ITEM 1. BUSINESS
ORGANIZATION
CCC Information Services Group Inc. ("Company") (formerly known as InfoVest Corporation), through its wholly owned subsidiary CCC Information Services Inc. ("CCC"), is a supplier of automobile claims information and processing services, claims management software and communication services. The Company's services and products enable automobile insurance company, automobile dealers and collision repair facility customers to improve efficiency, manage costs and increase consumer satisfaction in the management of automobile claims and restoration.
As of December 31, 1998, White River Ventures Inc. ("White River") held approximately 30.5% of the total outstanding common stock of the Company. As a result of White River's substantial equity interest and 51% voting power, including rights established through its ownership interest in the Company's Mandatory Redeemable Series E Preferred Stock, the Company is a consolidated subsidiary of White River.
On June 30, 1998, the White River Corporation, the sole shareholder of White River, was acquired in a merger with 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 will act as investment manager with respect to the investment of White River in the Company.
BUSINESS SUMMARY
The principal services and products offered by the Company automate the process of evaluating and settling both total loss and repairable automobile claims. When a vehicle cannot be repaired, the Company's vehicle valuation services and products, primarily TOTAL LOSS, provide insurance companies with the ability to effect total loss settlements on the basis of market-specific vehicle values. When a vehicle is repairable, the Company's collision estimating services and products, principally EZEST and PATHWAYS, provide insurance appraisers and collision repair facilities with up-to-date pricing, interactive decision support and computer-assisted logic to produce accurate collision repair estimates. The Company's Consumer Processing Services Division provides claims outsourcing services and products including ACCESS, a vehicle restoration and management service, CARS, a car rental management service and complete outsourced auto claims service. The Company offers a communication services network, EZNET, which connects insurers, appraisers and collision repair facilities. The Company's PATHWAYS workflow management software is designed to integrate each of the Company's product offerings on a common platform with a common graphical user interface, facilitating the learning of new applications while providing the Company's customers with a broader tool set for claims completion. In 1999, the Company introduced information and software services to address the needs of auto casualty claims and underwriting. The Company has also started to service the claims market in Europe by entering the U.K. market. The Company's services and products represent an integrated solution, combining information, claims management software and secure communication systems to improve the efficiency of the automobile claims process.
The Company's customers include Automobile insurance companies and collision repair facilities. The Company's core competencies include collection and processing of claims and automobile valuation and repair data, the collection and processing of data related to auto insurance pricing and underwriting, development of client-server, object-oriented claims and collision repair software products, communications network management, customer service and the workflow processes of automobile insurance claims.
The Company sells its services and products to insurance companies through a direct sales force. The Company contracts with independent sales representatives to sell its products to collision repair facilities. Over 60% of the Company's revenue for 1998 was for services and products sold pursuant to contracts, which generally have multi-year terms. A substantial portion of the Company's remaining revenue represented sales to customers that have been doing business with the Company for many years. The Company's services and products are generally sold under multi-year contracts either on a monthly subscription or a per transaction basis. Of the Company's ten largest customers in the Insurance Division with multiyear contracts, five are due for renewal in 1999, representing 19% of the Insurance Division revenue.
OVERVIEW OF THE U.S. AUTOMOBILE INSURANCE CLAIMS PROCESS
Automobile claims generally involve three types of participants: automobile insurance companies, consumers and service providers, such as collision repair facilities and attorneys. The interaction among these parties in the processing of a claim can be referred to as the "automobile claims industry." The Company believes that the claims process has historically been inefficient and contentious for the participating parties due, in part, to the lack of independently verifiable claims data and inefficient communications networks.
THE U.S. AUTOMOBILE INSURANCE INDUSTRY
Of the companies offering private passenger automobile insurance in the United States, the twenty largest providers dominate the market for automobile insurance premiums. Insurance companies compete principally on the basis of price, marketing, consumer satisfaction and claims paying ability. State agencies closely regulate the product offerings, claims processes and the premium structure of insurance companies. In addition, the laws of many states require motorists to carry liability insurance at specified minimum levels.
The automobile insurance industry is changing rapidly. The automobile insurance marketplace is experiencing price constraints as a result of increasing competition and regulatory activity. At the same time, policy holders are demanding higher levels of customer service. The growing complexity and sophistication of automobile design and engineering is increasing the actual repair cost (referred to in the automobile claims industry as "severity") of collision claims. In addition, the personal injury component of automobile insurance claims is rising, in part, as a result of the increasing frequency of, and magnitude of, claims involving alleged bodily injury, including soft-tissue claims. Competitive pressures and resistance by policy holders and regulators to premium increases are causing insurance companies to focus on managing costs.
The Company believes that the insurance industry's focus on cost management has been accompanied by an increasing recognition that it is easier and more cost-effective to retain an existing policy holder than to lure a new customer away from a competitor. Dissatisfaction with the claims handling process is a frequently cited cause of policy non-renewal.
THE COLLISION REPAIR INDUSTRY
The collision repair industry, which has historically been extremely fragmented, is consolidating. Most collision repair facilities are owner-operated, single-location businesses which focus on a local market. The Company estimates that 20 to 25 thousand collision repair facilities have annual revenues in excess of $300 thousand. These facilities tend to be larger, better capitalized and increasingly reliant on professional
and sophisticated management who are adopting new technology and wholesale marketing techniques to compete.
The costs to operate a collision repair facility have risen substantially over the past decade. Modern automobile designs coupled with extensive environmental regulations are forcing repair facilities to make significant capital investments in increasingly sophisticated equipment and better training. At the same time, insurance companies are looking to collision repair facilities to assist in cost containment.
Because a substantial portion of collision repair facility revenue is sourced from insurance companies, collision repair facility owners are increasingly shifting their marketing efforts from consumer-oriented advertising to wholesale marketing and insurance company referrals. For example, many collision repair facilities are seeking to capitalize on insurance industry-driven trends such as the growth in direct repair programs. A direct repair program, or DRP, allows an insured whose automobile is involved in a collision to have the repair performed within a network of approved repair facilities. To participate in DRPs with major insurance companies, collision repair facilities must meet minimum standards for equipment, training and facilities. To ensure continued satisfaction at both the referring insurance company and consumer level, collision repair facilities must seek ways to improve productivity and optimize the workflow of the automobile repair process. To achieve these goals, collision repair facilities are making substantial investments in capital equipment and computer technology.
THE AUTOMOBILE CLAIMS PROCESS
Insurance companies generally handle automobile physical damage claims in one of three ways: in-house staff appraisals, direct repair programs and independent adjustments.
STAFF APPRAISAL. The insurance industry employs staff appraisers and claims representatives who, the Company estimates, handle most automobile claims. This estimate is based on the Company's claims experience, and interviews with its large insurance company customers. Staff appraisers handle a broad range of claims tasks, including appraisal, claims supplements, police reporting, total loss files, salvage processing and settlement payments. Based on the Company's internal estimates, staff appraisers typically handle twelve or more claims per day when in a drive-in facility and three to five claims per day when in the field. The Company believes that most insurance company staff appraisers use collision estimating software to prepare collision repair estimates.
DIRECT REPAIR PROGRAMS. Seventeen of the top twenty automobile insurers, including each of the five largest, offer some form of direct repair program. Based on the Company's interviews with its insurance company customers, the fastest-growing method for handling automobile claims is through a DRP. The Company believes that DRPs present significant opportunities to both insurance companies and collision repair facilities to increase the satisfaction of their customers. By eliminating several days from the claims process, insurers utilizing DRPs reduce replacement rental car expense and eliminate the costs associated with dispatching an adjuster to appraise each vehicle. An automated DRP ensures accurate estimates, facilitates the use of alternate replacement parts and increases the productivity of auditors and reinspectors. The Company estimates that adjusters who formerly completed only three to five estimates per day under a staff appraisal program can review 20 to 25 claims per day under a DRP. Participating collision repair facilities gain volume and efficiency and reduce disputes with consumers and insurance companies.
INDEPENDENT ADJUSTMENT. Based on the Company's interviews with its insurance customers, the Company estimates that independent claims adjusters handle 15% to 22% of all automobile claims. Independent adjusters offer their appraisal skills to a variety of insurance companies in a specific geographic location. Insurers typically outsource claims to independent adjusters where their market coverage does not justify hiring local staff or when the volume of work exceeds local capacity. The Company estimates that approximately half the independent adjusters that handle auto claims use automated collision estimating systems.
NEEDS AND OPPORTUNITIES IN THE AUTOMOBILE CLAIMS PROCESS
The Company believes trends in the automobile insurance industry create several identifiable needs. First, automobile insurers need to increase consumer satisfaction through faster, more efficient claims handling procedures. Second, insurance companies need to improve working relationships with their primary service providers through the exchange of auditable data and improved communication. Third, insurers need to integrate emerging technologies into their legacy mainframe hardware and software systems. Finally, smaller insurance companies need to become cost competitive with the major insurers by adopting solutions which provide economies of scale benefits.
Trends in the collision repair industry also present collision repair facilities with several needs and opportunities. First, repair facilities need to secure a steady supply of customers through efficient marketing and greater connectivity to insurance companies. Second, repair facilities need to improve their operating efficiency, business management and repair processing through affordable information and decision making tools.
The Company believes that improvements in the automobile claims process will require that participants have ready access to data, decision making tools and efficient communications. As a result, there is a need for integrated, efficient solutions in the appraisal, repair and settlement processes which will speed repairs, assure consumer satisfaction and save money.
OVERVIEW OF THE EUROPEAN AUTOMOBILE INSURANCE CLAIMS PROCESS
THE EUROPEAN AUTOMOBILE INSURANCE INDUSTRY
The European automobile insurance market continues to consolidate rapidly with the emergence of a number of pan-European insurance groups with major operating companies in all European states. Across the market the twin pressures of price and customer service continue to force major change. There is now a general acceptance among insurers that they can increase efficiency in many aspects of claims management and this has led to an increasing focus on the possibilities of outsourcing claims operations in totality or in part. As a consequence, there is a rapidly emerging market for claims outsourcing focusing on utilizing market know how and information technology. The market, in general, has a very conservative view of technology; the use of effective management information and decision support tools has historically been very limited and represents a major opportunity.
The actual size of the market for these providers varies significantly territory by territory, driven by local market and legal conditions. However, in 1999, there will be over 34 million motor claims across Europe and at today's level of outsourcing, the Company believes this equates to a $700 million market. All the Company's forecasts suggest this market will enjoy near double digit growth per annum over the next five years. The opportunity exists not only to supply the outsourcing services in totality, but also the individual tool components of the offer.
THE COLLISION REPAIR INDUSTRY
As in the U.S., the collision repair industry is consolidating rapidly and moving towards larger more capital intensive units and repairer chains. However, across Europe there are still over 100,000 repair facilities. The situation in the United Kingdom market is typical of the major European markets; the number of repairers has halved in the last 7 years. In the future, the Company believes the market will be dominated by large, factory repair environments that deliver consistent customer service at the lowest cost to repair. These repair facilities will handle increasingly large components of the claims process and will have direct supply relationships with only one or two insurance companies.
The emergence of these deep relationships will mean that insurance company's actively deal with fewer and fewer repairers. The Company believes the current process in which insurance company's are
downsizing their direct repair networks reflects this trend. In order to service insurance company relationships, repair facilities are investing heavily in computer technology.
THE AUTOMOBILE CLAIMS PROCESS
Within the automobile claim, the vehicle inspection/ repair cost audit is seen as critical in driving down cost for the insurer. Currently, insurers use a number of methods to manage this process:
PHYSICAL INSPECTION. The insurance company will physically inspect vehicles to estimate repair costs. These inspections are carried out by the insurance company's staff, or Independent inspectors. This process is labor intensive and costly relative to the overall cost of the claim. Most companies operating in this area will use collision estimating software and some form of network data capture. The use of approved repairer networks assists in minimizing the number of inspection nodes. Insurance companies are constantly reviewing the cost of internal versus third party inspection. There is a discernible trend towards the use of third party agencies with a fixed price per inspection.
REMOTE INSPECTION. The use of remote video inspections continues to grow as a low cost alternative to physical inspection. The falling cost of technology and the cost benefits available to the insurance companies will see further growth. In essence there are two types: live moving image inspection and still image inspection offline. The provision of these services represents a rapidly emerging outsourcing opportunity.
AUDIT. Analysis of repair costs provided by computerized estimating. Currently the use of this approach is limited and has had only partial success. There is a clear need for automation and decision support tools to drive this option forward.
NEEDS AND OPPORTUNITIES IN THE AUTOMOBILE CLAIMS PROCESS
The Company believes trends in the automobile insurance industry create several identifiable needs. First, automobile insurers need to increase consumer satisfaction through faster, more efficient claims handling procedures. Second, insurance companies need to improve working relationships with their primary service providers through the exchange of auditable data and improved communication. Third, large European insurers will need to use technology solutions to give them access to pan European data. Finally, smaller insurance companies need to become cost competitive with the major insurers by adopting solutions which provide economies of scale benefits.
Trends in the collision repair industry also present collision repair facilities with several needs and opportunities. First, repair facilities need to secure a steady supply of customers through efficient marketing and greater connectivity to insurance companies. The development of approved repair networks are key in this area. Second, repair facilities need to improve their operating efficiency, business management and repair processing through affordable information and decision making tools.
The Company believes that improvements in the automobile claims process will require that participants have ready access to data, decision making tools and efficient communications. As a result, there is a need for integrated, efficient solutions in the appraisal, repair and settlement processes which will speed repairs, assure consumer satisfaction and save money.
PRODUCTS AND SERVICES
The Company is organized into three divisions, Insurance Services, Automotive Services and Consumer Processing Services, based on the nature of the products and services and the methods used to distribute these products and services. The Insurance Services Division offers products and services to its customers through the use of a direct selling force. These products and services generally are used by insurance companies to facilitate the processing of automobile physical damage claims and improve
decision making in the insurance underwriting processes. The Automotive Services Division offers products and services to its customers through the use of independent sales representatives. These products and services are tools used by collision repair facilities to receive and process automobile damage claims electronically in conjunction with insurance companies. The Consumer Processing Services Division offers a suite of products and services for the complete outsourcing of automobile physical damage claims and bodily injury claims.
The Company's services and products are integrated for use with one another across multiple platforms and are designed for ease of use by the large number of people involved in the automobile claims process on a daily basis. Approximately 65% of the Company's consolidated revenue for 1998 was from the sale of products and services to insurance companies with the remainder sold to collision repair facilities and other customers. The primary products and services sold by the Insurance Division include: TOTAL LOSS, PATHWAYS COLLISION ESTIMATING, PATHWAYS DIGITAL IMAGING, GUIDEPOST, EZNET AND CCC RATINGS SERVICES. The primary products and services sold by the Automotive Services Division include: EZEST, PATHWAYS COLLISION ESTIMATING, PATHWAYS DIGITAL IMAGING, PATHWAYS ENTERPRISE SOLUTION, GUIDELINES AND EZNET. The primary products and services sold by the Consumer Processing Services Division include: ACCESS, CARS and complete claims outsourcing.
PATHWAYS WORKSTATION SOFTWARE. PATHWAYS is a windows-based workstation software platform designed to better serve the overall workflow needs of insurance field staffs and collision repairers. PATHWAYSoffers a common, graphical user interface across all applications which organizes claims in tabbed, electronic workfiles and reduces the time required to learn or develop new software functions or applications. PATHWAYSincludes a workflow manager which assists users in managing all aspects of their day-to-day activities, including receipt of new assignments, communication of completed activity, electronic file notes and reports as well as the automatic logging of key events in the claims process. The Company intends to integrate all of its existing field applications into this platform and develop all future field applications on PATHWAYS. PATHWAYS is fully integrated with the Company's communications network, allowing adjusters to operate in the field, and thereby reduce office and other expenses. The first PATHWAYS application was PATHWAYS Collision Estimating, which provides improved functionality when compared to the predecessor DOS based EZEST product.
VEHICLE VALUATION SERVICES AND PRODUCTS. The Company's TOTAL LOSS service provides insurance companies the ability to effect total loss settlements on the basis of market-specific values based upon physically inspected used car inventories. The Company believes that its vehicle database, which contains detailed information about millions of vehicles either physically inventoried from one of more than 4,500 dealer lots or taken from recent advertisements, is the most comprehensive in North America. The Company uses its proprietary database and valuation software to provide insurance companies with independent, current, local, market-values and vehicle identification data. The Company's TOTAL LOSS product complies with the regulatory requirements of all 50 states. Each total loss valuation includes a vehicle identification search under VINGUARD, the Company's vehicle identification number fraud protection program which matches current claims against the Company's database of previously totaled or stolen vehicles.
COLLISION ESTIMATING SERVICES AND PRODUCTS. EZEST was the first stand-alone, PC-based collision estimating system utilizing intelligent logic to automate the process of eliminating repair activity overlaps and automating all included operations and ancillary repair work in preparing an estimate. Intelligent logic represents automation of procedure pages from crash estimating guides that detail the steps involved in repairing various parts of a damaged vehicle depending on the extent of the damage. The Company now also offers its next generation collision estimating product, Pathways Collision Estimating. Pathways provides automobile insurers and collision repairers with fast and reliable estimates at a low cost. Pathways runs on any IBM-compatible laptop or desktop computer and contains all nine volumes of the Motor Crash Estimating Guide and other data necessary to build an estimate. The Company licenses the Motor
Crash Estimating Guide data from a subsidiary of The Hearst Corporation. A unique feature of Pathways is its recycled part valuation upgrade which will display and automatically insert into the estimate a predicted price of those recycled or salvage automotive parts statistically known to be available in the local market in which the estimate is written. The Pathways software, Motor Crash Estimating Guide database and other associated databases are updated via a monthly CD-ROM. Pathways is sold under multi-year contracts on a monthly subscription basis to both insurers and collision repair facilities.
PATHWAYS DIGITAL IMAGING. PATHWAYS DIGITAL IMAGING, a Pathways workstation application, allows shops to capture and instantly transmit damage images, thereby reducing the need for a physical vehicle inspection. The computerized digital photo imaging system allows automobile insurers and collision repairers to visually document vehicle damage and electronically communicate the image. This reduces claims cycle time while eliminating film cost and saving travel and overnight delivery expense. PATHWAYS Digital Imaging is sold under multi-year contracts on a monthly subscription basis.
GUIDEPOST AND GUIDELINES DECISION SUPPORT. GUIDEPOST AND GUIDELINES are executive information and data navigation software packages. GUIDEPOST allows insurance managers to electronically evaluate results, format reports, drill down for subject or personnel review and compare performance to industry and regional indices. GUIDELINES provides similar functions for collision repair managers. GUIDEPOST updates are distributed monthly. GUIDELINES is an Internet based product which users access via a web browser.
EZNET COMMUNICATIONS NETWORK. EZNET connects insurers with their appraisers and repair network partners. EZNET'S process management capabilities provide the information required to make appropriate and timely decisions, regardless of location or settlement process. EZNET is used principally for the complete electronic communication of work files and estimates to staff appraisers or DRP partners and for the receipt of auditable estimate data. EZNET is the only communications network tailored to provide automated communication service to participants in the automobile physical damage claim process, including: mailboxing, messaging, routing, imaging, assignment tracking, record library and third-party gateways. A unique feature of EZNET is the electronic appraisal review feature that provides real-time exception reporting to target re-inspections and improves management control of DRP networks and appraisers. EZNET also facilitates the management of car rental and salvage disposition. EZNET is sold both on a per transaction basis and on a monthly subscription basis.
CLAIMS OUTSOURCING SERVICES AND PRODUCTS. ACCESS is an outsourced vehicle appraisal and restoration management service. Insurance companies use ACCESS to appraise and settle claims without hiring either additional staff or independent appraisers. ACCESS uses a network of Company certified, fully equipped repair facilities and the Company's claims management tools to provide fast, low cost claims settlement with high customer satisfaction. In addition, the Company provides reinspection and restoration management staff for quality assurance. ACCESS is sold on a per claim basis under multi-year agreements. CARS is a computerized rental car reservations service which is most often used in conjunction with ACCESS services. During the claims reporting process, a rental car is reserved for the consumer and the useage of the rental car is monitored against the vehicle restoration date, thus improving consumer satisfaction aond reducing car rental expense. CARS is sold on a per transaction basis and under multi-year agreements. The Company offers third party claims administration (TPA), a complete claims outsourcing service that manages all aspects of the claim process. Using a proprietary, state-of-the-art, paperless claims management system, the outsourcing service takes the initial loss notification and manages the file through settlement.
CCC RATINGS SERVICES--Through a relationship with InsurQuote Systems Inc. ("InsurQuote"), the Company offers services to insurance underwriters that assist in the process of rate filing for new products, as well as services that help underwriters better analyze the competitive rate environment.
PATHWAYS ENTERPRISE SOLUTION--The Company offers a computerized management information system for collision repair operations. PATHWAYS ENTERPRISE SOLUTION is a state of the art product based on the latest
Microsoft development tools which allows for centralized management of consolidated collision repair operations.
CUSTOMERS
The Company's business is based on relationships with the two primary users of the Company's services: automobile insurance companies and collision repair facilities. The Company's customers include the largest U.S. automobile insurance companies and most of the small to medium size automobile insurance companies in the country.
The Company's products are used by approximately 13,000 collision repair facilities. The Company has collision repair customers in all 50 states, including most major metropolitan markets. In addition to assisting collision repair facilities in managing their businesses, many of these customers use the Company's services and products as a means to participate in insurance DRP programs, thereby making the use of the Company's services and products important to the repair facilities business growth.
Over 60% of the Company's revenue for 1998 was for services and products sold pursuant to contracts, which generally have multi-year terms. A substantial portion of the Company's remaining revenue represented sales to customers that have been doing business with the Company for many years. The Company's services and products are sold either on a monthly subscription or a per transaction basis. Of the Company's ten largest customers in the Insurance Division with multiyear contracts five are due for renewal in 1999, representing 19% of the Insurance Division revenue.
SALES AND MARKETING
Including Collision Repair Representatives, the Company utilizes approximately 350 sales and service professionals across five different sales organizations and certain other sales and marketing functions to market and sell its services and products. Employee counts below for each of the five sales organization are as of December 31, 1998.
NATIONAL SALES ORGANIZATION. The National Sales Organization comprises national account managers ("NAMs") who focus on the Company's overall relationships with the home and regional offices of insurance companies. NAMs are experienced sales professionals charged with meeting customers' business needs with a consultative approach.
TECHNICAL ACCOUNT MANAGEMENT GROUP. The Technical Account Management Group consists of Technical Account Managers ("TAMs") who identify opportunities to better integrate CCC products and services with our clients' internal systems, resulting in the development of custom and standards-based user interfaces. The TAMs also play a critical role in reviewing customer business practices to benchmark current operations and to identify opportunities for improvement. TAMs often work closely with customer system staffs to assure smooth implementation of more technically complicated and customized service offerings.
FIELD SALES & SERVICE GROUP. Claims office territory managers are deployed geographically with responsibility for individual claims offices of all of the Company's insurance company clients. These employees are charged with on-going field training and support for the Company's transaction-based businesses. The Company's territory managers assist claim managers with the training of high turnover personnel, program result analysis and problem resolution. Increasingly, territory managers are functioning as claim settlement consultants.
PRODUCT SALES AND DELIVERY ORGANIZATION. The Product Sales and Delivery Organization ("PSDO") is focused on the quality sale and delivery of the Company's products and services into the insurance market. A team of product specialists, who are industry experts in specific client process segments are responsible
for growing the Company's market share. They work closely with other sales organizations to bring specific product expertise to our customers.
COLLISION REPAIR REPRESENTATIVES. The Company contracts independent sales representatives to sell the Company's products to collision repair facilities across the country. The primary representatives are assigned geographic territories and often employ secondary representatives to increase presence in particular areas. The representatives are highly experienced within the collision repair industry and typically assist customers in dealing with a variety of business issues. The Company has recently converted a portion of its collision repair independent representative sales force to full time employees focused on servicing and cross-selling current collision repair customers.
The Company's marketing efforts for the automobile insurance industry are conducted as follows: development of professional collateral materials used by the sales force, an annual company sponsored industry conference for senior claims executives and collision repair industry leaders and publication of articles in industry and national print media.
The Company's marketing efforts for the automobile repair market are conducted through participation in national and regional trade shows, lead generating direct marketing programs, collateral materials and trade advertising.
TRAINING AND SUPPORT
Field appraisers, claim representatives and collision repair facility owners use the Company's tools and information for decision making. The Company addresses its customer service needs through a field and telephone training and support staff that consists of approximately 450 employees. The support staff consists of individuals with technical knowledge and experience relating not only to application software, operating systems and network communications, but also to new and used car automobile markets and collision repair. The Company routinely analyzes customer call types to modify products or training and, whenever necessary, will dispatch a field representative to provide process assistance. The support stafff also includes individuals that process the bodily injury and physical damage claims.
TECHNOLOGY
Underlying each of the Company's principal services and products are databases which customers access through software and the Company's communications network.
VEHICLE VALUATION PRODUCTS AND SERVICES. The Company's proprietary database of valuation data used in connection with its TOTAL LOSS products and services is built through the Company's own data collection network. This network includes detailed used car inventory and sales data from more than 4,500 automobile dealers throughout the United States and Canada, as well as data from local newspaper advertisements and prior transactions. The database includes more than 18 million prior valuations, including theft data. The Company maintains its TOTAL LOSS database on a mainframe computer which customers directly access using the Company's proprietary communications network or by telephone or facsimile.
COLLISION ESTIMATING PRODUCTS AND SERVICES. The Company offers its collision estimating products and services through a personal computer-based, open systems approach using its object-oriented design. The Company's principal database for its collision estimating products is the Motor Crash Estimating Guide published by a subsidiary of The Hearst Corporation. The Company licenses this database under a contract which was extended in 1998 for a term of 20 years, that grants to the Company a license to publish the database electronically. This contract includes the exclusive license for intelligent logic to the insurance industry, the integral component of collision estimating software. See further discussion of this contract under "Intellectual Property."
EZNET COMMUNICATIONS NETWORK. The Company's communications network, EZNET, transmits and processes both staff and direct repair claims data. EZNET'S Transport Layer provides reliable, secure data transmission. EZNET'S Workflow Layer routes claims information and status updates to multiple recipients according to insurance company preference and provides storage through network mailboxes maintained by the Company. EZNET supports all major communications protocols, including X25, SNA, ISDN and TCP/IP, as well as industry standards such as the Collision Industry Electronic Commerce Association.
PATHWAYS ENVIRONMENT. The Company has built and completed class libraries consisting of approximately 1,000 business and system objects that serve as the foundation of its PATHWAYS product line. These objects were designed with a work flow orientation and are used in a framework to manage databases, maintain model persistence, create electronic workfiles, and facilitate communications. These elements are used in conjunction with a common graphical user interface for all applications. This approach is intended to offer many advantages to the Company's customers, including ease of training and integration of complementary systems and legacy applications. In addition, the graphical user interface and object-oriented foundation of these services and products is designed to enable faster introduction of additional application modules with greater product quality assurance as well as easy integration with customer-developed software applications. It is the Company's intent to build all new products within this framework and to migrate existing products to it.
EUROPEAN MARKET PRODUCTS AND SERVICES. The Company entered into a joint venture agreement with Hearst Communications Inc. for the purpose of assisting Hearst in the development and implementation of the Company's technology and tools for the European market. As part of the joint venture, the Company intends to deliver its collision estimating products and services which include a European version of the Motors database as well as an enhanced communications network. The Company will also leverage its Pathways architecture to create the next generation of appraisal and reinspection workstations for the insurance industry.
CCC RATINGS SERVICES. The Company, through its investment in InsurQuote, has an opportunity to market services to insurance underwriters which utilize proprietary rating data and software developed by InsurQuote.
PRODUCT DEVELOPMENT AND PROGRAMMING
The Company's ability to maintain and grow its position in the claims industry is dependent upon expansion of its products and services. Investments in development are therefore critical to obtaining new customers and renewals from existing customers. The Company's product development and programming efforts principally consist of software development, development of enhanced communication protocols and applications, and database design and enhancement. Product engineering activities focus on improving speed to market of new products, services, and enhancements, adding new business functions without affecting existing products and services, and reducing development costs. The Company uses its class library of objects, knowledge of its clients' workflows and its automated testing tools to deliver quality workflow-oriented solutions to the marketplace quickly. The Company develops products in close collaboration with its clients based on specific needs. The Company's total product development and programming expense was $25.8 million, $20.2 million and $17.0 million for the years ended December 31, 1998, 1997 and 1996, respectively.
INTELLECTUAL PROPERTY
The Company relies primarily on a combination of contracts, intellectual property laws, confidentiality agreements and software security measures to protect its proprietary technology. The Company distributes its products under written license agreements, which grant end-users a license to use the Company's services and products and which contain various provisions intended to protect the Company's ownership and confidentiality of the underlying technology. The Company also requires all of its employees and other
parties with access to its confidential information to execute agreements prohibiting the unauthorized use or disclosure of the Company's technology.
The Company has trademarked virtually all of its products and services. These marks are used by the Company in the advertising and marketing of the Company's products and services. EZEST, PATHWAYS and CCC are well-known marks within the automobile insurance and collision repair industries. The Company has patents for its collision estimation product pertaining to the comparison and analysis of the "repair or replace" and the "new or used" parts decisions. While the TOTAL LOSS calculation process is not patented, the methodology and processes are trade secrets of the Company and are essential to the Company's TOTAL LOSS business. Despite these precautions, the Company believes that existing laws provide only limited protection for the Company's technology and that it may be possible for a third party to misappropriate the Company's technology or to independently develop similar technology.
Certain data used in the Company's services and products is licensed from third parties for which they receive royalties. The Company does not believe that the Company's services and products are significantly dependent upon licensed data, other than the Motor Crash Estimating Guide data, because the Company believes it can find alternative sources for such data. The Company does not believe that it has access to an alternative database that would provide comparable information to the Motor Crash Estimating Guide. The Motor Crash Estimating Guide is licensed from the Hearst Corporation through a scheduled expiration of April 1, 2018. Any interruption of the Company's access to the Motor Crash Estimating Guide data could have a material adverse effect on the Company's business, financial condition and results of operations.
The Company is not engaged in any material disputes with other parties with respect to the ownership or use of the Company's proprietary technology. The Company has been previously involved, however, in intellectual property litigation concerning certain data ownership rights, the resolution of which resulted in substantial payments by the Company. There can be no assurance that other parties will not assert technology infringement claims against the Company in the future. The litigation of such a claim may involve significant expense and management time. In addition, if any such claim were successful, the Company could be required to pay monetary damages and may also be required to either refrain from distributing the infringing product or obtain a license from the party asserting the claim (which license may not be available on commercially reasonable terms).
COMPETITION
The market for the Company's products is highly competitive. The Company competes primarily on product differentiation, customer service and price. The Company's principal competitors are small divisions of two well capitalized, multinational firms, Automatic Data Processing ("ADP") and Thomson Publishing Corporation ("Thomson"). ADP offers both a PC-based collision estimating system and a total loss product to the insurance industry. It offers a different collision estimating system and a digital imaging system to the collision repair industry. Thomson publishes crash guides for both the insurance and automobile collision repair industries and markets collision estimating, shop management and imaging products. In addition, there are several very small, collision estimating programs sold into the market which do not use intelligent logic. In addition, the claims outsourcing business competes with various outsourcing service providers and third party administration (TPA) entities. The Company has experienced steady competitive price pressure, particularly in the collision estimating market, over the past few years and expects that trend to continue. The strength of this trend may cause the Company to alter its mix of services, features and prices.
The Company intends to address competitive price pressures by providing high quality, feature enhanced products and services to its clients. The Company intends to continue to develop user-friendly claims products and services incorporating its comprehensive proprietary inventory of data. The Company
expects that the PATHWAYS workflow manager will provide the necessary position with its insurance and collision repair customers to effectively compete against competitive price pressures.
At times, insurance companies have entered into agreements with service providers (including ADP, Thomson and CCC) wherein the agreement provides, in part, that the insurance company will either use the product or service of that vendor on an exclusive basis or designate the vendor as a preferred provider of that product or service. If it is an exclusive agreement, the insurance company mandates that collision repair facilities, independent appraisers and regional offices use the particular product or service. If the vendor is a preferred provider, the collision repair facilities, appraisers and regional offices, are encouraged to use the preferred product, but may still choose another vendor's product or service. Additionally, some insurance companies mandate that all products be tested and approved at the companies' national level before regional levels can purchase such products. The benefits of being an endorsed product or on the approved list of an insurance company include immediate customer availability and a head start over competitors who may not be so approved. With respect to those insurance companies that have endorsed ADP or Thomson, but not CCC, the Company will be at a competitive disadvantage.
In connection with the Company's strategy to provide outsourced claims processing services, the Company will compete with other third-party service providers, some of whom may have more capital and greater resources than the Company.
The Company currently processes the majority of insurer-to-collision repair facility repair assignment and estimate retrieval for DRPs through its EZNET communications network. The Company believes there is a wide range of prospective competitors in this service area, many of which have greater resources than the Company.
EMPLOYEES
As of December 31, 1998, the Company had approximately 1,500 full-time employees of whom approximately 350 were employed in sales and marketing functions (excluding independent collision repair representatives), approximately 450 were employed in customer support functions, approximately 315 in product development and quality assurance functions, approximately 265 in operations and approximately 120 in finance and administration. The Company regularly seeks to identify skilled software engineers and other potential employee candidates, and has found that competition for personnel in the software industry is intense. The Company believes its ability to recruit and retain highly skilled technical and other management personnel will be critical to execute its business plans. The Company's employees are not represented by any collective bargaining agreement or organization. The Company believes that its relationships with its employees are good.
ITEM 2.
ITEM 2. PROPERTIES
The Company's corporate office is located in Chicago, Illinois where the Company leases approximately 141,000 square feet of a multi-tenant facility under several leases, the last of which expires in November 2008. The Company leases approximately 84,000 square feet in Glendora, California where a satellite development center and distribution center are housed, under a lease expiring in August 2000. The Company also leases 26,000 square feet in Placenta, California where Professional Claims Services, Inc. provides claims adjusting and third party administration in the western United States, under a lease expiring in November 2001. The Company purchased a 50,000 square foot facility in Sioux Falls, South Dakota in 1998 in connection with relocating certain customer service and claims processing operations. The Company believes that its existing facilities and additional or alternative space available to it are adequate to meet its requirements for the foreseeable future.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In March 1999, the Company completed settlement of a lawsuit filed in late 1998 involving a former independent sales representative. This settlement resulted in a charge of $1.7 million including, among other things, payment for past earned commissions, resolution of disputed commissions, and other costs associated with the resolution of the dispute.
The Company is a party to various claims and routine litigation arising in the normal course of business. Such claims and litigation are not expected to have a material adverse effect on the financial condition or results of operations of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock (symbol: CCCG) is traded on the Nasdaq National Market ("Nasdaq"). Low and high sales prices of the Common Stock were as follows:
Since the public offering, no dividends have been declared on shares of the Company's Common Stock and the Company's Board of Directors currently has no intention to declare such dividends. As of March 30, 1999, there were 23,737,944 shares of Common Stock issued and outstanding. There were 98 stockholders of record on March 30, 1999, plus an indeterminate number of stockholders that hold shares of Common Stock in the names of nominees.
CCC INFORMATION SERVICES GROUP INC. AND SUBSIDIARIES
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
- ------------------------
(*) The Company accounted for its interest in the CCC Development Company ("CCCDC") Joint Venture under the equity method of accounting prior to acquiring the remaining interest in the CCCDC Joint Venture, effective March 30, 1994.
CCC INFORMATION SERVICES GROUP INC.
AND SUBSIDIARIES
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The Company's net income (loss) for the periods indicated, are set forth below:
CCC INFORMATION SERVICES GROUP INC.
AND SUBSIDIARIES
OVERVIEW
The Company is a supplier of automobile claims information and processing, claims management software and communication services. The Company's customers include insurance companies and collision repair facilities. The Company's products and services are designed to improve efficiency, manage costs and increase consumer satisfaction in the management of automobile claims and restoration.
The Company is organized into three divisions, Insurance Services, Automotive Services and Consumer Processing Services, based on the nature of the products and services and the methods used to distribute these products and services. The Insurance Services Division offers products and services to its customers through the use of a direct selling force. These products and services generally are used by insurance companies to facilitate the processing of automobile physical damage claims and improve decision making in the insurance underwriting processes. The Automotive Services Division offers products and services to its customers through the use of independent sales representatives. These products and services are tools used by collision repair facilities to receive and process automobile damage claims electronically in conjunction with insurance companies. The Consumer Processing Services Division offers a suite of products and services for the complete outsourcing of automobile physical damage claims and bodily injury claims The Company sells its products to two primary customer groups: insurance companies (approximately 65% of revenue in 1998) and collision repair facilities. In addition, certain Company products and services are aimed at improving the efficiency of both markets by enabling the two groups to communicate electronically. The Company's principal products for insurance companies are its TOTAL LOSS vehicle valuation service, used to estimate the value of unrepairable vehicles, and its PATHWAYS collision estimating software, used to estimate the cost of repairing vehicles. The Company also offers PATHWAYS DIGITAL IMAGING, GUIDEPOST, EZNET and CCC RATINGS SERVICES. In addition to claims processing tools, the Company offers insurers ACCESS, an integrated appraisal and restoration management service, CARS, a car rental management service and TPA, a complete claims outsourcing service. The Company also offers its PATHWAYS workflow management software, which integrates the Company's information and software products into a total workflow management solution for insurance field appraisal staffs. The Company's principal products for collision repair facilities is its EZEST, PATHWAYS and PATHWAYS DIGITAL IMAGING.
TOTAL LOSS vehicle valuation services are generally obtained through direct dial-up access to the Company's host-based valuation system and billed to insurance companies on a per valuation basis or under contract terms that specify fixed fees for a prescribed number of transactions. Collision Estimating software subscriptions are billed monthly in advance. EZNET communication services are generally priced on a per transaction basis. ACCESS and CARS services are billed monthly on a per transaction basis. The TPA services are sold on a per claim and performance sharing basis under multi-year contracts. Monthly subscription and transaction rates for all products and services are established under negotiated contracts or pricing agreements. In general, customer account balances are settled monthly. Under the terms of certain contracts involving quarterly or annual prepayments, deferred revenues are recorded and subsequently recognized over the periods in which related revenues are earned.
Customer contracts generally have multi-year terms. A substantial portion of the Company's revenues were earned under contracts with customers that provide for exclusivity or specify minimum purchase requirements; most remaining revenue represented sales to customers that have been doing business with the Company for many years. Use of multi-year contracts is common practice within the industry, making it difficult to take customers from competitors during the contract term.
As a result of debt incurred in connection with the Company's 1988 acquisition of CCC, the Company became highly leveraged. The Company's ability to invest in new product development and conduct its business in accordance with its business plan was constrained by limitations imposed by its acquisition
CCC INFORMATION SERVICES GROUP INC.
AND SUBSIDIARIES
borrowings. The Company formed CCCDC to develop the EZEST collision estimating software. In June 1994, the Company completed a recapitalization. In connection with this recapitalization, White River acquired $39 million of Mandatorily Redeemable Preferred Stock ("Preferred Stock"), and 7,050,840 shares of the Company's common stock (the "White River Transaction"), and CCC entered into the 1994 bank credit facility. White River immediately sold $1,462,000 of the Preferred Stock (3.7% of the then-outstanding Preferred Stock) and 264,407 shares of the Common Stock (1.6% of the then-outstanding Common Stock) to two investment partnerships affiliated with Hambrecht & Quist LLC. In 1994, the Company acquired the 50% of CCCDC that it did not previously own. In 1995, the Company consolidated this investment with its other operations.
The Preferred Stock includes certain rights set forth in detail in Notes 14 and 15 to the consolidated financial statements, Mandatorily Redeemable Preferred Stock and Initial Public Offering of Common Stock, respectively. In particular, the Series E Preferred Stock permits White River and its affiliates to cast 51% of the votes to be cast on any matter to be voted on by the holders of the Company's common stock, subject to reductions in the event that either the Company redeems part of the outstanding Series E Preferred Stock or White River and its affiliates no longer hold all of such stock. In addition, under the terms of a Stockholders Agreement among White River and certain stockholders, including the Company's Chairman (the "Management Stockholders"), the parties have agreed, subject to fiduciary duties, that White River will vote with the Management Stockholders regarding defined business combinations and subsequent offerings of Company common stock. This Stockholders Agreement expires in June 1999, at which time White River will no longer hold Series E Preferred Stock which provides WR 51% voting power as a condition of the Agreement of the votes.
Depreciation/amortization expense through March 1996 includes depreciation attributable to certain software acquired through the Company's acquisition of UCOP's interest in CCCDC. In the purchase price allocation for the CCCDC acquisition, $5.2 million was assigned to purchased software, $13.8 million was assigned to in-process research and development software projects, $6.6 million was assigned to acquired tangible assets and the balance of $3.7 million was assigned to goodwill.
The Company expenses research and development costs as incurred. The Company has evaluated the establishment of technological feasibility of its product in accordance with Statement of Financial Accounting Standard No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." The Company sells its products in a market that is subject to rapid technological change, new product development and changing customer needs. Accordingly, the Company has concluded that technological feasibility is not established until the development stage of the product is nearly complete. The Company defines technological feasibility as the completion of a working model. The time period during which costs could be capitalized, from the point of reaching technological feasibility until the time of general product release, is very short and, consequently, the amounts that could be capitalized are not significant.
The Company believes that its future success depends on its ability to enhance its current services and products and to develop new services and products that address the needs of its customers. As a result, the Company has in the past and intends to continue to commit substantial resources to product development and programming. Over the past three years ended December 31, 1998 the Company expended approximately $63.0 million for product development and programming.
CCC INFORMATION SERVICES GROUP INC.
AND SUBSIDIARIES
NET INCOME (LOSS) AS A PERCENTAGE OF REVENUE
The Company's net income (loss), as a percentage of revenue for the periods indicated, are set forth below:
1998 COMPARED WITH 1997
For the year ended December 31, 1998, the Company reported a net loss applicable to common stock of $38 thousand, or $0.00 per share on a diluted basis, versus net income applicable to common stock of $15.5 million, or $0.62 per share on a diluted basis, for the same period last year. The change in income per share on a diluted basis was the result of recording the equity in net losses of affiliates of $11.7 million, or $0.46 per share, a litigation settlement of $0.04 per share, relocation of claims settlement function of $0.04 per share, as well as other increases in expenses ahead of revenue growth as described below. Operating income for the year ended December 31, 1998 of $20.0 million was also $5.7 million less than the same period last year reflecting increased spending on new and enhanced products and customer support activities. The equity in net losses of affiliates of $11.7 million is principally the result of the Company's investment in InsurQuote, which resulted in the recording of an $11.4 million loss for the year.
REVENUES. Revenues for the year ended December 31, 1998 of $188.2 million were $29.1 million, or 18.3% higher than the same period last year. The increase in revenues was due primarily to continued growth in the Company's Consumer Processing Services Division. Revenues for the Consumer Processing Services Division for the year ended December 31, 1998 of $22.7 million were $13.1 million or 136% higher
CCC INFORMATION SERVICES GROUP INC.
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than the same period last year. In addition, revenues for the Automotive Services Division for the year ended December 31, 1998 of $63.5 million were $12.4 million or 24.3% higher than the same period last year. The revenues for the Insurance Services Division for the year ended December 31, 1998 of $101.4 million were $5.0 million or 5.2% higher than the same period last year. The increase in both the Automotive Services and the Insurance Services Divisions were due to growth in the digital imaging product and collision estimating software seats.
PRODUCTION AND CUSTOMER SUPPORT.
Production and customer support increased from $35.7 million or 22.4% of revenue to $48.2 million or 25.7% of revenue. The year over year variance was due primarily to additional production and customer support related to Consumer Processing Services, Pathways workflow/collision estimating seats and the introduction of Pathways Enterprise Solutions.
COMMISSIONS, ROYALTIES AND LICENSES. Commission, royalties and licenses increased from $18.9 million or 11.9% of revenues to $21.5 or 11.4% of revenues. The increase was due primarily to higher revenues from autobody collision estimating licensing which generates both a commission and a data royalty.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative increased from $50.9 million or 32.0% of revenues to $60.0 million or 31.9% of revenues. Headcount increases as well as higher average wages necessary to recruit and retain key employees were the principal reasons for the increase, along with additional bad debt provisions associated with the expansion of the Automotive Services Division customer base.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from $7.7 million to $9.2 million. The increase in depreciation year over year was principally the result of higher internal capital expenditures for the Consumer Processing Services Division and depreciation and amortization associated with the acquisitions.
PRODUCT DEVELOPMENT AND PROGRAMMING. Product development and programming increased from $20.2 million or 12.7% of revenue to $25.8 million or 13.7% or revenue. The increase in costs over prior year mainly related to the growth in the Consumer Processing Services Division, Year 2000 compliance spending and other new product development.
LITIGATION SETTLEMENT. Litigation settlement costs of $1.7 million related to a claim filed in the fourth quarter of 1998 by an independent sales representative settled in early 1999.
RELOCATION OF CLAIMS SETTLEMENT FUNCTION. Relocation of the claims settlement function of $1.7 million related to relocating certain customer service and claims processing operations to South Dakota was incurred in 1998.
OTHER INCOME/INTEREST EXPENSE AND INCOME TAXES. Net other income/interest decreased from $1.4 million to $0.4 million. The effective income tax rate increased from 41.5% to 43.4%.
EQUITY IN LOSSES OF AFFILIATES: 1998 results include an $11.4 million loss in InsurQuote and $0.2 million loss from Enterstand Joint Venture.
CCC INFORMATION SERVICES GROUP INC.
AND SUBSIDIARIES
1997 COMPARED WITH 1996
For the year ended December 31, 1997, the Company reported net income applicable to common stock of $15.5 million, or $0.62 per share on a diluted basis, versus net income applicable to common stock of $8.2 million, or $0.40 per share on a diluted basis, for the same period last year. Operating income for the year ended December 31, 1997 of $25.7 million was $5.6 million higher than the same period last year.
REVENUES Revenues for the year ended December 31, 1997 of $159.1 million were $28.1 million, or 21.5% higher than the same period last year. Revenues for the Insurance Services Division for the year ended December 31, 1997 of $96.3 million were $13.2 million or 15.8% higher than the same period last year primarily due to the growth in collision estimatings software seats and increase in the VEHICLE VALUATION SERVICES due to higher transaction volumes. In addition, revenues for the Automotive Services Division for the year ended December 31, 1997 of $51.0 million were $12.6 million or 32.6% higher than the same period last year also due to growth in collision estimating seats. Revenues for the Consumer Processing Services Division for the year ended December 31, 1997 of $9.6 million were $2.4 million or 33.7% higher than the same period last year due to the introduction of the TPA business and incremental transaction volume in ACCESS and CARS.
PRODUCTION AND CUSTOMER SUPPORT. Production and customer support increased from $31.8 million to $35.7 million. Due to leverage on a higher revenue base and continued efforts to reduce production costs, production and customer support decreased on a percent of revenue basis from 24.3% to 22.4%.
COMMISSIONS, ROYALTIES AND LICENSES. Commission, royalties and licenses increased from $14.0 million or 10.7% of revenues to $18.9 or 11.9% of revenues. The increase as a percent of revenues was due primarily to higher revenues from autobody collision estimating licensing which generates both a commission and a data royalty.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative increased from $40.7 million or 31% of revenues to $50.9 million or 32% of revenues. Headcount increases as well as higher average wages necessary to recruit and retain key employees were the principal reasons for the increase.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from $7.3 million to $7.7 million.
PRODUCT DEVELOPMENT AND PROGRAMMING. Product development and programming increased from $17.0 million to $20.2 million. Due to leverage on a higher revenue base, product development and programming costs declined from 13.0% of revenues to 12.7%.
OTHER INCOME/INTEREST EXPENSE AND INCOME TAXES. Net other income/interest expense changed from a net expense of $1.9 million last year to net other income of $1.4 million. The change in net other income was a combination of the full year impact of a change in the capital structure subsequent to the public offering of common stock in 1996, as well as a significant increase in invested cash in 1997 generated from operations. The effective income tax rate increased from 14.7% to 41.5% due primarily to the release of deferred income tax valuation allowances in 1996. Adjusting the 1996 tax rate for the release of valuation allowances would have resulted in an effective tax rate of 40.4%.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1998, net cash provided by operating activities was $15.9 million. The Company applied $11.0 million, to purchase equipment and software, and $1.8 million to the purchase of land and building in Sioux Falls, South Dakota associated with the relocation of certain customer service
CCC INFORMATION SERVICES GROUP INC.
AND SUBSIDIARIES
and claims processing operations. The Company invested $20 million in InsurQuote, which is developing services to manage insurance rating information. The Company purchased two subsidiaries for $4.5 million to expand its Consumer Processing Services operations domestically and in Europe and invested $2.0 million in an Enterstand, an international joint venture to develop products for the European marketplace. The Company also repurchased 1.4 million of the Company's outstanding shares for $15.7 million.
On October 28, 1998, the credit facility between CCC and the commercial bank was amended and restated, from the original revolving credit agreement entered into on August 22, 1996. Under the amended credit facility, CCC increased its ability to borrow under the revolving line of credit to $50 million. In addition, the maturity date of the credit facility was extended to October 31, 2003. The interest rate under the amended bank credit facility is the London Interbank Offering Rate (LIBOR) plus 1.0% or the prime rate in effect from time to time, as selected by CCC. The Company's principal liquidity requirements include its operating activities, including product development, and its investments in internal and customer capital equipment.
Under the bank facility, CCC is, with certain exceptions, prohibited from making certain sales or transfers of assets, incurring nonpermitted indebtedness or encumbrances, and redeeming or repurchasing its capital stock, among other restrictions. In addition, the bank credit facility requires CCC to maintain certain levels of operating cash flow and debt coverage, and limits CCC's ability to make investments and declare dividends.
During the year ended December 31, 1997, net cash provided by operating activities was $20.1 million. The Company applied $8.1 million to purchase equipment and software and invested the rest of the excess cash in marketable securities.
On August 21, 1996, the Company completed its initial public offering of common stock, generating proceeds of $72.1 million, net of underwriters' discounts and related equity issue costs. Proceeds from the offering of $36.1 million were used to redeem approximately 87% of the Company's mandatorily redeemable preferred stock at stated value plus accrued dividends. In addition, proceeds from the offering of $28.0 million were used to make principal repayments on long-term debt.
The Company has over the past three years been able to fund all of its working capital needs and capital expenditures from cash generated from operations. Management believes that cash flows from operations and available credit line facility will be sufficient to meet the Company's liquidity needs over the next 12 months. There can be no assurance, however, that the Company will be able to satisfy its liquidity needs in the future without engaging in financing activities beyond those described above.
YEAR 2000 ISSUE
BACKGROUND. Some computers, software and other equipment include programming code in which calendar year data is abbreviated to only two digits. As a result of this design decision, some of these systems could fail to operate or fail to produce correct results if "00" is interpreted to mean 1900, rather than 2000 ("Year 2000 Problem"). These problems are widely expected to increase in frequency and severity as the year 2000 approaches. The Company defines an application to be Year 2000 compliant if it can accurately process date data (including calculating, comparing and sequencing) from, into and between 1999 and 2000, including leap year calculations.
ASSESSMENT. The Year 2000 Problem could affect computers, software, and other equipment used, operated, or maintained by the Company. Accordingly, the Company is reviewing its internal computer programs and systems to ensure that the programs and systems will be Year 2000 compliant. The Company presently believes that its computer systems will be Year 2000 compliant in a timely manner. However,
CCC INFORMATION SERVICES GROUP INC.
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while the estimated cost of these efforts are not expected to be material to the Company's financial position or any year's results of operations, there can be no assurance to this effect.
SOFTWARE SOLD TO CUSTOMERS. The Company believes that it has substantially identified all potential Year 2000 Problems with any of the software products, which it develops and markets. As a key supplier to insurance companies and collision repair facilities, the Company has identified a significant exposure for Year 2000 problems regarding the effect of its legacy collision estimating software on some customers' ability to complete an estimate. A major undertaking is currently in process to convert those customers impacted to the Year 2000 compliant version of the software. While lost revenues from such an event are a concern for the Company, the greater risks are the monetary damages for which the Company could be liable if it in fact is found responsible for the shutdown of one of its customer's facilities. Such a finding could have a material adverse impact on the Company's results of operations.
INTERNAL INFRASTRUCTURE. The Company believes that it has identified substantially all of the major computers, software applications, and related equipment, with the exception of desktop hardware and software applications, used in connection with its internal operations that must be modified, upgraded or replaced to minimize the possibility of a material disruption to its business. The Company has commenced the process of modifying, upgrading, and replacing major systems that have been identified as adversely affected, and expects to complete this process before the middle of 1999. The Company expects to complete testing of desktop hardware and software applications by the second quarter of 1999 and upgrades will be scheduled as needed.
SYSTEMS OTHER THAN INFORMATION TECHNOLOGY SYSTEMS. In addition to computers and related systems, the operation of office and facilities equipment, such as fax machines, photocopiers, telephone switches, security systems, elevators, and other common devices may be affected by the Year 2000 Problem. The Company has nearly completed its assessment and expects that most facility and office equipment will be compliant by June 1999.
The Company estimates the total cost to the Company of completing any required modifications, upgrades, or replacements of these internal systems will not have a material adverse effect on the Company's business or results of operations. Currently, the Company is expensing approximately $600 thousand per quarter associated with this effort. It is expected that this cost will continue through the fourth quarter of 1999. This estimate is being monitored and will be revised as additional information becomes available.
SUPPLIERS. The Company has initiated communications with third party suppliers of the major computers, software, and other equipment used, operated, or maintained by the Company to identify and, to the extent possible, to resolve issues involving the Year 2000 Problem. However, the Company has limited or no control over the actions of these third party suppliers. Thus, while the Company expects that it will be able to resolve any significant Year 2000 Problems with these systems, there can be no assurance that these suppliers will resolve any or all Year 2000 Problems with these systems before the occurrence of a material disruption to the business of the Company or any of its customers. Any failure of these third parties to resolve Year 2000 Problems with their systems in a timely manner could have a material adverse effect on the Company's business, financial condition, and results of operation.
MOST LIKELY CONSEQUENCES OF YEAR 2000 PROBLEMS. The Company expects to identify and resolve all Year 2000 Problems that could materially adversely affect its business operations. However, management believes that it is not possible to determine with complete certainty that all Year 2000 Problems affecting the Company have been identified or corrected. The number of devices that could be affected and the interactions among these devices are simply too numerous. In addition, one cannot accurately predict how
CCC INFORMATION SERVICES GROUP INC.
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many Year 2000 Problem-related failures will occur or the severity, duration, or financial consequences of these perhaps inevitable failures. As a result, management expects that the Company could likely suffer the following consequences:
1. a significant number of operational inconveniences and inefficiencies for the Company and its customers that may divert management's time and attention and financial and human resources from its ordinary business activities; and
2. a lesser number of serious failures that may require significant efforts by the Company or its customers to prevent or alleviate material business disruptions.
Although the Company expects its critical systems to be compliant by mid 1999, there is no guarantee that these results will be achieved. Specific factors that give rise to this uncertainty include a possible loss of technical resources to perform the work, failure to identify all susceptible systems, non-compliance by third parties whose systems and operations impact the Company, and other similar uncertainties. A possible worst case scenario might include one or more of the Company's software products sold to customers being non-compliant. Such an event could result in a material disruption to the Company's or customers operations. For example, the software could experience an interruption in its ability to properly calculate or access the data required to complete a collision estimate. Should the worst case scenario occur it could, depending on its duration, have a material impact on the Company's results of operations and financial position.
CONTINGENCY PLANS. The Company is currently developing contingency plans to be implemented as part of its efforts to identify and correct Year 2000 Problems that may occur. The Company expects to complete its contingency plans by April 1999. Depending on the systems affected, these plans could include accelerated replacement of affected equipment or software, short to medium use of backup equipment and software, increased work hours for Company personnel or use of contract personnel to correct on an accelerated schedule any Year 2000 Problems that arise or to provide manual workarounds for information systems, and similar approaches. If the Company is required to implement any of these contingency plans, it could have a material adverse effect on the Company's financial condition and results of operations.
Based on the activities described above, Management believes the Company is devoting the necessary resources to identify and resolve Year 2000 Problems. The success of this effort and a favorable outcome to the various potential situations described herein will determine the impact the Year 2000 Problem has on the Company's business or results of operations
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 contains certain safe harbors regarding forward-looking statements. In that context, the discussion in this Item 7 contains forward-looking statements which involve certain degrees of risk and uncertainties, including statements relating to liquidity and capital resources. Except for the historical information, the matters discussed in this Item 7 are such forward-looking statements that involve risks and uncertainties, including, without limitation, the effect of competitive pricing within the industry, the presence of competitors with greater financial resources than the Company, the intense competition for top software engineering talent and the volatile nature of technological change within the automobile claims industry. Additional factors that could affect the Company's financial condition and results of operations are included in the Company's Final Prospectus in connection with the Registration Statement on Form S-1, as amended, filed with the Securities and Exchange Commission on August 16, 1996, Commission File Number 333-07287.
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ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required with respect to this Item 8 are listed in Item 14(a)(1) and 14(a)(2) included elsewhere in this filing
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is hereby incorporated by reference to CCC Information Services Group Inc.'s Notice of 1999 Annual Meeting of Stockholders and Proxy Statement, which was filed with the Securities and Exchange Commission and provided to Stockholders on or about March 31, 1999.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by reference to CCC Information Services Group Inc.'s Notice of 1999 Annual Meeting of Stockholders and Proxy Statement, which was filed with the Securities and Exchange Commission and provided to Stockholders on or about March 31, 1999.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is hereby incorporated by reference to CCC Information Services Group Inc.'s Notice of 1999 Annual Meeting of Stockholders and Proxy Statement, which was filed with the Securities and Exchange Commission and provided to Stockholders on or about March 31, 1999.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is hereby incorporated by reference to CCC Information Services Group Inc.'s Notice of 1999 Annual Meeting of Stockholders and Proxy Statement, which was filed with the Securities and Exchange Commission and provided to Stockholders on or about March 31, 1999.
CCC INFORMATION SERVICES GROUP INC. AND SUBSIDIARIES
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Index to Consolidated Financial Statements and Schedules
1. Consolidated Financial Statements
2. Financial Statement Schedule
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
(b) Reports on Form 8-K
No reports on Form 8-K were filed by CCC Information Services Group Inc. during 1998.
CCC INFORMATION SERVICES GROUP INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of CCC Information Services Group Inc.
In our opinion, the consolidated financial statements listed in the accompanying index appearing under Item 14(a)1 and (a)2 present fairly, in all material respects, the financial position of CCC Information Services Group Inc. (a subsidiary of White River Ventures, Inc.) and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP March 31, 1999 Chicago, Illinois
CCC INFORMATION SERVICES GROUP INC.
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CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
CCC INFORMATION SERVICES GROUP INC.
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CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
CCC INFORMATION SERVICES GROUP INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
CCC INFORMATION SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
The accompanying notes are an integral part of these consolidated financial statements.
CCC INFORMATION SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--DESCRIPTION OF BUSINESSES AND ORGANIZATION
CCC Information Services Group Inc. (formerly known as InfoVest Corporation), through its wholly owned subsidiary CCC Information Services Inc. ("CCC") (collectively referred to as the "Company"), is a supplier of automobile claims information and processing, claims management software and communication services. The Company's services and products enable automobile insurance company customers and collision repair facility customers to improve efficiency, manage costs and increase consumer satisfaction in the management of automobile claims and restoration.
As of December 31, 1998, White River Ventures, Inc. ("White River") held approximately 30.5% of the total outstanding common stock of the Company. White River is a wholly owned subsidiary of White River Corporation. As a result of White River's substantial equity interest and 51% voting power, including voting rights established through its ownership interest in the Company's Series E Preferred Stock, the Company is a consolidated subsidiary of White River. See Note 14--Mandatorily Redeemable Preferred Stock and Note 15--Initial Public Offering of Common Stock.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, which are currently wholly owned or majority owned.
REVENUE RECOGNITION
Revenues are recognized as services are provided. Of total Company revenues in the years 1998, 1997 and 1996, 65%, 66% and 69%, respectively, were attributable to revenues from insurance companies.
MARKETABLE SECURITIES
Marketable securities consisted primarily of U.S. treasury bills, which are stated at cost.
ACCOUNTS RECEIVABLE
Accounts receivable as presented in the accompanying consolidated balance sheet are net of reserves for customer credits and doubtful accounts. As of December 31, 1998 and 1997, $3.3 million, and $2.7 million, respectively, have been applied as a reduction of accounts receivable. Of total accounts receivable, net of reserves, at December 31, 1998 and 1997, $20.2 million and $14.3 million, respectively, were due from insurance companies.
INTERNAL SOFTWARE DEVELOPMENT COSTS
The Company expenses research and development costs as incurred. The Company has evaluated the establishment of technological feasibility of its product in accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." The Company sells its products in a market that is subject to rapid technological change, new product development and changing customer needs. Accordingly, the Company has concluded that technological feasibility is not established until the development stage of the product is nearly complete. The Company defines technological feasibility as the completion of a working model. The time period during which costs could be capitalized, from the point of reaching technological feasibility until the time of general product release, is very short
CCC INFORMATION SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) and, consequently, the amounts that could be capitalized are not significant. For the years 1998, 1997 and 1996, research and development costs of approximately $4.9 million, $5.5 million and $4.3 million, respectively, are reflected in the accompanying consolidated statement of operations.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, net of accumulated depreciation. Depreciation of equipment is provided on a straight-line basis over estimated useful lives ranging from 2 to 20 years.
GOODWILL
The excess of purchase price paid over the estimated fair value of identifiable tangible and intangible net assets of acquired businesses is capitalized and amortized on a straight-line basis over periods not to exceed 20 years. Goodwill is periodically reviewed to determine recoverability by comparing its carrying value to expected undiscounted future cash flows.
DEBT ISSUE COSTS
As of December 31, 1998 and 1997, deferred debt issue costs, net of accumulated amortization, of $0.5 million and $0.3 million, respectively, were included in other assets.
FOREIGN CURRENCY
The Company has determined that the functional currency of each foreign operation is the local currency. Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the exchange rate on the balance sheet date, while revenues and expenses are translated at average rates of exchange prevailing during the period. Translation adjustments are included in accumulated other comprehensive income as a separate component of stockholders' equity.
PER SHARE INFORMATION
Earnings per share are based on the weighted average number of shares of common stock outstanding and common stock equivalents using the treasury stock method. See Note 18--Earnings Per Share.
FAIR VALUE OF FINANCIAL INSTRUMENTS
As of December 31, 1998, the carrying amount of the Company's financial instruments, excluding the Investment in InsurQuote, (See Note 3--Investment in InsurQuote) approximates their estimated fair value based upon market prices for the same or similar type of financial instruments.
PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, and that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
CCC INFORMATION SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1996, the Company adopted the "disclosure method" provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," which became effective January 1, 1996. As permitted by SFAS No. 123, the Company continues to recognize stock-based compensation costs under the intrinsic value- based method of accounting as prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees."
Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") which establishes standards for reporting and display of comprehensive income and its components in the financial statements. Comprehensive income represents the change in stockholders' equity during a period resulting from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. There were no elements of Comprehensive Income in 1997 and 1996.
Effective January 1, 1998, the Company adopted SOP 97-2, "Software Revenue Recognition". SOP 97-2 provided guidance on when revenue should be recognized and in what amounts for licensing, selling, leasing or otherwise marketing computer software. The Company previously maintained a policy similar to SOP 97-2 and therefore the adoption of SOP 97-2 did not have a material impact on the Company's consolidated results of operations or financial position.
In March 1998, the AICPA issued SOP98-1, "Accounting For the Costs of Computer Software Developed For or Obtained For Internal-Use" (SOP 98-1), which the Company adopted. SOP 98-1 requires the capitalization of certain costs incurred in connection with developing or obtaining software for internal-use. The Company previously maintained a policy similar to SOP 98-1 and, therefore, the adoption of SOP98-1 did not have a material impact on the Company's consolidated results of operations or financial position.
Effective December 31, 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes new standards for reporting information about operating segments in interim and annual financial statements.
NOTE 3--INVESTMENT IN INSURQUOTE
On February 10, 1998, the Company invested $20.0 million in InsurQuote Systems, Inc. (InsurQuote). InsurQuote, formed in 1989, is a provider of insurance rating information and the software tools used to manage that information. The Company's $20.0 million investment included 19.9% of InsurQuote common stock, an $8.9 million subordinated note, warrants, shares of Series C redeemable convertible preferred stock and Series D convertible preferred stock. The warrants provide the Company with the right to acquire additional shares of InsurQuote common stock and are exercisable by the Company through February 10, 2008, subject to potential early termination provisions. The Series C preferred stock is redeemable in full at the end of five years, or earlier under certain conditions, if not converted prior to that time. Each share of Series C and D preferred stock is initially convertible into one share of common stock at the option of the Company. Under the terms of the investment agreement, the Company, subject to certain conditions, can increase its investment through additional purchases of common and preferred
CCC INFORMATION SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--INVESTMENT IN INSURQUOTE (CONTINUED) shares. The Company's ownership percentage, assuming conversion into common stock all of the securities currently exercisable, would be increased to 37.7% at December 31, 1998.
The Company had accounted for its investment in InsurQuote on the cost method until the fourth quarter of 1998, when it was determined that the equity method should be applied. Accordingly, prior quarters have been restated to reflect the investment in InsurQuote on the equity method. As a result, reported net income for quarters ended March 31, 1998, June 30, 1998 and September 30, 1998 have been adjusted to reflect equity losses of InsurQuote of $1.2 million, $3.0 million and $3.2 million, respectively and the elimination of interest and dividend income of $0.1 million, $0.2 million and $0.2 million, respectively. Notwithstanding the Company's 19.9% common stock equity share, the Company has recorded 100% of InsurQuote's net losses for the period from the Company's ownership, February 10, 1998 to December 31, 1998. The recording of 100% of InsurQuote's losses was the result of the Company's $20.0 million investment being the primary source of funding for InsurQuote's operating losses during the year. The Company has not recorded any income tax benefit on the InsurQuote losses. At December 31, 1998, the Company's remaining investment in InsurQuote was approximately $8.1 million. The market value of the investment in InsurQuote at December 31, 1998 is not readily determinable.
InsurQuote's fiscal year ended June 30, 1998. While the Company included InsurQuote's losses from the period of the Company's ownership during 1998 (February 10, 1998 to December 31, 1998). Set forth below is summary InsurQuote financial information as of its fiscal year ended June 30, 1998 is as follows:
On March 31, 1999, InsurQuote received a $20.0 million investment from a new investor for preferred stock with an 11% voting interest. Upon receipt of this new investment by InsurQuote the Company will cease recording losses on its investment, unless it is determined that its remaining investment is impaired.
NOTE 4--ENTERSTAND JOINT VENTURE
On December 30, 1998, the Company and Hearst Communications, Inc. ("Hearst") established a joint venture, Enterstand Limited (Enterstand), in Europe to develop and market claims tools to insurers and collision repair facilities. Under the provision of the Subscription and Stockholders Agreement ("Subscription Agreement"), the Company invested $2.0 million for a 19.9% equity interest. The Subscription Agreement provides the Company with an option to purchase 85% of Hearst shares of Enterstand at an agreed upon purchase price. The option is exercisable by the Company after one year from the date of the Subscription Agreement. The Company is applying the equity method of accounting for its investment in
CCC INFORMATION SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--ENTERSTAND JOINT VENTURE (CONTINUED) the joint venture and recorded a charge of $0.2 million for it's 19.9% share of the joint venture losses during 1998.
CCC and Enterstand entered into an agreement whereby CCC would develop for the benefit of Enterstand certain claims processing tools. During 1998, CCC charged Enterstand $0.6 million for the development work performed in 1998.
CCC International and Enterstand entered into an agreement where CCC International would provide Enterstand with certain administrative and operating services and office space. For the year ended December 31, 1998 CCC International charged Enterstand $0.5 million for these services.
NOTE 5--ACQUISITIONS
On July 1, 1998, the Company acquired 93.75% of CCC International, for $1.9 million. CCC International's business included claims consulting and expertise for insurance companies in the United Kingdom.
On August 31, 1998, the Company acquired 99.2% of Professional Claims Services, Inc. (PCSI) for $2.9 million. PCSI provides claims adjusting and third-party administration to the insurance industry and self-insured entities in the western United States. The PCSI purchase agreement provides for a contingent purchase price between $1.8 million and $7.0 million and is based on certain performance measures of PCSI through December 31, 2002.
The above acquisitions were accounted for as purchases and results of operations were included in the consolidated financial statements from their respective acquisitions dates. The purchase price for each acquisition was allocated based on estimated fair values at the date of acquisition. Substantially all the purchase price was allocated to goodwill amortized over a straight-line basis over its estimated useful life. Pro forma information has not been presented as the pro forma results would not be materially different from the historical results.
NOTE 6--RELOCATION OF CLAIMS SETTLEMENT FUNCTION
In the second quarter of 1998, the Company recorded a relocation charge of $1.7 million, $1.0 million after-tax or $0.04 per share, related to relocating certain customer service and claims processing operations to South Dakota. The charge for the relocation consisted primarily of severance and other incremental costs directly related to the relocation of 100 employees. The actual expenditures related to the relocation approximated the amount originally estimated and all expenditures associated with this relocation were completed by December 31, 1998. In connection with the relocation, the Company acquired a building and land at a total cost of $1.8 million.
NOTE 7--NONCASH INVESTING AND FINANCING ACTIVITIES
The Company directly charges accumulated deficit for preferred stock accretion and preferred stock dividends accrued. During 1998, 1997 and 1996, these amounts totaled $0.0 million, $0.4 million and $6.7 million, respectively.
CCC INFORMATION SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--NONCASH INVESTING AND FINANCING ACTIVITIES (CONTINUED) In conjunction with the exercise of certain stock options, the Company has reduced current income taxes payable with an offsetting credit to paid-in-capital for the tax benefit of stock options exercised. During 1998, 1997 and 1996, these amounts totaled $3.3 million, $4.3 million and $0.3 million, respectively.
In addition to amounts reported as purchases of equipment in the consolidated statement of cash flows, the Company has directly financed certain noncash capital expenditures. During 1996 these noncash capital expenditures totaled $1.3 million. There were no noncash capital expenditures in 1998 and 1997.
NOTE 8--INCOME TAXES
Income taxes applicable to income before equity losses, minority interest and extraordinary item consisted of the following (provision) benefit:
The Company's effective income tax rate applicable to continuing operations differs from the federal statutory rate as follows:
CCC INFORMATION SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--INCOME TAXES (CONTINUED) During 1998, 1997 and 1996, the Company made income tax payments, net of refunds, of $8.8 million, $6.7 million and $1.9 million, respectively.
The approximate income tax effect of each type of temporary difference giving rise to deferred income tax assets was as follows:
NOTE 9--OTHER CURRENT ASSETS
Other current assets consisted of the following:
CCC INFORMATION SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10--PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
As of December 31, 1998 and 1997, computer equipment, net of accumulated depreciation, that is on lease to certain customers under operating leases of $1.5 million and $2.4 million, respectively, is included in computer equipment. Future minimum rentals under noncancelable customer leases aggregate approximately $1.4 million and $0.5 million in 1999 and 2000, respectively.
NOTE 11--GOODWILL
Goodwill consisted of the following:
CCC INFORMATION SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
NOTE 13--LONG-TERM DEBT
On October 28, 1998, the credit facility between CCC and the commercial bank was amended and restated. Under the amended credit facility, CCC increased its ability to borrow under the revolving line of credit from $20 million to $50 million. In addition, the maturity date of the credit facility was extended to October 31, 2003. The interest rate under the amended bank credit facility is the London Interbank Offering Rate (LIBOR) plus 1.0% or the prime rate in effect from time to time, as selected by CCC. CCC pays a commitment fee of 0.25% on any unused portion of the revolving credit facility. When borrowings are outstanding, interest payments are due quarterly.
Under the bank facility, CCC is, with certain exceptions, prohibited from making certain sales or transfers of assets, incurring nonpermitted indebtedness or encumbrances, and redeeming or repurchasing its capital stock, among other restrictions. In addition, the bank credit facility requires CCC to maintain certain levels of operating cash flow and debt coverage, and limits CCC's ability to make investments and declare dividends.
The Company made cash interest payments of $0.1 million, $0.1 million and $2.6 million during the year ended December 31, 1998, 1997 and 1996, respectively.
Long-term debt consisted of the following:
CCC INFORMATION SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--LONG-TERM DEBT (CONTINUED) The bank revolving credit facility balance of $11.0 million is due on October 31, 2003, the maturity date of the bank credit facility.
NOTE 14--MANDATORILY REDEEMABLE PREFERRED STOCK
On June 16, 1994, pursuant to a reorganization and recapitalization, the Company issued: (a) 5,000 shares of its preferred stock, par value $1.00, designated as Series C Cumulative Redeemable Preferred Stock ("Series C Preferred Stock"), (b) 34,000 shares of its preferred stock, par value $1.00, designated as Series D Cumulative Redeemable Preferred Stock ("Series D Preferred Stock") and (c) 7,050,840 shares of the Company's Common Stock, par value $0.10, to White River in exchange for the Company's subordinated debt and Series A, B and C warrants acquired from the original subordinated debtholders by White River on April 15, 1994. At the date of exchange, the subordinated debt consisted of a principal balance of $41.7 million and accrued interest of $2.7 million. In recording the exchange, $3.9 million and $25.7 million were assigned to the Series C and Series D Preferred Stock, respectively. The balance of $14.8 million, less certain transaction costs of $2.4 million, was assigned to common stock and credited to paid-in capital.
As part of the reorganization and recapitalization, the Company and White River entered into an agreement under which the Company, following receipt of written notification from White River that the number of shares of the Company's common stock owned by White River represents less than a majority of the issued and outstanding shares of common stock of the Company, must issue to White River 500 shares of the Company's preferred stock, par value $1.00, designated as Series E Cumulative Redeemable Preferred Stock ("Series E Preferred Stock") in exchange for 500 shares of the Series D Preferred Stock. (Collectively, the Series C, D and E Preferred Stock are hereinafter referred to as "Preferred Stock.") The terms of the Series E Preferred Stock and the Series C and D Preferred Stock are generally the same, except that outstanding shares of the Series E Preferred Stock carry certain voting rights if they are beneficially owned by White River or any of its affiliates. In such circumstances, White River and/or its affiliates that own any shares of Series E Preferred Stock would be entitled to vote on all matters voted on by holders of the Company's common stock.
Subject to the pro-ration provisions described below, the number of votes that each share of Series E Preferred Stock may cast is determined according to a formula, the effect of which is to cause White River and/or it affiliates to have 51% of the votes to be cast on any matter to be voted upon by holders of the Company's common stock, for so long as all of the shares of Series E Preferred Stock are issued, outstanding and held by White River and/or its affiliates. To the extent White River also owns shares of the Company's common stock, such Series E Preferred Stock will only provide an additional voting percentage that, when added together with the vote from White River's shares of Company common stock, will provide White River with a maximum of 51% of the votes. Under the terms of a Stockholders Agreement among White River and certain stockholders, including the Company's Chairman (the "Management Stockholders"), the parties have agreed, subject to fiduciary duties, that White River will vote with the Management Stockholders regarding defined business combinations and subsequent offerings of Company common stock.
The terms of the Series E Preferred Stock provide for the pro-rata reduction of Series E Preferred Stock voting power from the voting power established as of its original issuance, to the extent that outstanding shares of Series E Preferred Stock are either redeemed by the Company or no longer owned
CCC INFORMATION SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--MANDATORILY REDEEMABLE PREFERRED STOCK (CONTINUED) by White River and/or its affiliates. Outstanding shares of Series E Preferred Stock are redeemable pro rata with the outstanding shares of Series C and Series D Preferred Stock.
Through the date of redemption, Preferred Stock dividends have accrued at a rate of 2.75% per annum. Because the Company completed the required redemption of Preferred Stock through the use of proceeds from the company's initial public offering of common stock, Preferred Stock dividends from the date of redemption through June 16, 1998 have been eliminated. See Note 15--Initial Public Offering of Common Stock. Beginning June 17, 1998, Preferred Stock dividends, payable quarterly, accrue at an annual rate of 8%. The Preferred Stock is mandatorily redeemable, at stated value plus accrued dividends, on June 16, 1999. Prior to the mandatory redemption date, under the terms of the Preferred Stock, White River is only required to accept an offer to redeem that is funded through a public offering of the Company's common stock. On May 29, 1998, the Company made an offer to White River to redeem all outstanding Preferred Stock. This redemption offer was declined by White River. Accordingly, under the terms of the Preferred Stock, the dividend rate on the Preferred Stock subject to the redemption offer was reduced from 8% to 1%.
On December 31, 1998, the Company redeemed all of the Series C Preferred stock outstanding and 3,601 Shares of Series D Preferred Stock at a discounted value of 14% of the future redemption value and stated dividends plus accrued dividends as of December 31, 1998. As a result of this early redemption discount, the Company recorded a gain of $0.2 million on early redemption of Preferred Stock. This amount was included in the dividends and accretion line in the Company's consolidated statement of operations. At December 31, 1998, 184 Shares of Series D Preferred Stock and 500 Shares of Series E Preferred Stock are issued and outstanding.
NOTE 15--INITIAL PUBLIC OFFERING OF COMMON STOCK
On June 27, 1996, the Company's Board of Directors authorized the filing of a registration statement with the Securities and Exchange Commission for an initial public offering (IPO) of the Company's common stock. In addition, on August 13, 1996 the Company's Board of Directors authorized a 40 for 1 split of the common stock of the Company, which was effective August 13, 1996. All reported share information has been restated to reflect the split. On August 21, 1996, the Company completed its IPO by issuing 6,900,000 shares of common stock, par value $0.10, at $11.50 per share. Gross proceeds from the IPO of $79.4 million were reduced by Underwriters' discounts of $5.6 million and equity issue costs of $1.7 million. Proceeds from the IPO were used to repay certain bank debt and, as required by the terms of the Company's Series C and Series D Preferred Stock, the Company used 50% of the net proceeds from the IPO to redeem 34,085 shares of outstanding Preferred Stock at its stated value of $34.1 million plus accrued dividends of $2.0 million. As a result of the redemption and in accordance with the terms of the Preferred Stock, Preferred Stock dividends from the IPO date through June 16, 1998 have been eliminated.
As a result of the IPO, White River's common equity ownership percentage was reduced from approximately 52% to approximately 37%. On August 23, 1996, White River informed the Company of its intention to exchange 500 shares of Series D Preferred Stock for 500 shares of the Company's Series E Preferred Stock. Pursuant to the request from White River, the Company issued 500 Shares of Series E Preferred Stock in exchange for 500 Shares of Series D Preferred Stock.
CCC INFORMATION SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--BENEFIT PLAN
The Company sponsors a defined contribution savings and investment plan. Participation in the plan is voluntary, with substantially all employees eligible to participate. Expenses related to the plan consist primarily of Company contributions which are based on percentages of certain employees contributions. Defined contribution expense for 1998, 1997 and 1996 was $0.7 million, $0.5 million and $0.4 million, respectively.
NOTE 17--STOCK OPTION PLAN
In May 1988, the Company's Board of Directors adopted a nonqualified stock option plan (the "1988 Plan"). Under the 1988 Plan, as amended in 1992, options may be granted at a per share price of not less than the greater of $1.375 or the fair market value as of the date of grant, as determined by the Compensation Committee of the Board of Directors (Committee). Options are generally exercisable within 5 years from the date of grant, subject to vesting schedules determined at the discretion of the Committee. In general, however, option grants vest over 4 years. As a result of the Company's June 1994 reorganization and recapitalization, under an agreement with White River, the number of incremental options that may be granted under the 1988 Plan subsequent to June 16, 1994 was limited to 3% of outstanding stock on June 16, 1994 or 488,880 shares. Including these incremental options, 2,956,040 total options were available under the plan to be granted. No additional options can be granted under the 1988 Plan. During 1997, the Company's Board of Directors adopted a new stock option plan that provides for the granting of 675,800 new options to purchase Company common stock. As under the 1988 Plan, options are generally exercisable within five years from the date of grant. On August 25, 1998, the 1997 stock option plan was amended to increase the number of shares available to be granted to 1,500,000 shares. In addition, the term of the option was extended from 5 years to 10 years on new stock option grants.
On September 23, 1998, the Company's Board of Directors approved a one-time stock option exchange program, whereby all non-executive management option holders could exchange their outstanding options for new options at a strike price of $12.125. The 164,975 stock options that were part of the exchange program are included in the 1998 option activity below as corresponding grants and terminations.
CCC INFORMATION SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--STOCK OPTION PLAN (CONTINUED) Option activity during 1998, 1997 and 1996 is summarized below:
The next table summarizes information about fixed stock options outstanding at December 31, 1998:
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model. The principal determinants of option pricing are: fair market value of the Company's common stock at the date of grant, expected volatility, risk-free interest rate, expected option lives and dividend yields. Weighted average assumptions employed by the Company were: expected volatility of 32%, 31% and 30% for 1998, 1997 and 1996, respectively; and a risk-free interest rate of 4.7%, 6.4% and 6.5% for 1998, 1997 and 1996, respectively. In addition, the Company assumed an expected option life of 4.5 years to 5.5 years for 1998 and 4.5 years for both 1997 and 1996. No dividend yield was assumed for all years.
The Company applies APB Opinion 25 in accounting for its fixed stock option plan and, accordingly, has not recognized compensation cost in the accompanying consolidated statement of operations. Had compensation cost been recognized based on fair value as of the grant dates as defined in SFAS No. 123,
CCC INFORMATION SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--STOCK OPTION PLAN (CONTINUED) the Company's net income applicable to common stock and related per share amounts would have been reduced as indicated below:
The effects of applying SFAS No. 123 in the above pro forma disclosures are not indicative of future amounts as they do not include the effects of awards granted prior to 1995, some of which would have had income statement effects in 1998, 1997 and 1996 due to the four-year vesting period associated with the fixed stock option awards. Additionally, future amounts are likely to be affected by the number of grants awarded since additional awards are generally expected to be made at varying amounts.
NOTE 18--EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share" in the fourth quarter of 1997. SFAS No. 128 requires the presentation of basic and diluted earnings per share, including the restatement of prior periods. A summary of the calculation of basic and diluted earnings per share for the years ended December 31, 1998, 1997 and 1996, is presented below (in thousands, except per share data):
Options to purchase a weighted average number of 251,136 shares and 70,528 shares of common stock for 1998 and 1997, respectively, were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares. The price of these options ranged from $18.25 to $27.50 per share. At December 31, 1998, 169,350 of these options, which expire in the range of 2002 through 2003, were still outstanding.
CCC INFORMATION SERVICES GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19--COMMITMENTS AND CONTINGENCIES
The Company leases facilities, computers, telecommunications and office equipment under the terms of noncancelable operating lease agreements which expire at various dates through 2008. As of December 31, 1998, future minimum cash lease payments were as follows:
During 1998, 1997 and 1996, operating lease expense was $5.1 million, $3.5 million and $3.2 million, respectively.
The Company has a $0.2 million letter of credit available until October 2003. Under the terms of this agreement, interest rates are determined at the time of borrowing. There was no amount outstanding under the letter of credit at December 31, 1998.
During the first quarter of 1999, the Company entered into a settlement with a service provider for amounts paid in prior years which would result in a partial refund. Pursuant to the terms of the settlement, the Company expects to receive credits of approximately $0.8 million in March of 1999.
CCC INFORMATION SERVICES GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20--BUSINESS SEGMENTS
FASB Statement No. 131, "Disclosures About Segments for Enterprise and Related Information," requires companies to provide certain information about their operating segments.
The Company has three reportable segments; Insurance Services, Automotive Services and Consumer Processing Services. The Insurance Services Division sells products and services which assist their customers in managing total loss and repairable auto claims as well as a product to assist in the underwriting of insurance. The Automotive Services Division sells products and services which assist their customers in managing repairable auto claims. The Consumer Processing Services Division sells products and services which provide complete outsourcing services on all aspects of the claim process.
The Company's reportable segments are based upon the nature of the products and services within the Company and the methods used to distribute these products and services. The Company is organized into revenue producing divisions and support organizations (product development and customer support) tasked with facilitating the performance of the revenue producing divisions. Division expenses represent principally salaries and related employee expenses directly related to the Division's activities. Each revenue division and support organization is led by a vice president that reports to either the Chief Operating Officer or the Chief Executive Officer. Management evaluates performance at the total company profit level and at the product revenue level. The support organization costs are not currently allocated to the revenue producing divisions and includes product engineering, management information systems, customer support and finance and administration costs.
CCC INFORMATION SERVICES GROUP INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20--BUSINESS SEGMENTS (CONTINUED) * Other net revenue includes a discontinued product which provided new and used car pricing to consumers. Other expenses include support costs.
Net revenue by major products include:
NOTE 21--LEGAL PROCEEDINGS
In March 1999, the Company completed settlement of a lawsuit involving a former independent sales representative. The settlement resulted in a charge of $1.7 million including among other things payment for past earned commissions, resolution of disputed commissions and other costs associated with the resolution of the dispute.
The Company is a party to various other legal proceedings in the ordinary course of business. The Company believes that the ultimate resolution of these other matters will not have a material effect on the Company's financial position.
NOTE 22--SUMMARIZED QUARTERLY OPERATING RESULTS (UNAUDITED)
The first, second and third quarters of 1998 were restated to reflect the investment in InsurQuote on the equity method of accounting. A comparison between as originally reported and as restated follows:
The following table sets forth unaudited consolidated statements of operations for the quarters in the years ended December 31, 1998 and 1997. These 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.
NOTE 22--SUMMARIZED QUARTERLY OPERATING RESULTS (UNAUDITED) (CONTINUED)
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(1) See Note 21--Legal Proceedings
(2) See Note 6--Relocation of Claims Settlement Function
CCC INFORMATION SERVICES GROUP, INC. AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
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(a) Accounts receivable write-offs, net of recoveries.
(b) Opening reserve balance for Professional Claims Services Inc.
(c) Reversal of deferred tax valuation allowances.
CCC INFORMATION SERVICES GROUP INC. AND SUBSIDIARIES
EXHIBIT INDEX
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* To be filed by Amendment.
CCC INFORMATION SERVICES GROUP INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CCC INFORMATION SERVICES GROUP INC. AND SUBSIDIARIES
CCC INFORMATION SERVICES GROUP INC. AND SUBSIDIARIES
CCC INFORMATION SERVICES GROUP INC. AND SUBSIDIARIES
CORPORATE INFORMATION