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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(312) 222-4636
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $0.10 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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 June 30, 2003, the aggregate market value of the registrant's common
stock held by non-affiliates was approximately $140,760,760, based upon the
closing sales price of the registrant's common stock on NASDAQ on such date.
For purposes of this calculation, all directors, executive officers and holders
of more than 5% of the registrant's outstanding common stock as of such date
were deemed to be "affiliates" of the registrant.
As of February 13, 2004, 26,524,059 shares of the registrant's common
stock, par value $0.10 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference
portions of the registrant's Notice of 2004 Annual Meeting of Stockholders and
Proxy Statement.
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CCC INFORMATION SERVICES GROUP INC. AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
TABLE OF CONTENTS
Page
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PART I
Item 1. Business 1
Organization 1
Products and Services 2
Sales and Marketing 6
Training and Support 6
Customers 6
ChoiceParts Joint Venture 6
Intellectual Property and Licenses 6
Competition 7
Regulation 8
Research and Development 9
Certain Risks Related to our Business 9
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 26
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Auditors on Accounting and
Financial Disclosure 26
Item 9A. Controls and Procedures 26
PART III
Item 10. Directors and Executive Officers of the Registrant 27
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain Beneficial Owners and Management 27
Item 13. Certain Relationships and Related Transactions 27
Item 14. Principal Accounting Fees and Services 27
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 28
Signatures 64
Directors and Executive Officers 65
Corporate Information 66
FORWARD-LOOKING STATEMENTS
In addition to historical facts or statements of current conditions, this
Annual Report on Form 10-K for the year ended December 31, 2003 ("Form 10-K")
contains forward-looking statements. Forward-looking statements provide our
current expectations or forecasts of future events. These may include statements
regarding market prospects of our products, sales and earnings projections, and
other statements regarding matters that are not historical facts. 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. Our performance
and financial results could differ materially from those reflected in these
forward-looking statements due to general financial, economic, regulatory and
political conditions affecting the technology and insurance industries as well
as more specific risks and uncertainties such as those set forth elsewhere in
the Form 10-K. Given these risks and uncertainties, any or all of these
forward-looking statements may prove to be incorrect. Therefore, you should not
rely on any such forward-looking statements. Furthermore, we do not intend, nor
are we obligated, to update publicly any forward-looking statements. Risks that
we anticipate are discussed in more detail in the section entitled "Item 1.
Business - Certain Risks Related to Our Business." This discussion is permitted
by the Private Securities Litigation Reform Act of 1995.
PART I
ITEM 1. BUSINESS
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 895 full-time employees at December 31, 2003, compared to 834
at the end of 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 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"), formerly known as Total Loss
Valuation Services. Revenues from CCC Pathways represented 61.1%, 60.6% and
58.3% of our consolidated revenues for the years ended December 31, 2003, 2002,
2001, respectively. Revenues from CCC Valuescope represented 21.8%, 23.7% and
25.5% of our consolidated revenues for the years ended December 31, 2003, 2002
and 2001, respectively.
As of December 31, 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.
Our principal executive office is located at World Trade Center Chicago,
444 Merchandise Mart, Chicago, Illinois 60654. Our telephone number is (312)
222-4636 and our Internet home page is located at www.cccis.com; however, the
information in, or that can be accessed through, our home page is not part of
this report. Our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to such reports, if any, are
available free of charge, on our Internet home page as soon as reasonably
practicable after we electronically file such material with, or furnish it to,
the Securities and Exchange Commission ("SEC").
PRODUCTS AND SERVICES
OVERVIEW
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. CCC has long been a leader and innovator in the automotive claims and
collision repair market. CCC has over 21,000 collision repair-facilities,
located in all 50 states, and over 350 insurance company installations 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 repair 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 Services and CCC Valuescope, in order to organize individual claim
information in electronic workfiles, which can be stored on our EZNet
communications network, described in greater detail later in this section under
"Workflow Products." We have received three United States patents for CCC
Pathways. CCC Pathways can be used on laptop or desktop computers.
CCC Pathways gives customers access to the MOTOR Crash Estimating Guide, a
comprehensive estimating guide, prepared by Motor Information Systems, a unit of
Hearst Business Publishing, Inc. ("Hearst"), which provides pricing, labor and
refinishing information for original equipment manufacturer parts and recycled
assemblies. We use this guide to create a database of parts, price and labor
time for various repairs. An exclusive license from Hearst that expires in 2021
permits us to publish this guide electronically, which is an integral component
of CCC Pathways. For more information about this license, please see the
description later in this section under "Intellectual Property and Licenses."
Customers also use CCC Pathways to access databases of information gathered
from various vendors. These databases include one database, which compiles data
from over 1,547 sources on local part availability and price information on
aftermarket and reconditioned parts, and another database, which includes
information on pricing and availability of over 17,495 tire models from 24
different manufacturers. Customers using CCC Pathways with Recycled Parts
Services also have access to a database that provides local part availability
and price information on over 22.7 million available recycled or salvage parts.
For example, a customer may access the database of recycled or salvage parts to
determine if a specific recycled part is available from an identified vendor in
his region and to ascertain the price of that part. If the customer selects that
part for use in the repair process, CCC Pathways integrates that choice into the
estimate workfile.
We sell Recycled Parts Services to our customers on a subscription and/or
per transaction basis under multi-year agreements and bill our customers on a
monthly basis one month in advance.
We update the MOTOR Crash Estimating Guide and the other integrated
databases used by CCC Pathways for our customers monthly via a CD-ROM, except
for the Recycled Parts Services database, which the vendor updates
electronically on a daily basis.
We license CCC Pathways to automobile insurance companies, collision repair
facilities and independent appraisers under multi-year contracts and bill
customers on a monthly subscription basis one month in advance.
CCC Pathways Digital Imaging. Imaging integration allows automobile
insurance companies, collision repair facilities and independent appraisers to
digitally photograph, attach and transmit images of damaged vehicles to the CCC
Pathways estimate workfile. These electronic images can be accessed by an
authorized participant in the automobile claim process at any time and from any
location that is web enabled. For example, an adjuster in the field in
California may add a digital image of a damaged vehicle to the CCC Pathways
estimate workfile using the integrated imaging function. The estimate can then
be stored on our EZNet communications network, which allows an insurance company
representative in New York to access the same workfile and digital image, review
the estimate and approve the claim. Our EZNet communications network is
described in greater detail later in this section under "Workflow Products."
CCC Pathways Digital Imaging reduces the need for onsite inspections and
eliminates film, photo processing, travel and overnight delivery costs.
We sell CCC Pathways Digital Imaging to our customers under multi-year
contracts and bill our customers on a monthly subscription basis one month in
advance.
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. We sell Comp-Est Estimating Solution to our customers
generally under multi-year contracts and bill them on a monthly subscription
basis one month in advance.
CCC VALUESCOPE
CCC Valuescope. Our CCC Valuescope services are 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. Our values
are based on local market data that identifies the location and price of
comparable vehicles. To compile this data, CCC representatives survey over 3,965
car dealerships in more than 265 markets at least twice each month to obtain
detailed information about the vehicles on the dealerships' used car lots. We
also subscribe to more than 1,900 local newspapers and other publications and
cull information from the classified advertisements to provide additional
information on vehicle availability and pricing. We believe our CCC Valuescope
database is among the most current and comprehensive vehicle databases in North
America. Each CCC Valuescope valuation also includes a vehicle identification
search under VINguard, which matches a current vehicle claim against our
database of previously totaled or stolen vehicles to identify potential
duplication or possible fraud.
Customers of CCC Valuescope who are also customers of CCC Pathways may
access the CCC Valuescope program electronically using CCC Pathways software.
Customers may also obtain CCC Valuescope valuations from us by telephone, e-mail
or facsimile. Our TL2000 Solution product allows customers to submit CCC
Valuescope valuation requests and retrieve CCC Valuescope market valuation
reports through the Internet via secured access. In addition, our customers'
insureds and claimants can access their own vehicle valuation reports via the
Internet. Customers may store CCC Valuescope valuations on our EZNet
communications network as part of a claims workfile.
Commercial and Recreational Vehicle Valuation Services ("CRV"). CRV is the
Company's CCC Valuescope valuation service for commercial and recreational
vehicles. CRV provides valuations for specialty vehicles including trucks,
semi-trailers, marine craft, motorcycles, recreational vehicles and
pre-fabricated housing.
We sell CCC Valuescope and CRV to our customers, including those who are
CCC Pathways customers, on a per-transaction basis under multi-year contracts.
Customers are generally billed in the month following the transaction.
WORKFLOW PRODUCTS
EZNet Communications Network. Our EZNet communications network is a secure
network that allows clients to communicate estimates and claim information
electronically. Our customers can access our EZNet communications network in
various ways, including dedicated data lines and/or telephone lines via modems,
as well as over the Internet. We offer various services such as dispatch of
assignment information, estimate and supplement retrieval and electronic review
of automobile appraisals to our customers that are provided over our EZNet
communications network, all of which comprise our Electronic Direct Repair
services. 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 communications
network 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.
When a customer completes an estimate, the customer may store the estimate
information on our EZNet communications network in the electronic library. For
example, a remote claims adjuster in New York may prepare an estimate using CCC
Pathways and store the completed estimate on EZNet. An adjuster's supervisor and
other members of his company's automobile claim team in California can access
the estimate through our EZNet communications network on a confidential basis
using a claim reference number.
We sell EZNet services to our customers under multi-year contracts and bill
them on a per-transaction basis. Customers are billed at the beginning of the
month following the transactions.
CCC Pathways Quality Advisor and Quality Advisor Appraisal Review (QAAR
Plus). 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 Quality Advisor 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.
We sell CCC Pathways Quality Advisor and QAAR Plus to our customers on a
per-transaction basis under multi-year agreements. Customers are billed at the
beginning of the month following the transactions.
CCC Autoverse. Our CCC Autoverse product consists of CCC Autoverse Claim
Management (for insurance customers), which was launched during the third
quarter of 2002, CCC Autoverse Repair Management (for multiple-location repair
facilities), and CCC Autoverse Appraiser Management (for independent appraiser
customers), both of which were launched during the first quarter of 2003 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.
We sell CCC Autoverse products to our customers on a per-transaction basis
under multi-year agreements. Customers are billed at the beginning of the month
following the transactions.
INFORMATION SERVICES PRODUCTS
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.
We sell our ClaimScope Navigator service on a subscription basis under
multi-year agreements, which are billed to customers one month in advance.
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.
We sell Pathways Professional Advantage and Pathways Enterprise Solution to
our customers under multi-year contracts and bill them on a monthly subscription
basis one month in advance.
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.
SALES AND MARKETING
All of our services are currently sold throughout the United States. Our
sales and marketing strategy is to strengthen our relationships with existing
customers and to expand our current customer base by providing efficient,
integrated and value-added services in the automobile claims industry. We
utilize approximately 184 sales and service professionals to market and
implement our services.
TRAINING AND SUPPORT
Our training and support staff, which consists of approximately 99
employees, provides basic training in the field, advanced training courses,
telephonic technical support and implementation services. Our training and
support staff consists of individuals with technical knowledge relating not only
to CCC software and services, operating systems and network communications, but
also to new and used automobile markets and collision repair. We routinely
analyze customer calls to modify services or training and, whenever necessary,
will dispatch a field representative to a customer's location.
CUSTOMERS
We provide our services primarily to automobile insurance companies and
collision repair facilities. Our insurance company customers include most of the
largest United States automobile insurance companies and small to medium size
automobile insurance companies serving regional or local markets. CCC has over
21,000 collision repair-facilities, located in all 50 states, and over 350
insurance company installations in the United States. We charge fees for our
services based on either a monthly subscription or a per-transaction basis. No
single customer accounted for more than 6.4% of our total revenues in any of the
last three fiscal years.
CHOICEPARTS JOINT VENTURE
On May 4, 2000, we formed an independent company, ChoiceParts, LLC
("ChoiceParts") with Automatic Data Processing, Inc. ("ADP") and The Reynolds
and Reynolds Company ("Reynolds"). We have a 27.5% equity interest in
ChoiceParts. See Note 7, "Investment in ChoiceParts, LLC" for additional
information.
INTELLECTUAL PROPERTY AND LICENSES
Our competitive advantage depends upon our proprietary technology. We rely
primarily on a combination of patents, contracts, intellectual property laws,
confidentiality agreements and software security measures to protect our
proprietary rights. We distribute our services under written license agreements,
which grant our customers a license to use our products and services and contain
provisions to protect our ownership and the confidentiality of the underlying
technology. We also require all of our employees and other parties with access
to our confidential information to sign agreements prohibiting the unauthorized
use or disclosure of our technology.
We have trademarked names and slogans used in connection with virtually all
of our products and services, which we use in the advertising and marketing of
our products and services. CCC Pathways and CCC are well-known marks within the
automobile insurance and collision repair industries. We have patents for our
collision estimating service pertaining to the comparison and analysis of the
"repair or replace" and the "new or used" parts decisions. In 1999, we received
a patent covering the CCC Pathways method for managing insurance claim
processing. Although we do not have a patent concerning the CCC Valuescope
calculation process, the processes involved in this program are our trade
secrets and are essential to our CCC Valuescope business. Despite these
precautions, we believe that existing laws provide only limited protection for
our technology. A third party may misappropriate our technology or independently
develop similar technology. Additionally, it is possible other companies could
successfully challenge the validity or scope of our patents, diminishing the
competitive advantage that our patents may provide.
We license certain data used in our services from third parties to whom we
pay royalties. With the exception of the MOTOR Crash Estimating Guide, which we
license from a division of Hearst, we do not believe that our services are
significantly dependent upon licensed data that cannot be obtained from other
vendors. Although we have licensed the estimating guide from Hearst through
2021, we do not have access to an alternative database that would provide
comparable information in the event the license is terminated. Hearst may
terminate the license if any of the following events occur: (1) we fail to make
payment of license fees, royalties and other charges due under the agreement;
(2) we do not comply with the material terms and conditions of the agreement;
(3) we become bankrupt or insolvent and we are unable to perform our obligations
under the agreement; or (4) upon two years' notice, if Hearst discontinues or
abandons publication of the estimating guide.
Any interruption of our access to the MOTOR Crash Estimating Guide provided
by a division of Hearst could have a material adverse effect on our business,
financial condition and results of operations.
In addition, we license data used in the Recycled Parts Services database
and, in 2002, we entered into a data supply agreement, which expires in June of
2005, with a new provider of recycled parts data, Car-Part.com. Any interruption
of our access to the data contained in the Recycled Parts Services database
could have a material adverse effect on our business.
We are not engaged in any material disputes with other parties with respect
to our ownership or use of our proprietary technology. We cannot assure you that
other parties will not assert technology infringement claims against us in the
future. Defending any such claim may involve significant expense and management
time. Moreover, if any such claim were successful, we could be required to pay
monetary damages, refrain from distributing the infringing product or obtain a
license from the party asserting the claim, which may not be available on
commercially reasonable terms. In addition, we cannot assure you that we will
not have to take legal action in the future to enforce our intellectual property
rights, as we have done in the action we filed against Mitchell International
Inc. ("Mitchell") described in Item 3. Legal Proceedings. Any action we may
take to enforce our intellectual property rights may involve significant expense
and management time and the outcome is uncertain.
COMPETITION
The industry in which we participate is highly competitive. We compete by
offering value added products and services that we believe are unique and by
providing what we believe is superior customer service for these solutions.
Historically, our principal competitors have included the Claims Services Group
of ADP and Mitchell. The Claims Services Group of ADP offers a collision
estimating, digital imaging system and a vehicle valuation service to the
automobile insurance industry and a collision estimating and digital imaging
system and a shop management system to the collision repair industry. Mitchell
publishes crash guides for both the automobile insurance and collision repair
industries and markets collision estimating, shop management and imaging
products. In addition, we face competition from several new companies, many of
which focus on the delivery of services over the Internet. We experience steady
competitive price pressure.
We intend to address competitive price pressures by providing higher
quality value-added solutions and services that offer more advanced features to
our clients. We also intend to continue to develop unified, user-friendly claim
services that incorporate our comprehensive proprietary inventory of data. We
expect that CCC Pathways will continue to provide a unique service for our
insurance and collision repair customers and allow us to effectively address
competitive price pressures.
At times, insurance companies have entered into agreements with companies
(including ADP, Mitchell and CCC) that provide that the insurance company will
either use the product or service of that company exclusively or designate the
company as its preferred provider of that product or service. If the agreement
is exclusive, the insurance company requires that collision repair facilities,
independent appraisers and regional offices use the particular product or
service. If the company is simply a preferred provider, the collision repair
facilities, independent appraisers and regional offices are encouraged to use
one of the approved products, but may choose any other vendor's product or
service. Being included on the approved list of an insurance company or having a
product that is endorsed by the insurance company provides certain benefits,
including immediate customer availability and an advantage over competitors who
may not have such approval. To the extent an insurance company has endorsed ADP
or Mitchell, but not us, we may experience a competitive disadvantage.
REGULATION
The Company's insurance company customers are subject to laws and
regulation by individual state insurance regulatory agencies. In many states,
those agencies have promulgated regulations governing the settlement of total
loss insurance claims, and the Company monitors these regulations and their
impact on CCC Valuescope. A large portion of the revenue from CCC Valuescope
during the year ended December 31, 2003 came from those states with the largest
number of registered vehicles, such as California, Florida, Illinois, New York,
Pennsylvania, Ohio, New Jersey, Georgia and Texas, with no specific state
accounting for more than approximately 17% of the Company's volume for CCC
Valuescope.
CCC Valuescope has been expressly approved for use by regulators in some
states. In most states, there is no formal approval process for total loss
valuation products, but CCC Valuescope is indirectly affected by the actions of
insurance regulators because the Company's customers are subject to regulation.
Periodically, the Company or its customers receive inquiries from state
insurance regulators regarding various aspects of CCC Valuescope. Most such
inquiries are of a routine nature and are addressed in the ordinary course.
However, from time to time, individual state Departments of Insurance have taken
positions as to whether the use of CCC Valuescope valuations in compliance with
a state's claim handling regulations.
The Company is aware that in 2002 and 2003 the California Department of
Insurance advised some of the Company's customers (which management estimates to
be approximately 14% of the total revenue earned in 2003 from the Company's CCC
Valuescope valuation service) that their use of CCC Valuescope has not been in
compliance with applicable California insurance regulations with respect to a
particular component of the product's methodology. The Company believes the
product is, and has been, in compliance with the current California regulations.
On April 24, 2003, the California Department of Insurance formally adopted
new regulations, which, if implemented, would have required 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 were not valid.
The Plaintiffs in the suit also sought 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 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 implement its modified
methodology to be in compliance with those regulations.
RESEARCH AND DEVELOPMENT
For the years 2003, 2002 and 2001 we incurred research and development
costs of $6.3 million, $7.6 million and $13.0 million, respectively.
CERTAIN RISKS RELATED TO OUR BUSINESS
Set forth below and elsewhere in this Report and in other documents we file
with the SEC are certain risks and uncertainties that we believe could cause
actual results to differ materially from the results contemplated by the
forward-looking statements contained in this report.
WE MAY NOT BE ABLE TO SUCCESSFULLY DEVELOP NEW PRODUCTS AND SERVICES, WHICH MAY
ADVERSELY AFFECT OUR BUSINESS.
The markets in which we compete are increasingly characterized by
technological change. The introduction of competing products and services
incorporating new technologies could render some or all of our products and
services unmarketable. We believe that our future success depends on our ability
to enhance our current products and services and to develop new products and
services that address the increasingly sophisticated needs of our customers. As
a result, we have in the past and intend to continue to commit substantial
resources to product development and programming. The development of new
products and services may result in unanticipated expenditures and capital
costs, which may not be recovered in the event one or more of our products is
unsuccessful. Our failure to develop and introduce new or enhanced products and
services in a timely and cost-effective manner in response to changing
technologies or customer requirements would have a material adverse effect on
our business, financial condition and results of operations.
OUR ABILITY TO PROVIDE COLLISION ESTIMATING SERVICES TO OUR CUSTOMERS COULD BE
SEVERELY LIMITED IF OUR ACCESS TO DATA IS INTERRUPTED.
A substantial portion of the data utilized in our collision estimating
products is derived from the MOTOR Crash Estimating Guide, a publication of a
subsidiary of The Hearst Corporation. We have a license to use the MOTOR Crash
Estimating Guide data under an agreement with Hearst, which expires in 2021.
Hearst may terminate the license if any of the following events occur: (1) we
fail to make payment of license fees, royalties and other charges due under the
agreement; (2) we do not comply with the material terms and conditions of the
agreement; (3) we become bankrupt or insolvent and we are unable to perform our
obligations under the agreement; or (4) upon two years' notice, if Hearst
discontinues or abandons publication of the estimating guide.
We do not believe that we have access to an alternative database that
would provide comparable information. Any interruption of our access to the
MOTOR Crash Estimating Guide data could have a material adverse effect on our
business, financial condition and results of operations. For additional
information regarding our license with Hearst, see the section entitled
"Business - Intellectual Property and Licenses".
In addition, we license data used in the Recycled Parts Services database,
and in 2002, we entered into a data supply agreement, which expires in June of
2005, with a new provider of recycled parts data, Car-Part.com. Any interruption
of our access to the data contained in the Recycled Parts Services database
could have a material adverse effect on our business. There can be no assurance
that we will be able to renew this agreement on economic terms that are
beneficial to us, or at all.
IF WE ARE UNABLE TO PROTECT OUR TRADE SECRETS, INTELLECTUAL PROPERTY AND OTHER
PROPRIETARY INFORMATION, OUR ABILITY TO COMPETE EFFECTIVELY COULD BE ADVERSELY
IMPACTED.
We regard the technology underlying our products and services as
proprietary. We rely primarily on a combination of intellectual property laws,
patents, trademarks, confidentiality agreements and contractual provisions to
protect our proprietary rights. We have registered certain of our trademarks.
Our CCC Valuescope calculation process is not patented; however, the underlying
methodology and processes are trade secrets and are essential to our CCC
Valuescope business. Existing trade secrets and copyright laws afford us limited
protection. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our software, implement our proprietary
patented technology or obtain and use information that we regard as proprietary.
Policing unauthorized use of our software is difficult. There can be no
assurance that the obligations to maintain the confidentiality of our trade
secrets and proprietary information will effectively prevent disclosure of our
confidential information or provide meaningful protection for proprietary patent
rights and our confidential information, or that our trade secrets or
proprietary information will not be independently developed by our competitors.
There can be no assurance that our trade secrets, patent rights, copyrights or
proprietary information will provide competitive advantages or will not be
challenged or circumvented by our competitors. We may be required to litigate to
defend against claims of infringement, to protect our intellectual property
rights, which could result in substantial cost to, and diversion of efforts by,
us. There can be no assurance that we would prevail in any such litigation. If
we are unable to protect our proprietary rights in our intellectual property, it
could have a material adverse effect on our business, financial condition and
results of operations.
WE ARE INVOLVED IN LEGAL PROCEEDINGS THAT, IF ADVERSELY ADJUDICATED OR SETTLED,
COULD MATERIALLY IMPACT OUR FINANCIAL CONDITION.
We are currently involved in several legal proceedings that may result in
substantial payments by the Company. We currently are defendants in 11 class
action suits regarding CCC Valuescope. If we were to face a full court trial and
be held liable in any of the actions (or otherwise determine that it is in our
best interests to settle any of them), we could incur significant legal expenses
and be required to pay monetary damages (or settlement payments) that may have a
significant negative impact on our financial condition. See Note 27, "Legal
Proceedings" for further discussion.
WE HAVE A HISTORY OF OPERATING LOSSES AND OUR FUTURE PROFITABILITY IS UNCERTAIN,
WHICH MAY IMPACT OUR ABILITY TO CONTINUE OPERATIONS.
We have an accumulated net deficit from inception of approximately $36.8
million through December 31, 2003. Additionally, we failed to generate a profit
for the years 2001 and 2000. Losses in those years had resulted principally
from costs incurred in product acquisition and development, from servicing of
debt and from general and administrative costs. The costs exceeded our revenues
in most years prior to 2002. Although we increased our revenue in each of the
years since 1999 and generated operating income of $40.5 million and $37.3
million in 2003 and 2002, respectively, there can be no assurance that we will
be able to sustain this revenue growth or achieve or maintain profitability in
the future.
IF WE ARE UNABLE TO GENERATE SUFFICIENT CASH FLOW TO SERVICE OUR OBLIGATIONS OR
FIND ALTERNATIVE FINANCING SOURCES, OUR BUSINESS MAY BE ADVERSELY AFFECTED.
Our ability to make payments on our obligations and to fund planned
expenditures depends on our ability to generate future cash flow. This, to some
extent, is subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control. In addition, our
ability to borrow funds under our $30 million Credit Facility, depends on our
satisfying various covenants, which require us to maintain certain levels of
operating cash flow, debt coverage and net worth and limits our ability to make
certain investments. As of December 31, 2003, we were in compliance with all of
these covenants and had no advances under the Credit Facility. Our current
Credit Facility expires during the fourth quarter of 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.
We cannot assure you that our business will generate cash flow from
operations or that future borrowings will be available to us under the Credit
Facility or otherwise. In addition, we can give no assurances as to whether we
will be able to obtain additional financing from other sources. Inability to
obtain financing from alternative sources may have an adverse effect on our
financial position, results of operations and cash flow.
VARIOUS STATE LAWS AND REGULATIONS GOVERN THE USE OF CCC VALUESCOPE BY INSURANCE
COMPANIES.
Changes in the content or interpretation of state laws or regulations in a
way that restricts the use of CCC Valuescope by insurance companies could
restrict our ability to sell CCC Valuescope in certain jurisdictions or require
us to incur significant expenses, modify and maintain the product. In addition,
changes in interpretation of existing laws or regulations could expose the
Company or its customers to lawsuits or regulatory action relating to past usage
of the product. These consequences of changes in content or interpretation of
state laws or regulations may have a material adverse effect on our business,
financial condition and results of operations. See "Regulation" section of Item
1. Business.
IT MAY BECOME INCREASINGLY EXPENSIVE TO OBTAIN AND MAINTAIN LIABILITY INSURANCE.
We contract for insurance to cover a variety of potential risks and
liabilities. In the current market, insurance coverage is becoming more
restrictive and, when insurance coverage is offered, the deductible for which we
are responsible is larger. In light of these circumstances, it may become more
difficult to maintain insurance coverage at historical levels, or if such
coverage is available, the cost to obtain or maintain it may increase
substantially. This may result in our being forced to bear the burden of an
increased portion of risks for which we have traditionally been covered by
insurance, which could negatively impact our results of operations.
TERRORIST ACTS AND ACTS OF WAR MAY SERIOUSLY HARM OUR BUSINESS AND REVENUE,
COSTS AND EXPENSES AND FINANCIAL CONDITION.
Terrorist acts or acts of war may cause damage or disruption to CCC, our
employees, facilities, suppliers, or customers, which could significantly impact
our revenue, costs and expenses and financial condition. The potential for
future terrorist attacks, the national and international responses to terrorist
attacks or perceived threats to national security, and other acts of war or
hostility have created many economic and political uncertainties that could
adversely affect our business and results of operations in ways that cannot
presently be predicted.
ITEM 2. PROPERTIES
Our corporate office is located in Chicago, Illinois, where we lease two
spaces of a multi-tenant facility, one for approximately 104,000 square feet,
which expires in November 2008 and the second for approximately 37,000 square
feet, which expires at the end of February in 2004. In Glendora, California, we
lease approximately 42,000 square feet of a facility under a lease expiring in
June 2012, where a satellite development center and distribution center are
housed. We own a 50,000 square foot facility in Sioux Falls, South Dakota used
primarily for certain customer service and claims processing operations. During
2001, we vacated approximately 34,000 feet of a multi-tenant facility in Chicago
previously occupied by our discontinued DriveLogic segment under a lease
expiring in March 2006. We have subleased the premises through the end of the
term on the existing lease. In addition, we vacated facilities previously
occupied by CCC Consumer Services Inc. and CCC International, both of which were
shut down in 2001, and we are currently subleasing approximately 12,000 square
feet of our Sioux Falls facility. During 2003, we also entered into a lease,
expiring in September 2006, of approximately 12,000 square feet in Itasca,
Illinois for a customer service center. We believe that our existing facilities
are adequate to meet our requirements for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The information provided in Note 27 of the financial statements contained
in Item 15(a) 1 of this Form 10-K 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 early stages and is continuing. A trial
date has not yet been set for the matter by the Court.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the NASDAQ National Market under the symbol
"CCCG." The following table sets forth the high and low closing sales prices per
share of our common stock for the fiscal periods indicated:
2003 2002
-------------- --------------
HIGH LOW HIGH LOW
------ ------ ------ ------
First Quarter $21.60 $15.97 $ 9.42 $ 6.60
Second Quarter $18.19 $13.92 $14.29 $ 9.41
Third Quarter $16.76 $12.37 $13.99 $ 9.79
Fourth Quarter $17.20 $16.55 $20.35 $13.52
Our policy has been to retain cash to fund future growth. Accordingly,
since our initial public offering of common stock in August of 1996, we have not
paid any dividends. As of February 13, 2004, there were 26,524,059 shares of
common stock outstanding. There were 64 stockholders of record on February 13,
2004.
ITEM 6. SELECTED FINANCIAL DATA
Below are the Company's condensed consolidated statements of operations and
selected balance sheet information for the five years ended December 31, 2003.
This information should be read in conjunction with the Consolidated Financial
Statements, which are included elsewhere in this Annual Report on Form 10-K.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2003 2002 2001 2000 1999
----------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS:
Revenues . . . . . . . . . . . . . . . . . . . . $193,352 $191,860 $187,941 $184,641 $179,021
Expenses:
Operating expenses . . . . . . . . . . . . . . 151,825 153,688 175,768 181,018 160,751
Restructuring charges. . . . . . . . . . . . . 1,061 869 10,499 6,017 2,242
Litigation settlements . . . . . . . . . . . . - - 4,250 2,375 -
----------------------------------------------------
Operating income (loss). . . . . . . . . . . . . 40,466 37,303 (2,576) (4,769) 16,028
Interest expense . . . . . . . . . . . . . . . . (392) (708) (5,680) (3,135) (1,358)
Other income (expense), net. . . . . . . . . . . 272 455 (248) 5,101 412
Gain on exchange of investment securities, net . - - - 18,437 -
Loss on investment securities and notes. . . . . - - (28,267) - -
CCC Capital Trust minority interest expense. . . - (3,984) (1,371) - -
Equity in net losses of ChoiceParts investment . (21) (291) (2,486) (2,071) -
----------------------------------------------------
Income (loss) from continuing operations before
income taxes . . . . . . . . . . . . . . . . . 40,325 32,775 (40,628) 13,563 15,082
Income tax (provision) benefit . . . . . . . . . (14,285) (10,420) 18,329 (3,452) (7,352)
----------------------------------------------------
Income (loss) from continuing operations before
equity losses. . . . . . . . . . . . . . . . . 26,040 22,355 (22,299) 10,111 7,730
Equity in net losses of affiliates . . . . . . . - - (2,354) (15,650) (6,645)
----------------------------------------------------
Income (loss) from continuing operations . . . . 26,040 22,355 (24,653) (5,539) 1,085
Income (loss) from discontinued operations, net
of income taxes. . . . . . . . . . . . . . . . - 354 (5,972) (3,704) (333)
----------------------------------------------------
Net income (loss). . . . . . . . . . . . . . . . 26,040 22,709 (30,625) (9,243) 752
Dividends and accretion on mandatorily
redeemable preferred stock . . . . . . . . . . - - - - (2)
----------------------------------------------------
Net income (loss) applicable to common stock . . $ 26,040 $ 22,709 $(30,625) $ (9,243) $ 750
====================================================
INCOME (LOSS) PER COMMON SHARE-BASIC
Income (loss) from continuing operations . . . $ 0.99 $ 0.86 $ (1.12) $ (0.25) $ 0.05
Income (loss) from discontinued operations . . - 0.01 (0.27) (0.17) (0.02)
----------------------------------------------------
Net income (loss). . . . . . . . . . . . . . . . $ 0.99 $ 0.87 $ (1.39) $ (0.42) $ 0.03
====================================================
INCOME (LOSS) PER COMMON SHARE-DILUTED
Income (loss) from continuing operations . . . $ 0.94 $ 0.83 $ (1.12) $ (0.25) $ 0.05
Income (loss) from discontinued operations . . - 0.01 (0.27) (0.17) (0.02)
----------------------------------------------------
Net income (loss). . . . . . . . . . . . . . . . $ 0.94 $ 0.84 $ (1.39) $ (0.42) $ 0.03
====================================================
Weighted average shares outstanding:
Basic. . . . . . . . . . . . . . . . . . . . . 26,243 25,850 21,967 21,851 22,856
Diluted. . . . . . . . . . . . . . . . . . . . 27,655 26,904 21,967 21,851 23,162
SELECTED CONSOLIDATED BALANCE SHEET DATA:
Cash and marketable securities. . . . . . . . . $ 27,759 $ 20,200 $ 766 $ 912 $ 1,378
Working capital . . . . . . . . . . . . . . . . 14,287 (4,444) (20,256) (24,886) (3,868)
Total assets. . . . . . . . . . . . . . . . . . 86,735 67,843 62,194 94,688 84,549
Long-term debt, excluding current maturities. . - - 7,145 42,000 24,685
Stockholders' equity (deficit). . . . . . . . . 51,583 21,184 (6,811) 2,118 15,261
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read together with the Company's
consolidated financial statements and notes thereto, appearing elsewhere in this
Form 10-K. This item contains forward-looking statements that involve risks and
uncertainties. Actual results may differ materially from those indicated in such
forward-looking statements. Factors that may cause such a difference include,
but are not limited to, those discussed in "Item 1. Business - Certain Risks
Related to our Business."
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, net. Accounts receivable as presented in the
accompanying consolidated balance sheet are net of reserves for customer
allowances and doubtful accounts. We determine allowances for accounts
receivable based on specific identification of customer accounts requiring
allowances and the application of a predetermined percentage to the remaining
accounts receivable balances. Generally, we determine the allowance based on our
assessment of the realization of receivables using historical information and
current economic trends, including assessing the probability of collection from
customers. If there is a deterioration of a major customer's credit worthiness
or actual defaults are higher than our historical experience, the recoverability
of amounts due could be adversely affected.
Income Taxes. Deferred income taxes are recognized for the future tax
effects of temporary differences between financial and income tax reporting
using tax rates in effect for the years in which the differences are expected to
reverse. Such deferred income taxes primarily relate to the timing of
recognition of certain revenue and expense items, the timing of the
deductibility of certain reserves and accruals for income tax purposes. We
establish a tax valuation allowance to the extent that it is more likely than
not that the deferred tax assets will not be realizable against future taxable
income. During 2001 we recorded a net loss of $27.1 million on the write-off of
the ChannelPoint investment and note receivable, including accrued interest.
For tax purposes, $20.8 million of this loss was considered a capital loss,
which can only be offset with net capital gains. We believe that it is more
likely than not that the capital loss will not be realized; therefore, a
valuation allowance has been established for this item. We also have foreign
net operating losses from prior years related to our former CCC International
operations. We have established a valuation allowance for the full amount of
these foreign net-operating losses because realization of these assets is
doubtful.
We have considered future market growth, forecasted earnings, future
taxable income, and the mix of earnings in the jurisdictions in which we operate
and prudent and feasible tax planning strategies in determining the need for
valuation allowances. In the event we were to determine that we would not be
able to realize all or part of our net deferred tax assets in the future, an
adjustment to the deferred tax assets would be charged to earnings in the period
such determination is made. Likewise, if we later determine that it is more
likely than not that the deferred tax assets would be realized, the previously
provided valuation allowances would be reversed.
In 2002, the Company filed amended income tax returns to claim research and
experimentation tax credits applicable to the years 1998, 1999 and 2000 and
recorded a credit to income tax expense of $2.0 million, which was the Company's
best estimate of the amount of tax credits to be realized. The Company also
recorded research and experimentation credits of $0.4 million for 2002.
During the fourth quarter of 2003, the Company recorded an additional
research tax credit of $0.1 million. The Company also reviewed its tax reserves
in conjunction with the completion of the Internal Revenue Service tax audit for
the years 1999 to 2001 and recorded a favorable adjustment of $1.1 million.
Goodwill and Intangibles. 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 is 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, and 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.
The goodwill balance as of December 31, 2003 was $15.7 million. The balance
from the 1988 acquisition that included the CCC Valuescope service is $4.9
million and the remaining balance of $10.8 million represents the goodwill from
the Comp-Est acquisition completed during February 2003. See Note 4,
"Acquisition". We performed our annual impairment analysis during the second
quarter of 2003.
Intangible assets as of December 31, 2003 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. There have been no
events or changes in circumstances that indicate that the values of such assets
are not recoverable.
Software Development Costs. The Company expenses research and development
costs as they are incurred. The Company evaluates the establishment of
technological feasibility of its software products in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed." The Company sells
its software products in a market that is subject to rapid technological change,
new product development and changing customer needs. Accordingly, technological
feasibility of the Company's software products is generally not established
until the development of the software product is nearly complete. The Company
defines technological feasibility as the completion of a working model. The
period of time during which costs should be capitalized, from the point of
reaching technological feasibility until the time of general product release,
has historically been very short and, consequently, amounts subject to
capitalization have not been significant. Should our development process change
significantly the Company would reevaluate the impact of SFAS No. 86.
Fair Value of Financial Instruments. The carrying amount of our financial
instruments approximates their estimated fair value based upon market prices for
the same or similar type of financial instruments. We perform an impairment
review whenever events or changes in circumstances indicate that the carrying
value of these investments and notes receivable may not be recoverable. Factors
we consider important which could trigger an impairment review include market
conditions, valuations for similar companies, financial performance and a going
concern risk.
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.
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, 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.
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 the our annual and quarterly results,
along with key accounting policies and estimates, with the Audit Committee of
our Board of Directors.
2003 COMPARED WITH 2002
Operating Income. Operating income increased year over year by $3.2
million, to $40.5 million, in 2003, due to an increase in revenues of $1.5
million and a decrease in expenses of $1.7 million. Our operating margins
(operating income as a percentage of revenue), increased to 20.9% for the year
ended 2003 compared to 19.4% in 2002.
Revenues. Revenue by suites is as follows (dollars in thousands):
VARIANCE
2003 2002 INCREASE (DECREASE)
-------------------------------------------------------
CCC Pathways. . . . . . . . . $ 118,190 61.1% $ 116,231 60.6% $ 1,959 1.7%
CCC Valuescope. . . . . . . . 42,187 21.8 45,463 23.7 (3,276) (7.2)
Workflow Products . . . . . . 26,107 13.5 22,602 11.8 3,505 15.5
Information Services Products 1,708 0.9 1,134 0.6 574 50.6
Other Products and Services . 5,160 2.7 6,430 3.3 (1,270) (19.8)
-------------------------------------------------------
Total Revenue . . . . . . . $ 193,352 100.0% $ 191,860 100.0% $ 1,492 0.8%
=======================================================
Revenues from CCC Pathways increased for the year ended 2003 by $2.0
million, or 1.7%, compared to the same period of 2002. The automotive channel
continued to be the key growth driver in this suite as we benefited from our
first quarter 2003 acquisition of Comp-Est Inc. and both CCC Pathways and CCC
Pathways Digital Imaging sales in this channel remained strong. This growth was
partially offset as the insurance channel revenue was down versus the prior year
primarily due to lost volume of one customer. Contract renewal rates remain
strong with our existing customers and we are seeing increased demand in the
mid-market.
Revenues from CCC Valuescope decreased by $3.3 million, or 7.2%, for the
year ended December 31, 2003 compared to the prior year primarily as 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. In other cases, regulatory issues have had an impact, as
well as industry consolidation of the customer base. See "Regulation" section of
Item 1. Business.
Revenues from our workflow products increased in 2003 by $3.5 million, or
15.5%, compared to the prior year mainly due to the continued adoption of the
CCC Autoverse products. We continue to focus on the implementation and
acceptance process with our customers to help accelerate this suite's revenue
growth even further.
Revenue from information services increased $0.6 million, or 50.6%, due to
an increased number of subscriptions and at more favorable prices.
Revenues from our other products and services decreased by $1.3 million, or
19.8%, mainly attributable to a continued decrease in hardware revenue, as the
number of computer units leased by our customers has declined.
Operating Expenses. Operating expenses as a percentage of revenues are
summarized as follows (in thousands):
VARIANCE
2003 2002 INCREASE (DECREASE)
----------------------------------------------------
Revenues $193,352 100.0% $191,860 100.0% $ 1,492 0.8%
Production and Customer Support 31,866 16.5 28,376 14.8 3,490 12.3
Commissions, Royalties and Licenses 11,713 6.1 10,411 5.4 1,302 12.5
Selling, General and Administrative 68,089 35.2 77,449 40.4 (9,360) (12.1)
Depreciation and Amortization 7,923 4.1 9,069 4.7 (1,146) (12.6)
Product Development and Programming 32,234 16.7 28,383 14.8 3,851 13.6
Restructuring Charges 1,061 0.5 869 0.5 192 22.1
----------------------------------------------------
Total Operating Expenses $152,886 79.1% $154,557 80.6% $(1,671) (1.1)%
====================================================
Production and Customer Support. Production and customer support
increased by $3.5 million, or 12.3%, due to increased costs associated with the
acquired Comp-Est business and an investment in our technical support area to
move to a universal service representative model, which was completed during the
fourth quarter of 2003.
Commissions, Royalties and Licenses. Commissions, royalties and licenses
increased by $1.3 million, or 12.5%, due to additional license fees, which
resulted from the acquisition of repair facility customers through the Comp-Est
acquisition completed during the first quarter of 2003.
Selling, General and Administrative. Selling, general and
administrative expenses decreased by $9.4 million, or 12.1%, primarily as a
result of lower incentive compensation costs tied to business performance. The
reduced compensation costs reflect anticipated reductions in bonus payments of
approximately $6.6 million for 2003. The reductions represent adjustments made
to align projected payouts with our final financial results. We have also
continued to focus on controlling expenses, specifically in the management
information systems area including the consolidation of our data center
operations. The savings described above were also partially offset by operating
expenses related to the Comp-Est acquisition.
Depreciation and Amortization. Depreciation and amortization decreased
by $1.1 million, or 12.6%, as a result of fewer investments in internal-use
software and customer leased computer equipment as well as using fully amortized
software. This was partially offset by the amortization recorded on the
intangible assets acquired from the Comp-Est acquisition.
Product Development and Programming. Product development and programming
increased by $3.9 million, or 13.6%, due to development projects related to our
existing workflow and information products, as well as work being done under a
new multi-customer contract. In 2003, we expensed $0.6 million of research and
development funding made to a third-party software development company. We are
currently in the process of establishing a formal research and development
agreement.
Restructuring Charges. In 2002, we recorded an additional charge of $0.9
million related to the excess office space in Chicago, formerly occupied by its
DriveLogic business. The charge was incurred as a result of revising the
original expected future sublease income due to weak conditions of the real
estate market. During 2003, we recorded a final charge of $1.1 million to revise
the original expected future sublease income 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.
See Note 9, "Restructuring Charges."
Interest Expense. Interest expense decreased from $0.7 million in 2002
to $0.4 million in 2003 as a result of recording a favorable adjustment upon the
completion of the Internal Revenue Service tax audit. See Note 12, "Income
Taxes."
Minority Interest Expense. We recorded minority interest expense of $4.0
million for the year ended December 31, 2002, which was associated with the
issuance on February 23, 2001 of the Trust Preferred Securities to Capricorn
Investors III, L.P and represents Capricorn Investors III, L.P.'s share of CCC
Capital Trust's income. In October of 2002 we purchased the outstanding Trust
Preferred Securities from Capricorn, and as a result have not had any interest
expense relating to these securities since November 2002. See Note 17, "CCC
Capital Trust."
Equity in Net Losses of ChoiceParts. We recorded a charge of $0.3
million for the year ended December 31, 2002 related to our 27.5% share of the
losses in ChoiceParts compared to a charge of $21 thousand for 2003. See Note
7, "Investment in ChoiceParts, LLC."
Income Taxes. Income taxes increased from a provision of $10.4 million,
or 31.8% of income from continuing operations before taxes in 2002, to a tax
provision of $14.3 million, or 35.4% of income from continuing operations
before taxes, in 2003. The 2002 provision was offset by research tax credits of
$2.4 million. During the fourth quarter of 2003, the Company recorded an
additional research tax credit of $0.1 million. The Company also reviewed its
tax reserves in conjunction with the completion of the Internal Revenue Service
tax audit and recorded a favorable adjustment of $1.1 million.
2002 COMPARED WITH 2001
Operating Income. Operating income increased year over year by $39.9
million, to $37.3 million, in 2002, due to a decrease in expenses of $36.0
million and an increase in revenues of $3.9 million. Our operating margins
(operating income (loss) as a percentage of revenue) increased to 19.4% for the
year ended 2002 compared to (1.4%) in 2001. The increase in operating income and
margin for the year ended 2002 was due primarily to a continued improvement in
profitability resulting from our restructuring, which occurred in June 2001.
Operating loss for the year ended 2001 included a restructuring charge of
$(10.5) million, an estimated charge for settlement of a lawsuit related to CCC
Valuescope of $(4.3) million and an operating loss of $(3.4) million for CCC
International, which was shut down in June 2001.
Revenues. Revenues for the year ended December 31, 2002 of $191.9 million
were $3.9 million, or 2.1%, higher than the same period of 2001. Revenues from
our U.S. business increased $5.6 million, or 3.0% in 2002, compared to the same
period last year.
Revenue by major product and service groups are as follows (in thousands):
VARIANCE
2002 2001 INCREASE (DECREASE)
-----------------------------------------------------
CCC Pathways . . . . . . . . . . . . . $116,231 60.6% $109,568 58.3% $ 6,663 6.1%
CCC Valuescope . . . . . . . . . . . . 45,463 23.7 47,977 25.6 (2,514) (5.2)
Workflow Products. . . . . . . . . . . 22,602 11.8 19,706 10.5 2,896 14.7
Information Services Products. . . . . 1,134 0.6 828 0.4 306 37.0
Other Products and Services. . . . . . 6,430 3.3 8,180 4.4 (1,750) (21.4)
-----------------------------------------------------
Total Revenue from U.S. Operations . 191,860 100.0 186,259 99.1 5,601 3.0
Total Revenue from CCC International - - 1,682 0.9 (1,682) (100.0)
-----------------------------------------------------
Total Revenue. . . . . . . . . . . . $191,860 100.0% $187,941 100.0% $ 3,919 2.1%
=====================================================
Revenues from our CCC Pathways' products increased for the year ended 2002
by $6.7 million, or 6.1%, compared to the same period of 2001. This was
primarily led by an increase in the number of new automotive collision repair
customers, an increase in units from existing collision repair facilities and an
increase in the number of CCC Pathways Digital Imaging product units used by our
automotive collision repair customers.
Revenues from CCC Valuescope decreased by $2.5 million, or 5.2%, from the
year ended December 31, 2001 compared to the same period of 2002 as a result of
lower transaction volumes due primarily to a customer switching to an in-house
solution.
Revenues from our workflow products, including our EZNet communications
network, our Pathways Quality Advisor, QAAR Plus and our CCC Autoverse products,
increased in 2002 by $2.9 million, or 14.7%, compared to the same period of
2001. This was mainly due to increased transaction volume from several new
customers and existing insurance companies adding new direct repair transactions
to the EZNet communications network.
Revenue from information services increased $0.3 million, or 37.0%, due to
an insurance customer adopting ClaimScope Navigator in 2002.
Revenues from our other products and services, which includes the CARS
Direct service and the leasing of computer hardware, decreased by $1.8 million,
or 21.4%. The decrease was mainly attributable to a decrease in transaction
volume related to the CARS Direct service, a decrease in the number of hardware
units leased and a renegotiated price for a customer leasing hardware.
Operating Expenses. Operating expenses as a percentage of revenues are
summarized as follows (in thousands):
VARIANCE
2002 2001 INCREASE (DECREASE)
-----------------------------------------------------
Revenues $191,860 100.0% $187,941 100.0% 3,919 2.1%
Production and Customer Support 28,376 14.8 32,498 17.3 (4,122) (12.7)
Commissions, Royalties and Licenses 10,411 5.4 10,129 5.4 282 2.8
Selling, General and Administrative 77,449 40.4 90,892 48.4 (13,443) (14.8)
Depreciation and Amortization 9,069 4.7 11,820 6.3 (2,751) (23.3)
Product Development and Programming 28,383 14.8 30,429 16.2 (2,046) (6.7)
Restructuring Charges 869 0.5 10,499 5.6 (9,630) (91.7)
Settlements - - 4,250 2.3 (4,250) (100.0)
-----------------------------------------------------
Total Operating Expenses $154,557 80.6% 190,517 101.4% (35,960) (18.9)%
=====================================================
Production and Customer Support. Production and customer support
decreased from $ 32.5 million, or 17.3% of revenue, to $28.4 million, or 14.8%
of revenue. The year-over-year decrease was due to a decrease of $1.5 million as
a result of our shut down of CCC International, $1.3 million due to lower
headcount and associated costs related to improved efficiency in the customer
support area, including the consolidation of certain customer support functions
and $0.9 million due to renegotiated reduced rates for telecommunication,
service bureau and network costs.
Commissions, Royalties and Licenses. Commissions, royalties and licenses
increased from $10.1 million, or 5.4% of revenues, to $10.4 million, or 5.4%
of revenues. These expenses remained relatively stable year-over-year.
Selling, General and Administrative. Selling, general and
administrative decreased from $90.9 million, or 48.4% of revenues, to $77.4
million, or 40.4% of revenues. These expenses decreased primarily as a result
of the benefits of the restructuring in 2001 and profit improvement initiatives
in 2002. Other contributing factors were lower communication expenses, lower web
hosting fees and reduced conferences held in 2002.
Depreciation and Amortization. Depreciation and amortization decreased
from $11.8 million, or 6.3% of revenues, to $9.1 million, or 4.7% of revenues.
Depreciation and amortization decreased as a result of fewer investments in
internal use software and customer leased computer equipment and our adoption in
January 2002 of SFAS 142, which ceased the amortization of goodwill. See Note 2,
"Significant Accounting Policies".
Product Development and Programming. Product development and programming
decreased from $30.4 million, or 16.2% of revenue, to $28.4 million, or 14.8%
of revenue. The decrease was due to lower development expenses, resulting from
the consolidation of our DriveLogic business unit and the associated
reduction-in-force partially offset by hiring additional staff and additional
consulting work for increased product development efforts.
Restructuring Charges. In June 2001, we announced a set of strategic
decisions as part of a company-wide effort to improve profitability. As a
result, we recorded a restructuring charge of $2.8 million, which consisted
primarily of severance and outplacement costs related to the termination of 130
employees.
In addition, we recorded a charge of $3.4 million in June 2001 related to
our decision to shut down CCC International in order to focus on U.S. market
opportunities. This charge consisted of a write-off of goodwill of $1.1
million, contractual commitments (including office space) of $0.5 million and
severance and related costs to terminate 39 employees of $1.8 million.
During 2001, we also recorded a charge of $4.3 million to write off excess
office space in Chicago, formerly occupied by DriveLogic. This charge was
recorded after a complete review of our short-term and long-term facility
requirements. The charge included future rent commitments of $5.4 million and
the write-off of leasehold improvements of $2.1 million, net of expected future
sublease income of $3.2 million. In 2002, the Company recorded an additional
$0.9 million charge to revise the estimated future sublease income from $3.2
million to $2.3 million as a result of the current weak conditions of the real
estate market. The lease for this office space expires March 31, 2006. See Note
9, "Restructuring Charges."
Litigation Settlement. We recorded a charge of $4.3 million, net of an
expected insurance reimbursement of $2.0 million, in 2001 as an estimate of the
amount we will contribute towards a potential settlement that would resolve
potential claims arising out of approximately 30% of the total transaction
volume of CCC Valuescope during the period covered by the lawsuits. This charge
was based on Statement of Financial Accounting Standards No. 5 "Accounting For
Contingencies" that establishes standards of financial accounting and reporting
for loss contingencies. As settlement negotiations have progressed, the number
of participants and the cost of the proposed settlement have fluctuated. Based
on the current status of those discussions, CCC anticipates completing an
initial settlement that would eliminate the viability of class claims in 7 of
the 11 class actions, pending in the trial and appellate courts against the
Company and certain of its customers related to CCC Valuescope and would resolve
potential claims arising out of approximately 17% of the Company's total
transaction volume, for valuations involving first party claims, during the time
period covered by the lawsuits. The Company estimates that its contribution
toward such a settlement would be approximately $2.7 million, net of the
expected insurance reimbursement of $2.0 million. As for the remainder of the
original $4.3 million charge, we continue to believe the recorded reserve is
necessary and appropriate. The Company currently anticipates that the proposed
settlement would include a resolution of any potential claims for
indemnification or contribution by its customers relating to the transactions
covered by the settlement. 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, 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 Valuescope
transaction volume could be settled on comparable terms. See discussion in Note
27, "Legal Proceedings."
Interest Expense. Interest expense decreased from $5.7 million in 2001 to
$0.7 million in 2002. A lower level of borrowings and a decrease in interest
rates drove the decrease from 2001 as well as lower amortization of deferred
financing fees related to our Credit Facility. The lower level of borrowings was
due primarily to the utilization of net proceeds of $18.1 million from a rights
offering in December 2001 to reduce our outstanding debt, in addition to cash
generated from operations associated with increased profitability. In April
2002, we repaid the remaining balance on our Credit Facility and have had no
borrowings since that time.
Loss on Investment Securities and Notes. We recorded a loss in the second
quarter of 2001 of approximately $27.1 million in connection with the write-off
of the investment in ChannelPoint, including a $4.9 million allowance related to
a note receivable plus accrued interest. This charge was based on our
evaluation of the collectibility of the note and the review of our carrying
value of the ChannelPoint common stock. See Note 5, "Investment in
InsurQuote/ChannelPoint." In addition, we recorded a loss in 2001 of
approximately $1.1 million for the write-off of our investment in Info4cars.com
Inc., a provider of vehicle history reports and other products ("Info4cars"),
including a $0.8 million allowance related to notes receivable plus accrued
interest. This charge was based on a review of Info4cars' financial statements
and representations from Info4cars' management. Both notes were settled and were
no longer outstanding as of December 31, 2002.
Minority Interest Expense. We recorded minority interest expense of $4.0
million for the year ended 2002 versus $1.4 million for the same period of 2001.
The minority interest expense was associated with the issuance on February 23,
2001 of the Trust Preferred Securities to Capricorn Investors III, L.P and
represents Capricorn Investors III, L.P.'s share of CCC Capital Trust's income.
In October of 2002 we purchased the outstanding Trust Preferred Securities from
Capricorn, and as a result have not had any interest expense relating to these
securities since November 2002. See Note 17, "CCC Capital Trust." Assuming the
Trust Preferred Securities had not been repurchased early, the following is the
Company's estimate of the amount of minority interest expense that would have
been incurred in the year's 2003 through the scheduled maturity date of the
Trust Preferred Securities in 2006 (in thousands):
TOTAL 2003 2004 2005 2006
------------------------------------
Minority interest expense savings $7,607 $2,107 $2,392 $2,695 $ 413
Equity in Net Losses of ChoiceParts. We recorded a charge of $0.3 million
for the year ended December 31, 2002 related to our 27.5% share of the losses in
ChoiceParts compared to a charge of $2.5 million for the same period in 2001.
ChoiceParts was established in May 2000. See Note 7, "Investment in ChoiceParts,
LLC."
Income Taxes. Income taxes increased from a benefit of $18.3 million, or
45.1% of losses from continuing operations before taxes in 2001, to a tax
provision of $10.4 million, or 31.8% of income from continuing operations
before taxes, in 2002. The tax benefit of $18.3 million, in 2001, reflects the
tax effect of the shut down of CCC International of $13.9 million, the
ChannelPoint allowance recorded of $2.4 million and other pre-tax losses of $2.0
million. The 2002 increase was mainly attributable to pretax income partially
offset by research and experimentation tax credits of $2.4 million.
Equity in Net Losses of Affiliates. In conjunction with our reduction of
investments in and closing of CCC International in May 2001 we ceased funding
the operating losses of Enterstand. As a result, the operations of Enterstand
ceased.
Discontinued Operations. Income from discontinued operations, the former
CCC Consumer Services segment, and net of income taxes increased from a loss of
$6.0 million in 2001 to income of $0.4 million in 2002. See Note 10,
"Discontinued Operations."
QUARTERLY RESULTS OF OPERATIONS/SUPPLEMENTARY FINANCIAL INFORMATION
The following table sets forth unaudited condensed consolidated statements
of operations for the quarters in 2003 and 2002. These condensed quarterly
statements of operations have been prepared on a basis consistent with the
audited financial statements. They include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the quarterly
results of operations, when such results are read in conjunction with the
audited consolidated financial statements and the notes thereto. The operating
results for any quarter are not necessarily indicative of results for any future
period. Amounts are in thousands, except for per share data.
Three Months Ended
------------------------------------------------------------------------------------------
MAR.31, JUNE 30, SEPT.30, DEC.31, MAR.31, JUNE 30, SEPT.30, DEC.31,
2002 2002 2002 2002 2003 2003 2003 2003
------------------------------------------------------------------------------------------
Revenues. . . . . . . . . . . . . . . $ 47,500 $ 48,178 $ 47,797 $ 48,385 $ 47,732 $ 48,097 $ 48,621 $ 48,902
Operating expenses. . . . . . . . . . (38,290) (38,978) (38,641) (37,779) (37,953) (38,087) (37,944) (37,841)
Restructuring charges . . . . . . . . - - (869) - - (1,061) - -
------------------------------------------------------------------------------------------
Operating income. . . . . . . . . . . 9,210 9,200 8,287 10,606 9,779 8,949 10,677 11,061
Interest income (expense) . . . . . . (228) (168) (160) (152) (222) (165) (169) 164
Other income (expense). . . . . . . . 217 (7) 76 169 89 67 45 71
CCC Capital Trust minority interest
expense. . . . . . . . . . . . . . (448) (461) (475) (2,600) - - - -
Equity in income (loss) of
ChoiceParts. . . . . . . . . . . . (292) (50) 47 4 (6) 12 (150) 123
------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes . . . . . . . 8,459 8,514 7,775 8,027 9,640 8,863 10,403 11,419
Income tax provision. . . . . . . . . (3,243) (3,218) (754) (3,205) (3,669) (3,369) (4,052) (3,195)
------------------------------------------------------------------------------------------
Income from continuing operations . . 5,216 5,296 7,021 4,822 5,971 5,494 6,351 8,224
Income from discontinued operations,
net of income taxes. . . . . . . . - - 354 - - - - -
------------------------------------------------------------------------------------------
Net income. . . . . . . . . . . . . . $ 5,216 $ 5,296 $ 7,375 $ 4,822 $ 5,971 $ 5,494 $ 6,351 $ 8,224
==========================================================================================
PER SHARE DATA:
Net Income per common share -
basic. . . . . . . . . . . . . $ 0.20 $ 0.21 $ 0.28 $ 0.19 $ 0.23 $ 0.21 $ 0.24 $ 0.31
==========================================================================================
Net Income per common share -
diluted. . . . . . . . . . . . $ 0.20 $ 0.20 $ 0.27 $ 0.17 $ 0.22 $ 0.20 $ 0.23 $ 0.30
==========================================================================================
Weighted average shares outstanding:
Basic. . . . . . . . . . . . . . . . 25,699 25,826 25,873 26,000 26,156 26,224 26,256 26,338
Diluted. . . . . . . . . . . . . . . 26,138 26,767 26,904 27,574 27,741 27,630 27,484 27,752
OUTLOOK FOR 2004
As part of our fourth quarter earnings release, we provided updated
guidance for the first quarter and full year of 2004.
Revenue growth for the first quarter is expected to be in the 3 to 5
percent range with growth rates for the full year at least that of the first
quarter 2004. Operating income for the first quarter should be in the $10
million range, and full year operating income is expected to be in the $45 to
$47 million range. First quarter operating margins are expected to be lower
than reported in the second half of 2003, primarily as a result of increased
compensation costs tied to business performance, increased insurance expenses,
and the timing of certain planned sales expenses. Margins are expected to
increase throughout the year to a full year range of 22 to 23 percent. Earnings
per share for the full year is expected to be in the $1.00 to $1.04 per share
range. Earnings per share for the first quarter is expected to be in $0.21 to
$0.22 per share range. (Using a fully diluted share base of 27.7 million
shares)
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 2003, net cash provided by operating
activities was $25.0 million. Proceeds received from the exercise of stock
options were $1.8 million and proceeds received from the repayment of notes due
from the Chief Executive Officer and Chairman of the Board were $1.5 million.
The Company used $13.2 million to complete the acquisition of Comp-Est Inc.
during the first quarter of 2003, $7.5 million for the purchase of equipment and
software and $7.0 million for the purchase of short-term investments.
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 have 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 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 will be sufficient to meet our liquidity needs for
the foreseeable future. Our current credit facility expires during the fourth
quarter of 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.
OFF-BALANCE SHEET ARRANGEMENTS
We are not party to any transactions, arrangements and other relationships
with unconsolidated entities or other persons that are reasonably likely to have
a current or future material effect on our financial condition, results of
operations, liquidity, capital expenditures or capital resources. In the normal
course of business, we are party to a variety of agreements pursuant to which we
may be obligated to indemnify the other party with respect to certain matters.
We evaluate estimated losses for such indemnifications on a regular basis. To
date, we have not encountered material costs as a result of such obligations,
and we do not currently believe that we are likely to incur any material costs
relating to such indemnifications. See Note 2, "Significant Accounting
Policies."
EFFECTS OF TRANSACTIONS WITH RELATED AND CERTAIN OTHER PARTIES
In 2000, the Company received a promissory note from the Chief Executive
Officer and Chairman of the Board in the amount of $0.2 million to exercise
options granted to him by the Company. In 2002, the Company received a second
promissory note from the same officer in the amount of $1.2 million, accruing
interest at 6.75%, for the purchase of 192,000 treasury shares at a price of
$6.25 per share, which was the fair value of the Company's stock at that date.
During the second quarter of 2003, both notes, along with accrued interest, were
repaid in full. As of December 31, 2003, there were no notes receivable from
officers.
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 annually in the
form of cash. The fair value of the restricted stock on the date of grant in
2003 was approximately $0.2 million. Total compensation expense recognized in
relation to the restricted stock issued for the year ended December 31, 2003,
was approximately $16 thousand.
CONTRACTUAL OBLIGATIONS
The following summarizes our significant contractual obligations and
commitments as of December 31, 2003 (in thousands):
LESS THAN 1-3 4-5 MORE THAN
TOTAL 1 YEAR YEARS YEARS 5 YEARS
--------------------------------------------------
Operating lease obligations $ 35,464 12,430 17,379 5,655 -
Capital lease obligations . $ 158 158 - - -
Long-term debt obligations. $ - - - - -
Purchase obligations. . . . $ - - - - -
Other long-term liabilities $ 3,923 859 2,074 990 -
--------------------------------------------------
Total . . . . . . . . . . . $ 39,545 $ 13,447 $ 19,453 $ 6,645 $ -
==================================================
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Due to the shut down of our operations in the United Kingdom in 2001, we no
longer believe our financial results will be affected by factors such as changes
in foreign currency exchange rates or weak economic conditions in the foreign
markets.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required with respect to
this Item 8 are listed in Item 15(a)(1) and 15(a)(2) included elsewhere in this
filing.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. 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 (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 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 investments in certain
unconsolidated entities. As the Company does not control or manage these
entities, its disclosure controls and procedures with respect to such entities
are necessarily substantially more limited than those it maintains with respect
to its consolidated subsidiaries.
Within 90 days prior to the date of 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.
Changes in internal controls
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be included in our definitive
proxy statement, which is to be filed with the Securities and Exchange
Commission within 120 days of the Company's fiscal year ended December 31, 2003
and such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be included in our definitive
proxy statement, which is to be filed with the Securities and Exchange
Commission within 120 days of the Company's fiscal year ended December 31, 2003
and such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be included in our definitive
proxy statement, which is to be filed with the Securities and Exchange
Commission within 120 days of the Company's fiscal year ended December 31, 2003
and such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be included in our definitive
proxy statement, which is to be filed with the Securities and Exchange
Commission within 120 days of the Company's fiscal year ended December 31, 2003
and such information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item will be included in our definitive
proxy statement, which is to be filed with the Securities and Exchange
Commission within 120 days of the Company's fiscal year ended December 31, 2003
and such information is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Index to Consolidated Financial Statements and Schedules
1. Consolidated Financial Statements
PAGE
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Report of Independent Auditors . . . . . . . . . 29
Consolidated Financial Statements:
Consolidated Statements of Operations . . . . . 30
Consolidated Balance Sheets . . . . . . . . . . 31
Consolidated Statements of Cash Flows . . . . . 32
Consolidated Statements of Stockholders' Equity 34
Notes to Consolidated Financial Statements. . . 35
2. Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts . . 60
All other schedules have been omitted because the required
information is included in the financial statements or notes
thereto or because they are not required.
3. Exhibits
The exhibits required by this item are set forth
on the exhibit index attached hereto. . . . 61
(b) Reports on Form 8-K
A report on Form 8-K, dated November 18, 2003, was filed on
November 18, 2003, announcing that a notice was sent to Company's
directors and executive officers informing them that the CCC
Information Services Inc. 401(k) Retirement Savings & Investment Plan
was moving to a new service provider and that they were prohibited
from engaging in any transactions in equity securities of the Company
acquired in connection with service to or employment with the Company
during that transition.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors