step involves a comparison of the fair value of a reporting unit with its
carrying value. If the carrying value of the reporting unit exceeds its fair
value, the second step of the process involves a comparison of the implied fair
value and carrying value of the goodwill of that reporting unit. If the
carrying value of the goodwill exceeds the implied fair value of that goodwill,
an impairment loss is recognized in an amount equal to the excess. In
accordance with SFAS 142, we completed our annual impairment analysis during the
first quarter of 2004. No events or changes in circumstances have occurred since
our annual impairment testing to indicate that the carrying value of such assets
may not be recoverable as of June 30, 2004.
The aggregate goodwill balance as of June 30, 2004 was $15.7 million. The
balance from the 1988 acquisition that included CCC Valuescope was $4.9 million
and the remaining balance of $10.8 million represents the goodwill from the
Comp-Est acquisition completed during February 2003.
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 six month
periods ended June 30, 2004, options to purchase a weighted average number of
553,913 and 533,508 shares of common stock, respectively, were not included in
the computations of diluted earnings per share because the options' exercise
prices were greater than the average market price of the common shares during
the period.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------
2004 2003 2004 2003
--------------------------------------
Net income . . . . . . . . . . . . . . . . . . . . $ 5,343 $ 5,494 $11,550 $11,465
======================================
Weighted average common shares outstanding:
Shares attributable to common stock outstanding 26,643 26,224 26,558 26,187
Shares attributable to common stock equivalents
outstanding. . . . . . . . . . . . . . . . . . 1,181 1,406 1,317 1,495
--------------------------------------
27,824 27,630 27,875 27,682
======================================
Per share net income:
Basic . . . . . . . . . . . . . . . . . . . . . $ 0.20 $ 0.21 $ 0.43 $ 0.44
======================================
Diluted . . . . . . . . . . . . . . . . . . . . $ 0.19 $ 0.20 $ 0.41 $ 0.41
======================================
Stock Based Compensation
The Company follows SFAS No. 123, "Accounting for Stock Based Compensation"
("SFAS 123"). As allowed by SFAS 123, the Company has elected to continue to
account for its stock based compensation programs according to the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." The Company has adopted the disclosure provisions required by
SFAS 123.
The Company applies APB No. 25 in accounting for its stock option plans and
employee stock purchase plan, and accordingly, has not recognized compensation
cost in the accompanying consolidated statement of operations. Had compensation
cost been recognized based on fair value as of the grant dates as prescribed by
SFAS 123, the Company's net income applicable to common stock and related per
share amounts would have been impacted as indicated below (in thousands, except
per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------
2004 2003 2004 2003
---------------------------------------
Net income:
As reported . . . . . . . . . . . . $ 5,343 $ 5,494 $ 11,550 $ 11,465
Pro forma . . . . . . . . . . . . . $ 4,886 $ 4,823 $ 10,492 $ 10,336
Per share net income - basic:
As reported . . . . . . . . . . . . $ 0.20 $ 0.21 $ 0.43 $ 0.44
Pro forma . . . . . . . . . . . . . $ 0.18 $ 0.18 $ 0.40 $ 0.39
Per share net income - diluted:
As reported . . . . . . . . . . . . $ 0.19 $ 0.20 $ 0.41 $ 0.41
Pro forma . . . . . . . . . . . . . $ 0.18 $ 0.17 $ 0.38 $ 0.37
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . 26,643 26,224 26,558 26,187
Diluted . . . . . . . . . . . . . . 27,824 27,630 27,875 27,682
Assumptions used:
Expected volatility . . . . . . . . 68.9 % 73.8 % 68.9 % 73.8 %
Risk free rate. . . . . . . . . . . 3.8 % 2.3 % 3.8 % 2.7 %
Expected option life. . . . . . . . 5.5yrs 5.5yrs 5.5yrs 5.5 yrs
Dividend yield. . . . . . . . . . . - - - -
The effects of applying SFAS 123 in the above pro forma disclosures are not
necessarily indicative of future amounts as they do not include the effects of
awards granted prior to 1995, some of which would have had income statement
effects in 2004 and 2003. Additionally, future amounts are likely to be affected
by the number of grants awarded since additional awards are generally expected
to be made at varying amounts.
Pervasiveness of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities as of
the date of the consolidated financial statements, and that affect the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from these estimates.
Commitments and Contingencies.
Loss contingencies are recorded as liabilities when it is probable that a
liability has been incurred and the amount of the loss is reasonably estimable.
Contingent liabilities are often resolved over long time periods. Estimating
probable losses requires analysis of multiple factors that often depend on
judgments about potential actions by third parties such as regulators. We
regularly evaluate current information available to us to determine whether such
accruals should be adjusted.
Indemnification Disclosure
In the normal course of business, we are a party to a variety of agreements
pursuant to which we may be obligated to indemnify the other party with respect
to certain matters. Generally, these obligations arise in the context of
agreements entered into by us, under which we customarily agree to hold the
other party harmless against losses arising from a breach of representations and
covenants related to such matters as title to assets sold, certain intellectual
property rights and, in certain circumstances, specified environmental matters.
These terms are common in the industry in which we conduct business. In each of
these circumstances, payment by us is subject to certain monetary and other
limitations and is conditioned on the other party making an adverse claim
pursuant to the procedures specified in the particular agreement, which
typically allow us to challenge the other party's claims.
We evaluate estimated losses for such indemnifications under SFAS No. 5,
"Accounting for Contingencies" as interpreted by FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN 45"). We consider such
factors as the degree of probability of an unfavorable outcome and the ability
to make a reasonable estimate of the amount of loss. To date, we have not
encountered material costs as a result of such obligations and as of June 30,
2004, have not recorded any liabilities related to such indemnifications in our
financial statements, as we do not believe the likelihood of a material
obligation is probable.
NOTE 3 - INVESTMENT IN CHOICEPARTS
In 2000, we formed a new independent company, ChoiceParts, LLC
("ChoiceParts"), with 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 SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------------------
2004 2003 2004 2003
------------------------------
Revenues. . . . . . . . $2,041 $2,763 $4,331 $5,978
==============================
Income from operations. $ 342 $ 24 $ 851 $ 4
==============================
Net income (loss) . . . $ 336 $ 25 $ 846 $ (20)
==============================
NOTE 4 - OTHER CURRENT ASSETS
Other current assets consisted of the following (in thousands):
JUNE 30, DECEMBER 31,
2004 2003
------------------------
Insurance reimbursement for litigation settlement. . . . . . $ 2,000 $ 2,000
Prepaid data royalties . . . . . . . . . . . . . . . . . . . 1,889 1,948
Prepaid equipment maintenance. . . . . . . . . . . . . . . . 1,624 1,261
Prepaid insurance. . . . . . . . . . . . . . . . . . . . . . 831 1,080
Income tax receivable - research and experimentation credits 750 750
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,538 1,330
------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,632 $ 8,369
========================
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 8, "Legal Proceedings" for discussion of the charge.
NOTE 5 - ACCRUED EXPENSES
Accrued expenses consisted of the following (in thousands):
JUNE 30, DECEMBER 31,
2004 2003
-----------------------
Litigation settlements $ 6,246 $ 6,475
Compensation . . . . . 3,650 4,468
Restructuring charges. 1,561 860
Professional fees. . . 1,321 843
Health insurance . . . 1,310 1,256
Sales tax. . . . . . . 857 933
Other. . . . . . . . . 1,281 1,687
-----------------------
Total. . . . . . . . . $ 16,226 $ 16,522
=======================
NOTE 6 - OTHER LIABILITIES
Other liabilities consisted of the following (in thousands):
JUNE 30, DECEMBER 31,
2004 2003
------------------------
Deferred rent $ 1,670 $ 2,140
Other, net. . 359 924
------------------------
Total . . . . $ 2,029 $ 3,064
========================
NOTE 7 - RESTRUCTURING CHARGES
In 2001, the Company wrote off excess office space, located in Chicago,
which was occupied by a former business. During the second 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.
During the second quarter of 2004, we recorded a charge of $0.9 million for
a realignment of our organization, which primarily related to severance costs
for 41 former employees. The restructuring will allow us to better streamline
and focus our implementation process and improve our overall sales and support
execution and is expected to generate cost savings in excess of $4.0 million
annually beginning in the third quarter of 2004.
The following summarizes the activity in the restructuring accrual (in
thousands):
EXCESS REDUCTION
FACILITIES IN FORCE
-------------------------
Balance at December 31, 2003 $ 1,830 -
Cash payments (172) -
-------------------------
Balance at March 31, 2004 1,658 -
Cash payments (172) -
Additional charges - 886
-------------------------
Balance at June 30, 2004 $ 1,486 $ 886
=========================
NOTE 8 - LEGAL PROCEEDINGS
As disclosed in our Annual Report on Form 10-K for the year ended December
31, 2003, the Company has pending against it certain putative class actions and
individual actions in which the plaintiffs allege that their insurers, using
valuation reports prepared by CCC, offered them an inadequate amount for their
total loss vehicles. Set forth below is a discussion of developments with
respect to these cases since the discussion in the Company's Quarterly Report on
Form 10-Q for the period ended March 31, 2004.
SUSANNA COOK v. DAIRYLAND INS. CO., SENTRY INS., and CCC INFORMATION
SERVICES INC., No. 2000 L-1 (filed January 31, 2000 in the Circuit Court of
Johnson County, Illinois). On June 7, 2004, the Circuit Court granted CCC's
motion for summary judgment and dismissed all of plaintiff's claims against CCC.
The Court also granted the summary judgment motions of CCC's insurance company
co-defendants. The plaintiff has filed a motion seeking reconsideration of the
Court's ruling.
MYERS v. TRAVELERS PROPERTY CASUALTY CORP., THE TRAVELERS INDEMNITY
COMPANY OF AMERICA, and CCC INFORMATION SERVICES INC., No. 99 CH 2793 (filed
February 22, 2000) and STEPHENS v. PROGRESSIVE CORP., PROGRESSIVE PREFERRED INS.
CO. and CCC INFORMATION SERVICES INC., No. 99 CH 15557 (filed October 28, 1999).
On April 30, 2004, the Appellate Court of Illinois for the First Judicial
District issued an opinion in each of these cases reversing, in part, the
Circuit Court's prior rulings dismissing plaintiffs' claims against CCC. In
particular, in each case, the Appellate Court reversed the Circuit Court's
ruling that the Illinois Consumer Fraud and Deceptive Business Practices Act
does not apply to non-Illinois resident plaintiffs. That issue is currently
before the Illinois Supreme Court in a separate case to which CCC is not a
party. Both cases were remanded to the Circuit Court of Cook County for further
proceedings.
CCC intends to vigorously defend its interests in all of the above
described pending matters and claims to which it is a party and support its
customers in other actions. Due to the numerous legal and factual issues that
must be resolved during the course of litigation, CCC is unable to predict the
ultimate outcome of any of these actions. If CCC was 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 for compensatory and punitive damages, or potential claims
for indemnification 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. CCC is unable to estimate the magnitude of its exposure, if any,
at this time. As additional information is gathered and the lawsuits proceed,
CCC will continue to assess its potential impact.
During 2001, CCC recorded a pre-tax charge of $4.3 million, net of the
expected insurance reimbursement of $2.0 million, as an estimate of the amount
that CCC will contribute toward a potential settlement of that would resolve
potential claims arising out of approximately 30% of CCC's total transaction
volume during the time period covered by the lawsuits. Based on the current
status of the settlement discussions, the Company anticipates contributing
approximately $2.7 million, net of the expected insurance reimbursement of $2.0
million, toward an initial settlement that would resolve potential claims
arising out of approximately 17% of the Company's transaction volume, for
valuations involving first party claims, during the period covered by the
lawsuits. As for the remainder of the original $4.3 million charge, we continue
to believe the recorded reserve is necessary and appropriate. However, the
consummation of the settlement with the plaintiffs and the amount of CCC's
contribution to the proposed settlement remain subject to a number of
significant contingencies, including, among other things, the extent of
participation on the part of CCC's insurance company customers, the negotiation
of settlement terms between the plaintiffs and those of CCC's customers that are
participating in the settlement negotiations, the existence and extent of
additional sources of insurance reimbursement to CCC, as well as judicial
approval of any proposed settlement agreement. As a result, at this time, there
is no assurance that the settlement will be successfully consummated or, if
completed, that the final settlement will be on the terms or levels of
participation set forth above. There is also no assurance that existing or
potential claims arising out of the remainder of CCC's total loss transaction
volume could be settled on comparable terms.
NOTE 9 - SUBSEQUENT EVENT
The company's Board of Directors has authorized a self-tender offer to
repurchase up to $210 million of its common stock at a price of $18.75 per
share. If the tender, as we anticipate, is fully subscribed then 11.2 million
shares will be repurchased, representing approximately 37% of the approximately
30.4 million shares available for tender. The repurchase will be made through a
fixed price tender offer in which all of CCC's stockholders, vested option
holders and warrant holders, including employee benefit plans, will be given the
opportunity to sell a portion of their shares at a price of $18.75 per share,
without incurring any brokerage fees or commissions. This represents a premium
of approximately 26% over the closing stock price of $14.90 per share on July
21, 2004, the day before the tender was announced. The offer to purchase shares
will commence on July 26, 2004 and will expire at 12:00 midnight, New York City
time on August 23, 2004, unless extended by the company. If the number of
shares tendered is greater than 11,200,000, purchases will be made on a pro rata
basis from shareholders tendering. It is anticipated the self-tender offer will
be funded by a term loan facility of approximately $177.5 million and the
company's excess cash on hand. As a result, the tender offer will be subject to
the receipt of the financing on terms satisfactory to CCC, as well as other
customary conditions. The offer is not contingent upon any minimum number of
shares being tendered.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING INFORMATION
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, 2003 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": CCC
Pathways, CCC Valuescope, 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, 2003.
CCC has long been a leader and innovator in the automotive claims and
collision repair market. CCC has over 21,000 collision repair-facilities
installations, located in all 50 states, and over 350 insurance company
customers in the United States. We have also pioneered value-added network
communications between industries involved in claims settlement, and today our
EZNet communications network handles an average of over 1 million
claims-related transactions each business day. CCC Valuescope is also an
established market leader. We continue to seek products and services to
anticipate and respond to changing demands in the auto-claims industry.
CCC PATHWAYS
This suite consists of our collision estimating products:
- CCC Pathways Appraisal Solution (for insurance customers);
- CCC Pathways Estimating Solution (for collision repair facility
customers);
- CCC Pathways Independent Appraiser Solution (for independent
appraisers);
- CCC Pathways Digital Imaging;
- Recycled Parts Service; and
- Comp-Est Estimating Solution
CCC Pathways helps automobile insurance companies, collision-repair
facilities and independent appraisers 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. The CCC Pathways platform allows customers to integrate our
other services, including CCC Pathways Digital Imaging, Recycled Parts Service
and CCC Valuescope, in order to organize individual claim information in
electronic workfiles, which can be stored via our EZNet communications network,
described later in this section under "Workflow Products."
Pathways Digital Imaging allows our customers to transmit digital images of
damaged vehicles to the Pathways estimate workfile. Customers using Pathways
with our Recycled Parts Service also have access to a database that provides
local part availability and price information on over 22.7 million available
recycled or salvage parts.
Comp-Est Estimating Solution is our collision estimating software that
targets smaller repair facilities that do not communicate electronically with
insurance companies. This product also allows our customers to access the MOTOR
Crash Estimating Guide and provides them with the ability to generate estimates
and supplements.
CCC VALUESCOPE
CCC Valuescope is used primarily by automobile insurance companies and
independent appraisers in processing claims involving private passenger vehicles
that have been heavily damaged or stolen. Typically, when the cost to repair a
vehicle exceeds 70% to 90% of the vehicle's value, the automobile insurance
company will declare that vehicle to be a "total loss." In such cases, we
provide the insurer or independent appraiser with the local market value of the
vehicle to assist in processing the claim. The valuation service can be obtained
for both commercial and recreational vehicles as well as for specialty vehicles,
such as, trucks, semi-trailers, marine craft, motorcycles and pre-fabricated
housing.
WORKFLOW PRODUCTS
This suite includes the following products and services:
- EZNet Communications Network ("EZNet");
- CCC Pathways Appraisal Quality Advisor and Quality
Advisor Appraisal Review (QAAR Plus)
- CCC Autoverse
- CCC Accumark Reinspection
EZNet is a secure network that allows clients to communicate estimates and
claim information electronically. The network allows customers to electronically
communicate claim information, including assignments, workfiles, estimates,
images and auditable estimate data, internally and among insurance company
appraisers, collision repair facilities, independent appraisers, insurance
company reinspectors and other parties involved in the automobile claims
process. EZNet allows customers to share information and review claims,
regardless of the location and provides them with an electronic library to
catalog, organize and store completed claims files.
QAAR Plus 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, CCC
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. For example, CCC
Pathways Quality Advisor allows an insurance company to establish certain
criteria for reviewing the preparation of estimates, which in turn allows the
insurance company to determine if an appraiser prepared an accurate estimate.
CCC Autoverse. Our CCC Autoverse product consists of CCC Autoverse Claim
Management (for insurance customers), CCC Autoverse Repair Management (for
multiple-location repair facilities) and CCC Autoverse Appraiser Management (for
independent appraiser customers). CCC Autoverse is a web-based open workflow
solution that allows for the exchange of claims information derived from using
CCC Pathways products as well as established collision estimating systems that
meet the Collision Industry Electronic Commerce Association Estimating
Management System standard. CCC Autoverse products permit the free flow of
information between those who write damage estimates and insurers who process
claims.
CCC Autoverse Claim Management allows the insurance adjuster to review
estimates as well as digital images, supplements, claim summary reports and
other documents associated with the claim. In addition, CCC Autoverse Claim
Management allows the insurance adjuster to review events, enter new assignments
and request and record payment information. CCC Autoverse Claim Management also
provides reporting for assignment status.
CCC Autoverse Repair Management allows the CCC Pathways user and non-user
repair facility operator to receive assignments into a central location from
multiple insurance carriers. Through the CCC Autoverse dispatch feature,
multi-location repair facilities are provided the ability to load balanced work
across their different locations. This permits the multi-location operator to
reduce their cycle time and improve their shop utilization.
CCC Accumark Reinspection. Our next-generation, real-time, web-based
reinspection tool offers advanced management of company appraisal procedures and
tracking capabilities. The product automatically reviews each line of an
appraisal within a customized framework of company-established rules. CCC
Accumark Reinspection can enable insurers to save an estimated 6 to 13% per
estimate.
INFORMATION SERVICES
ClaimScope Navigator. ClaimScope Navigator is our on-line, web-based
information service that provides a comprehensive method to create management
reports comparing industry and company performance using CCC Pathways and CCC
Valuescope data. ClaimScope Navigator permits our customers to conduct in-depth
analyses of claim information by parts and labor usage, cycle time measurements
and vehicle type and condition.
OTHER PRODUCTS AND SERVICES
Pathways Enterprise Solution and Pathways Professional Advantage .
Pathways Enterprise Solution is an automotive repair facility 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 repair facility management software system for a
single store location.
CARS Direct is a multi-vendor, on-line car rental reservation and
management system, which allows insurers control over car class selection, rates
and extensions. We sell the CARS Direct service on a per-transaction basis and
bill at the beginning of the month following the transactions.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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 accounting principles generally accepted in the
United States, or "GAAP." We review the accounting policies, including those
described in the Notes to the Consolidated Financial Statements, 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 our accounts
receivable, income taxes, goodwill, intangibles, software development, fair
value of financial instruments and commitments and contingencies. 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 our Board of
Directors and Disclosure Committee. See "Preparation of Financial Information"
in this section for further discussion of the Disclosure Committee.
We believe that the following critical accounting policies can have a
significant impact on our results of operations, financial position and
financial statement disclosures and require the most difficult, subjective and
complex estimates and judgments.
- - Accounts Receivable
- - Income Taxes
- - Goodwill and Intangibles
- - Software Development Costs
- - Fair Value of Financial Instruments
- - Commitments and Contingencies
For a detailed discussion on 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, 2003.
During the first quarter of 2004 we implemented new performance
compensation plans, as such, the methodology for recognizing annual performance
compensation expenses changed from the prior year. Our objective was to directly
correlate our quarterly bonus achievement and accrual more closely with the
performance against our growth targets and corporate objectives that drive our
variable compensation plans. Under this new method, we will be more closely
linking achievement against our annual growth targets by funding the bonus pool
based on certain year-to-date growth metrics over the prior year. Under the
historic method, a proportionate amount of the projected annual payout was
recorded each quarter and was adjusted when full year annual projections were
revised. As a result, we expect to see more stability in the selling, general
and administrative expense line on a quarter-to-quarter basis when measured as a
percentage of revenue.
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 believe that our accounting policies are prudent
and provide a clear view of our financial performance. In 2002, we formed a
Disclosure Committee, composed of senior management, including senior financial
and legal personnel, to help ensure the completeness and accuracy of our
financial results and disclosures. In addition, prior to the release of our
financial results, key management reviews our annual and quarterly results,
along with key accounting policies and estimates, with the Audit Committee of
our Board of Directors.
REGULATION
As disclosed in our Annual Report on Form 10-K for the year ended December
31, 2003, the Company is aware of a case pending in the Superior Court of the
State of California for the County of Los Angeles 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 has
learned that on or about June 7, 2004, a partial settlement was reached in that
litigation among the parties thereto. Pursuant to that settlement, the
Department of Insurance will be allowed to implement and enforce certain
provisions of the proposed amendments to the Fair Claims Settlement Practices
Regulations that had been preliminarily enjoined by the Court. These amended
regulations provide that they will take effect ninety (90) calendar days after
they are filed with the Secretary of State. The amended regulations will
require the Company to change certain aspects of its methodology for computing
total loss valuations in California, and the Company plans to implement its
modified methodology by the effective date of the new regulations.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2003
Operating Income. Operating income decreased quarter-over-quarter from 2003
to 2004 by $0.3 million, to $8.6 million, due to an increase in operating
expenses of $1.7 million, partially offset by an increase in revenue of $1.4
million. Our operating margin (operating income as a percentage of revenue)
decreased to 17.5% for the quarter ended June 30, 2004 compared to 18.6% for the
same quarter in 2003.
Revenues. Revenues for each of our product and service suites are
summarized as follows (in thousands):
THREE MONTHS ENDED JUNE 30, VARIANCE
2004 2003 INCREASE (DECREASE)
----------------------------------------------------
Pathways. . . . . . . . . . $31,255 63.2% $29,494 61.3% $1,761 6.0%
CCC Valuescope. . . . . . . 10,161 20.5 10,239 21.3 (78) (0.8)
Workflow Products . . . . . 6,541 13.2 6,638 13.8 (97) (1.5)
Information Services. . . . 504 1.0 488 1.0 16 3.3
Other Products and Services 1,012 2.1 1,238 2.6 (226) (18.3)
----------------------------------------------------
Total . . . . . . . . . . . $49,473 100.0% $48,097 100.0% $1,376 2.9%
====================================================
Revenues from our CCC Pathways products increased in the second quarter of
2004 by $1.8 million, or 6.0%, compared to the second quarter of last year due
to continued growth of our estimating solutions in the repair facility channel,
and increased revenue of the Recycled Parts Service to insurance carriers.
Revenues from our workflow product suite decreased slightly from the prior
year. The gains we made with CCC Autoverse during the quarter were partially
offset by a decline in revenue from EZNet. The decreased revenue from EZNet was
attributable to continued softness in industry claim volumes, as well as the
impact of pricing declines due to recent customer renewal activity.
Revenues from our other products decreased inline with the company's plan
to exit the customer hardware business.
Operating Expenses. Operating expenses as a percentage of revenues are
summarized as follows (dollars in thousands):
THREE MONTHS ENDED JUNE 30, VARIANCE
2004 2003 INCREASE (DECREASE)
---------------------------------------------------
Revenues $49,473 100.0% $48,097 100.0% $1,376 2.9%
Production and Customer Support 7,807 15.8 7,754 16.1 53 0.7
Commissions, Royalties and Licenses 3,145 6.4 3,013 6.2 132 4.4
Selling, General and Administrative 19,105 38.6 17,150 35.7 1,955 11.4
Depreciation and amortization 1,805 3.6 2,014 4.2 (209) (10.4)
Product Development and Programming 8,089 16.3 8,156 17.0 (67) (0.8)
Restructuring Charges 1,061 886 1.8 1,061 2.2 (175) (16.5)
---------------------------------------------------
Total Operating Expenses $40,837 82.5% $39,148 81.4% $1,689 4.3%
===================================================
Selling, General and Administrative. Selling, general and administrative
expenses increased quarter-over-quarter from 2003 to 2004 partially as a result
of the timing of our industry conference. In 2003, the conference was held
during the first quarter, while in 2004 it was held during the second quarter.
The expense for the conference in 2004 was approximately $0.9 million.
At the end of 2003, the company changed its administrator of the company's
401(k) Retirement Savings & Investment Plan ("the Plan"). The new administrator
of the Plan performed the non-discrimination test for 1999 through 2002, and
concluded the test had previously been performed incorrectly. As a result,
during the second quarter of 2004, the company recorded a charge of
approximately $0.8 million related to additional contributions ($0.7 million)
and penalties ($0.1 million) the company needs to make in order to meet the
non-discrimination test for the years 1999 through 2002.
Other factors contributing to the increase in selling, general and
administrative expenses included, higher wages, due to the annual increases
issued to employees and higher legal expenses. Partially offsetting these
expenses was a benefit recorded for lower healthcare costs.
Depreciation and Amortization. Depreciation and amortization expenses
decreased as a result of fewer investments in software and customer-leased
computer equipment as well as the use of certain software that is now fully
depreciated.
Product Development and Programming. The decrease in product development
and programming expenses was due to certain incremental development expenses
being incurred in 2003 for CCC Autoverse. This decrease was partially offset by
a continued investment in development of a new shop management product, as well
as expenses incurred to continue development of our new subrogation, salvage and
reinspection products.
Restructuring Charges. During the second quarter of 2004, we recorded a
charge of $0.9 million for a realignment of our organization, which primarily
related to severance costs for 41 former employees. The restructuring will
allow us to better streamline and focus our implementation process and improve
our overall sales and support execution and is expected to generate cost savings
in excess of $4.0 million annually beginning in the third quarter of 2004.
During the second quarter of 2003, we recorded a final charge related to excess
office space, located in Chicago, which was occupied by a former business of
ours.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2003
Operating Income. Operating income decreased slightly for the first half of
the year from 2003 to 2004 by $0.1 million, to $18.6 million, due to an
increase in operating expenses of $3.3 million, partially offset by an increase
in revenue of $3.2 million. Our operating margin (operating income as a
percentage of revenue) decreased to 18.8% for the six months ended June 30, 2004
compared to 19.5% for the six months ended June 30, 2003.
Revenues. Revenues for each of our product and service suites are
summarized as follows (in thousands):
SIX MONTHS ENDED JUNE 30, VARIANCE
2004 2003 INCREASE (DECREASE)
----------------------------------------------------
Pathways. . . . . . . . . . $62,429 63.0% $58,514 61.0% $3,915 6.7%
CCC Valuescope. . . . . . . 20,300 20.5 20,935 21.9 (635) (3.0)
Workflow Products . . . . . 12,798 12.9 13,000 13.6 (202) (1.6)
Information Services. . . . 1,006 1.0 795 0.8 211 26.5
Other Products and Services 2,543 2.6 2,585 2.7 (42) (1.6)
----------------------------------------------------
Total . . . . . . . . . . . $99,076 100.0% $95,829 100.0% $3,247 3.4%
====================================================
Revenues from our CCC Pathways products increased for the six months ended
June 30, 2004 by $1.1 million, or 7.0%, compared to the six months ended June
30, 2003, primarily due to the acquisition of Comp-Est being completed part way
through the first half of the year in 2003. Only four months revenue was
included for Comp-Est for the six months ended June 30, 2003 versus a full six
months of revenue being included for first half of the year in 2004.
Revenues from CCC Valuescope decreased by $0.6 million, or 3.0%, primarily
all during the first quarter of 2004, compared to the first quarter of 2003. The
decrease was as a result of pricing declines due to contract renewals, which
were not offset by transaction volumes. We had expected transaction volumes to
increase enough to offset the pricing declines, but this did not occur, as many
of our insurance customers experienced a decrease in claim volumes. Revenue
from this suite was relatively stable for the second quarter of 2004 compared to
the second quarter of 2003.
Revenues from our workflow product suite decreased slightly from the prior
year. The gains we made with Autoverse during the first half of the year
compared to the prior year were partially offset by a decline in revenue from
EZNet. The decreased revenue from EZNet was attributable to continued softness
in industry claim volumes, as well as the impact of pricing declines due to
recent customer renewal activity.
Revenue from our information services product suite increased due to higher
sales of our management information tools to both insurance companies and repair
facilities.
Operating Expenses. Operating expenses as a percentage of revenues are
summarized as follows (dollars in thousands):
SIX MONTHS ENDED JUNE 30,
------------------------------- VARIANCE
2004 2003 INCREASE (DECREASE)
-------------------------------------------------
Revenues $99,076 100.0% $95,829 100.0% $3,247 3.4%
Production and Customer Support 16,156 16.3 15,098 15.8 1,058 7.0
Commissions, Royalties and Licenses 6,319 6.4 5,430 5.7 889 16.4
Selling, General and Administrative 37,035 37.4 35,716 37.3 1,319 3.7
Depreciation and amortization 3,908 3.9 3,944 4.1 (36) (0.9)
Product Development and Programming 16,126 16.3 15,852 16.5 274 1.7
Restructuring Charges 1,061 886 0.9 1,061 1.1 (175) (16.5)
-------------------------------------------------
Total Operating Expenses $80,430 81.2% $77,101 80.5% $3,329 4.3%
=================================================
Production and Customer Support. Production and customer support expenses
increased 7.0% compared to last year due mainly to higher than anticipated
training and transition costs needed to complete the implementation of the new
customer support model, that is, moving to a universal service representative
model. While we finished the migration to the new model during the fourth
quarter of 2003, we continued to incur additional training and transition
expense related to this project during the first quarter of 2004.
Commissions, Royalties and Licenses. Commissions, royalties and licenses
expenses increased in 2004 compared to the first half of the year in 2003
partially due to the inclusion of a full six months' of data license fees for
the Comp-Est product versus only four months of expense being included last
year, since the acquisition was completed at the end of February 2003.
Selling, General and Administrative. Selling, general and administrative
expenses increased by $1.3 million, or 3.7%, from the first half of 2003 to the
first half of 2004 mainly due to the items described below, in addition to a
number of immaterial items.
At the end of 2003, the company changed its administrator of the company's
401(k) Retirement Savings & Investment Plan ("the Plan"). The new administrator
of the Plan performed the non-discrimination test for 1999 through 2002, and
concluded the test had previously been performed incorrectly. As a result,
during the second quarter of 2004, the company recorded a charge of
approximately $0.8 million related to additional contributions ($0.7 million)
and penalties ($0.1 million) the company needs to make in order to meet the
non-discrimination test for the years 1999 through 2002.
There was also a favorable impact of approximately $2.0 million, due to a
change in methodology for annual performance compensation expenses, as well as
actual performance against our plan targets during the first half of the year in
2004. During the first quarter of 2004 we implemented new performance
compensation plans, as such, the methodology for recognizing annual performance
compensation expenses changed from the prior year.
Also contributing to the increase in selling, general and administrative
expenses was approximately $1.8 million of costs associated with our sales
force, increased insurance premiums and expenses incurred to consolidate and
make improvements to our main office in Chicago.
Depreciation and Amortization. Depreciation and amortization decreased as a
result of fewer investments in software and customer leased computer equipment
as well as using certain software that is now fully depreciated. The decrease
was partially offset by an increase in amortization related to Comp-Est's
intangibles, since 2003 only included four months of amortization compared to
six months of amortization in 2004.
Product Development and Programming. Product development and programming
expenses increased slightly from the first half of 2003 to the first half of
2004 as a result of the timing of our continued investment in development of a
new shop management product.
Restructuring Charges. During the second quarter of 2004, we recorded a
charge of $0.9 million for a realignment of our organization, which primarily
related to severance costs for 41 former employees. The restructuring will
allow us to better streamline and focus our implementation process and improve
our overall sales and support execution and is expected to generate cost savings
in excess of $4.0 million annually beginning in the third quarter of 2004.
During the second quarter of 2003, we recorded a final charge related to excess
office space, located in Chicago, which was occupied by a former business.
OUTLOOK
As part of our second quarter earnings release, we provided updated
guidance for the third quarter and full year 2004. The guidance provided below
excludes any effect of the proposed completion of our self-tender offer
discussed in the notes to the financial statements.
Revenue growth for the third quarter and full year is expected to be in the
3 to 4 percent range. This is a change from our previous guidance of 3 to 5
percent.
Operating income for the third quarter is expected to be in the range of $12 to
$13 million. Operating income for the full year should be in the range of $43 to
$45 million including the impact of the charges taken in the second quarter of
$1.7 million. Operating margins are expected to increase for the remainder of
the year to a full year range of 22 to 23 percent.
EPS for the third quarter is expected to be in the $0.27 to $0.29 range.
The increase in EPS from first and second quarter results can be attributed to
the anticipated cost savings of the realignment and revenue growth for the
quarter. The forecast for full year EPS is $0.96 to $1.00 per share range. This
estimate includes both the $0.02 per share restructuring charge and the $0.02
per share charge related to the additional contributions required to be made to
the company's 401(k) Retirement Savings & Investment Plan. The fully diluted
share base of 27.9 million is being used to calculate the EPS figure.
Please note that this guidance excludes the effects of the self-tender offer
transaction announced by the Company on July 22, 2004. See note 9 to the
financial statements for additional information.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 2004, net cash provided by operating
activities was $10.4 million, proceeds received from the sale of short-term
investments were $7.0 million and proceeds received from the exercise of stock
options were $2.6 million. We used $3.1 million for the purchase of equipment,
software, and for costs related to consolidate and make improvements to our main
office in Chicago.
Our principal liquidity requirements consist of our operating activities,
including product development, our investments in capital equipment and other
business development activities. 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 CCC Pathways' services. 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 revenues.
In addition, management believes that cash flows from operations and our
available credit facility of $30 million will be sufficient to meet our
liquidity needs for the foreseeable future. Our current credit facility matures
on November 30, 2004, and there can be no assurance that we will be able to
renew the credit facility on economic terms that are beneficial to us, or at
all. There can also be no assurance, that we will be able to satisfy our
liquidity needs in the future without engaging in financing activities beyond
those described above. As of June 30, 2004, we were in compliance with all
covenants and had no advances under the credit facility.
In connection with the company's proposed self-tender offer of up to $210
million of its common stock at a price of $18.75 per share, the company is
negotiating a term loan of approximately $177.5 million which, together with
excess cash on hand, will fund the self-tender offer. In addition to the term
loan, the company is negotiating a new $30 million revolver. This revolver would
replace the current $30 million credit facility. The self-tender offer is
conditioned upon our being able to enter into such new credit facilities on
terms acceptable to us.
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.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure 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 ( "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 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 necessarily was
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 June 30, 2004, 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.
Changes in internal controls
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 reasonably 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 8 to the financial statements contained in
Part I of this Form 10-Q are incorporated herein by reference.
On July 2, 2004, Mitchell International Inc. filed a motion for summary
judgment in the patent infringement lawsuit brought by the Company in the United
States District Court for the Northern District of Illinois (Eastern Division).
The Company has not yet filed its response but expects to do so on or prior to
August 6, 2004.
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
(a) The annual meeting of the stockholders of the Registrant was held on June
2, 2004.
(b) The directors listed in the Registrant's Proxy Statement dated April 23,
2004, were elected to serve until the earlier of the next Annual Meeting of
Stockholders or until their respective successors have been elected and
qualified, as follows:
Director For Against Withheld Broker Non Votes
- ----------------------- ---------- --------- ----------- ------------------
Morgan W. Davis . . . . 24,626,412 - 606,718 -
Michael R. Eisenson . . 24,770,821 - 462,309 -
J. Roderick Heller, III 24,828,227 - 404,903 -
Thomas L. Kempner . . . 22,830,279 - 2,402,851 -
Githesh Ramamurthy. . . 24,504,705 - 728,425 -
Mark A. Rosen . . . . . 24,786,243 - 446,887 -
Herbert S. Winokur, Jr. 24,623,267 - 609,863 -
(c) Appointment of PricewaterhouseCoopers LLP as the Company's independent
auditors was approved. Voting by stockholders on the proposal was
25,104,763 for, 62,854 against, 66,512 withheld and no broker non votes.
(d) Approval of the restatement of the Company's 2000 Stock Incentive Plan was
received. Voting by stockholders on the proposal was 19,326,262 for,
796,078 against, 108,339 withheld and 3,802,451 broker non votes.
ITEM 5. OTHER INFORMATION
NONE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Amended and Restated Certificate of Incorporation
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 April 12, 2004 to announce that
our executive vice president and chief financial officer was leaving the
company, effective April 30, 2004, to assume a similar role at another company.
We filed a Current Report on Form 8-K on April 20, 2004 to announce that we
had named an interim chief financial officer effective May 1, 2004.
We filed a Current Report on Form 8-K on April 21, 2004 to report the
issuance of a press release commenting on the first fiscal quarter ended March
31, 2004.
We filed a Current Report on Form 8-K on June 3, 2004 to announce the
results of the company's annual stockholders' meeting as well as announcing that
our former President and Chief Operating Officer accepted a special assignment
through November 2004.
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: July 22, 2004 CCC Information Services Group Inc.
By: /s/ Githesh Ramamurthy
----------------------
Name: Githesh Ramamurthy
Title: Chairman and
Chief Executive Officer
By: /s/ David L. Harbert
---------------------
Name: David L. Harbert
Title: Senior Vice President
and Chief Financial Officer
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
-----------------------------------------------------------------------------------------
Amended and Restated Certificate of Incorporation
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
Rule 13a-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certifications of Chief Executive and Financial Officers