As filed with the Securities and Exchange Commission on
October 7, 2008
Registration
No. 333-152973
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Amendment No. 1
to
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
VERISK ANALYTICS,
INC.
(Exact Name of Registrant as
Specified in Its Charter)
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Delaware
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7374
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26-2994223
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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545 Washington Boulevard
Jersey City, NJ 07310-1686
(201) 469-2000
(Address, Including Zip Code,
and Telephone Number, Including Area Code, of Registrants
Principal Executive Offices)
Kenneth E. Thompson
Senior Vice President, General Counsel and Corporate
Secretary
Verisk Analytics, Inc.
545 Washington Boulevard
Jersey City, NJ 07310-1686
(201) 469-2000
(Name, Address, Including Zip
Code, and Telephone Number, Including Area Code, of Agent For
Service)
Copies to:
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Richard J. Sandler
Ethan T. James
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
(212) 450-4000
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Eric J. Friedman
Richard B. Aftanas
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036
(212) 735-3000
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Approximate date of commencement of proposed sale to the
public:
As soon as practicable after the effective date of
this Registration Statement.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box.
o
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering.
o
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering.
o
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering.
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b2 of the Exchange Act.
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Large
accelerated
filer
o
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Accelerated
filer
o
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Non-accelerated
filer
þ
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Smaller
reporting
company
o
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(Do not check if a smaller reporting company)
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Title of Each Class
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Proposed Maximum Aggregate
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Amount of
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of Securities to be Registered
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Offering Price(1)(2)
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Registration Fee
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Class A common stock, par value $0.001 per share
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$750,000,000
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$29,475(3)
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(1)
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Includes shares of Class A common stock which the
underwriters have the right to purchase to cover over-allotments.
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(2)
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Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) under the
Securities Act of 1933.
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The Registrant hereby amends
this Registration Statement on such date or dates as may be
necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933
or until the Registration Statement shall become effective on
such date as the Commission, acting pursuant to said
Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell
these securities and is not soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not
permitted.
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(Subject to
Completion)
PRELIMINARY
PROSPECTUS
Dated October 7, 2008
Shares
Verisk Analytics,
Inc.
Class A Common
Stock
This is our initial public offering of common stock. Our
stockholders are selling all of the shares of our Class A
common stock, par value $0.001 per share, offered by this
prospectus. We are not selling any shares in this offering. We
expect the public offering price to be between
$ and
$ per share. Currently, no public
market exists for the shares.
After pricing of the offering, we expect that the shares will be
listed on the New York Stock Exchange under the symbol
.
Investing in our common stock involves risks that are
described in the Risk Factors section beginning on
page 10 of this prospectus.
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Per Share
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Total
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Public offering price
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$
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$
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Underwriting discount
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$
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$
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Proceeds, before expenses, to the selling stockholders
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$
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$
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The underwriters may also purchase up to an
additional shares
of Class A common stock from the selling stockholders at
the initial public offering price, less the underwriting
discount, within 30 days from the date of this prospectus
to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The shares will be ready for delivery on or
about ,
2008.
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Merrill
Lynch & Co.
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Morgan Stanley
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,
2008
TABLE OF
CONTENTS
You should rely only on the information contained in this
prospectus. We and the selling stockholders have not authorized
anyone to provide you with information different from that
contained in this prospectus. We and the selling stockholders
are offering to sell, and seeking offers to buy, shares of
Class A common stock only in jurisdictions where offers and
sales are permitted. The information contained in this
prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or of any
sale of the common stock.
Prior to the completion of this offering, we will have effected
an internal reorganization whereby our predecessor, Insurance
Services Office, Inc., or ISO, will become a wholly-owned
subsidiary of the Company and all outstanding shares of ISO
common stock will be replaced with common stock of the Company.
We will immediately thereafter effect an
approximately -for-one split of our
common stock. Unless otherwise stated herein or the context
otherwise requires, the terms Verisk, the
Company, we, us, and
our refer to Verisk Analytics, Inc. and its
consolidated subsidiaries after giving effect to the
reorganization described above, and prior to such reorganization
these terms refer to ISO and its consolidated subsidiaries
through which we are currently conducting our operations. In
addition, except as the context otherwise requires, the share
and per share information in this prospectus gives effect to the
stock split that will occur immediately after the reorganization.
Until ,
2008, 25 days after the commencement of this offering, all
dealers that buy, sell, or trade shares of our common stock,
whether or not participating in this offering, may be required
to deliver a prospectus. This delivery requirement is in
addition to the dealers obligations to deliver a
prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
i
PROSPECTUS
SUMMARY
This summary highlights information contained elsewhere in
this prospectus. This summary may not contain all of the
information that you should consider before deciding to invest
in our Class A common stock. You should read this entire
prospectus carefully, including the Risk Factors
section and the consolidated financial statements and the notes
to those statements.
Company
Overview
We enable risk-bearing businesses to better understand and
manage their risks. We provide value to our customers by
supplying proprietary data that, combined with our analytic
methods, creates embedded decision support solutions. We are the
largest aggregator and provider of detailed actuarial and
underwriting data pertaining to U.S. property and casualty,
or P&C, insurance risks. We offer solutions for detecting
fraud in the U.S. P&C insurance, healthcare and
mortgage industries, and sophisticated methods to predict and
quantify loss in diverse contexts ranging from natural
catastrophes to health insurance.
Our customers use our solutions, in the form of our data,
statistical models or tailored analytics, to make more logical
decisions. We develop solutions which our customers use to
analyze the four key processes in managing risk, in what we
define as the Verisk Risk Analysis Framework: Prediction of
Loss, Selection and Pricing of Risk, Detection and Prevention of
Fraud, and Quantification of Loss.
We organize our business in two segments: Risk Assessment and
Decision Analytics.
Risk Assessment:
We are the leading
provider of statistical, actuarial and underwriting data for the
U.S. P&C insurance industry. Our proprietary and
unique databases describe premiums and losses in insurance
transactions, casualty and property risk attributes for
commercial buildings and their occupants and fire suppression
capabilities of municipalities in addition to other properties
and attributes. Our largest P&C insurance database includes
nearly 14 billion records, and, in each of the past three
years, we updated the database with over 2 billion
validated new records. We use our data, for example, to create
policy language and proprietary risk classifications that are
industry standard and to generate prospective loss cost
estimates used to price insurance policies.
Decision Analytics:
We provide
solutions in each of the four processes of the Verisk Risk
Analysis Framework by combining algorithms and analytic methods,
which incorporate our proprietary data. Our unique data sets
include approximately 600 million P&C insurance
claims, historic natural catastrophe data covering more than 50
countries, data from more than 13 million applications for
mortgage loans and over 300 million U.S. criminal
records. Customers integrate our solutions into their models,
formulas or underwriting criteria to predict potential loss
events, ranging from hurricanes and earthquakes to unanticipated
healthcare claims. We are a leading developer of catastrophe and
extreme event models and offer solutions covering natural and
man-made risks, including acts of terrorism. We also develop
solutions that allow customers to quantify costs after loss
events occur. Our fraud solutions include data on claim
histories, analysis of mortgage applications to identify
misinformation, analysis of claims to find emerging patterns of
fraud and identification of suspicious claims in the insurance,
healthcare and mortgage sectors.
We believe our solutions for analyzing risk positively impact
our customers revenues and help them better manage their
costs. The embedded nature of our solutions serves to strengthen
and extend our relationships. In 2007, our U.S. customers
included all of the top 100 P&C insurance providers, four
of the 10 largest Blue Cross Blue Shield plans, four of the
seven leading mortgage insurers, 14 of the top 20 mortgage
lenders, and 8 of the 10 largest global reinsurers.
Approximately 96% of our top 200 customers in 2007, as ranked by
revenue, have been our customers for each of the last five
years. Further, from 2003 to 2007, revenues generated from these
top 200 customers grew at a compound annual growth rate, or
CAGR, of 13%.
We offer our solutions and services primarily through annual
subscriptions or long-term agreements, which are typically
pre-paid and represented approximately 74% of our revenues in
2007. For the year ended December 31, 2007 and the six
months ended June 30, 2008, we had revenues of
$802 million and $438 million, respectively, and net
income of $150 million and $81 million, respectively.
For the five year
1
period ended December 31, 2007, our revenues and net income
have grown at a CAGR of 13.8% and 21.2%, respectively.
Our
Market Opportunity
We believe there is a long-term trend for companies to set
strategy and direct operations using data and analytics to guide
their decisions, which has resulted in a large and rapidly
growing market for professional and business information.
According to Veronis Suhler Stevenson, an industry consultant,
in a report dated September 2006, spending on professional and
business information services in the U.S. reached
$61 billion in 2005 and is projected to grow at a CAGR of
8% through 2010. Another research firm, International Data
Corporation, or IDC, in a report dated March 2008, estimates
that the business analytics services market, which totaled
$32 billion in 2007, will grow at a CAGR of 9% through 2012.
We believe that the consistent decline in the cost of computing
power contributes to the trend towards greater use of data and
analytics. As a result, larger data sets are assembled faster
and at a lower cost per record while the complexity and accuracy
of analytical applications and solutions have expanded. This
trend has led to an increase in the use of analytic output,
which can be generated and applied more quickly, resulting in
more informed decision making. As computing power increases,
cost decreases and accuracy improves, we believe customers will
continue to apply and integrate data and analytic solutions more
broadly.
Companies that engage in risk transactions, including P&C
insurers, healthcare payors and mortgage lenders and insurers,
are particularly motivated to use enhanced analytics because of
several factors affecting risk markets, including:
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the total value of exposures in risk transactions is increasing;
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the number of participants in risk transactions is often large
and the asymmetry of information among participants is often
substantial; and
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the failure to understand risk can lead to large and rapid
declines in financial performance.
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Our
Competitive Strengths
We believe our competitive strengths include the following:
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Our Solutions are Embedded In Our Customers Critical
Decision Processes.
Our customers use our
solutions to make better risk decisions and to price risk
appropriately. In the U.S. P&C insurance industry, our
solutions for prospective loss costs, policy language,
rating/underwriting rules and regulatory filing services are the
industry standard. In the U.S. healthcare and mortgage
industries, our predictive models, loss estimation tools and
fraud identification applications are the primary solutions that
allow customers to understand their risk exposures and
proactively manage them. Over the last three years, we have
retained 98% of our customers across all of our businesses,
which we believe reflects our customers recognition of the
value they derive from our solutions.
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Extensive and Differentiated Data Assets and Analytic
Methods.
We maintain what we believe are some
of the largest, most accurate, and most complete databases in
the markets we serve. Much of the information we provide is not
available from any other source and would be difficult and
costly for another party to replicate. As a result, our
accumulated experience and years of significant investment have
given us a competitive advantage in serving our customers.
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Culture of Continuous Improvement.
Our
intellectual capital and focus on continuous improvement have
allowed us to develop proprietary algorithms and solutions that
assist our customers in making informed risk decisions. Our team
includes approximately 390 individuals with advanced degrees,
certifications and professional designations in such fields as
actuarial science, data management, mathematics, statistics,
economics, soil mechanics, meteorology and various engineering
disciplines. Our compensation and benefit plans are
pay-for-performance-
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oriented, including incentive compensation plans and substantial
equity participation by employees. Today, our employees own
approximately 30% of the company.
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Attractive Operating Model.
We believe we have
an attractive operating model due to the recurring nature of our
revenues, the scalability of our solutions and the low capital
intensity of our business.
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Our
Growth Strategy
Over the past five years, we have grown our revenues at a CAGR
of 13.8% through the successful execution of our business plan.
These results reflect strong organic revenue growth, new product
development and selected acquisitions. We have made, and
continue to make, investments in people, data sets, analytic
solutions, technology, and complementary businesses. The key
components of our strategy include:
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Increase Sales to Insurance
Customers.
We expect to expand the
application of our solutions in insurance customers
internal risk and underwriting processes. Building on our deep
knowledge of, and embedded position in, the insurance industry,
we expect to sell more solutions to existing customers tailored
to individual insurance segments. By increasing the breadth and
relevance of our offerings, we believe we can strengthen our
relationships with customers and increase our value to their
decision making in critical ways.
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Develop New, Proprietary Data Sets and Predictive
Analytics.
We work with our customers to
understand their evolving needs. We plan to create new solutions
by enriching our mix of proprietary data sets, analytic
solutions and effective decision support across the markets we
serve. We constantly seek to add new data sets that can further
leverage our analytic methods, technology platforms and
intellectual capital.
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Leverage Our Intellectual Capital to Expand into Adjacent
Markets and New Customer Sectors.
Our
organization is built on nearly four decades of intellectual
property in risk management. We believe we can continue to
profitably expand the use of our intellectual capital and apply
our analytic methods in new markets, where significant
opportunities for long-term growth exist. We also continue to
pursue growth through targeted international expansion. We have
already demonstrated the effectiveness of this strategy with our
expansion into healthcare and non-insurance financial services.
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Pursue Strategic Acquisitions that Complement Our
Leadership Positions.
We will continue to
expand our data and analytics capabilities across industries.
While we expect this will occur primarily through organic
growth, we have and will continue to acquire assets and
businesses that strengthen our value proposition to customers.
We have developed an internal capability to source, evaluate and
integrate acquisitions that have created value for shareholders.
We have acquired 14 businesses in the past five years, which in
the aggregate have increased their revenue with a weighted
average CAGR of 40% over the same period.
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Risk
Factors
Investing in our common stock involves substantial risk. Please
read Risk Factors beginning on page 10 for a
discussion of certain factors you should consider in evaluating
an investment in our common stock.
3
Corporate
History and Information
We were formed in 1971 as an advisory and rating organization
for the P&C insurance industry to provide statistical and
actuarial services, to develop insurance programs and to assist
insurance companies in meeting state regulatory requirements.
Over the past decade, we have transformed our business by
deepening and broadening our data assets, entering new markets,
placing a greater emphasis on analytics and pursing strategic
acquisitions to enhance these efforts. Members of our senior
management operating team have been with us for an average of
almost twenty years. This team has led our transformation to a
successful for-profit entity and our expansion from P&C
insurance into a variety of new markets.
Our principal executive offices are located at 545 Washington
Boulevard, Jersey City, New Jersey,
07310-1686
and our telephone number is
(201) 469-2000.
4
THE
OFFERING
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Class A common stock offered by the selling stockholders
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shares
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Class A common stock outstanding
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shares
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Over-allotment option
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shares
of Class A common stock from the selling stockholders
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Class B common stock outstanding
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shares
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Sale and transfer restrictions on Class B common stock
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The Class B (Series 1) common stock is not
transferable until 18 months after the date of this
prospectus and the Class B (Series 2) common
stock is not transferable until 30 months after the date of
this prospectus.
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These transfer restrictions are subject to limited exceptions,
including transfers to another holder of Class B common
stock. See Description of Capital Stock Common
Stock Transfer Restrictions.
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Conversion of Class B common stock
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After termination of the restrictions on transfer described
above for each series of Class B common stock, such series
of Class B common stock will be automatically converted
into Class A common stock. No later than 30 months
after the date of this prospectus, there will be no outstanding
shares of Class B common stock.
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In the event that Class B common stock is transferred and
converts into Class A common stock, it will have the effect
of diluting the voting power of our existing holders of
Class A common stock. See Description of Capital
Stock Common Stock Conversion.
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Use of proceeds
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The Company will not receive any proceeds from sale of
Class A common stock in the offering.
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Dividend policy
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Following this offering and subject to legally available funds,
we currently intend to pay a quarterly dividend, in cash, at an
annual rate initially equal to
$ per share of Class A
common stock (representing a quarterly rate initially equal to
$ per share) commencing with
the quarter
ended ,
2008. Our Class B common stock will share ratably on an
as-converted basis in such dividends. The declaration and
payment of any dividends will be at the sole discretion of our
board of directors after taking into account various factors,
including our financial condition, operating results, capital
requirements, covenants in our debt instruments and other
factors that our board of directors deems relevant.
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Stock symbol
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5
Unless the context requires otherwise, the number of shares of
our Class A common stock to be outstanding after this
offering is based on the number of shares outstanding as of
June 30, 2008, giving effect to the stock split
of -for-one
that will have occurred prior to the completion of this
offering. The number of shares of our Class A common stock
to be outstanding after this offering does not take into
account, unless the context otherwise requires:
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shares
of Class A common stock issuable upon the exercise of
outstanding stock options as of June 30, 2008 at a weighted
average exercise price of $ per
share; and
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an aggregate
of shares
of Class A common stock that will be reserved for future
issuances under our 2008 Equity Incentive Plan as of the closing
of this offering.
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6
SUMMARY
CONSOLIDATED FINANCIAL AND OTHER DATA
The following summary historical financial data should be read
in conjunction with, and are qualified by reference to,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the consolidated
financial statements and unaudited condensed consolidated
financial statements and notes thereto included elsewhere in
this prospectus. The consolidated statement of operations data
for the years ended December 31, 2005, 2006 and 2007 and
the consolidated balance sheet data as of December 31, 2006
and 2007 are derived from the audited consolidated financial
statements included elsewhere in this prospectus. The
consolidated balance sheet data as of December 31, 2005 is
derived from the unaudited consolidated financial statements
that are not included in this prospectus. The consolidated
statement of operations data for the six-month periods ended
June 30, 2007 and 2008 and the consolidated balance sheet
data as of June 30, 2008 are derived from unaudited
condensed consolidated financial statements that are included in
this prospectus and the consolidated balance sheet data as of
June 30, 2007 is derived from unaudited condensed
consolidated financial statements that is not included in this
prospectus. The unaudited condensed consolidated financial
statements, in our opinion, have been prepared on the same basis
as the audited consolidated financial statements and reflect all
adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of our results of operations
and financial position. Results for the six-month period ended
June 30, 2008 are not necessarily indicative of results
that may be expected for the fiscal year ended December 31,
2008 or any future period.
Since January 1, 2005 we have acquired 10 businesses, which
may affect the comparability of our financial statements.
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Six Months
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Year Ended December 31,
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Ended June 30,
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2005
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2006
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2007
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2007
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2008
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(In thousands, except for share and per share data)
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Statement of income data:
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Revenues:
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Risk Assessment revenues
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$
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448,875
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$
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472,634
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$
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485,160
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$
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244,556
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$
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253,356
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Decision Analytics revenues
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196,785
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257,499
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317,035
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155,432
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184,334
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Revenues
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645,660
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730,133
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802,195
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399,988
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437,690
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Expenses:
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Cost of revenues
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294,911
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331,804
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357,191
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176,502
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190,678
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Selling, general and administrative
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88,723
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100,124
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107,576
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55,600
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59,028
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Depreciation and amortization of fixed assets
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22,024
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28,007
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31,745
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15,498
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16,424
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Amortization of intangible assets
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19,800
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26,854
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33,916
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17,240
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14,937
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Total expenses
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425,458
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486,789
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530,428
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264,840
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281,067
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Operating income
|
|
|
220,202
|
|
|
|
243,344
|
|
|
|
271,767
|
|
|
|
135,148
|
|
|
|
156,623
|
|
Other income/(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income and realized gains on securities, net
|
|
|
2,932
|
|
|
|
6,101
|
|
|
|
9,308
|
|
|
|
4,963
|
|
|
|
317
|
|
Interest expense
|
|
|
(10,465
|
)
|
|
|
(16,668
|
)
|
|
|
(22,928
|
)
|
|
|
(11,474
|
)
|
|
|
(14,173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(7,533
|
)
|
|
|
(10,567
|
)
|
|
|
(13,620
|
)
|
|
|
(6,511
|
)
|
|
|
(13,856
|
)
|
Income from continuing operations before income taxes
|
|
|
212,669
|
|
|
|
232,777
|
|
|
|
258,147
|
|
|
|
128,637
|
|
|
|
142,767
|
|
Provision for income taxes
|
|
|
(85,722
|
)
|
|
|
(86,921
|
)
|
|
|
(103,184
|
)
|
|
|
(52,432
|
)
|
|
|
(61,818
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
126,947
|
|
|
|
145,856
|
|
|
|
154,963
|
|
|
|
76,205
|
|
|
|
80,949
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Year Ended December 31,
|
|
|
Ended June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands, except for share and per share data)
|
|
|
Loss from discontinued operations, net of tax(1)
|
|
|
(2,574
|
)
|
|
|
(1,805
|
)
|
|
|
(4,589
|
)
|
|
|
(1,302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
124,373
|
|
|
$
|
144,051
|
|
|
$
|
150,374
|
|
|
$
|
74,903
|
|
|
$
|
80,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income/(loss) per share
(2)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
29.81
|
|
|
$
|
35.31
|
|
|
$
|
38.58
|
|
|
$
|
18.69
|
|
|
$
|
21.73
|
|
Loss from discontinued operations
|
|
|
(0.61
|
)
|
|
|
(0.44
|
)
|
|
|
(1.14
|
)
|
|
|
(0.32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$
|
29.20
|
|
|
$
|
34.87
|
|
|
$
|
37.44
|
|
|
$
|
18.37
|
|
|
$
|
21.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income/(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
28.45
|
|
|
$
|
33.85
|
|
|
$
|
37.03
|
|
|
$
|
17.97
|
|
|
$
|
20.87
|
|
Loss from discontinued operations
|
|
|
(0.58
|
)
|
|
|
(0.42
|
)
|
|
|
(1.10
|
)
|
|
|
(0.31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$
|
27.87
|
|
|
$
|
33.43
|
|
|
$
|
35.93
|
|
|
$
|
17.66
|
|
|
$
|
20.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,258,989
|
|
|
|
4,130,962
|
|
|
|
4,016,928
|
|
|
|
4,077,259
|
|
|
|
3,724,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
4,462,109
|
|
|
|
4,308,976
|
|
|
|
4,185,151
|
|
|
|
4,240,053
|
|
|
|
3,877,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Assessment EBITDA
|
|
$
|
195,951
|
|
|
$
|
202,872
|
|
|
$
|
212,780
|
|
|
$
|
104,819
|
|
|
$
|
113,500
|
|
Decision Analytics EBITDA
|
|
|
66,075
|
|
|
|
95,333
|
|
|
|
124,648
|
|
|
|
63,067
|
|
|
|
74,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
262,026
|
|
|
$
|
298,205
|
|
|
$
|
337,428
|
|
|
$
|
167,886
|
|
|
$
|
187,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of fixed assets
|
|
$
|
(24,019
|
)
|
|
$
|
(25,742
|
)
|
|
$
|
(32,941
|
)
|
|
$
|
(23,050
|
)
|
|
$
|
(17,810
|
)
|
Net cash provided by operating activities
|
|
|
174,071
|
|
|
|
223,499
|
|
|
|
248,521
|
|
|
|
117,136
|
|
|
|
141,929
|
|
Net cash used in investing activities
|
|
|
(107,444
|
)
|
|
|
(243,452
|
)
|
|
|
(110,831
|
)
|
|
|
(49,403
|
)
|
|
|
(98,402
|
)
|
Net cash (used in) provided by financing activities
|
|
|
(90,954
|
)
|
|
|
75,907
|
|
|
|
(212,591
|
)
|
|
|
(127,194
|
)
|
|
|
(16,759
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
42,822
|
|
|
$
|
99,152
|
|
|
$
|
24,049
|
|
|
$
|
39,826
|
|
|
$
|
50,835
|
|
Total assets
|
|
|
466,244
|
|
|
|
744,731
|
|
|
|
828,483
|
|
|
|
779,465
|
|
|
|
866,839
|
|
Total debt(4)
|
|
|
276,964
|
|
|
|
448,698
|
|
|
|
438,330
|
|
|
|
401,700
|
|
|
|
642,182
|
|
Redeemable common stock(5)
|
|
|
901,089
|
|
|
|
1,125,933
|
|
|
|
1,171,188
|
|
|
|
1,211,422
|
|
|
|
1,006,287
|
|
Stockholders deficit
|
|
|
(938,294
|
)
|
|
|
(1,116,357
|
)
|
|
|
(1,195,728
|
)
|
|
|
(1,203,279
|
)
|
|
|
(1,178,947
|
)
|
|
|
|
(1)
|
|
As of December 31, 2007, we discontinued operations of our
claim consulting business located in New Hope, Pennsylvania and
the United Kingdom.
|
|
(2)
|
|
In conjunction with the initial public offering, the stock of
Insurance Services Office, Inc. will convert to stock of Verisk
Analytics, Inc., which plans to effect a stock split of its
common stock. Giving effect to the
approximately -for-one
stock split that will have occurred prior to the completion of
this offering, basic earnings per share from continuing
operations and discontinued operations would have been
$ and
$ , $
and $ , and
$ and
$ for each of the years ended
December 31,
|
8
|
|
|
|
|
2005, 2006 and 2007, respectively, and
$ and
$ and
$ and
$ for the six months ended
June 30, 2007 and 2008, respectively. Diluted earnings per
shares from continuing operations and discontinued operations
would have been $ and
$ , $
and $ , and
$ and
$ for each of the years ended
December 31, 2005, 2006 and 2007 and
$ and
$ and
$ and
$ for the six months ended
June 30, 2007 and 2008, respectively.
|
|
|
|
(3)
|
|
EBITDA is the financial measure which management uses to
evaluate the performance of our segments. EBITDA is
defined as income from continuing operations before investment
income and interest expense, income taxes, depreciation and
amortization. See note 18 to our audited consolidated
financial statements and note 16 to our unaudited condensed
consolidated financial statements included elsewhere in this
prospectus.
|
|
|
|
|
|
Although EBITDA is frequently used by securities analysts,
lenders and others in their evaluation of companies, EBITDA has
limitations as an analytical tool, and should not be considered
in isolation, or as a substitute for an analysis of our results
of operations or cash flow from operating activities reported
under U.S. GAAP. Management uses EBITDA in conjunction with
traditional GAAP operating performance measures as part of its
overall assessment of company performance. Some of these
limitations are:
|
|
|
|
|
|
EBITDA does not reflect our
cash expenditures, or future requirements for capital
expenditures or contractual commitments;
|
|
|
|
|
|
EBITDA does not reflect
changes in, or cash requirements for, our working capital needs;
|
|
|
|
|
|
Although depreciation and
amortization are non-cash charges, the assets being depreciated
and amortized often will have to be replaced in the future and
EBITDA does not reflect any cash requirements for such
replacements; and
|
|
|
|
|
|
Other companies in our
industry may calculate EBITDA differently than we do, limiting
its usefulness as a comparative measure.
|
The following is a reconciliation of income from continuing
operations to EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Year Ended December 31,
|
|
|
Ended June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Income from continuing operations
|
|
$
|
126,947
|
|
|
$
|
145,856
|
|
|
$
|
154,963
|
|
|
$
|
76,205
|
|
|
$
|
80,949
|
|
Depreciation and amortization of fixed and intangible assets
|
|
|
41,824
|
|
|
|
54,861
|
|
|
|
65,661
|
|
|
|
32,738
|
|
|
|
31,361
|
|
Interest expense
|
|
|
10,465
|
|
|
|
16,668
|
|
|
|
22,928
|
|
|
|
11,474
|
|
|
|
14,173
|
|
Investment income and realized gains on securities, net
|
|
|
(2,932
|
)
|
|
|
(6,101
|
)
|
|
|
(9,308
|
)
|
|
|
(4,963
|
)
|
|
|
(317
|
)
|
Provision for income taxes
|
|
|
85,722
|
|
|
|
86,921
|
|
|
|
103,184
|
|
|
|
52,432
|
|
|
|
61,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
262,026
|
|
|
$
|
298,205
|
|
|
$
|
337,428
|
|
|
|
167,886
|
|
|
|
187,984
|
|
(4) Includes capital lease obligations.
|
|
|
(5)
|
|
Prior to this offering, we are required to record our
Class A common stock and vested options at redemption value
at each balance sheet date as the redemption of these securities
is not solely within our control, due to our contractual
obligations to redeem these shares. We classify this redemption
value as redeemable common stock. Subsequent to this offering,
we will no longer be obligated to redeem these shares and
therefore we will not be required to record any redeemable
common stock.
|
9
RISK
FACTORS
You should carefully consider the following risks and all of
the other information set forth in this prospectus before
deciding to invest in shares of our Class A common stock.
If any of the following risks actually occurs, our business,
financial condition or results of operations would likely
suffer. In such case, the trading price of our Class A
common stock could decline due to any of these risks, and you
may lose all or part of your investment.
Risks
Related to Our Business
We
could lose our access to data from external sources which could
prevent us from providing our solutions.
We depend upon data from external sources, including data
received from customers and various government and public record
services, for information used in our databases. In general, we
do not own the information in these databases, and the
participating organizations could discontinue contributing
information to the databases. Our data sources could withdraw or
increase the price for their data for a variety of reasons, and
we could also become subject to legislative or judicial
restrictions on the use of such data, in particular if such data
is not collected by the third parties in a way which allows us
to legally use
and/or
process the data. In addition, many of our customers are
significant stockholders of our company. Specifically, all of
our Class B common stock is owned by insurers who are also
our customers and provide us with a significant percentage of
our data. If our customers percentage of ownership of our
common stock decreases in the future, including as a result of
this offering, there can be no assurance that our customers will
continue to provide data to the same extent or on the same
terms. If a substantial number of data sources, or certain key
sources, were to withdraw or be unable to provide their data, or
if we were to lose access to data due to government regulation
or if the collection of data became uneconomical, our ability to
provide solutions to our customers could be impacted, which
could materially adversely affect our business, reputation,
financial condition, operating results and cash flows.
Agreements with our data suppliers are short-term agreements.
Some suppliers are also competitors, which may make us
vulnerable to unpredictable price increases and may cause some
suppliers not to renew certain agreements. Our competitors could
also enter into exclusive contracts with our data sources. If
our competitors enter into such exclusive contracts, we may be
precluded from receiving certain data from these suppliers or
restricted in our use of such data, which would give our
competitors an advantage. Such a termination or exclusive
contracts could have a material adverse effect on our business,
financial position, and operating results if we were unable to
arrange for substitute sources.
We
derive a substantial portion of our revenues from the U.S.
P&C insurance industry. If there is a downturn in the U.S.
insurance industry or that industry does not continue to accept
our solutions, our revenues will decline.
Revenues derived from solutions we provide to the
U.S. P&C insurance industry account for a substantial
portion of our total revenues. During the six months ended
June 30, 2008, approximately 67% of our revenue was derived
from solutions provided to the U.S. P&C insurance
industry. Also, sales of certain of our solutions are tied to
premiums in the U.S. P&C insurance market, which may
rise or fall in any given year due to loss experience and
capital capacity and other factors in the insurance industry
beyond our control. In addition, our revenues will decline if
the insurance industry does not continue to accept these
solutions. Factors that might affect the acceptance of these
solutions by P&C insurers include the following:
|
|
|
|
|
changes in the business analytics industry;
|
|
|
|
changes in technology;
|
|
|
|
our inability to obtain or use state fee schedule or claims data
in our insurance solutions;
|
|
|
|
saturation of market demand;
|
|
|
|
loss of key customers;
|
10
|
|
|
|
|
industry consolidation; and
|
|
|
|
failure to execute our customer-focused selling approach.
|
A downturn in the insurance industry or lower acceptance of our
solutions by the insurance industry could result in a decline in
revenues from that industry and have a material adverse effect
on our financial condition, results of operations and cash flows.
There
may be consolidation in our end customer market, which would
reduce the use of our services.
Mergers or consolidations among our customers could reduce the
number of our customers and potential customers. This could
adversely affect our revenues even if these events do not reduce
the aggregate number of customers or the activities of the
consolidated entities. If our customers merge with or are
acquired by other entities that are not our customers, or that
use fewer of our services, they may discontinue or reduce their
use of our services. The adverse effects of consolidation will
be greater in sectors that we are particularly dependent upon,
for example, in the P&C insurance services sector. Any of
these developments could materially and adversely affect our
business, financial condition, operating results and cash flows.
If we
are unable to develop successful new solutions or if we
experience defects, failures and delays associated with the
introduction of new solutions, our business could suffer serious
harm.
Our growth and success depends upon our ability to develop and
sell new solutions. If we are unable to develop new solutions,
or if we are not successful in introducing
and/or
obtaining regulatory approval or acceptance for new solutions,
we may not be able to grow our business, or growth may occur
more slowly than we anticipate. In addition, significant
undetected errors or delays in new solutions may affect market
acceptance of our solutions and could harm our business,
financial condition or results of operations. In the past, we
have experienced delays while developing and introducing new
solutions, primarily due to difficulties developing models,
acquiring data and adapting to particular operating
environments. Errors or defects in our solutions that are
significant, or are perceived to be significant, could result in
rejection of our solutions, damage to our reputation, loss of
revenues, diversion of development resources, an increase in
product liability claims, and increases in service and support
costs and warranty claims.
We
will continue to rely upon proprietary technology rights, and if
we are unable to protect them, our business could be
harmed.
Our success depends, in part, upon our intellectual property
rights. To date, we have relied primarily on a combination of
copyright, patent, trade secret, and trademark laws and
nondisclosure and other contractual restrictions on copying and
distribution to protect our proprietary technology. This
protection of our proprietary technology is limited, and our
proprietary technology could be used by others without our
consent. In addition, patents may not be issued with respect to
our pending or future patent applications, and our patents may
not be upheld as valid or may not prevent the development of
competitive products. Any disclosure, loss, invalidity of, or
failure to protect our intellectual property could negatively
impact our competitive position, and ultimately, our business.
Our protection of our intellectual property rights in the United
States or abroad may not be adequate and others, including our
competitors, may use our proprietary technology without our
consent. Furthermore, litigation may be necessary to enforce our
intellectual property rights, to protect our trade secrets, or
to determine the validity and scope of the proprietary rights of
others. Such litigation could result in substantial costs and
diversion of resources and could harm our business, financial
condition, results of operations and cash flows.
We
could face claims for intellectual property infringement, which
if successful could restrict us from using and providing our
technologies and solutions to our customers.
There has been substantial litigation and other proceedings,
particularly in the United States, regarding patent and other
intellectual property rights in the information technology
industry. There is a risk that we are infringing, or may in the
future infringe, the intellectual property rights of third
parties. We monitor third-party patents and patent applications
that may be relevant to our technologies and solutions and
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we carry out freedom to operate analyses where we deem
appropriate. However, such monitoring and analysis has not been,
and is unlikely in the future to be, comprehensive, and it may
not be possible to detect all potentially relevant patents and
patent applications. Since the patent application process can
take several years to complete, there may be currently pending
applications, unknown to us, that may later result in issued
patents that cover our products and technologies. As a result,
we may infringe existing and future third-party patents of which
we are not aware. As we expand our operations there is a higher
risk that such activity could infringe the intellectual property
rights of third parties.
Third-party intellectual property infringement claims and any
resultant litigation against us or our technology partners or
providers, could subject us to liability for damages, restrict
us from using and providing our technologies and solutions or
operating our business generally, or require changes to be made
to our technologies and solutions. Even if we prevail,
litigation is time consuming and expensive to defend and would
result in the diversion of managements time and attention.
If a successful claim of infringement is brought against us and
we fail to develop non-infringing technologies and solutions or
to obtain licenses on a timely and cost effective basis this
could materially and adversely affect our business, reputation,
financial condition, operating results and cash flows.
Regulatory
developments could negatively impact our business.
Because personal, public and non-public information is stored in
some of our databases, we are vulnerable to government
regulation and adverse publicity concerning the use of our data.
We provide many types of data and services that already are
subject to regulation under the Fair Credit Reporting Act,
Gramm-Leach-Bliley Act, Drivers Privacy Protection Act,
Health Insurance Portability and Accountability Act, the
European Unions Data Protection Directive and to a lesser
extent, various other federal, state, and local laws and
regulations. These laws and regulations are designed to protect
the privacy of the public and to prevent the misuse of personal
information in the marketplace. However, many consumer
advocates, privacy advocates, and government regulators believe
that the existing laws and regulations do not adequately protect
privacy. They have become increasingly concerned with the use of
personal information, particularly social security numbers,
department of motor vehicle data and dates of birth. As a
result, they are lobbying for further restrictions on the
dissemination or commercial use of personal information to the
public and private sectors. Similar initiatives are under way in
other countries in which we do business or from which we source
data. The following legal and regulatory developments also could
have a material adverse affect on our business, financial
position, results of operations or cash flows:
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amendment, enactment, or interpretation of laws and regulations
which restrict the access and use of personal information and
reduce the supply of data available to customers;
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changes in cultural and consumer attitudes to favor further
restrictions on information collection and sharing, which may
lead to regulations that prevent full utilization of our
solutions;
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failure of our solutions to comply with current laws and
regulations; and
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failure of our solutions to adapt to changes in the regulatory
environment in an efficient, cost-effective manner.
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Fraudulent
data access and other security breaches may negatively impact
our business and harm our reputation.
Security breaches in our facilities, computer networks, and
databases may cause harm to our business and reputation and
result in a loss of customers. Our systems may be vulnerable to
physical break-ins, computer viruses, attacks by hackers and
similar disruptive problems. Third-party contractors also may
experience security breaches involving the storage and
transmission of proprietary information. If users gain improper
access to our databases, they may be able to steal, publish,
delete or modify confidential third-party information that is
stored or transmitted on our networks.
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In addition, customers misuse of our information services
could cause harm to our business and reputation and result in
loss of customers. Any such misappropriation
and/or
misuse of our information could result in us, among other
things, being in breach of certain data protection and related
legislation.
A security or privacy breach may affect us in the following ways:
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deterring customers from using our solutions;
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deterring data suppliers from supplying data to us;
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harming our reputation;
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exposing us to liability;
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increasing operating expenses to correct problems caused by the
breach;
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affecting our ability to meet customers expectations; or
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causing inquiry from governmental authorities.
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We may detect incidents in which consumer data has been
fraudulently or improperly acquired. The number of potentially
affected consumers identified by any future incidents is
obviously unknown. Any such incident could materially and
adversely affect our business, reputation, financial condition,
operating results and cash flows.
We
typically face a long selling cycle to secure new contracts that
requires significant resource commitments, which result in a
long lead time before we receive revenues from new
relationships.
We typically face a long selling cycle to secure a new contract
and there is generally a long preparation period in order to
commence providing the services. We typically incur significant
business development expenses during the selling cycle and we
may not succeed in winning a new customers business, in
which case we receive no revenues and may receive no
reimbursement for such expenses. Even if we succeed in
developing a relationship with a potential new customer, we may
not be successful in obtaining contractual commitments after the
selling cycle or in maintaining contractual commitments after
the implementation cycle, which may have a material adverse
effect on our business, results of operations and financial
condition.
We may
lose key business assets, including loss of data center capacity
or the interruption of telecommunications links, the internet,
or power sources, which could significantly impede our ability
to do business.
Our operations depend on our ability, as well as that of
third-party service providers to whom we have outsourced several
critical functions, to protect data centers and related
technology against damage from hardware failure, fire, power
loss, telecommunications failure, impacts of terrorism, breaches
in security (such as the actions of computer hackers), natural
disasters, or other disasters. The on-line services we provide
are dependent on links to telecommunications providers. In
addition, we generate a significant amount of our revenues
through telesales centers and websites that we utilize in the
acquisition of new customers, fulfillment of solutions and
services and responding to customer inquiries. We may not have
sufficient redundant operations to cover a loss or failure in
all of these areas in a timely manner. Certain of our customer
contracts provide that our on-line servers may not be
unavailable for specified periods of time. Any damage to our
data centers, failure of our telecommunications links or
inability to access these telesales centers or websites could
cause interruptions in operations that materially adversely
affect our ability to meet customers requirements,
resulting in decreased revenue, operating income and earnings
per share.
We are
subject to significant competition in many of the markets in
which we operate and we may not be able to compete
effectively.
Some markets in which we operate or which we believe may provide
growth opportunities for us are highly competitive, and are
expected to remain highly competitive. We compete on the basis
of quality,
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customer service, product and service selection and price. Our
competitive position in various market segments depends upon the
relative strength of competitors in the segment and the
resources devoted to competing in that segment. Due to their
size, certain competitors may be able to allocate greater
resources to a particular market segment than we can. As a
result, these competitors may be in a better position to
anticipate and respond to changing customer preferences,
emerging technologies and market trends. In addition, new
competitors and alliances may emerge to take market share away.
We may be unable to maintain our competitive position in our
market segments, especially against larger competitors. We may
also invest further to upgrade our systems in order to compete.
If we fail to successfully compete, our business, financial
position and results of operations may be adversely affected.
Acquisitions
could result in operating difficulties, dilution and other
harmful consequences.
Our long-term business strategy includes growth through
acquisitions. Future acquisitions may not be completed on
acceptable terms and acquired assets, data or businesses may not
be successfully integrated into our operations. Any acquisitions
or investments will be accompanied by the risks commonly
encountered in acquisitions of businesses. Such risks include,
among other things:
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failing to implement or remediate controls, procedures and
policies appropriate for a larger public company at acquired
companies that prior to the acquisition lacked such controls,
procedures and policies;
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paying more than fair market value for an acquired company or
assets;
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failing to integrate the operations and personnel of the
acquired businesses in an efficient, timely manner;
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assuming potential liabilities of an acquired company;
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managing the potential disruption to our ongoing business;
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distracting management focus from our core businesses;
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difficulty in acquiring suitable businesses;
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impairing relationships with employees, customers, and strategic
partners;
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incurring expenses associated with the amortization of
intangible assets;
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incurring expenses associated with an impairment of all or a
portion of goodwill and other intangible assets due to changes
in market conditions, weak economies in certain competitive
markets, or the failure of certain acquisitions to realize
expected benefits; and
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diluting the share value and voting power of existing
stockholders.
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The anticipated benefits of many of our acquisitions may not
materialize. Future acquisitions or dispositions could result in
the incurrence of debt, contingent liabilities or amortization
expenses, or write-offs of goodwill and other intangible assets,
any of which could harm our financial condition. Future
acquisitions may require us to obtain additional financing,
which may not be available on favorable terms or at all.
To the
extent the availability of free or relatively inexpensive
information increases, the demand for some of our solutions may
decrease.
Public sources of free or relatively inexpensive information
have become increasingly available recently, particularly
through the internet, and this trend is expected to continue.
Governmental agencies in particular have increased the amount of
information to which they provide free public access. Public
sources of free or relatively inexpensive information may reduce
demand for our solutions. To the extent that customers choose
not to obtain solutions from us and instead rely on information
obtained at little or no cost from these public sources, our
business and results of operations may be adversely affected.
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Our
senior leadership team is critical to our continued success and
the loss of such personnel could harm our
business.
Our future success substantially depends on the continued
service and performance of the members of our senior leadership
team. These personnel possess business and technical
capabilities that are difficult to replace. Members of our
senior management operating team have been with us for an
average of almost twenty years. If we lose key members of our
senior management operating team, we may not be able to
effectively manage our current operations or meet ongoing and
future business challenges, and this may have a material adverse
effect on our business, results of operations and financial
condition.
We may
fail to attract and retain enough qualified employees to support
our operations, which could have an adverse effect on our
ability to expand our business and service our
customers.
Our business relies on large numbers of skilled employees and
our success depends on our ability to attract, train and retain
a sufficient number of qualified employees. If our attrition
rate increases, our operating efficiency and productivity may
decrease. We compete for employees not only with other companies
in our industry but also with companies in other industries,
such as software services, engineering services and financial
services companies, and there is a limited pool of employees who
have the skills and training needed to do our work. If our
business continues to grow, the number of people we will need to
hire will increase. We will also need to increase our hiring if
we are not able to maintain our attrition rate through our
current recruiting and retention policies. Increased competition
for employees could have an adverse effect on our ability to
expand our business and service our customers, as well as cause
us to incur greater personnel expenses and training costs.
We are
subject to antitrust and other litigation, and may in the future
become subject to further such litigation; an adverse outcome in
such litigation could have a material adverse effect on our
financial condition, revenues and profitability.
We participate in businesses (particularly insurance-related
businesses and services) that are subject to substantial
litigation, including antitrust litigation. We are subject to
the provisions of a 1995 settlement agreement in an antitrust
lawsuit brought by various state Attorneys General and private
plaintiffs which imposes certain constraints with respect to
insurer involvement in our governance and business. We currently
are defending against several putative class action lawsuits in
which it is alleged that certain of our subsidiaries unlawfully
have conspired with insurers with respect to their payment of
insurance claims. See Business Legal
Proceedings. Our failure to successfully defend or settle
such litigation could result in liability that, to the extent
not covered by our insurance, could have a material adverse
effect on our financial condition, revenues and profitability.
Given the nature of our business, we may be subject to similar
litigation in the future. Even if the direct financial impact of
such litigation is not material, settlements or judgments
arising out of such litigation could include further
restrictions on our ability to conduct business, including
potentially the elimination of entire lines of business, which
could increase our cost of doing business and limit our
prospects for future growth.
General
economic, political and market forces and dislocations beyond
our control could reduce demand for our solutions and harm our
business.
The demand for our solutions may be impacted by domestic and
international factors that are beyond our control, including
macroeconomic, political and market conditions, the availability
of short-term and long-term funding and capital, the level and
volatility of interest rates, currency exchange rates and
inflation. The United States economy is currently undergoing a
period of slowdown, which some observers view as a possible
recession and both the future domestic and global economic
environments may continue to be less favorable than those of
recent years. Any one or more of these factors may contribute to
reduced activity and prices in the securities markets generally
and could result in a reduction in demand for our solutions,
which could have an adverse effect on our results of operation
and financial condition.
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The current global dislocation of the credit markets, which have
significantly contributed to the slowdown described above, has
not yet been fully accounted for by many financial institutions.
A significant additional decline in the value of assets for
which risk is transferred in market transactions could have an
adverse impact on the demand for our solutions. In addition, the
decline of the credit markets has reduced the number of mortgage
originators, and therefore, the immediate demand for our related
mortgage solutions. Specifically, certain of our fraud detection
and prevention solutions are directed at the mortgage market.
This decline in asset value and originations and an increase in
foreclosure levels has also created greater regulatory scrutiny
of mortgage originations and securitization. Any new regulatory
regime may change the utility of our solutions for mortgage
lenders and other participants in the mortgage lending industry
and related derivative markets or increase our costs as we adapt
our solutions to new regulation.
Risks
Related to the Offering
There
is no prior public market for our common stock and therefore an
active trading market or any specific price for our common stock
may not be established.
Currently, there is no public trading market for our common
stock. We expect that our Class A common stock will be
listed on the New York Stock Exchange under the symbol
. The initial public
offering price per share was determined by agreement among us,
the selling stockholders and the representatives of the
underwriters and may not be indicative of the market price of
our common stock after our initial public offering. An active
trading market for our common stock may not develop and continue
upon the completion of this offering and the market price of our
common stock may decline below the initial public offering price.
The
market price for our common stock may be volatile.
The market price for our common stock is likely to be highly
volatile and subject to wide fluctuations in response to factors
including the following:
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actual or anticipated fluctuations in our quarterly operating
results;
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changes in financial estimates by securities research analysts;
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changes in the economic performance or market valuations of
other companies engaged in our industry;
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regulatory developments in our industry affecting us, our
customers or our competitors;
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announcements of technological developments;
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sales or expected sales of additional common stock;
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continued dislocations and downward pressure in the capital
markets; and
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terrorist attacks or natural disasters or other such events
impacting countries where we or our customers have operations.
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In addition, securities markets generally and from time to time
experience significant price and volume fluctuations that are
not related to the operating performance of particular
companies. These market fluctuations may have a material adverse
effect on the market price of our common stock.
We
plan to issue a number of options to purchase Class A
common stock to our directors and employees that could dilute
your interest in us.
Upon the closing of this offering we will
have shares
of Class A common stock available for issuance to our
directors, executive officers and employees in connection with
grants of options to purchase Class A common stock under
our employee benefits arrangements. Issuances of Class A
common stock to our directors, executive officers and employees
pursuant to the exercise of stock options under our employee
benefits arrangements will dilute your interest in us.
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If
there are substantial sales of our common stock, our stock price
could decline.
The market price of our common stock could decline as a result
of sales of a large number of shares of common stock in the
market after this offering or the perception that these sales
could occur. These sales, or the possibility that these sales
may occur, also might make it more difficult for us to sell
equity securities in the future at a time and at a price that we
deem attractive. Upon consummation of this offering, we will
have shares
of common stock outstanding. Of these shares,
the shares
of common stock offered hereby will be freely tradable without
restriction in the public market, unless purchased by our
affiliates.
Following this offering, our existing stockholders will
beneficially own in the aggregate
approximately shares
of our Class A common stock
and shares
of our Class B common stock, representing in aggregate
approximately % of our outstanding
common stock. Such stockholders will be able to sell their
common stock in the public market from time to time without
registering them, subject to the
lock-up
periods described below, and subject to limitations on the
timing, amount and method of those sales imposed by securities
laws. If any of these stockholders were to sell a large number
of their common stock, the market price of our common stock
could decline significantly. In addition, the perception in the
public markets that sales by them might occur could also
adversely affect the market price of our common stock.
In connection with this offering, we, our selling stockholders,
our directors and certain members of our management have each
agreed to enter into a
lock-up
agreement and thereby be subject to a
lock-up
period, meaning that they and their permitted transferees will
not be permitted to sell any of their common stock without the
prior consent of the underwriters for 180 days after the
date of this prospectus. Although we have been advised that
there is no present intention to do so, the underwriters may, in
their sole discretion and without notice, release all or any
portion of the common stock from the restrictions in any of the
lock-up
agreements described above. In addition, certain members of our
management will be subject to a
lock-up
agreements with us whereby they will not be permitted to sell
any of their common stock, subject to certain conditions, for a
period of time after the pricing of this initial public
offering. See Certain Relationships and Related
Transactions Letter Agreements.
Also, pursuant to our amended and restated certificate of
incorporation, our Class B stockholders will not be able to
sell any of their common stock, subject to certain conditions,
to the public for a period of time after the pricing of this
initial public offering. Each share of Class B
(Series 1) common stock shall convert automatically,
without any action by the holder, into one share of Class A
common stock 18 months after the date of this prospectus.
Each share of Class B (Series 2) common stock
shall convert automatically, without any action by the holder,
into one share of Class A common stock 30 months after
the date of this prospectus. Our board of directors may approve
exceptions to the limitation on transfers of our Class B
common stock in their sole discretion, in connection with the
sale of such Class B common stock in a public offering
registered with the Securities and Exchange Commission or in
such other limited circumstances as our board of directors may
determine. Any Class B common stock sold to the public will
first be converted to Class A common stock. Such further
resale of our common stock could cause the price of our common
stock to decline. See Description of Capital
Stock Common Stock Conversion.
Pursuant to our equity incentive plans, options to purchase
approximately shares
of Class A common stock will be outstanding upon
consummation of this offering. Following this offering, we
intend to file a registration statement under the Securities Act
registering a total of
approximately shares
of Class A common stock which will cover the shares
available for issuance under our equity incentive plans
(including for such outstanding options) as well as shares held
for resale by our existing stockholders that were previously
issued under our equity incentive plans. Such further issuance
and resale of our common stock could cause the price of our
common stock to decline.
Also, in the future, we may issue our securities in connection
with investments and acquisitions. The amount of our common
stock issued in connection with an investment or acquisition
could constitute a material portion of our then outstanding
common stock.
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The
holders of our Class B common stock have the right to elect
up to three of our directors and their interests in our business
may be different than yours.
Until no Class B common stock remains outstanding, the
holders of our Class B common stock will have the right to
elect up to three of our directors. Stockholders of the
Class B common stock may not have the same incentive to
approve a corporate action that may be favorable for the holders
of Class A common stock, or their interests may otherwise
conflict with yours. For example, holders of our Class B
common stock may seek to cause us to take courses of action
that, in their judgment, could enhance their investment in us
and the use of our solutions, but which might involve risks to
holders of our Class A common stock. See Description
of Capital Stock Common Stock Voting
Rights.
Following
this offering, changes in our capital structure and level of
indebtedness and the terms of anti-takeover provisions under
Delaware law and in our amended and restated certificate of
incorporation and bylaws could diminish the value of our common
stock and could make a merger, tender offer or proxy contest
difficult or could impede an attempt to replace or remove our
directors.
We are a Delaware corporation and the anti-takeover provisions
of the Delaware General Corporation Law may discourage, delay or
prevent a change in control by prohibiting us from engaging in a
business combination with an interested stockholder for a period
of three years after the person becomes an interested
stockholder, even if a change of control would be beneficial to
our existing stockholders. In addition, our certificate of
incorporation and bylaws may discourage, delay or prevent a
change in our management or control over us that stockholders
may consider favorable or make it more difficult for
stockholders to replace directors even if stockholders consider
it beneficial to do so. Our certificate of incorporation and
bylaws:
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authorize the issuance of blank check preferred
stock that could be issued by our board of directors to increase
the number of outstanding shares to thwart a takeover attempt;
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prohibit cumulative voting in the election of directors, which
would otherwise allow holders of less than a majority of the
stock to elect some directors;
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require that vacancies on the board of directors, including
newly-created directorships, be filled only by a majority vote
of directors then in office;
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limit who may call special meetings of stockholders;
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authorize the issuance of authorized but unissued shares of
common stock and preferred stock without stockholder approval,
subject to the rules and regulations of
the ;
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prohibit stockholder action by written consent, requiring all
stockholder actions to be taken at a meeting of the
stockholders; and
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establish advance notice requirements for nominating candidates
for election to the board of directors or for proposing matters
that can be acted upon by stockholders at stockholder meetings.
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In addition, Section 203 of the Delaware General
Corporation Law may inhibit potential acquisition bids for us.
Upon completion of this offering, we will be subject to
Section 203, which regulates corporate acquisitions and
limits the ability of a holder of 15% or more of our stock from
acquiring the rest of our stock. Under Delaware law a
corporation may opt out of the anti-takeover provisions, but we
do not intend to do so.
These provisions may prevent a stockholder from receiving the
benefit from any premium over the market price of our common
stock offered by a bidder in a potential takeover. Even in the
absence of an attempt to effect a change in management or a
takeover attempt, these provisions may adversely affect the
prevailing market price of our common stock if they are viewed
as discouraging takeover attempts in the future.
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We
will incur increased costs as a result of being a public
company.
As a privately held company, we have not been responsible for
the corporate governance and financial reporting practices and
policies required of a public company. Following the completion
of this offering, we will be a publicly traded company. Once we
become a public company, we will incur significant legal,
accounting, investor relations and other expenses that we do not
currently incur. In addition, the Sarbanes-Oxley Act of 2002, as
well as new rules implemented by the Securities and Exchange
Commission, the applicable listing rules and rules implemented
by the applicable foreign regulatory agencies, may require
changes in corporate governance practices of public companies.
We expect such rules and regulations to increase our legal and
financial compliance costs and to make some activities more
time-consuming and costly.
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SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made statements under the captions Prospectus
Summary, Risk Factors, Managements
Discussion and Analysis of Financial Condition and Results of
Operations, Business and in other sections of
this prospectus that are forward-looking statements. In some
cases, you can identify these statements by forward-looking
words such as may, might,
will, should, expects,
plans, anticipates,
believes, estimates,
predicts, potential or
continue, the negative of these terms and other
comparable terminology. These forward-looking statements, which
are subject to risks, uncertainties and assumptions about us,
may include projections of our future financial performance, our
anticipated growth strategies and anticipated trends in our
business. These statements are only predictions based on our
current expectations and projections about future events. There
are important factors that could cause our actual results, level
of activity, performance or achievements to differ materially
from the results, level of activity, performance or achievements
expressed or implied by the forward-looking statements,
including those factors discussed under the caption entitled
Risk Factors. You should specifically consider the
numerous risks outlined under Risk Factors.
Although we believe the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee
future results, level of activity, performance or achievements.
Moreover, neither we nor any other person assumes responsibility
for the accuracy and completeness of any of these
forward-looking statements. We are under no duty to update any
of these forward-looking statements after the date of this
prospectus to conform our prior statements to actual results or
revised expectations.
MARKET
AND INDUSTRY DATA AND FORECASTS
Market data and certain industry data and forecasts used
throughout this prospectus were obtained from internal company
surveys, market research, consultant surveys, publicly available
information, reports of governmental agencies and industry
publications and surveys. We believe the data from third-party
sources to be reliable based upon our managements
knowledge of the industry, but have not independently verified
such data. Our estimates involve risks and uncertainties and are
subject to change based on various factors, including those
discussed under the heading Risk Factors in this
prospectus.
20
THE
REORGANIZATION
On May 23, 2008, in contemplation of our initial public
offering, we formed Verisk Analytics, Inc., a Delaware
corporation, to be the new holding company for our business. It
was initially formed as a wholly-owned subsidiary of Insurance
Services Office, Inc. Prior to the completion of this offering,
we will have effected an internal reorganization whereby ISO
will become a wholly-owned subsidiary of Verisk and all
outstanding shares of ISO common stock will be replaced with
common stock of Verisk.
This transaction will occur by the stockholders of ISO
exchanging their common stock in ISO for common stock in Verisk.
As part of this reorganization, our existing equity based
compensation plans will be assigned to Verisk. As a result, all
outstanding options issued under our existing equity based
compensation plans will become options to acquire common stock
of Verisk.
Immediately after the reorganization we will effect an
approximately -for-one
split of our common stock in order to have a price per share
equal to the mid-point of the range set forth on the cover page
of this prospectus.
21
USE OF
PROCEEDS
The selling stockholders are selling all of the shares of common
stock in this offering and we will not receive any proceeds from
the sale of the shares.
DIVIDEND
POLICY
Following this offering and subject to legally available funds,
we currently intend to pay a quarterly dividend, in cash, at an
annual rate initially equal to $
per share of Class A common stock (representing a quarterly
rate initially equal to $ per
share) commencing with the quarter
ended ,
2008. Our Class B common stock will share ratably on an
as-converted basis in such dividends. The declaration and
payment of any dividends will be at the sole discretion of our
board of directors after taking into account various factors,
including our financial condition, operating results, capital
requirements, covenants in our debt instruments, and other
factors that our board of directors deems relevant.
22
CAPITALIZATION
The following table sets forth our capitalization as of
June 30, 2008:
|
|
|
|
|
on an actual basis; and
|
|
|
|
on an as adjusted basis to give effect to changes in the terms
of our capital stock in connection with this initial public
offering and the consequent expiration of our obligations to
redeem our Class A common stock.
|
This table should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the consolidated
financial statements and notes thereto appearing elsewhere in
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2008
|
|
|
|
Actual
|
|
|
As Adjusted
|
|
|
|
(in thousands,
|
|
|
|
except share numbers)
|
|
|
Long-term debt (including current portion of long-term debt)
|
|
$
|
642,182
|
|
|
$
|
642,182
|
|
|
|
|
|
|
|
|
|
|
Redeemable common stock:(1)
|
|
|
|
|
|
|
|
|
Class A redeemable common stock, stated at redemption
value, $0.01 par value; 6,700,000 shares authorized;
2,999,939 shares issued and 946,518 outstanding
|
|
|
1,058,631
|
|
|
|
|
|
Unearned Class A common stock ESOP shares
|
|
|
(3,751
|
)
|
|
|
|
|
Notes receivable from stockholders(2)
|
|
|
(48,593
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total redeemable common stock
|
|
|
1,006,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders deficit:
|
|
|
|
|
|
|
|
|
Class A common stock, $0.001 par value per share,
20,000,000 shares authorized; 10,004,500 shares issued
and 2,863,742 shares outstanding(3)
|
|
|
|
|
|
|
30
|
|
Class B (Series 1 and 2) common stock,
$0.001 par value per
share, shares
authorized, shares
issued
and shares
outstanding(3)
|
|
|
100
|
|
|
|
100
|
|
Additional paid-in capital
|
|
|
|
|
|
|
1,058,601
|
|
Class A common stock unearned ESOP shares
|
|
|
|
|
|
|
(3,751
|
)
|
Accumulated other comprehensive loss
|
|
|
(29,915
|
)
|
|
|
(29,915
|
)
|
(Accumulated deficit)/retained earnings
|
|
|
(465,138
|
)
|
|
|
(465,138
|
)
|
Class A common stock, treasury stock, 2,053,421 shares
|
|
|
|
|
|
|
|
|
Class B common stock, treasury stock, 7,140,758 shares
|
|
|
(683,994
|
)
|
|
|
(683,994
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(1,178,947
|
)
|
|
|
(124,067
|
)
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
469,522
|
|
|
$
|
518,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Prior to this offering, we were required to record our
Class A common stock and vested options at redemption value
at each balance sheet date as the redemption of these securities
is not solely within our control, due to our contractual
obligations to redeem these shares. We classify this redemption
value as redeemable common stock. Subsequent to this offering,
we will no longer be obligated to redeem these shares and
therefore we will not be required to record any redeemable
common stock.
|
|
(2)
|
|
Prior to the filing of this prospectus, we provided full
recourse loans to directors and senior management in connection
with exercising their stock options. The loan program has been
terminated and all of these loans have been repaid.
|
|
(3)
|
|
Giving effect to the
approximately -for-one stock split that
will have occurred prior to the completion of this offering.
|
23
SELECTED
CONSOLIDATED FINANCIAL DATA
The following selected historical financial data should be read
in conjunction with, and are qualified by reference to,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the consolidated
financial statements and unaudited condensed consolidated
financial statements and notes thereto included elsewhere in
this prospectus. The consolidated statement of operations data
for the years ended December 31, 2005, 2006 and 2007 and
the consolidated balance sheet data as of December 31, 2006
and 2007 are derived from the audited consolidated financial
statements included elsewhere in this prospectus. The
consolidated statement of operations data for the years ended
December 31, 2003 and 2004 and the consolidated balance
sheet data as of December 31, 2003, 2004 and 2005 are
derived from the unaudited consolidated financial statements
that are not included in this prospectus. The condensed
consolidated statement of operations data for the six-month
periods ended June 30, 2007 and 2008 and the condensed
consolidated balance sheet data as of June 30, 2008 are
derived from unaudited condensed consolidated financial
statements that are included in this prospectus and the
consolidated balance sheet data as of June 30, 2007 are
derived from unaudited condensed consolidated financial
statements that are not included in this prospectus. The
unaudited condensed consolidated financial statements, in our
opinion, have been prepared on the same basis as the audited
consolidated financial statements and reflect all adjustments,
consisting only of normal recurring adjustments, necessary for a
fair presentation of our results of operations and financial
position. Results for the six-month period ended June 30,
2008 are not necessarily indicative of results that may be
expected for the fiscal year ended December 31, 2008 or any
future period.
Since January 1, 2003 we have acquired 14 businesses, which
may affect the comparability of our financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Year Ended December 31,
|
|
|
Ended June 30,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands, except for share and per share data)
|
|
|
Statement of income data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Assessment revenues
|
|
$
|
359,186
|
|
|
$
|
403,616
|
|
|
$
|
448,875
|
|
|
$
|
472,634
|
|
|
$
|
485,160
|
|
|
$
|
244,556
|
|
|
$
|
253,356
|
|
Decision Analytics revenues
|
|
|
118,897
|
|
|
|
144,711
|
|
|
|
196,785
|
|
|
|
257,499
|
|
|
|
317,035
|
|
|
|
155,432
|
|
|
|
184,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
478,083
|
|
|
|
548,327
|
|
|
|
645,660
|
|
|
|
730,133
|
|
|
|
802,195
|
|
|
|
399,988
|
|
|
|
437,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
256,917
|
|
|
|
263,332
|
|
|
|
294,911
|
|
|
|
331,804
|
|
|
|
357,191
|
|
|
|
176,502
|
|
|
|
190,678
|
|
Selling, general and administrative
|
|
|
75,075
|
|
|
|
81,020
|
|
|
|
88,723
|
|
|
|
100,124
|
|
|
|
107,576
|
|
|
|
55,600
|
|
|
|
59,028
|
|
Depreciation and amortization of fixed assets
|
|
|
20,261
|
|
|
|
19,569
|
|
|
|
22,024
|
|
|
|
28,007
|
|
|
|
31,745
|
|
|
|
15,498
|
|
|
|
16,424
|
|
Amortization of intangible assets
|
|
|
9,927
|
|
|
|
11,412
|
|
|
|
19,800
|
|
|
|
26,854
|
|
|
|
33,916
|
|
|
|
17,240
|
|
|
|
14,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
362,180
|
|
|
|
375,333
|
|
|
|
425,458
|
|
|
|
486,789
|
|
|
|
530,428
|
|
|
|
264,840
|
|
|
|
281,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
115,903
|
|
|
|
172,994
|
|
|
|
220,202
|
|
|
|
243,344
|
|
|
|
271,767
|
|
|
|
135,148
|
|
|
|
156,623
|
|
Other income/(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income and realized gains on securities, net
|
|
|
3,789
|
|
|
|
950
|
|
|
|
2,932
|
|
|
|
6,101
|
|
|
|
9,308
|
|
|
|
4,963
|
|
|
|
317
|
|
Interest expense
|
|
|
(2,333
|
)
|
|
|
(5,241
|
)
|
|
|
(10,465
|
)
|
|
|
(16,668
|
)
|
|
|
(22,928
|
)
|
|
|
(11,474
|
)
|
|
|
(14,173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
1,456
|
|
|
|
(4,291
|
)
|
|
|
(7,533
|
)
|
|
|
(10,567
|
)
|
|
|
(13,620
|
)
|
|
|
(6,511
|
)
|
|
|
(13,856
|
)
|
Income from continuing operations before income taxes
|
|
|
117,359
|
|
|
|
168,703
|
|
|
|
212,669
|
|
|
|
232,777
|
|
|
|
258,147
|
|
|
|
128,637
|
|
|
|
142,767
|
|
Provision for income taxes
|
|
|
(47,745
|
)
|
|
|
(68,925
|
)
|
|
|
(85,722
|
)
|
|
|
(86,921
|
)
|
|
|
(103,184
|
)
|
|
|
(52,432
|
)
|
|
|
(61,818
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
69,614
|
|
|
|
99,778
|
|
|
|
126,947
|
|
|
|
145,856
|
|
|
|
154,963
|
|
|
|
76,205
|
|
|
|
80,949
|
|
Loss from discontinued operations, net of tax(1)
|
|
|
(12
|
)
|
|
|
(508
|
)
|
|
|
(2,574
|
)
|
|
|
(1,805
|
)
|
|
|
(4,589
|
)
|
|
|
(1,302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
69,602
|
|
|
$
|
99,270
|
|
|
$
|
124,373
|
|
|
$
|
144,051
|
|
|
$
|
150,374
|
|
|
$
|
74,903
|
|
|
$
|
80,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Year Ended December 31,
|
|
|
Ended June 30,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands, except for share and per share data)
|
|
|
Basic income/(loss) per share
(2)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
10.91
|
|
|
$
|
20.12
|
|
|
$
|
29.81
|
|
|
$
|
35.31
|
|
|
$
|
38.58
|
|
|
$
|
18.69
|
|
|
$
|
21.73
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
(0.10
|
)
|
|
|
(0.61
|
)
|
|
|
(0.44
|
)
|
|
|
(1.14
|
)
|
|
|
(0.32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$
|
10.91
|
|
|
$
|
20.02
|
|
|
$
|
29.20
|
|
|
$
|
34.87
|
|
|
$
|
37.44
|
|
|
$
|
18.37
|
|
|
$
|
21.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income/(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
10.62
|
|
|
$
|
19.28
|
|
|
$
|
28.45
|
|
|
$
|
33.85
|
|
|
$
|
37.03
|
|
|
$
|
17.97
|
|
|
$
|
20.87
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
(0.10
|
)
|
|
|
(0.58
|
)
|
|
|
(0.42
|
)
|
|
|
(1.10
|
)
|
|
|
(0.31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$
|
10.62
|
|
|
$
|
19.18
|
|
|
$
|
27.87
|
|
|
$
|
33.43
|
|
|
$
|
35.93
|
|
|
$
|
17.66
|
|
|
$
|
20.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
6,382,836
|
|
|
|
4,958,161
|
|
|
|
4,258,989
|
|
|
|
4,130,962
|
|
|
|
4,016,928
|
|
|
|
4,077,259
|
|
|
|
3,724,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
6,557,950
|
|
|
|
5,174,281
|
|
|
|
4,462,109
|
|
|
|
4,308,976
|
|
|
|
4,185,151
|
|
|
|
4,240,053
|
|
|
|
3,877,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of fixed assets
|
|
$
|
(14,385
|
)
|
|
$
|
(17,516
|
)
|
|
$
|
(24,019
|
)
|
|
$
|
(25,742
|
)
|
|
$
|
(32,941
|
)
|
|
$
|
(23,050
|
)
|
|
$
|
(17,810
|
)
|
Net cash provided by operating activities
|
|
|
131,340
|
|
|
|
174,780
|
|
|
|
174,071
|
|
|
|
223,499
|
|
|
|
248,521
|
|
|
|
117,136
|
|
|
|
141,929
|
|
Net cash (used in) provided by investing activities
|
|
|
19,731
|
|
|
|
(41,851
|
)
|
|
|
(107,444
|
)
|
|
|
(243,452
|
)
|
|
|
(110,831
|
)
|
|
|
(49,403
|
)
|
|
|
(98,402
|
)
|
Net cash (used in) provided by financing activities
|
|
|
(150,912
|
)
|
|
|
(114,280
|
)
|
|
|
(90,954
|
)
|
|
|
75,907
|
|
|
|
(212,591
|
)
|
|
|
(127,194
|
)
|
|
|
(16,759
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
As of June 30,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
48,954
|
|
|
$
|
67,700
|
|
|
$
|
42,822
|
|
|
$
|
99,152
|
|
|
$
|
24,049
|
|
|
$
|
39,826
|
|
|
$
|
50,835
|
|
Total assets
|
|
|
344,145
|
|
|
|
386,496
|
|
|
|
466,244
|
|
|
|
744,731
|
|
|
|
828,483
|
|
|
|
779,465
|
|
|
|
866,839
|
|
Total debt(3)
|
|
|
112,880
|
|
|
|
206,152
|
|
|
|
276,964
|
|
|
|
448,698
|
|
|
|
438,330
|
|
|
|
401,700
|
|
|
|
642,182
|
|
Redeemable common stock(4)
|
|
|
380,246
|
|
|
|
722,532
|
|
|
|
901,089
|
|
|
|
1,125,933
|
|
|
|
1,171,188
|
|
|
|
1,211,422
|
|
|
|
1,006,287
|
|
Stockholders deficit
|
|
|
(316,369
|
)
|
|
|
(737,929
|
)
|
|
|
(938,294
|
)
|
|
|
(1,116,357
|
)
|
|
|
(1,195,728
|
)
|
|
|
(1,203,279
|
)
|
|
|
(1,178,947
|
)
|
|
|
|
(1)
|
|
As of December 31, 2007, we discontinued operations of our
claim consulting business located in New Hope, Pennsylvania and
the United Kingdom.
|
|
|
|
(2)
|
|
In conjunction with the initial public offering, the stock of
Insurance Services Office, Inc. will convert to stock of Verisk
Analytics, Inc., which plans to effect a stock split of its
common stock. Giving effect to the
approximately -for-one
stock split that will have occurred prior to the completion of
this offering, basic earnings per share from continuing
operations and discontinued operations would have been
$ and
$ , $
and $ ,
$ and
$ , $
and $ , and
$ and
$ for each of the years ended
December 31, 2003, 2004, 2005, 2006 and 2007, respectively,
and $ and
$ and
$ and
$ for the six months ended
June 30, 2007 and 2008, respectively. Diluted earnings per
shares from continuing operations and discontinued operations
would have been $ and
$ , $
and $ , and
$ and
$ for each of the years ended
December 31, 2005, 2006 and 2007, respectively, and
$ and
$ and
$ and
$ for the six months ended
June 30, 2007 and 2008, respectively.
|
|
|
|
(3)
|
|
Includes capital lease obligations.
|
|
|
|
(4)
|
|
Prior to this offering, we are required to record our
Class A common stock and vested options at redemption value
at each balance sheet date as the redemption of these securities
is not solely within our control, due to our contractual
obligations to redeem these shares. We classify this redemption
value as redeemable common stock. Subsequent to this offering,
we will no longer be obligated to redeem these shares and
therefore we will not be required to record any redeemable
common stock.
|
25
MANAGEMENTS
DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with
our historical financial statements and the related notes
included elsewhere in this prospectus, as well as the discussion
under Selected Consolidated Financial Data. This
discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results may differ
materially from those discussed in or implied by any of the
forward-looking statements as a result of various factors,
including but not limited to those listed under Risk
Factors and Special Note Regarding Forward-Looking
Statements.
We enable risk-bearing businesses to better understand and
manage their risks. We provide value to our customers by
supplying proprietary data that, combined with our analytic
methods, creates embedded decision support solutions. We are the
largest aggregator and provider of data pertaining to
U.S. property and casualty, or P&C, insurance risks.
We offer solutions for detecting fraud in the U.S. P&C
insurance, mortgage and healthcare industries and sophisticated
methods to predict and quantify loss in diverse contexts ranging
from natural catastrophes to health insurance.
Our customers use our solutions to make better risk decisions
with greater efficiency and discipline. We refer to these
products and services as solutions due to the
integration among our products and the flexibility that enables
our customers to purchase components or the comprehensive
package of products. These solutions take various forms,
including data, statistical models or tailored analytics, all
designed to allow our clients to make more logical decisions. We
believe our solutions for analyzing risk positively impact our
customers revenues and help them better manage their costs.
We organize our business in two segments: Risk Assessment and
Decision Analytics. Our Risk Assessment segment provides
statistical, actuarial and underwriting data for the
U.S. P&C insurance industry. Our Risk Assessment
segment revenues represented approximately 60% and 58% of our
revenues for the year ended December 31, 2007 and the six
months ended June 30, 2008, respectively. Our Decision
Analytics segment provides solutions our customers use to
analyze the four processes of the Verisk Risk Analysis
Framework: Prediction of Loss, Selection and Pricing of Risk,
Detection and Prevention of Fraud, and Quantification of Loss.
Our Decision Analytics segment revenues represented
approximately 40% and 42% of our revenues for the year ended
December 31, 2007 and the six months ended June 30,
2008, respectively.
Executive
Summary
Key
Business Characteristics
We believe we have an attractive operating model due to the
recurring nature of our revenues, the scalability of our
solutions and the low capital intensity of our business.
Recurring Nature of Revenues.
We offer our
solutions primarily through annual subscriptions or long-term
agreements, which are generally pre-paid. For the year ended
December 31, 2007 and the six months ended June 30,
2008, 74% and 72% of our revenues, respectively, were derived
from subscriptions and long-term agreements for our solutions.
Approximately 96% of our top 200 customers in 2007, as ranked by
revenues, have been our customers for each of the last five
years. The combination of our historically high renewal rates,
which we believe are due to the embedded nature of our
solutions, and our subscription-based revenue model, results in
predictable cash flows.
Scalable Solutions.
Our technology
infrastructure and scalable solution platforms allow us to
accommodate significant additional transaction volumes with
limited incremental costs. This operating leverage enabled us to
increase our EBITDA margins from 30.6% in 2003 to 42.1% in 2007.
Low Capital Intensity.
We have low capital
needs that allow us to generate strong cash flow. In 2007, our
operating income and capital expenditures as a percentage of
revenue were 33.9% and 4.1%, respectively.
26
Revenues
We earn revenues through subscriptions, long-term agreements and
on a transactional basis. Subscriptions for our solutions are
generally paid in advance of rendering services either quarterly
or in full upon commencement of the subscription period, which
is usually for one year and are automatically renewed each year.
As a result, the timing of our cash flows generally precedes our
recognition of revenues and income and our cash flow from
operations tends to be higher in the first quarter as we receive
subscription payments. Examples of these arrangements include
subscriptions that allow our customers to access our
standardized coverage language or our actuarial services
throughout the subscription period. In general, we experience
minimal seasonality within the business. Our long-term
agreements are generally for periods of three to seven years. We
recognize revenue from subscriptions ratably over the term of
the subscription and most long-term agreements are recognized
ratably over the term of the agreement.
Certain of our solutions are also paid for by our customers on a
transactional basis. For example, we have solutions that allow
our customers to access fraud detection tools in the context of
an individual mortgage application, obtain property-specific
rating and underwriting information to price a policy on a
commercial building, or compare a P&C insurance, medical or
workers compensation claim with information in our
databases. For the year ended December 31, 2007 and the six
months ended June 30, 2008, 26% and 28% of our revenues,
respectively, were derived from providing transactional
solutions. We earn transactional revenues as our solutions are
delivered or services performed. In general, transactions are
billed monthly at the end of each month.
More than 80% and 81% of the revenues in our Risk Assessment
segment for the year ended December 31, 2007 and the six
months ended June 30, 2008, respectively, were derived from
subscriptions and long-term agreements for our solutions. Our
customers in this segment include most of the P&C insurance
providers in the United States and we have retained
approximately 99% of our P&C insurance customer base in
each of the last five years. More than 63% and 59% of the
revenues in our Decision Analytics segment, for the year ended
December 31, 2007 and the six months ended June 30,
2008, respectively, were derived from subscriptions and
long-term agreements for our solutions.
Principal
Operating Costs and Expenses
Personnel expenses are the major component of both our cost of
revenues and selling, general and administrative expenses.
Personnel expenses include salaries, benefits, incentive
compensation, equity compensation costs (described under
Equity Compensation Costs below), sales
commissions, employment taxes, recruiting costs and outsourced
temporary agency costs and represented 66% of our total expenses
for each of the year ended December 31, 2007 and the six
months ended June 30, 2008.
We allocate personnel expenses between two categories, cost of
revenues and selling, general and administrative costs based on
the actual costs associated with each employee. We categorize
employees who maintain our solutions as cost of revenues, and
all other personnel, including executive managers, sales people,
marketing, business development, finance, legal, human resources
and administrative services as selling, general and
administrative expenses. A significant portion of our other
operating costs, such as facilities and communications, are also
either captured within cost of revenues or selling, general and
administrative expense, based on the nature of the work being
performed.
While we expect to grow our headcount over time to take
advantage of our market opportunities, we believe that the
economies of scale in our operating model will allow us to grow
our personnel expenses at a lower rate than revenues.
Historically, our EBITDA margin has improved because we have
been able to increase revenues without a proportionate
corresponding increase in expenses.
Cost of Revenues.
Our cost of revenues
consists primarily of personnel expenses. Cost of revenues also
includes the expenses associated with the acquisition and
verification of data, the maintenance of our existing solutions
and the development and enhancement of our next-generation
solutions. Within our Risk Assessment segment, much of our
revenues are based on the data we receive from our customers.
The costs for such revenue for the year ended December 31,
2007 and the six months ended June 30, 2008 were
27
$15.6 million and $7.9 million, respectively, and
have declined as a percentage of revenue from 3.7% to 3.1% of
our Risk Assessment segment revenues from December 31, 2005
to June 30, 2008.
Selling, General and Administrative
Expense.
Our selling, general and administrative
expense also consists primarily of personnel costs. A portion of
the other operating costs such as facilities, insurance and
communications are also allocated to selling, general and
administrative costs based on the nature of the work being
performed by the employee.
Description
of Acquisitions
As part of our growth strategy, we intend to continue to
selectively acquire companies primarily to augment our Decision
Analytics offerings. We have acquired ten businesses since
January 2005, all of which are included in our Decision
Analytics segment. Specifically, seven of these companies
provide fraud identification and detection solutions and two of
these companies provide loss prediction and selection solutions
to the healthcare market. In addition, we acquired Xactware,
Inc., or Xactware, in 2006, which provides loss quantification
solutions for all phases of building repair and reconstruction.
As a result of these acquisitions, our consolidated results of
operations may not be comparable between periods.
In 2007, we acquired three companies for an aggregate cash
purchase price of approximately $50.0 million and funded
indemnity and contingent payment escrows of $3.3 million
and $1.0 million, respectively. In 2006, we acquired four
companies for an aggregate cash purchase price of approximately
$202.1 million, of which $188.0 million relates to
Xactware, and funded indemnity and contingent payment escrows of
$11.1 million and $3.5 million, respectively. In 2005,
we acquired three companies for an aggregate cash purchase price
of approximately $62.7 million and funded contingency
escrows of $14.4 million.
At June 30, 2008, the current and long-term portions of
these escrows were $12.8 million and $0.9 million,
respectively. A portion of these escrows and other potential
acquisition contingent payments are linked to performance
targets and, in some cases, to continued employment of key
principals. When tied to continued employment, these contingent
payments must be expensed as compensation. Compensation expense
related to these acquisition contingent payments for the years
ended December 31, 2005, 2006 and 2007 were
$9.7 million, $9.0 million and $3.6 million,
respectively, and for the six months ended June 30, 2007
and 2008 were $2.4 million and $0.6 million.
Equity
Compensation Costs
We established a leveraged employee stock ownership plan, or
ESOP, funded with intercompany debt that includes 401(k), ESOP
and profit sharing components to provide employees with equity
participation. We make quarterly cash contributions to the plan
equal to the debt service requirements. As the debt is repaid,
shares are released to the ESOP to fund 401(k) matching and
profit sharing contributions and the remainder is allocated
annually to active employees in proportion to their eligible
compensation in relation to total participant eligible
compensation.
28
We accrue compensation expense ratably over the reporting period
equal to the fair value of the shares to be released to the
ESOP. As the value of our shares has increased, our compensation
expense relating to our ESOP has increased as well. The amount
of our equity compensation costs recognized for the years ended
December 31, 2005, 2006 and 2007 and the six months ended
June 30, 2007 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Year Ended December 31,
|
|
|
Ended June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
401(k) matching contribution expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Assessment
|
|
$
|
4,466
|
|
|
$
|
4,703
|
|
|
$
|
4,914
|
|
|
$
|
2,501
|
|
|
$
|
2,660
|
|
Decision Analytics
|
|
|
1,689
|
|
|
|
2,105
|
|
|
|
2,788
|
|
|
|
1,385
|
|
|
|
1,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 401(k) matching contribution expense
|
|
|
6,155
|
|
|
|
6,808
|
|
|
|
7,702
|
|
|
|
3,886
|
|
|
|
4,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit sharing contribution expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Assessment
|
|
|
|
|
|
|
|
|
|
|
473
|
|
|
|
239
|
|
|
|
370
|
|
Decision Analytics
|
|
|
|
|
|
|
|
|
|
|
268
|
|
|
|
132
|
|
|
|
215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total profit sharing contribution expense
|
|
|
|
|
|
|
|
|
|
|
741
|
|
|
|
371
|
|
|
|
585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESOP allocation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Assessment
|
|
|
5,422
|
|
|
|
8,105
|
|
|
|
8,806
|
|
|
|
4,224
|
|
|
|
4,289
|
|
Decision Analytics
|
|
|
2,051
|
|
|
|
3,627
|
|
|
|
4,997
|
|
|
|
2,340
|
|
|
|
2,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ESOP allocation expense
|
|
|
7,473
|
|
|
|
11,732
|
|
|
|
13,803
|
|
|
|
6,564
|
|
|
|
6,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ESOP costs
|
|
$
|
13,628
|
|
|
$
|
18,540
|
|
|
$
|
22,246
|
|
|
$
|
10,821
|
|
|
$
|
11,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to the completion of this offering, we intend to
accelerate the allocation of a portion of the shares to the
ESOP, which will result in a non-recurring non-cash charge of
approximately $ million,
based on the mid-point of the range set forth on the cover page
of this prospectus. As a result, subsequent to the offering, the
non-cash ESOP allocation expense will be substantially reduced.
Non-cash charges relating specifically to our 401(k) and profit
sharing were $6.8 million and $8.4 million for the
years ended December 31, 2006 and 2007, respectively, and
we expect this level of charges to continue to grow in the
future.
In addition, the portion of the ESOP allocation expense related
to the appreciation of the value of the shares in the ESOP above
the value of those shares when the ESOP was first established is
not tax deductible. Therefore, we believe the accelerated
allocation will result in a reduction of approximately 3% to our
effective tax rate from 2008 to 2009.
On January 1, 2005, we adopted FAS No. 123(R),
Share-Based Payment, or FAS No. 123(R),
using a prospective approach, which required us to record
compensation expense for all awards granted after the date of
adoption. Therefore, since January 1, 2005 the expense
associated with the number of options granted has increased
every year. For example, for the year ended December 31,
2005 we expensed the option grants vested in 2005, but for the
year ended December 31, 2006 we expensed the option grants
vested in 2005 and 2006. See Critical
Accounting Policies and Estimates Stock Based
Compensation.
Public
Company Expenses
Beginning in 2008, our selling, general and administrative costs
increased as we prepared for this initial public offering; for
the six months ended June 30, 2008, such costs were
$2.3 million. Following the offering, we will incur
additional selling, general and administrative expenses related
to operating as a public company, such as increased legal and
accounting expenses, the cost of an investor relations function,
costs related to Section 404 of the Sarbanes-Oxley Act and
increased director and officer insurance premiums.
29
Upon the completion of this offering, we expect to
grant shares
of our Class A common stock to our directors, officers and
employees in the form of stock options, performance shares,
performance unit awards, restricted shares or restricted stock
awards. Assuming that all of the performance measures are met,
we expect the related expense to be approximately
$ million,
$ million and
$ million for 2009, 2010 and
2011, respectively. See Management Executive
Compensation Verisk Analytics, Inc. 2008 Equity
Incentive Plan.
Trends
Affecting Our Business
A portion of our revenues are related to changes in historical
insurance premiums, therefore, our revenues could be positively
or negatively affected by growth or declines in premiums for the
lines of insurance for which we perform services. The pricing of
these solutions is based on an individual customers
premiums in a prior period, so the pricing is fixed at the
inception of each calendar year. The impact of insurance
premiums has a more significant impact on the Risk Assessment
segment than the Decision Analytics segment. Since 2005, premium
growth in the P&C insurance industry has slowed and we
expect little or no growth for most insurance lines during 2008.
In addition, since 2007, the softening of the automobile
insurance market negatively impacted our auto premium leakage
identification solutions. We do not expect this trend to have a
material impact on our liquidity or capital resources.
A portion of our revenues in the Decision Analytics segment are
tied to the volume of applications for new mortgages or
refinancing of existing mortgages. Turmoil in the mortgage
market over the past year has adversely affected revenue in this
segment of our business. Although we expect this trend to
continue to impact our business during the balance of 2008, due
to the rise in foreclosure and early pay defaults, we have seen
and expect to see in the future an increase in revenues from our
solutions that help our customers focus on improved underwriting
quality of mortgage loans, ensure the application data is
accurate and identify and rapidly settle bad loans which may
have been originated based upon fraudulent information.
Recent events within the United States economy are expected to
result in a further tightening in credit availability, which has
resulted in higher interest rates. To date we have been able to
adequately secure credit arrangements for the financing of the
business and we will continue to explore financing alternatives
to fund future growth opportunities. Borrowings under our debt
facilities are long-term in nature and are at fixed interest
rates. While the potential for higher interest rates may
translate into higher interest expense in the future, we do not
expect this to have a material impact on our business in the
near-term.
Results
of Operations
Set forth below is our results of operations expressed as a
percentage of revenues.
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
Ended
|
|
|
|
Year Ended December 31,
|
|
|
June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
Statement of income data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
45.7
|
%
|
|
|
45.4
|
%
|
|
|
44.5
|
%
|
|
|
44.1
|
%
|
|
|
43.6
|
%
|
Selling, general and administrative
|
|
|
13.7
|
%
|
|
|
13.7
|
%
|
|
|
13.4
|
%
|
|
|
13.9
|
%
|
|
|
13.5
|
%
|
Depreciation and amortization of fixed assets
|
|
|
3.4
|
%
|
|
|
3.8
|
%
|
|
|
4.0
|
%
|
|
|
3.9
|
%
|
|
|
3.8
|
%
|
Amortization of intangible assets
|
|
|
3.1
|
%
|
|
|
3.7
|
%
|
|
|
4.2
|
%
|
|
|
4.3
|
%
|
|
|
3.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
65.9
|
%
|
|
|
66.7
|
%
|
|
|
66.1
|
%
|
|
|
66.2
|
%
|
|
|
64.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
34.1
|
%
|
|
|
33.3
|
%
|
|
|
33.9
|
%
|
|
|
33.8
|
%
|
|
|
35.8
|
%
|
Other income/(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and investment income (loss)
|
|
|
0.5
|
%
|
|
|
0.8
|
%
|
|
|
1.2
|
%
|
|
|
1.2
|
%
|
|
|
0.1
|
%
|
Interest expense
|
|
|
(1.6
|
)%
|
|
|
(2.3
|
)%
|
|
|
(2.9
|
)%
|
|
|
(2.9
|
)%
|
|
|
(3.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income/(expense)
|
|
|
(1.2
|
)%
|
|
|
(1.4
|
)%
|
|
|
(1.7
|
)%
|
|
|
(1.6
|
)%
|
|
|
(3.2
|
)%
|
Income from continuing operations before income taxes
|
|
|
32.9
|
%
|
|
|
31.9
|
%
|
|
|
32.2
|
%
|
|
|
32.2
|
%
|
|
|
32.6
|
%
|
Provision for income taxes
|
|
|
(13.3
|
)%
|
|
|
(11.9
|
)%
|
|
|
(12.9
|
)%
|
|
|
(13.1
|
)%
|
|
|
(14.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
19.7
|
%
|
|
|
20.0
|
%
|
|
|
19.3
|
%
|
|
|
19.1
|
%
|
|
|
18.5
|
%
|
Loss from discontinued operations, net of tax
|
|
|
(0.4
|
)%
|
|
|
(0.2
|
)%
|
|
|
(0.6
|
)%
|
|
|
(0.3
|
)%
|
|
|
(
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
19.3
|
%
|
|
|
19.7
|
%
|
|
|
18.7
|
%
|
|
|
18.7
|
%
|
|
|
18.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
40.6
|
%
|
|
|
40.8
|
%
|
|
|
42.1
|
%
|
|
|
42.0
|
%
|
|
|
42.9
|
%
|
Six
Months Ended June 30, 2008 Compared to Six Months Ended
June 30, 2007
Consolidated
Results of Operations
Revenues
Revenues were $437.7 million for the six-month period ended
June 30, 2008 compared to $400.0 million for the
six-month period ended June 30, 2007, an increase of
$37.7 million or 9.4%. During the latter part of 2007, we
acquired three companies that accounted for $15.8 million
of additional revenues for the six-month period ended
June 30, 2008. Excluding these acquisitions, revenues
increased $21.9 million, which included an increase of
$8.8 million in our Risk Assessment segment and an increase
of $13.1 million in our Decision Analytics segment.
Cost of
Revenues
Cost of revenues was $190.7 million for the six-month
period ended June 30, 2008 compared to $176.5 million
for the six-month period ended June 30, 2007, an increase
of $14.2 million, or 8.0%. The increase was primarily due
to $10.0 million in costs attributable to the newly
acquired companies and $4.2 million in costs due to
increased salaries and employee benefits costs, which include
annual salary increases, medical costs and long-term incentive
plans across a relatively constant employee headcount, a
$1.5 million increase in office maintenance fees and other
operating expenses of $1.7 million. These increases were
partially offset by $1.4 million in loss on disposal of
assets in the period ended June 30, 2007 with no
corresponding amount in the current period and acquisition
contingent payments that were lower by $1.9 million
compared to the period ended June 30, 2007. These
acquisition contingent payments are related to achievement of
performance-related targets for different acquisitions in the
periods described. As a percentage of revenues, cost of revenues
was 44.1% and 43.6% for the six months ended June 30, 2007
and 2008, respectively.
31
Selling,
General and Administrative Expenses
Selling, general and administrative expenses were
$59.0 million for the six-month period ended June 30,
2008 compared to $55.6 million for the six-month period
ended June 30, 2007, an increase of $3.4 million or
6.2%. The increase was due to $0.6 million in costs
attributable to the newly acquired companies, $1.9 million
in costs due to increased salaries and employee benefits costs,
which include annual salary increases, medical costs and
long-term incentive plans across a relatively constant employee
headcount, and $2.4 million in legal costs primarily
resulting from the preparation for our initial public offering.
This increase was partially offset by lower advertising and
marketing costs of $0.6 million, and other general expenses
of $0.9 million. As a percentage of revenues, selling,
general and administrative expenses decreased to 13.5% from
13.9%.
Depreciation
and Amortization of Fixed Assets
Depreciation and amortization of fixed assets were
$16.4 million for the six-month period ended June 30,
2008 compared to $15.5 million for the six-month period
ended June 30, 2007, an increase of $0.9 million or
6.0%. Depreciation and amortization of fixed assets includes
depreciation of furniture and equipment, software, computer
hardware and related equipment. As a percentage of revenue,
depreciation and amortization of fixed assets decreased to 3.8%
from 3.9%.
Amortization
of Intangible Assets
Amortization of intangible assets was $14.9 million for the
six-month period ended June 30, 2008 compared to
$17.2 million for the six-month period ended June 30,
2007, a decrease of $2.3 million, or 13.4%. The decrease is
the result of certain intangible assets having been fully
amortized in 2007, partially offset by the increased
amortization of intangibles that resulted from our new
acquisitions. We amortize intangible assets obtained through
acquisitions over the periods that we expect to derive benefit
from such assets.
Investment
Income and Realized Gains (Losses) on Securities, Net
Investment income and realized gains (losses) on securities, net
was $0.3 million for the six-month period ended
June 30, 2008 compared to $5.0 million for the
six-month period ended June 30, 2007, a decrease of
$4.7 million. Interest income and realized gains (losses)
on securities, consists of interest income we receive from our
cash and cash equivalents and stockholder loans, dividend income
from our available-for-sale securities held with certain
financial institutions as well as realized amounts associated
with the sale of available-for-sale securities. The decrease
primarily resulted from reduced interest income of
$2.8 million coupled with the loss on sale of securities of
$1.3 million for the six-month period ended June 30,
2008.
Interest
Expense
Interest expense was $14.2 million for the six-month period
ended June 30, 2008 compared to $11.5 million for the
six-month period ended June 30, 2007, an increase of
$2.7 million or 23.5%. This increase is primarily due to
greater debt outstanding and higher interest rates in the
six-month period ended June 30, 2008 compared to the
six-month period ended June 30, 2007.
Provision
for Income Taxes
Provision for income taxes was $61.8 million for the
six-month period ended June 30, 2008 compared to
$52.4 million for the six-month period ended June 30,
2007, an increase of $9.4 million or 17.9%. The effective
tax rate was 43.3% for the six-month period ended June 30,
2008 compared to 40.8% for the
six-month
period ended June 30, 2007. The 2008 rate is higher due to
an increase in ESOP appreciation expenses not deductible for tax
purposes and a higher state tax rate in 2008. Subsequent interim
periods in 2008 should reflect lower effective tax rates as a
result of the reduction of state tax contingencies due to the
expiration of related statutes of limitations.
32
Loss from
Discontinued Operations, Net of Tax
Loss from discontinued operations, net of tax was
$1.3 million for the six-month period ended June 30,
2007, resulting from costs to support customer contracts in our
claim consulting business that was terminated in 2007. This
business will not have an impact on our 2008 results.
Risk
Assessment Results of Operations
Revenues
Revenues for our Risk Assessment segment were
$253.4 million for the six-month period ended June 30,
2008 compared to $244.6 for the six-month period ended
June 30, 2007, an increase of $8.8 million or 3.6%.
The increase was primarily due to an increase in the sales of
our industry-standard insurance programs partially offset by
decreases in rate making and policy administration solutions and
sales of our auto premium leakage identification solutions due
to a softening in the auto insurance market. The increase in our
industry-standard insurance programs primarily results from an
increase in prices derived from continued enhancements to the
content of our solutions and to a lesser extent, changes in our
customers premium volumes. Our revenue by category for the
periods presented is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
Percentage
|
|
|
2007
|
|
2008
|
|
Change
|
|
|
(In thousands)
|
|
|
|
Industry standard insurance programs
|
|
$
|
157,045
|
|
|
$
|
165,719
|
|
|
|
5.5
|
%
|
Property-specific rating and underwriting information
|
|
|
63,786
|
|
|
|
63,344
|
|
|
|
−0.7
|
%
|
Statistical agency and data services
|
|
|
13,643
|
|
|
|
13,820
|
|
|
|
1.3
|
%
|
Actuarial services
|
|
|
10,082
|
|
|
|
10,473
|
|
|
|
3.9
|
%
|
Cost of
Revenues
Cost of revenues for our Risk Assessment segment was
$103.1 million for the six-month period ended June 30,
2008 compared to $104.9 million for the six-month period
ended June 30, 2007, a decrease of $1.8 million or
1.7%. The decrease was due primarily to a $1.3 million loss
on disposal of assets in the six-month period ended
June 30, 2007, and an overall reduction of other operating
expenses of $0.5 million which includes a reduction in
salaries and employee benefits. As a percentage of Risk
Assessment revenues, cost of revenues decreased to 40.7% from
42.9%.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses for our Risk
Assessment segment were $36.7 million for the six months
ended June 30, 2008 compared to $34.8 million for the
six-month period ended June 30, 2007, a increase of
$1.9 million or 5.4%. The increase was primarily due to an
increase in legal fees associated with the preparation for our
initial public offering. As a percentage of Risk Assessment
revenues, selling, general and administrative expenses increased
to 14.5% from 14.2%.
EBITDA
Margin
The EBITDA margin for our Risk Assessment segment was 44.8% for
the six months ended June 30, 2008 compared to 42.9% for
the six months ended June 30, 2007.
Decision
Analytics Results of Operations
Revenues
Revenues for our Decision Analytics segment were
$184.3 million for the six-month period ended June 30,
2008 compared to $155.4 million for the six-month period
ended June 30, 2007, an increase of $28.9 million or
18.6%. During the latter part of 2007, we acquired three
companies that accounted for $15.8 million of the
additional revenues for the six-month period ended June 30,
2008. Excluding the impact
33
of these acquisitions, revenues increased $13.1 million,
primarily due to an increase in sales of our loss quantification
and loss prediction solutions, which was partially offset by a
decrease in our fraud identification and detection solutions.
Our loss quantification revenues increased as a result of new
customer contracts and volume increases associated with recent
floods and wildfires experienced in the United States. Increased
revenue in our loss prediction solutions resulted from sales to
new customers as well as increased penetration of our existing
customers. Excluding acquisitions, our fraud identification and
detection solutions decreased $1.3 million as revenue from
our mortgage businesses decreased $6.0 million due to
adverse market conditions in that industry, partially offset by
increases in our claims solutions as enhancements to the content
of our products increased subscription revenues. Our revenue by
category for the periods presented is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
Ended June 30,
|
|
|
Percentage
|
|
|
|
2007
|
|
|
2008
|
|
|
Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
Loss prediction solutions
|
|
$
|
38,025
|
|
|
$
|
46,260
|
|
|
|
21.7
|
%
|
Fraud identification and detection solutions
|
|
|
88,532
|
|
|
|
102,858
|
|
|
|
16.2
|
%
|
Loss quantification solutions
|
|
|
28,875
|
|
|
|
35,216
|
|
|
|
22.0
|
%
|
Cost of
Revenues
Cost of revenues for our Decision Analytics segment was
$87.5 million for the six-month period ended June 30,
2008 compared to $71.6 million for the six-month period
ended June 30, 2007, an increase of $16.0 million or
22.3%. The increase included $10.0 million in costs
attributable to the newly acquired companies. Excluding the
impact of these acquisitions, the cost of revenues increased
$6.0 million, primarily due to an increase in salaries and
employee benefits of $5.4 million across a relatively
constant employee headcount, which includes annual increases in
salary increases, medical costs, and equity compensation costs,
$0.9 million increase in office maintenance costs and an
increase in other operating expenses of $1.5 million,
partially offset by $1.9 million in lower acquisition
contingent payments associated with acquisitions made in the
prior period. As a percentage of Decision Analytics revenues,
cost of revenues increased to 47.5% from 46.1%.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses were
$22.3 million for the six months ended June 30, 2008
compared to $20.8 million for the six-month period ended
June 30, 2007, an increase of $1.5 million or 7.4%.
The increase was due to $0.6 million in costs attributable
to the newly acquired companies, and $1.3 million in costs
due to increased salaries and employee benefits costs, which
include annual salary increases, medical costs and long-term
incentive plans across a relatively constant employee headcount.
This increase was partially offset by lower advertising and
marketing costs of $0.4 million. As a percentage of
Decision Analytics revenues, selling, general and administrative
expenses decreased to 12.1% from 13.4%.
EBITDA
Margin
The EBITDA margin for our Decision Analytics segment was 40.4%
for the six months ended June 30, 2008 compared to 40.6%
for the six months ended June 30, 2007.
Year
Ended December 31, 2007 Compared to Year Ended
December 31, 2006
Consolidated
Results of Operations
Revenues
Revenues were $802.2 million for the year ended
December 31, 2007 compared to $730.1 million for the
year ended December 31, 2006, an increase of
$72.1 million or 9.9%. This increase was primarily due to
the inclusion of Xactware, which was acquired in August 2006,
for the full year, as well as several other acquisitions made
during the latter part of 2006 and during 2007. Xactware
contributed $63.2 million in revenues for the year ended
December 31, 2007 compared to $22.2 million for the
year ended December 31, 2006 and revenues from other
acquisitions increased $6.5 million for the year ended
December 31, 2007
34
compared to the year ended December 31, 2006. Excluding the
impact of these acquisitions, revenues increased
$24.6 million which was comprised of an increase of
$12.5 million in our Risk Assessment segment and an
increase of $12.0 million in our Decision Analytics segment.
Cost of
Revenues
Cost of revenues was $357.2 million for the year ended
December 31, 2007 compared to $331.8 million for the
year ended December 31, 2006, an increase of
$25.4 million or 7.7%. The increase was primarily due to
$22.7 million in costs attributable to the inclusion of the
full year results of our acquisitions in 2006 and the
acquisitions in 2007. Excluding these acquisitions, our cost of
revenues increased by $2.6 million partially due to an
increase in salaries and benefits of $12.5 million
resulting from growth in headcount and other operating expenses
of $1.0 million. These increases were partially offset by a
decrease in acquisition contingent payments tied to continuing
employment of $8.7 million. As a percentage of revenue,
cost of revenues decreased to 44.5% for the year ended
December 31, 2007 from 45.4% for the year ended
December 31, 2006.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses were
$107.6 million for the year ended December 31, 2007
compared to $100.1 million for the year ended
December 31, 2006, an increase of $7.5 million or
7.5%. The increase was due to $4.2 million in costs
attributable to the inclusion of the results of our acquisitions
in 2006 and 2007. Excluding these acquisitions, our selling,
general and administrative costs increased by $3.3 million
primarily as a result of an increase in salaries and benefits of
$2.4 million, an increase in equity compensation costs of
$1.1 million and an increase in financial system upgrade
costs of $0.7 million and $0.6 million of advertising
costs. These increases were partially offset by a
$1.8 million decrease in sales commission expense resulting
from a change in commission rates in 2007. As a percentage of
revenue, selling, general and administrative expenses decreased
to 13.4% from 13.7%.
Depreciation
and Amortization of Fixed Assets
Depreciation and amortization of fixed assets were
$31.7 million for the year ended December 31, 2007
compared to $28.0 million for the year ended
December 31, 2006, an increase of $3.7 million or
13.3%. This increase is primarily due to our continuing
investment in developing new products and enhancements to
existing products as well as the continued investment in our
technology infrastructure to support and grow our revenues. As a
percentage of revenue, depreciation and amortization of fixed
assets increased to 4.0% from 3.8%.
Amortization
of Intangible Assets
Amortization of intangibles assets was $33.9 million for
the year ended December 31, 2007 compared to
$26.9 million for the year ended December 31, 2006, an
increase of $7.0 million or 26.3%. This increase is the
result of having a full year of amortization in 2007 on the
intangible assets related to the acquisition of Xactware in
2006, partially offset by the final amortization during 2007 of
intangible assets related to other acquisitions.
Investment
Income and Realized Gains (Losses) on Securities, Net
Investment income and realized gains (losses) on securities, net
was $9.3 million for the year ended December 31, 2007
compared to $6.1 million for the year ended
December 31, 2006, an increase of $3.2 million or
52.6%. This increase is primarily due to a $2.0 million
gain on our investment portfolio as well as an increase of
$1.0 million in interest income primarily earned on
acquisition escrow deposits.
Interest
Expense
Interest expense was $22.9 million for the year ended
December 31, 2007 compared to $16.7 million for the
year ended December 31, 2006, an increase of
$6.2 million or 37.6%. This increase is primarily the
35
result of an increase in the weighted average balance of debt
outstanding as well as higher rates of interest on long-term
borrowings.
Provision
for Income Taxes
Provision for income taxes was $103.2 million for the year
ended December 31, 2007 compared to $86.9 million for
the year ended December 31, 2006, an increase of
$16.3 million or 18.7%. The effective tax rate was 40.0%
for the year ended December 31, 2007 compared to 37.3% for
the year ended December 31, 2006, which included the
favorable settlement of certain tax contingencies.
Loss from
Discontinued Operations, Net of Tax
Loss from discontinued operations, net of tax was
$4.6 million for the year ended December 31, 2007
compared to $1.8 million for the year ended
December 31, 2006, an increase of $2.8 million or
154.2%, reflecting exit costs, net of tax, including
$1.7 million in the impairment of goodwill, associated with
the discontinuation of our claim consulting business.
Risk
Assessment Results of Operations
Revenues
Revenues for our Risk Assessment segment were
$485.2 million for the year ended December 31, 2007
compared to $472.6 million for the year ended
December 31, 2006, an increase of $12.5 million or
2.7%. The increase was primarily due to an increase in the sales
of our industry-standard insurance programs, which was partially
offset by a decrease in the sales of our auto premium leakage
identification solutions due to a softening in the auto
insurance market. The increase in our industry-standard
insurance programs primarily results from an increase in prices
derived from continued enhancements to the content of our
solutions and to a lesser extent, changes in our customers
premium volumes. Increases from sales of additional lines of our
services to existing customers are offset by lost revenue
resulting from consolidation within the property and casualty
insurance industry. Our revenue by category for the periods
presented is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
Percentage
|
|
|
2006
|
|
2007
|
|
Change
|
|
|
(In thousands)
|
|
|
|
Industry standard insurance programs
|
|
$
|
303,957
|
|
|
$
|
311,087
|
|
|
|
2.3
|
%
|
Property-specific rating and underwriting information
|
|
|
123,627
|
|
|
|
126,291
|
|
|
|
2.2
|
%
|
Statistical agency and data services
|
|
|
25,793
|
|
|
|
27,282
|
|
|
|
5.8
|
%
|
Actuarial services
|
|
|
19,257
|
|
|
|
20,500
|
|
|
|
6.5
|
%
|
Cost of
Revenues
Cost of revenues for our Risk Assessment segment was
$204.2 million for the year ended December 31, 2007
compared to $203.9 million for the year ended
December 31, 2006, an increase of $0.3 million or
0.1%. The increase was primarily due to salary and benefit
increases of $2.0 million and an increase in equity
compensation costs of $2.3 million. These increases were
offset by a decrease in outsourced temporary agency costs of
$1.9 million, a decrease in software maintenance expenses
of $1.2 million, and a decrease in acquisition contingent
payments associated with acquisitions of $1.1 million. As a
percentage of Risk Assessment revenues, cost of revenues
decreased to 42.1% from 43.1%.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses for our Risk
Assessment segment were $68.2 million for the year ended
December 31, 2007 compared to $65.9 million for the
year ended December 31, 2006, an increase of
$2.3 million or 3.5%. The increase was primarily due to an
increase in salary and benefits of
36
$2.0 million, $0.6 million in costs to upgrade our
financial systems and an increase in equity compensation costs
of $0.9 million, partially offset by a decrease in
commission expense of $1.4 million, resulting from a change
in the commission plan in 2007. As a percentage of Risk
Assessment revenues, selling, general and administrative
expenses increased to 14.1% from 13.9%.
EBITDA
Margin
The EBITDA margin for our Risk Assessment segment was 43.9% for
the year ended December 31, 2007 compared to 42.9% for the
year ended December 31, 2006.
Decision
Analytics Results of Operations
Revenues
Revenues for our Decision Analytics segment were
$317.0 million for the year ended December 31, 2007
compared to $257.5 million for the year ended
December 31, 2006, an increase of $59.5 million or
23.1%. This increase reflects the inclusion of Xactware, our
loss quantification solution, which was acquired in August 2006,
for the full year, as well as several other acquisitions made
during the latter part of 2006 and during 2007. Xactware
contributed $63.2 million in revenues for the year ended
December 31, 2007 compared to $22.2 million for the
year ended December 31, 2006 and the other acquisitions
contributed $6.5 million of additional 2007 revenue
compared to the year ended December 31, 2006. Excluding the
impact of these acquisitions, revenues increased
$12.0 million primarily due to an increase in sales of our
loss prediction solutions resulting from revenue from new
customers as well as increased usage by our existing customers.
Within our fraud identification and detection solutions, growth
in our claims solutions and criminal record products were offset
by decreased revenue of $10.6 million in our mortgage
solutions due to adverse market conditions in that industry. Our
revenue by category for the periods presented is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2007
|
|
|
Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
Loss prediction solutions
|
|
$
|
67,129
|
|
|
$
|
81,110
|
|
|
|
20.8
|
%
|
Fraud identification and detection solutions
|
|
|
168,189
|
|
|
|
172,726
|
|
|
|
2.7
|
%
|
Loss quantification solutions
|
|
|
22,181
|
|
|
|
63,199
|
|
|
|
184.9
|
%
|
Cost of
Revenues
Cost of revenues for our Decision Analytics segment was
$153.0 million for the year ended December 31, 2007
compared to $127.9 million for the year ended
December 31, 2006, an increase of $25.1 million or
19.6%. The increase was primarily due to $22.7 million in
costs attributable to the inclusion of the full year results of
our acquisitions in 2006 and the acquisitions completed in 2007.
Excluding these acquisitions, our cost of revenues increased by
$2.4 million, partially due to salary and benefit increases
of $5.9 million, an increase in equity compensation costs
of $1.8 million, an increase in outsourced temporary agency
fees of $2.8 million and an increase of $0.7 million
in leased software, partially offset by a decrease in
acquisition contingent payments tied to continuing employment of
$7.6 million and $1.4 million on disposal of assets.
As a percentage of Decision Analytics revenues, cost of revenues
decreased to 48.3% from 49.7%.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses were
$39.4 million for our Decision Analytics segment for the
year ended December 31, 2007 compared to $34.2 million
for the year ended December 31, 2006, an increase of
$5.2 million or 15.0%. The increase was primarily due to
$4.2 million in costs attributable to the acquired
businesses. Excluding these acquisitions, the increase in
selling, general and administrative expenses was
$1.0 million, primarily due to an increase of
$0.4 million of salaries and benefits and $0.4 million
in advertising costs. As a percentage of Decision Analytics
revenues, selling, general and administrative expenses decreased
to 12.4% from 13.3%.
37
EBITDA
Margin
The EBITDA margin for our Decision Analytics segment was 39.3%
for the year ended December 31, 2007 compared to 37.0% for
the year ended December 31, 2006.
Year
Ended December 31, 2006 Compared to Year Ended
December 31, 2005
Consolidated
Results of Operations
Revenues
Revenues were $730.1 million for the year ended
December 31, 2006 compared to $645.7 million for the
year ended December 31, 2005, an increase of
$84.5 million or 13.1%. This increase in part reflected the
inclusion of acquisitions made in 2006, which contributed
$23.6 million in revenues for the year ended
December 31, 2006, and acquisitions made in 2005, which
contributed $16.4 million of revenues for the year ended
December 31, 2006 compared to $12.3 million for the
year ended December 31, 2005. Excluding these acquisitions,
revenues increased $56.8 million which was comprised of an
increase of $23.8 million in our Risk Assessment segment
and an increase of $33.0 million in our Decision Analytics
segment.
Cost of
Revenues
Cost of revenues was $331.8 million for the year ended
December 31, 2006 compared to $294.9 million for the
year ended December 31, 2005, an increase of
$36.9 million or 12.5%. The increase was primarily due to
$17.9 million in costs attributable to the inclusion of the
full year results of our acquisitions in 2005 and the
acquisitions completed in 2006. Excluding these acquisitions,
the increase in cost of revenues is $19.0 million,
consisting primarily of increases in personnel costs of
$18.9 million. The increase in personnel costs consists of
$10.7 million of salaries and benefits resulting from
growth in headcount, a $6.5 million increase in equity
compensation costs and a $1.0 million increase in pension
costs. As a percentage of revenue, cost of revenues decreased
slightly to 45.4% from 45.7%.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses were
$100.1 million for the year ended December 31, 2006
compared to $88.7 million for the year ended
December 31, 2005, an increase of $11.4 million or
12.9%. The increase was due to $3.8 million in costs
attributable to the inclusion of the full year results of our
acquisitions in 2005 and the partial year results of the
acquisitions completed in 2006. Excluding these acquisitions,
our selling general and administrative costs increased by
$7.6 million, primarily as a result of an increase in legal
costs of $3.4 million, an increase in salary and benefits
of $1.7 million as a result of growth in headcount, an
increase in commissions of $1.8 million as a result of an
increase in new sales and an increase in equity compensation
costs of $1.5 million. As a percentage of revenue, selling,
general and administrative expenses remained unchanged at 13.7%.
Depreciation
and Amortization of Fixed Assets
Depreciation and amortization of fixed assets were
$28.0 million for the year ended December 31, 2006
compared to $22.0 million for the year ended
December 31, 2005, an increase of $6.0 million or
27.2%. This increase is primarily due to investments in our
technology infrastructure, as well as continuing investments in
developing and enhancing our solutions. As a percentage of
revenue, depreciation and amortization of fixed assets increased
to 3.8% from 3.4%.
Amortization
of Intangible Assets
Amortization of intangible assets increased to
$26.9 million in the year ended December 31, 2006
compared to $19.8 million for the year ended
December 31, 2005, an increase of $7.1 million or
35.6%. This increase is primarily due to the amortization of
intangibles related to the acquisition of Xactware during August
2006.
38
Investment
Income and Realized Gains (Losses) on Securities, Net
Investment income and realized gains (losses) on securities, net
was $6.1 million for the year ended December 31, 2006
compared to $2.9 million for the year ended
December 31, 2005, an increase of $3.2 million or
108.1%. This increase is primarily due to a $2.6 million
increase in interest earned on money market accounts, interest
received on acquisition escrow deposits and interest earned on
stockholder loans as well as a $0.3 million increase in
dividend income.
Interest
Expense
Interest expense was $16.7 million for the year ended
December 31, 2006 compared to $10.5 million for the
year ended December 31, 2005, an increase of
$6.2 million or 59.3%. The increase is primarily the result
of higher average debt outstanding as well as higher rates of
interest on long-term borrowings.
Provision
for Income Taxes
Provision for income taxes was $86.9 million for the year
ended December 31, 2006 compared to $85.7 million for
the year ended December 31, 2005, an increase of
$1.2 million or 1.4%. The effective tax rate was 37.3% for
the year ended December 31, 2006, which included the
favorable settlement of certain tax contingencies, compared to
40.3% for the year ended December 31, 2005.
Loss from
Discontinued Operations, Net of Tax
Loss from discontinued operations, net of tax was
$1.8 million for the year ended December 31, 2006
compared to $2.6 million for the year ended
December 31, 2005, a decrease of $0.8 million or
29.9%, primarily resulting from a $1.1 million impairment
charge, net of tax, in 2005.
Risk
Assessment Results of Operations
Revenues
Revenues for our Risk Assessment segment were
$472.6 million for the year ended December 31, 2006
compared to $448.9 million for the year ended
December 31, 2005, an increase of $23.7 million or
5.3%. The increase was primarily due to an increase in the sales
of our industry-standard insurance programs and an increase in
the demand for our property-specific rating and underwriting
information. The increase in our industry-standard insurance
programs primarily results from an increase in prices derived
from continued enhancements to the content of our solutions and
to a lesser extent, changes in our customers premium
volumes. Increases from sales of additional lines of our
services to existing customers are offset by lost revenue
resulting from mergers of certain customers within the property
and casualty insurance industry. Our revenue by category for the
periods presented is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
Percentage
|
|
|
2005
|
|
2006
|
|
Change
|
|
|
(In thousands)
|
|
|
|
Industry standard insurance programs
|
|
$
|
290,204
|
|
|
$
|
303,957
|
|
|
|
4.7
|
%
|
Property-specific rating and underwriting information
|
|
|
114,467
|
|
|
|
123,627
|
|
|
|
8.0
|
%
|
Statistical agency and data services
|
|
|
25,228
|
|
|
|
25,793
|
|
|
|
2.2
|
%
|
Actuarial services
|
|
|
18,976
|
|
|
|
19,257
|
|
|
|
1.5
|
%
|
Cost of
Revenues
Cost of revenues for our Risk Assessment segment was
$203.9 million for the year ended December 31, 2006
compared to $191.5 million for the year ended
December 31, 2005, an increase of $12.4 million or
6.5%. The increase was primarily due to an increase in salary
and benefits of $14.6 million and an increase in equity
compensation costs of $3.0 million, partially offset by a
decrease in legal costs of
39
$1.2 million and professional consulting costs of
$0.9 million. As a percentage of Risk Assessment revenues,
cost of revenues increased to 43.1% from 42.6%.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses for our Risk
Assessment segment were $65.9 million for the year ended
December 31, 2006 compared to $61.4 million for the
year ended December 31, 2005, an increase of
$4.5 million or 7.3%. The increase was primarily due to an
increase in equity compensation costs of $1.3 million, an
increase in sales commission expense of $1.2 million and an
increase in legal expense of $2.9 million. As a percentage
of Risk Assessment revenues, selling, general and administrative
expenses increased to 13.9% from 13.7%.
EBITDA
Margin
The EBITDA margin for our Risk Assessment segment was 42.9% for
the year ended December 31, 2006 compared to 43.7% for the
year ended December 31, 2005.
Decision
Analytics Results of Operations
Revenues
Revenues for our Decision Analytics segment were
$257.5 million for the year ended December 31, 2006
compared to $196.8 million for the year ended
December 31, 2005, an increase of $60.7 million or
30.9%. During 2006 and 2005, we acquired seven companies that
accounted for $27.7 million of additional revenues for the
year ended December 31, 2006. Excluding the impact of these
acquisitions, revenues increased $33.0 million due to an
increase in sales of our loss prediction solutions, resulting
from revenue from new customers as well as increased usage by
our existing customers and an increase in revenue from our fraud
identification and detection solutions due to continued
enhancements in the solutions which resulted in increased sales.
The increase from acquisitions was primarily due to the
inclusion of Xactware, which was purchased in August 2006 and
generated $22.2 million in revenue subsequent to the
acquisition. Our revenue by category for the periods presented
is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
Percentage
|
|
|
|
2005
|
|
|
2006
|
|
|
Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
Loss prediction solutions
|
|
$
|
53,527
|
|
|
$
|
67,129
|
|
|
|
25.4
|
%
|
Fraud identification and detection solutions
|
|
|
143,258
|
|
|
|
168,189
|
|
|
|
17.4
|
%
|
Loss quantification solutions
|
|
|
|
|
|
|
22,181
|
|
|
|
|
|
Cost of
Revenues
Cost of revenues for our Decision Analytics segment was
$127.9 million for the year ended December 31, 2006
compared to $103.4 million for the year ended
December 31, 2005, an increase of $24.5 million, or
23.7%. The increase was primarily due to $17.9 million in
costs attributable to the inclusion of the full year results of
our acquisitions in 2005 and the acquisitions completed during
2006. Excluding these acquisitions, our cost of revenues
increased by $6.6 million. The increase in cost of revenues
was primarily due to increases in personnel costs of
$4.5 million and a loss on disposal of assets of
$1.4 million. The increase in personnel costs consists of
$1.5 million of salaries and benefits resulting from annual
salary increases across a relatively constant employee headcount
and a $3.0 million increase in equity compensation costs.
As a percentage of Decision Analytics revenues, cost of revenues
decreased to 49.7% from 52.5%.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses for our Decision
Analytics segment were $34.2 million for the year ended
December 31, 2006 compared to $27.3 million for the
year ended December 31, 2005, an
40
increase of $6.9 million or 25.3%. The increase was
primarily due to $3.8 million in costs attributable to the
acquired businesses. Excluding these acquisitions, the increase
in selling, general and administrative expenses was
$3.3 million primarily due to an increase in personnel
costs of $2.6 million and an increase in commissions of
$0.6 million. As a percentage of Decision Analytics
revenues, selling, general and administrative expenses decreased
to 13.3% from 13.9%.
EBITDA
Margin
The EBITDA margin for our Decision Analytics segment was 37.0%
for the year ended December 31, 2006 compared to 33.6% for
the year ended December 31, 2005.
Liquidity
and Capital Resources
As of December 31, 2007 and June 30, 2008, we had cash
and cash equivalents and available-for sale securities of
$52.4 million and $57.3 million, respectively.
Subscriptions for our solutions are billed and generally paid in
advance of rendering services either quarterly or in full upon
commencement of the subscription period, which is usually for
one year, and they are automatically renewed at the beginning of
each calendar year. Accordingly, our cash flow from operations
tends to be higher in the first half of the year as we receive
subscription payments. As a result of these billings and related
receipts, our accounts receivable and fees received in advance
at June 30, 2008 were $3.9 million and
$49.2 million higher than the balances at December 31,
2007, respectively. We have historically generated significant
cash flows from operations. As a result of this factor, as well
as the availability of funds under our credit facilities, we
believe we will have sufficient cash to meet our working capital
and capital expenditure needs, including potential acquisitions.
We have historically managed the business with a working capital
deficit due to the fact that, as described above, we offer our
solutions and services primarily through annual subscriptions or
long-term contracts, which are generally prepaid quarterly or
annually in advance of the services being rendered. When cash is
received for prepayment of invoices, we record an asset (cash
and cash equivalents) on our balance sheet with the offset
recorded as a current liability (fees received in advance). This
current liability is deferred revenue that does not require a
direct cash outflow since our customers have prepaid and are
obligated to purchase the services. In most businesses, growth
in revenue typically leads to an increase in the accounts
receivable balance causing a use of cash as a company grows.
Unlike these businesses, our cash position is favorably affected
by revenue growth, which results in a source of cash due to our
customers prepaying for most of our services.
Our capital expenditures as a percentage of revenues for the
years ended December 31, 2005, 2006 and 2007 were 3.7%,
3.5% and 4.1%, respectively, and for the six months ended
June 30, 2007 and 2008 were 5.8% and 4.1%. We estimate our
capital expenditures for the remainder of 2008 and full year
2009 to be approximately $16.0 million and
$36.0 million, respectively, which primarily includes
expenditures on our technology infrastructure and our continuing
investments in developing and enhancing our solutions.
Expenditures related to developing and enhancing our solutions
are predominately related to internal use software and are
capitalized in accordance with AICPA SOP No. 98-1,
Accounting for Costs of Computer Software Developed or
Obtained for Internal Use. The amounts capitalized in
accordance with FAS No. 86 Software to be Sold,
Leased or Otherwise Marketed, are not significant to the
financial statements.
To provide liquidity to our stockholders, we have also
historically used our cash for repurchases of our common stock
from our stockholders. For the years ended December 31,
2005, 2006 and 2007 we repurchased or redeemed
$181.2 million, $128.0 million and
$204.8 million, respectively, of our common stock, and for
the six months ended June 30, 2007 and 2008 we repurchased
or redeemed $92.4 million and $237.1 million,
respectively, of our common stock. A substantial portion of the
share redemption included in the totals above were completed
pursuant to the terms of the Insurance Service Office, Inc. 1996
Incentive Plan, which will automatically terminate upon
consummation of this offering. Therefore, we do not expect to
continue our historical practice of using cash for common stock
repurchases to provide liquidity to our stockholders.
41
Financing
and Financing Capacity
We had total debt, excluding capital lease and other
obligations, of $630.0 million at June 30, 2008 and
$265.3 million, $440.0 million and $425.0 million
at December 31, 2005, 2006 and 2007, respectively.
Approximately $545.0 million of this debt at June 30,
2008 was held under long-term loan facilities drawn to finance
our stock repurchases and acquisitions and the remaining
$85.0 million was held pursuant to our revolving credit
facilities.
We have long-term loan facilities under uncommitted master shelf
agreements with Prudential Capital Group, or Prudential, and New
York Life with available funds at June 30, 2008 in the
amount of $65.0 million and $15.0 million,
respectively. We can borrow under the Prudential uncommitted
master shelf agreement until February 28, 2010 and under
the New York Life facility until March 16, 2010. Our notes
mature over the next seven years. Individual borrowings are made
at a fixed rate of interest and interest is payable quarterly.
The uncommitted master shelf agreements contain certain
covenants that limit our ability to create liens, enter into
sale and leaseback transactions and consolidate, merge or sell
assets to another company. The uncommitted master shelf
agreements also contain financial covenants that require us to
maintain a fixed charge coverage of no less than 275% and a
leverage ratio of no more than 300%. As of the date of this
prospectus, we are in full compliance with all of the covenants
contained in these agreements. The weighted average rate of
interest with respect to our outstanding long-term borrowings
was 5.38% and 5.50% for the six months ended June 30, 2007
and 2008, respectively, and 3.90%, 4.75% and 5.23% for the years
ended December 31, 2005, 2006 and 2007, respectively.
We finance our short-term working capital needs through cash
from operations and borrowings from our short-term credit
facilities, which are made at variable rates of interest based
on LIBOR plus 0.65%. We had $30.0 million and
$85.0 million in short-term borrowings outstanding as of
December 31, 2007 and June 30, 2008, respectively. We
had $150.0 million in short-term credit facilities
available to us at June 30, 2008, of which
$55.0 million are committed lines.
Cash
Flow
The following table summarizes our cash flow data for the years
ended December 31, 2005, 2006 and 2007 and for the six
months ended June 30, 2007 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
For the Six Months
|
|
|
|
December 31,
|
|
|
Ended June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Net cash provided by operating activities
|
|
$
|
174,071
|
|
|
$
|
223,499
|
|
|
$
|
248,521
|
|
|
$
|
117,136
|
|
|
$
|
141,929
|
|
Net cash used in investing activities
|
|
$
|
(107,444
|
)
|
|
$
|
(243,452
|
)
|
|
$
|
(110,831
|
)
|
|
$
|
(49,403
|
)
|
|
$
|
(98,402
|
)
|
Net cash (used in) provided by financing activities
|
|
$
|
(90,954
|
)
|
|
$
|
75,907
|
|
|
$
|
(212,591
|
)
|
|
$
|
(127,194
|
)
|
|
$
|
(16,759
|
)
|
Operating
Activities
Net cash provided by operating activities increased from
$117.1 million for the six months ended June 30, 2007
to $141.9 million for the six months ended June 30,
2008. The $24.8 million increase in net cash provided by
operating activities was principally due to an increase in fees
received in advance for the six months ended June 30,
2008. Net cash provided by operating activities was
$174.1 million for the year ended December 31, 2005,
$223.5 million for the year ended December 31, 2006
and $248.5 million for the year ended December 31,
2007. The $25.0 million increase in net cash provided by
operating activities from 2006 to 2007 was principally due to
growth in net income and improved accounts receivable
collections, partially offset by reduced growth in our cash
received in advance from our customers. The $49.4 million
increase in net cash provided by operating activities from 2005
to 2006 primarily reflected strong growth in net income and an
increase in cash received in advance from customers, partially
offset by reduced growth of trade accounts payable and accrued
liabilities for the year ended December 31, 2006 compared
to the year ended December 31, 2005.
42
Investing
Activities
Net cash used in investing activities was $49.4 million for
the six months ended June 30, 2007 and $98.4 million
for the six months ended June 30, 2008. The increase in net
cash used in investing activities was principally due to the
payment of acquisition related liabilities resulting from
achievement of post-acquisition performance targets. Net cash
used by investing activities was $110.8 million for the
year ended December 31, 2007, $243.5 million for the
year ended December 31, 2006 and $107.4 million for
the year ended December 31, 2005. The decrease in net cash
used by investing activities from 2006 to 2007 and the increase
in net cash used by investing activities from 2005 to 2006 were
principally due to the acquisition of Xactware during August
2006.
Financing
Activities
Net cash used in financing activities was $127.2 million
for the six months ended June 30, 2007 and
$16.8 million for the six months ended June 30, 2008.
The decrease in net cash used in financing activities was
principally due to the redemptions or repurchases of common
stock, partially offset by proceeds from the issuance of
long-term debt. Net cash used by financing activities was
$212.6 million for the year ended December 31, 2007,
net cash provided by financing activities was $75.9 million
for the year ended December 31, 2006, and net cash used by
financing activities was $91.0 million for the year ended
December 31, 2005. The change in net cash provided by
financing activities from 2006 to 2007 and the change in net
cash used by financing activities from 2005 to 2006 were
principally due to the repurchases of common stock and the
repayment of our short term debt.
Contractual
Obligations
The following table summarizes our contractual obligations and
commercial commitments at December 31, 2007, and the future
periods in which such obligations are expected to be settled in
cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Contractual obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
496,638
|
|
|
$
|
21,512
|
|
|
$
|
143,967
|
|
|
$
|
149,594
|
|
|
$
|
181,565
|
|
Capital lease obligations
|
|
|
12,401
|
|
|
|
4,818
|
|
|
|
7,419
|
|
|
|
164
|
|
|
|
|
|
Operating leases
|
|
|
209,409
|
|
|
|
19,285
|
|
|
|
37,115
|
|
|
|
35,562
|
|
|
|
117,447
|
|
ESOP contribution
|
|
|
8,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,000
|
|
Earnout and contingent payment
|
|
|
123,700
|
|
|
|
100,300
|
|
|
|
23,400
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities(1)
|
|
|
322,029
|
|
|
|
27,091
|
|
|
|
56,342
|
|
|
|
60,210
|
|
|
|
178,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(2)
|
|
$
|
1,172,177
|
|
|
$
|
173,006
|
|
|
$
|
268,243
|
|
|
$
|
245,530
|
|
|
$
|
485,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Other long-term liabilities shown in the table above consists of
our pension plan, deferred compensation plan and the
post-retirement plan, including administrative expenses, net of
employee contributions and net of the federal Medical subsidy.
We also have a deferred compensation plan for our Board of
Directors. Our funding policy is to contribute an amount at
least equal to the minimum legal funding requirement. Based on
past performance and the uncertainty of the dollar amounts to be
paid, if any, we have excluded such amounts from the above table.
|
|
(2)
|
|
We have FIN 48 obligations that represent uncertain tax
positions related to temporary differences of $7.7 million
that have been omitted from the table above. Approximately
$32.0 million of unrecognized tax benefits have been
recorded as liabilities in accordance with FIN 48, and we
are uncertain as to if or when such amounts may be settled, with
the exception of those amounts subject to a statute of
limitation. Related to the unrecognized tax benefits not
included in the table above, we have also recorded a liability
for potential penalties and interest of $7.0 million.
|
43
Off-Balance
Sheet Arrangements
We have no off-balance sheet arrangements.
Critical
Accounting Policies and Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and judgments that affect
reported amounts of assets, liabilities, revenue and expenses,
and disclosure of contingent assets and liabilities. Management
considers the policies discussed below to be critical to
understanding our financial statements because their application
places the most significant demands on managements
judgment, and requires management to make estimates about the
effect of matters that are inherently uncertain. Actual results
may differ from those estimates.
Revenue
Recognition
The Companys revenues are primarily derived from sales of
services and revenue is recognized as services are preformed and
information is delivered to our customers. Revenue is recognized
when persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, fees and/or price is
fixed or determinable and collectability is reasonably assured.
Revenues for subscription services are recognized ratably over
the subscription term, usually one year. Revenues from
transaction-based fees are recognized as information is
delivered to customers, assuming all other revenue recognition
criteria are met.
The Company also has term based software licenses where the only
remaining undelivered element is post-contract customer support
or PCS, including unspecified upgrade rights on a when and if
available basis. The Company recognizes revenue for these
licenses ratably over the duration of the license term. The
Company also provides hosting or software solutions that provide
continuous access to information and include PCS and recognizes
revenue ratably over the duration of the license term. In
addition, the determination of certain of our services revenues
requires the use of estimates, principally related to
transaction volumes in instances where these volumes are
reported to us by our clients on a monthly basis in arrears. In
these instances, we estimate transaction volumes based on
average actual volumes reported by our customers in the past.
Differences between our estimates and actual final volumes
reported are recorded in the period in which actual volumes are
reported. We have not experienced significant variances between
our estimates of these services revenues reported to us by our
customers and actual reported volumes in the past.
We invoice our customers in annual, quarterly, or monthly
installments. Amounts billed and collected in advance are
recorded as fees received in advance on the balance sheet and
are recognized as the services are performed and revenue
recognition criteria are met.
Stock-Based
Compensation
On January 1, 2005, we adopted
FAS No. 123(R) using a prospective approach,
which required us to record compensation expense for all awards
granted after the date of adoption. The following table
illustrates the amount of compensation expense resulting from
the implementation of FAS No. 123(R) using the
44
prospective approach for the years ended December 31,
2005, 2006, 2007 and the six months ended June 30, 2007 and
2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six
|
|
|
|
For the Year Ended
|
|
|
Months Ended
|
|
|
|
December 31
|
|
|
June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
2005 grants
|
|
$
|
4,094
|
|
|
$
|
2,661
|
|
|
$
|
2,424
|
|
|
$
|
1,239
|
|
|
$
|
1,158
|
|
2006 grants
|
|
|
|
|
|
|
3,487
|
|
|
|
2,512
|
|
|
|
1,256
|
|
|
|
1,171
|
|
2007 grants
|
|
|
|
|
|
|
|
|
|
|
3,308
|
|
|
|
1,261
|
|
|
|
1,313
|
|
2008 grants*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
979
|
|
Total stock-based compensation
|
|
$
|
4,094
|
|
|
$
|
6,148
|
|
|
$
|
8,244
|
|
|
$
|
3,756
|
|
|
$
|
4,621
|
|
|
|
|
*
|
|
Only includes grants through June 30, 2008
|
According to FAS No. 123(R) we only use the
prospective approach for the prior four years of grants, each of
which have a four year vesting term, therefore our 2009
financial statements will reflect compensation expenses relating
to grants from 2006 to 2009.
The fair value of equity awards is measured on the date of grant
using a Black-Scholes option-pricing model, which requires the
use of several estimates, including expected term, expected
risk-free interest rate, expected volatility and expected
dividend yield.
Under FAS No. 123(R), stock-based compensation cost is
measured at the grant date, based on the fair value of the
awards granted, and is recognized as expense over the requisite
service period. Option grants are expensed ratably over the
four-year vesting period. We follow the substantive vesting
period approach for awards granted after the adoption of
FAS No. 123(R), which requires that stock-based
compensation expense be recognized over the period from the date
of grant to the date when the award is no longer contingent on
the employee providing additional service.
We estimate expected forfeitures of equity awards at the date of
grant and recognize compensation expense only for those awards
expected to vest. The forfeiture assumption is ultimately
adjusted to the actual forfeiture rate.
The fair value of the common stock underlying the stock-based
compensation is determined quarterly on or about the final day
of the quarter. The valuation methodology is based on a variety
of qualitative and quantitative factors including the nature of
the business and history of the enterprise, the economic outlook
in general and the condition of the specific industries in which
we operate, the financial condition of the business, our ability
to generate free cash flow, and goodwill or other intangible
asset value.
The fair value of our common stock is determined using generally
accepted valuation methodologies, including the use of the
guideline company method. This determination of fair market
value employs both a comparable company analysis, which examines
the valuation multiples of public companies deemed comparable,
in whole or in part, to us and a discounted cash flow analysis
that determines a present value of the projected future cash
flows of the business. The comparable companies are comprised of
a combination of public companies in the financial services
information and technology businesses. These methodologies have
been consistently applied since 1997. We regularly assess the
underlying assumptions used in the valuation methodologies,
including the comparable companies to be used in the analysis,
the future forecasts of revenue and earnings, and the impact of
market conditions on factors such as the weighted average cost
of capital. These assumptions are reviewed quarterly, with a
more comprehensive evaluation performed annually. For the
comparable company analysis, the share price and financial
performance of these comparables are updated quarterly based on
the most recent public information. In periods subsequent to
acquisitions, our stock price has generally increased based on
the increase in the discounted cash flows of the consolidated
enterprise. Our stock price is also impacted by the number of
shares outstanding. As the number of shares outstanding has
declined overtime, our share price has increased. The
determination of the fair value of our common stock
45
requires us to make judgments that are complex and inherently
subjective. If different assumptions are used in future periods,
stock-based compensation expense could be materially impacted in
the future.
Goodwill
and Intangibles
Goodwill represents the excess of acquisition costs over the
fair value of tangible net assets and identifiable intangible
assets of the businesses acquired. Goodwill and intangible
assets deemed to have indefinite lives are not amortized.
Intangible assets determined to have definite lives are
amortized over their useful lives. Goodwill and intangible
assets with indefinite lives are subject to impairment testing
annually as of June 30, or whenever events or changes in
circumstances indicate that the carrying amount may not be fully
recoverable, using the guidance and criteria described in
FAS No. 142,
Goodwill and Other Intangible
Assets
. This testing compares carrying values to fair
values and, when appropriate, the carrying value of these assets
is reduced to fair value. For the years ended December 31,
2005 and 2007, we recorded an impairment charge of
$1.5 million and $1.7 million, respectively, included
in loss from discontinued operations, net of tax in the
consolidated statements of operations.
As of June 30, 2008, we had goodwill and net intangible
assets of $481.6 million, which represents 55.5% of our
total assets. There are many assumptions and estimates used that
directly impact the results of impairment testing, including an
estimate of future expected revenues, earnings and cash flows,
useful lives and discount rates applied to such expected cash
flows in order to estimate fair value. We have the ability to
influence the outcome and ultimate results based on the
assumptions and estimates we choose for determining the fair
value of our reporting units. To mitigate undue influence, we
set criteria and benchmarks that are reviewed and approved by
various levels of management and reviewed by other independent
parties. The determination of whether or not goodwill or
indefinite-lived acquired intangible assets have become impaired
involves a significant level of judgment in the assumptions and
estimates underlying the approach used to determine the value of
our reporting units. Changes in our strategy or market
conditions could significantly impact these judgments and
require adjustments to recorded amounts of intangible assets and
goodwill.
Pension
and Postretirement
In September 2006, the FASB issued FAS No. 158,
Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans.
FAS No. 158
requires that employers recognize on a prospective basis the
funded status of their defined benefit pension and other
postretirement benefit plans on their consolidated balance
sheets and recognize as a component of other comprehensive
income (loss), net of tax, the gains or losses and prior service
costs or credits that arise during the period but are not
recognized as components of net periodic benefit cost.
Additional minimum pension liabilities and related intangible
assets are also derecognized upon adoption of the new standard.
We adopted FAS No. 158 as of December 31, 2006.
Certain assumptions are used in the determination of our annual
net period benefit cost and the disclosure of the funded status
of these plans. The principal assumptions concern the discount
rate used to measure the projected benefit obligation, the
expected future rate of return on plan assets and the expected
rate of future compensation increases. We revise these
assumptions based on an annual evaluation of long-term trends
and market conditions that may have an impact on the cost of
providing retirement benefits. In determining the discount rate,
we utilize market conditions and other data sources management
considers reasonable based upon the profile of the remaining
service life of eligible employees. The expected long-term rate
of return on plan assets is determined by taking into
consideration the weighted-average expected return on our asset
allocation, asset return data, historical return data, and the
current economic environment. We believe these considerations
provide the basis for reasonable assumptions of the expected
long-term rate of return on plan assets. The rate of
compensation increase is based on our long-term plans for such
increases. The measurement date used to determine the benefit
obligation and plan assets is December 31. The future
benefit payments for the postretirement plan are net of the
federal Medical subsidy.
46
A one percent change in discount rate, future rate of return on
plan assets and the rate of future compensation would have the
following effects:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1% Decrease
|
|
|
1% Increase
|
|
|
|
|
|
|
Projected Benefit
|
|
|
|
|
|
Projected Benefit
|
|
|
|
Benefit Cost
|
|
|
Obligation
|
|
|
Benefit Cost
|
|
|
Obligation
|
|
|
|
(In thousands)
|
|
|
Discount rate
|
|
$
|
483
|
|
|
$
|
40,166
|
|
|
$
|
673
|
|
|
$
|
(33,861
|
)
|
Expected return on asset
|
|
|
3,326
|
|
|
|
|
|
|
|
(3,326
|
)
|
|
|
|
|
Rate of compensation
|
|
|
(520
|
)
|
|
|
(2,906
|
)
|
|
|
530
|
|
|
|
2,932
|
|
A one percent change in assumed healthcare cost trend rates
would have the following effects:
|
|
|
|
|
|
|
|
|
|
|
1% Decrease
|
|
|
1% Increase
|
|
|
|
(In thousands)
|
|
|
Effect on total of service and interest cost components
|
|
$
|
(7
|
)
|
|
$
|
4
|
|
Effect on the healthcare component of the accumulated
postretirement benefit obligation
|
|
|
(136
|
)
|
|
|
76
|
|
Income
Taxes
In projecting future taxable income, we develop assumptions
including the amount of future state, federal and foreign pretax
operating income, the reversal of temporary differences, and the
implementation of feasible and prudent tax planning strategies.
These assumptions require significant judgment about the
forecasts of future taxable income and are consistent with the
plans and estimates we use to manage the underlying businesses.
The calculation of our tax liabilities also involves dealing
with uncertainties in the application and evolution of complex
tax laws and regulations in other jurisdictions.
On January 1, 2007, we adopted FASB
Interpretation
No. 48, Accounting for Uncertainty in Income Taxes
an interpretation of FASB Statement
No. 109
, or FIN 48. FIN 48 addresses the
determination of whether tax benefits claimed or expected to be
claimed on a tax return should be recorded in the financial
statements. Under FIN 48, we may recognize the tax benefit
from an uncertain tax position only if it is more likely than
not that the tax position will be sustained upon examination by
the taxing authorities, based on the technical merits of the
position. As a result of the implementation of FIN 48, we
recognized approximately a $10.3 million increase in the
liability for unrecognized tax benefits, which was accounted for
as an increase to the January 1, 2007 balance of
accumulated deficit.
We recognize tax liabilities in accordance with FIN 48 and
we adjust these liabilities when our judgment changes as a
result of the evaluation of new information not previously
available. Due to the complexity of some of these uncertainties,
the ultimate resolution may result in a payment that is
materially different from our current estimate of the tax
liabilities. These differences will be reflected as increases or
decreases to income tax expense in the period in which they are
determined. If the tax liabilities relate to tax uncertainties
existing at the date of the acquisition of a business, the
adjustment of such tax liabilities will result in an adjustment
to the goodwill recorded at the date of acquisition.
As of December 31, 2007 we have federal and state income
tax net operating loss carryforwards of $6.7 million and
$104.1 million which will expire at various dates from 2008
through 2027. Such net operating loss carryforwards expire as
follows:
|
|
|
|
|
2008 - 2015
|
|
$
|
78.8 million
|
|
2016 - 2020
|
|
|
0.6 million
|
|
2021 - 2027
|
|
|
31.4 million
|
|
|
|
|
|
|
|
|
$
|
110.8 million
|
|
|
|
|
|
|
The significant majority of the state net operating loss
carryforwards were generated by a subsidiary that employs our
internal staff as a result of favorable tax deductions from the
exercise of employee stock
47
options for the years ended December 31, 2004, 2005 and
2006. This subsidiarys state net operating loss
carryforwards will not be utilized unless the subsidiary is
profitable prior to their respective expiration dates.
We also have foreign net operating loss carryforwards of
$6.0 million that have no expiration date. We believe that
it is reasonably possible that approximately $3.4 million
of our currently remaining unrecognized tax positions, each of
which are individually insignificant, may be recognized by the
end of 2008 as a result of a lapse of the statute of limitations.
Recent
Accounting Pronouncements
In December 2007, the FASB issued FAS No. 141 (revised
2007),
Business Combinations
(FAS No. 141(R)).
FAS No. 141(R) replaces FAS No. 141,
Business Combinations
(FAS No. 141).
FAS No. 141(R) primarily requires an acquirer to
recognize the assets acquired and the liabilities assumed,
measured at their fair values as of that date. This replaces
FAS No. 141s cost-allocation process, which
required the cost of an acquisition to be allocated to the
individual assets acquired and liabilities assumed based on
their estimated fair values. Generally, FAS No. 141(R)
will become effective for business combinations for which the
acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15,
2008.
For a discussion of additional recent accounting pronouncements,
see note 2(n) to the audited consolidated financial
statements and note 2(p) to the unaudited condensed
consolidated financial statements included elsewhere in this
prospectus.
Qualitative
and Quantitative Disclosures about Market Risk
Interest
Rate Risk
We are exposed to market risk from fluctuations in interest
rates. At June 30, 2008 we had borrowings outstanding under
our revolving credit facilities of $85.0 million, which
bear interest at variable rates based on LIBOR plus 0.65%. A
change in interest rates on this variable rate debt impacts our
pre-tax income and cash flows, but does not impact the fair
value of the instruments. Based on our overall interest rate
exposure at June 30, 2008, a one percent change in interest
rates would result in a change in annual pretax interest expense
of approximately $8.5 million based on our current level of
borrowings.
48
BUSINESS
Company
Overview
We enable risk-bearing businesses to better understand and
manage their risks. We provide value to our customers by
supplying proprietary data that, combined with our analytic
methods, creates embedded decision support solutions. We are the
largest aggregator and provider of detailed actuarial and
underwriting data pertaining to U.S. property and casualty,
or P&C, insurance risks. We offer solutions for detecting
fraud in the U.S. P&C insurance, healthcare and
mortgage industries and sophisticated methods to predict and
quantify loss in diverse contexts ranging from natural
catastrophes to health insurance.
Our customers use our solutions to make better risk decisions
with greater efficiency and discipline. We refer to these
products and services as solutions due to the
integration among our services and the flexibility that enables
our customers to purchase components or the comprehensive
package. These solutions take various forms,
including data, statistical models or tailored analytics, all
designed to allow our clients to make more logical decisions. We
believe our solutions for analyzing risk positively impact our
customers revenues and help them better manage their
costs. In 2007, our U.S. customers included all of the top
100 P&C insurance providers, four of the 10 largest Blue
Cross and Blue Shield plans, four of the seven leading mortgage
insurers, 14 of the top 20 mortgage lenders and 8 of the 10
largest global reinsurers. We believe that our commitment to our
customers and the embedded nature of our solutions serve to
strengthen and extend our relationships. For example,
approximately 96% of our top 200 customers in 2007, as ranked by
revenue, have been our customers for each of the last five
years. Further, from 2003 to 2007, revenues generated from these
top 200 customers grew at a compound annual growth rate, or
CAGR, of 13%.
We help those businesses address what we believe are the four
primary decision making processes essential for managing risk as
set forth below in the Verisk Risk Analysis Framework:
The
Verisk Risk Analysis Framework
These four processes correspond to various functional areas
inside our customers operations:
|
|
|
|
|
our loss predictions are typically used by P&C insurance
and healthcare actuaries, advanced analytics groups and loss
control groups to help drive their own assessments of future
losses;
|
|
|
|
our risk selection and pricing solutions are typically used by
underwriters as they manage their books of business;
|
|
|
|
our fraud detection and prevention tools are used by P&C
insurance, healthcare and mortgage underwriters to root out
fraud prospectively and by claims departments to speed claims
and find fraud retroactively; and
|
|
|
|
our tools to quantify loss are primarily used by claims
departments, independent adjustors and contractors.
|
We add value by linking our solutions across these four key
processes; for example, we use the same modeling methods to
support the pricing of homeowners insurance policies and
to quantify the actual losses when damage occurs to insured
homes.
We offer our solutions and services primarily through annual
subscriptions or long-term agreements, which are typically
pre-paid and represented approximately 74% of our revenue in
2007. Our subscription-based revenue model, in combination with
high renewal rates, results in large and predictable cash flows.
For the year ended December 31, 2007 and the six months
ended June 30, 2008, we had revenue of $802 million
and $438 million, respectively, and net income of
$150 million and $81 million, respectively. For the
five year
49
period ended December 31, 2007, our revenues and net income
have grown at a CAGR of 13.8% and 21.2%, respectively.
We organize our business in two segments: Risk Assessment and
Decision Analytics.
Risk Assessment:
We are the leading
provider of statistical, actuarial and underwriting data for the
U.S. P&C insurance industry. Our databases include
cleansed and standardized records describing premiums and losses
in insurance transactions, casualty and property risk attributes
for commercial buildings and their occupants and fire
suppression capabilities of municipalities. Our largest P&C
insurance database, containing information on every transaction
associated with a policy, from inception to information on
losses, includes almost 14 billion records, and, in each of
the past three years, we updated the database with over
2 billion validated new records to improve the timeliness,
quality and accuracy of our data and actuarial analysis. We use
our data for example to create policy language and proprietary
risk classifications that are industry-standard and to generate
prospective loss cost estimates used to price insurance policies.
As an example of how customers use our Risk Assessment services,
P&C insurers use our Specific Property Information suite,
or SPI Plus, to underwrite and price commercial property risks.
SPI Plus is built on a proprietary database of approximately
2.7 million buildings and more than 5.4 million
individual businesses occupying those buildings. We maintain
information about each buildings construction, occupancy,
protective features (e.g., sprinkler systems) and exposure to
hazards collectively known as COPE data
all of which is critical to our customers decision making
processes. SPI Plus provides detailed narratives regarding
hazards of construction and occupancy and unique
building-specific analytics that assess the adequacy of
sprinkler systems, probable maximum loss due to fire and the
overall hazard level in relation to similar buildings. SPI Plus
also includes our assessments of municipal fire suppression
capability and building code enforcement, and a buildings
exposure to additional perils such as wind, crime and flood
damage. In addition to underwriting and pricing decisions, our
customers use this product for loss cost estimates and to
encourage property owners to reduce hazards and employ
protection features, such as automatic fire-detection,
fire-suppression systems, portable fire extinguishers, standpipe
systems and watchman services. Customers receive our data and
analytics via the internet. Typically, our loss cost estimates
will be automatically entered into an insurers policy
administration system for rating of the insurance policy, while
the COPE data and narrative about the building will be accessed
as the underwriter determines whether or not to offer coverage
for the building.
For the year ended December 31, 2007 and the six months
ended June 30, 2008, our Risk Assessment segment produced
revenue of $485 million and $253 million, representing
60% and 58% of our total revenue, respectively, and EBITDA of
$213 million and $114 million, representing 63% and
60% of our total EBITDA, respectively. This segments
revenue and EBITDA have a CAGR of 7.8% and 14.3%, respectively,
for the five-year period ended December 31, 2007.
Decision Analytics:
We provide
solutions in each of the four processes of the Verisk Risk
Analysis Framework by combining algorithms and analytic methods,
which incorporate our proprietary data. Other unique data sets
include approximately 600 million P&C insurance
claims, historical natural catastrophe data covering more than
50 countries, data from more than 13 million applications
for mortgage loans and over 300 million U.S. criminal
records. Customers integrate our solutions into their models,
formulas or underwriting criteria to predict potential loss
events, ranging from hurricanes and earthquakes to unanticipated
healthcare claims. We are a leading developer of catastrophe and
extreme event models and offer solutions covering natural and
man-made risks, including acts of terrorism. We also develop
solutions that allow customers to quantify costs after loss
events occur. For example, in 2007 we provided repair cost
estimates for more than 60% of the personal property claims paid
in the United States based on total amount of claims paid
according to A.M. Best. Our fraud solutions include data on
claim histories, analysis of mortgage applications to identify
misinformation, analysis of claims to find emerging patterns of
fraud and identification of suspicious claims in the insurance,
healthcare and mortgage sectors.
As an example of how customers use our Decision Analytics
products, our CLASIC/2 enterprise software system is used by
insurance companies to determine potential losses, and the
probability of such losses, for the insurance or reinsurance
they provide in regions prone to natural catastrophes such as
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hurricanes, earthquakes, hailstorms and tornadoes. The
catastrophe models underlying our software are based on the
physical principles of meteorology, geology and other sciences,
as well as the statistical analysis of historical time series of
data on prior natural catastrophes. Our software consists of
sophisticated stochastic simulation procedures for projecting
the location and severity of future catastrophes and powerful
computer models of how natural catastrophes behave and impact
buildings and the man-made environment. Our software includes
algorithms that translate estimated losses and insurance terms,
such as coverages and deductibles, into output that guide
underwriters as they select and price risks. Customers receive
our software and host the application on their own servers, and
link their own databases in order to run their risks through our
models. An underwriter can enter the address and characteristics
of a single prospective property in manual mode, or the
underwriter can work in batch mode where the software reads a
file with the addresses and characteristics of many prospective
properties. The software returns a series of estimates of the
total amount of loss likely in the next year including the
amount and cost of damage due to each peril (e.g., earthquake,
hurricane, hailstorms and tornadoes), the total expected loss
from all perils combined, and the estimated average annual loss.
Underwriters use our software to translate damage and loss
estimates into a series of recommendations for structuring
insurance policies including recommended levels of coverage,
deductibles, policy limits and a host of other insurance terms.
All of these terms are then fed into the insurers policy
administration software to determine the premiums to be charged
for insurance.
In addition to analyzing individual risks, insurance companies
can use CLASIC/2s reporting and visualization tools at the
corporate level to assess the aggregate risk and geographic
concentration of entire portfolios of risk to determine capital
adequacy, to decide how much reinsurance to buy, and to assess
the mix of business in their portfolio.
For the year ended December 31, 2007 and the six months
ended June 30, 2008, our Decision Analytics segment
produced revenue of $317 million and $184 million,
representing 40% and 42% of our total revenue, respectively, and
EBITDA of $125 million and $74 million, representing
37% and 40% of our total EBITDA, respectively. This
segments revenue and EBITDA had a CAGR of 27.8% and 55.4%,
respectively, for the five-year period ended December 31,
2007.
Our
Market Opportunity
We believe there is a long-term trend for companies to set
strategy and direct operations using data and analytics to guide
their decisions, which has resulted in a large and rapidly
growing market for professional and business information.
According to Veronis Suhler Stevenson, an industry consultant,
in a report dated September 2006, spending on professional and
business information services in the U.S. reached
$61 billion in 2005 and is projected to grow at a CAGR of
8% through 2010. Another research firm, International Data
Corporation, or IDC, in a report dated March 2008,
estimates that the business analytics services market, which
totaled $32 billion in 2007, will grow at a CAGR of 9%
through 2012.
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We believe that the consistent decline in the cost of computing
power contributes to the trend towards greater use of data and
analytics. As a result, larger data sets are assembled faster
and at a lower cost per record while the complexity and accuracy
of analytical applications and solutions have expanded. This
trend has led to an increase in the use of analytic output,
which can be generated and applied more quickly, resulting in
more informed decision making. As computing power increases,
cost decreases and accuracy improves, we believe customers will
continue to apply and integrate data and analytic solutions more
broadly.
Companies that engage in risk transactions, including P&C
insurers, healthcare payors and mortgage lenders and insurers,
are particularly motivated to use enhanced analytics because of
several factors affecting risk markets:
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the total value of exposures in risk transactions is increasing;
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the number of participants in risk transactions is often large
and the asymmetry of information among participants is often
substantial; and
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the failure to understand risk can lead to large and rapid
declines in financial performance.
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The
total value of exposures in risk transactions is
increasing
Across our target markets, the number and value of the assets
managed in risk transactions exhibits long-term growth. For
example:
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U.S. property value exposed to hurricanes continues to
increase dramatically due to population dynamics and increase of
wealth among other factors, with the current trend predicting a
doubling of losses every ten years. At this rate, a repeat of
the 1926 Great Miami hurricane could result in $500 billion
in economic damage as soon as the 2020s according to
Natural Hazards Review; and
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U.S. health expenditures have grown at a CAGR of 7% between
1997 and 2007 and are expected to grow at roughly the same level
through 2016 according to data compiled by the
U.S. Department of Health and Human Services;
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the total value of outstanding households mortgage debt
outstanding in the United States has increased by 11% annually
over the past ten years according to the Federal Reserve.
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The
number of participants in risk transactions is often large and
the asymmetry of information among participants is often
substantial
Many risk transactions involve multiple participants who either
structure the transaction or bear some of the risk. For example,
in the P&C insurance industry, a single commercial building
might be assessed, underwritten and insured by a combination of
insurance agents and brokers, managing general agents, loss
inspection consultants, underwriters, reinsurers, corporate risk
managers and capital markets participants looking to securitize
the risk of catastrophic loss. In the healthcare industry,
insurers and third-party administrators strive to refine their
understanding of transactions at the point at which care is
delivered to the patient and to determine the legitimacy of
claims filed by providers and insureds. Investors in mortgages
are far removed from the mortgage brokers and lenders who
originate the loans, the appraisers who assess the mortgaged
properties, the servicers who manage the cash flows associated
with the mortgages, and the packagers who assemble pools of
loans to be securitized.
Due to the greater separation of counterparties and the
potential asymmetry of data about underlying risks available to
counterparties, the different participants in such transactions
are in jeopardy of knowing less than their counterparties about
the risk they bear. In the securitization and trading markets,
this problem is exacerbated by the loss of information through
the pooling of risks.
One outcome of asymmetric information is fraudulent
transactions. The Coalition Against Insurance Fraud estimates
that the cost of fraud in the U.S. P&C insurance
industry is as high as $80 billion each year.
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The U.S. government estimates fraudulent billings to
U.S. healthcare programs, both public and private, to be
between 3% to 10% of total annual healthcare expenditures, or
between $67 billion and $226 billion in 2007.
Failure
to understand risk can lead to large and rapid declines in
performance
Any company that bears risk will find its profits predominantly
tied directly to its ability to select risks. In the P&C
insurance industry, the cost of goods sold is unknown to the
insurer at the time the insurance policy is written. Therefore,
efficient pricing of insurance policies depends on the ability
to predict the potential losses and costs associated with
underwriting each policy. There are a significant number of
factors which correlate with the size of a potential loss,
including weather, geographic location of risk, insured
characteristics and prior claims costs. An insurance company
differentiates itself by utilizing appropriate and reliable data
and complex analytics to select the risks that will have the
best risk-return profile. The importance of predicting loss in
order to select and price risk, and the linkage of these
analytics to profitability, is true for all companies
participating in risk-bearing transactions.
The current U.S. mortgage crisis provides an example of how
failure to understand risk can lead to a rapid loss of
performance by companies that bear risk. As the housing sector
and mortgage origination market expanded rapidly in the first
half of this decade, the need for underwriting discipline and
risk analysis was underestimated by mortgage brokers, lenders,
investors and regulators. We believe the mortgage
bubble that ended in 2007 masked the need to
integrate analytics into the origination and securitization
processes in order to manage exposures and profits. The rising
level of mortgage default and fraud in 2007 and 2008, combined
with severe contraction in the mortgage origination market, has
forced 38 mortgage-related entities into failure in 2008 and 150
in 2007, according to the Mortgage Daily. The Mortgage Bankers
Association reports a drop from 5,000 mortgage bankers in 2007
to 3,500 mortgage bankers in 2008, based upon lenders that
originated at least 100 loans each year. This in turn has
heightened awareness among various participants in the market of
the need to improve the quality of mortgage underwriting
analysis, in part through more sophisticated use of data. This
sophisticated use of data may extend beyond the acceptance or
rejection of risk to include risk-based pricing in order to
enhance financial performance in the face of a challenging
market.
Our
Competitive Strengths
We believe our competitive strengths include the following:
Our
Solutions are Embedded In Our Customers Critical Decision
Processes
Our customers use our solutions to make better risk decisions
and to price risk appropriately. These solutions are embedded in
our customers critical decision processes. In the
U.S. P&C insurance industry, our solutions for
prospective loss costs, policy language, rating/underwriting
rules and regulatory filing services are the industry standard.
Our decision analytics solutions facilitate the profitable
underwriting of policies. In the U.S. healthcare and
mortgage industries, our predictive models, loss estimation
tools and fraud
identification applications are the primary solutions that allow
customers to understand their risk exposures and proactively
manage them. Over the last three years, we have retained 98% of
our customers across all of our businesses, which we believe
reflects our customers recognition of the value they
derive from our solutions.
Extensive
and Differentiated Data Assets and Analytic
Methods
We maintain what we believe are some of the largest, most
accurate, and most complete databases in the markets we serve.
Our unique, proprietary data assets allow us to provide our
customers with a comprehensive set of risk analytics and
decision support solutions. Our largest data sets are sourced
from our customers and are not available from any other vendor.
Much of the information we provide is not available from any
other source and would be difficult and costly for another party
to replicate. As a result, our accumulated experience and years
of significant investment have given us a competitive advantage
in serving our customers. By continuously adding records to our
data sets we are able to refresh and to refine our data assets,
risk models and other analytic methods.
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Culture
of Continuous Improvement
Our intellectual capital and focus on continuous improvement
have allowed us to develop proprietary algorithms and solutions
that assist our customers in making informed risk decisions. Our
skilled workforce understands issues affecting our targeted
markets and to develop analytic solutions tailored to these
markets. Our team includes approximately 390 individuals with
advanced degrees, certifications and professional designations
in such fields as actuarial science, data management,
mathematics, statistics, economics, soil mechanics, meteorology
and various engineering disciplines. Leveraging the expertise of
our people, we have been able to continuously improve our
operations by constantly enhancing the timeliness, relevance and
quality of our solutions. Over the last three years, we have
retained over 95% of our most highly-rated employees. Over the
last decade, we transitioned our compensation and benefit plans
to be pay-for-performance-oriented, including incentive
compensation plans and greater equity participation by
employees. Today, our employees own approximately 30% of the
company.
Attractive
Operating Model
We believe we have an attractive operating model due to the
recurring nature of our revenues, the scalability of our
solutions and the low capital intensity of our business.
Recurring Nature of Revenues.
We offer our
solutions and services primarily through annual subscriptions or
long-term agreements, which are generally pre-paid and
represented approximately 74% of our revenues in 2007. The
combination of our historically high renewal rates, which we
believe are due to the embedded nature of our solutions, and our
subscription-based revenue model, results in predictable cash
flows.
Scalable Solutions.
Our technology
infrastructure and scalable solution platforms allow us to
accommodate significant additional transaction volumes with
limited incremental costs. This operating leverage enabled us to
increase our EBITDA margins from 30.6% in 2003 to 42.1% in 2007.
Low Capital Intensity.
We have low capital
needs that allow us to generate strong cash flow. In 2007, our
operating income and capital expenditures as a percentage of
revenue were 33.9% and 4.1%, respectively.
Our
Growth Strategy
Over the past five years, we have grown our revenues at a CAGR
of 13.8% through the successful execution of our business plan.
These results reflect strong organic revenue growth, new product
development and selected acquisitions. To build on our base
revenue, we use our intellectual property and customer
relationships to generate insight into where we may more
effectively extract or apply data. We then innovate or adapt
analytics that expand the range, utility and predictive
capabilities of our solutions to grow our revenues profitably.
We have made, and continue to make, investments in people, data
sets, analytic solutions, technology, and complementary
businesses.
To serve our customers and grow our business, we aggressively
pursue the following strategies:
Increase
Sales to Insurance Customers
We expect to expand the application of our solutions in
insurance customers underwriting and claims processes. We
encourage our customers to share more data with us to enhance
the power of our analytics so that our customers can profit from
improved risk management decisions. Building on our deep
knowledge of, and embedded position in, the insurance industry,
we expect to sell more solutions to existing customers tailored
to specific lines of insurance. In addition, as our databases
continue to grow, we believe the predictive capability of our
algorithms will also improve, enhancing the value of our
existing offerings and increasing demand for our solutions. By
increasing the breadth and relevance of our offerings, we
believe we can strengthen our relationships with customers and
increase our value to their decision making in critical ways.
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Develop
New, Proprietary Data Sets and Predictive
Analytics
We work with our customers to understand their evolving needs.
We plan to create new solutions by enriching our mix of
proprietary data sets, analytic solutions and effective decision
support across the markets we serve. Our data sets produce
analytics focused on emergent risks and evolving issues within
both new and current customer segments. We constantly seek to
add new data that can further leverage our analytic methods,
technology platforms and intellectual capital. Current areas of
focus in the U.S. include commercial loss histories,
detailed policy level information, vehicle-generated data, loan
level mortgage data, pharmaceutical claims and healthcare claims
data. We believe this strategy will spur revenue growth and
improve profitability.
Leverage
Our Intellectual Capital to Expand into Adjacent Markets and New
Customer Sectors
Our organization is built on nearly four decades of intellectual
property in risk management. We believe we can continue to
profitably expand the use of our intellectual capital and apply
our analytic methods in new markets, where significant
opportunities for long-term growth exist. For example, we have
leveraged our skills in predictive models for losses in the
healthcare segment into providing predictive analytic solutions
for workers compensation claims. In addition, we are
leveraging our industry-leading solutions for detecting fraud in
mortgage insurance to enhance the accuracy of our mortgage
lending fraud platform. We also continue to pursue growth
through targeted international expansion. We have already
demonstrated the effectiveness of this strategy with our
expansion into healthcare and non-insurance financial services.
We believe there are numerous opportunities to repurpose our
existing data assets and analytic capabilities to expand into
new markets.
Pursue
Strategic Acquisitions that Complement Our Leadership
Positions
We will continue to expand our data and analytics capabilities
across industries. While we expect this will occur primarily
through organic growth, we have and will continue to acquire
assets and businesses that strengthen our value proposition to
customers. We primarily focus on smaller acquisitions of
differentiated proprietary data that is complementary to our
own, analytical applications or models that can leverage our
proprietary data and businesses that address new risk markets.
Our acquisitions have been, and will continue to be, primarily
focused within our Decision Analytics segment. We have developed
an internal capability to source, evaluate and integrate
acquisitions that have created value for shareholders. We have
acquired 14 businesses in the past five years, which in the
aggregate have increased their revenue with a weighted average
CAGR of 40% over the same period.
Our
History
We trace our history to 1971, when Insurance Services Office,
Inc., or ISO, started operations as a not-for-profit advisory
and rating organization providing services for the
U.S. P&C insurance industry. ISO was formed as an
association of insurance companies to gather statistical data
and other information from insurers and report to regulators, as
required by law. ISOs original functions also included
developing programs to help insurers define and manage insurance
products and providing information to help insurers determine
their own independent premium rates. Insurers used and continue
to use our offerings primarily in their product development,
underwriting and rating functions. Today, those businesses form
the core of our Risk Assessment segment.
Over the past decade, we have transformed our business beyond
its original functions by deepening and broadening our data
assets, developing a set of integrated risk management solutions
and services and addressing new markets through our Decision
Analytics segment.
Our expansion into analytics began when we acquired the American
Insurance Services Group and certain operations and assets of
the National Insurance Crime Bureau in 1997 and 1998,
respectively. Those organizations brought to the company large
databases of insurance claims, as well as expertise in detecting
and preventing claims fraud. To further expand our Decision
Analytics segment, we acquired AIR Worldwide in 2002, the
technological leader in catastrophe modeling. In 2004, we
entered the healthcare space by acquiring several businesses
that now offer web-based analytical and reporting systems for
health insurers,
55
provider organizations and self-insured employers. In 2005 we
entered the mortgage lending sector, acquiring the first of
several businesses that now provide automated fraud detection,
compliance and decision support solutions for the
U.S. mortgage industry. In 2006, to bolster our position in
the claims field we acquired Xactware, a leading supplier of
estimating software for professionals involved in building
repair and reconstruction.
These acquisitions have added scale, geographic reach, highly
skilled workforces, and a wide array of new capabilities to our
Decision Analytics segment. They have helped to make us a
leading provider of information and decision analytics for
customers involved in the business of risk in the U.S. and
selectively around the world.
Our senior management operating team, which includes our chief
executive officer, chief financial officer, chief operating
officer, general counsel and the three senior officers who lead
our largest business units, have been with us for an average of
almost twenty years. This team has led our transformation to a
successful for-profit entity, focused on growth with our
U.S. P&C insurer customers and expansion into a
variety of new markets.
Services
Risk
Assessment Segment
Our Risk Assessment segment serves our P&C insurance
customers and focuses on the first two decision making processes
in our Risk Analysis Framework: prediction of loss and selection
and pricing of risk. Within this segment, we also provide
solutions to help our insurance customers comply with their
reporting requirements in each U.S. state in which they
operate. Our customers include most of the P&C insurance
providers in the United States and we have retained
approximately 99% of our P&C insurance customer base within
the Risk Assessment segment in each of the last five years.
For the year ended December 31, 2007 and the six months
ended June 30, 2008, our Risk Assessment segment produced
revenues of $485 million and $253 million,
representing 60% and 58% of our total revenues, respectively,
and EBITDA of $213 million and $114 million,
representing 63% and 60% of our total EBITDA, respectively. This
segments revenues and EBITDA have a CAGR of 7.8% and
14.3%, respectively, for the five-year period ended
December 31, 2007.
Statistical
Agent and Data Services
The P&C insurance industry is heavily regulated in the
United States. P&C insurers have a legal responsibility to
collect statistical data about their premiums and losses and to
report that data to regulators in every state in which they
operate. Our statistical agent services have enabled P&C
insurers to meet these regulatory requirements for over
30 years. We aggregate the data and, as a licensed
statistical agent in all 50 states, Puerto Rico
and the District of Columbia, we report these statistics to
insurance regulators. We are able to capture significant
economies of scale given the level of penetration of this
service within the U.S. P&C insurance industry.
To provide our customers and the regulators the information they
require, we maintain one of the largest private databases in the
world. Over the past four decades, we have developed core
expertise in acquiring, processing, managing and operating large
and comprehensive databases that are the foundation of our Risk
Assessment segment. We use our proprietary technology to
assemble, organize and update vast amounts of detailed
information submitted by our customers. We supplement this data
with publicly available information.
Each year, P&C insurers send us approximately
2.5 billion detailed individual records of insurance
transactions, such as insurance premiums collected or losses
incurred. We maintain a database of almost 14 billion
statistical records, including approximately 5 billion
commercial lines records and approximately 9 billion
personal lines records. We collect unit-transaction detail of
each premium and loss record, which enhances the validity,
reliability and accuracy of our data sets and our actuarial
analyses. Our proprietary quality process includes almost 2,500
separate checks to ensure that data meet our high standards of
quality.
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Actuarial
Services
We provide actuarial services to help our customers price their
risks as they underwrite. We project future losses and loss
expenses utilizing a broad set of data. These projections tend
to be more reliable than if our customers used solely their own
data. We provide loss costs by coverage, class, territory, and
many other categories. Our customers can use our estimates of
future loss costs in making independent decisions about the
prices charged for their policies. For most P&C insurers,
in most lines of business, we believe our loss costs are an
essential input to rating decisions. We make a number of
actuarial adjustments, including loss development and loss
adjustment expenses before the data is used to estimate future
loss costs. Our actuarial services are also used to create the
analytics underlying our industry-standard insurance programs
described below.
Our employees include over 200 actuarial professionals,
including 39 Fellows and 21 Associates of the Casualty
Actuarial Society, as well as 145 Chartered Property
Casualty Underwriters, 9 Certified and 18 Associate
Insurance Data Managers, 166 members of the Insurance Data
Management Association and 138 professionals with advanced
degrees, including PhDs in mathematics and statistical modeling
who review both the data and the models.
Using our large database of premium and loss data, our actuaries
are able to perform sophisticated analyses using our predictive
models and analytic methods to help our P&C insurance
customers with pricing, loss reserving, and marketing. We
distribute a significant number of actuarial products and offer
flexible services to meet our customers needs. In
addition, our actuarial consultants provide customized services
for our clients that include assisting them with the development
of independent insurance programs, analysis of their own
underwriting experience, development of classification systems
and rating plans and a wide variety of other business decisions.
We also supply information to a wide variety of customers in
other markets including reinsurance, government agencies and
real estate.
Industry-Standard
Insurance Programs
We are the recognized leader in the United States for
industry-standard insurance programs that help P&C insurers
define coverages and issue policies. Our policy language,
prospective loss cost information and policywriting rules can
serve as integrated turnkey insurance programs for our
customers. Insurance companies need to ensure that their policy
language, rules, and rates comply with all applicable legal and
regulatory requirements. Insurers must also make sure their
policies remain competitive by promptly changing coverages in
response to changes in statutes or case law. To meet their
needs, we process and interface with state regulators on average
over 4,000 filings each year, ensuring smooth implementation of
our rules and forms. When insurers choose to develop their own
alternative programs, our industry-standard insurance programs
also help regulators make sure that such insurers policies
meet basic coverage requirements.
Standardized coverage language, which has been tested in
litigation and tailored to reflect judicial interpretation,
helps to ensure consistent treatment of claimants. As a result,
our industry-standard language also simplifies claim settlements
and can reduce the occurrence of costly litigation, because our
language causes the meaning of coverage terminology to become
established and known. Our policy language includes standard
coverage language, endorsements and policy writing support
language that assist our customers in understanding the risks
they assume and the coverages they are offering. With these
policy programs, insurers also benefit from economies of scale.
We have over 200 specialized lawyers and insurance experts
reviewing changes in each states insurance rules and
regulations, including on average over 11,000 legislative bills,
750 regulatory actions and 2,000 court cases per year, to
make any required changes to our policy language and rating
information.
To cover the wide variety of risks in the marketplace, we offer
a broad range of policy programs. For example, in the
homeowners line of insurance, we maintain policy language
and rules for six basic coverages, 172 national endorsements,
and 469 state-specific endorsements. Overall, we provide
policy language, prospective loss costs, policy writing rules
and a variety of other solutions for 24 lines of insurance.
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Property-Specific
Rating and Underwriting Information
We gather information on individual properties and communities
so that insurers can use our information to evaluate and price
personal and commercial property insurance, as well as
commercial liability insurance. Our property-specific rating and
underwriting information allow our customers to understand,
quantify, underwrite, mitigate and avoid potential loss for
residential and commercial properties. Our database contains
loss costs and other vital information on approximately
2.7 million specifically-rated and
class-rated
commercial buildings in the United States and also holds
information on approximately 4.5 million individual
businesses occupying those buildings. We have a staff of more
than 600 field representatives strategically located around the
United States who observe and report on conditions at commercial
and residential properties, evaluate community fire-protection
capabilities and assess the effectiveness of municipal
building-code enforcement. Each year, our field staff visits
over 350,000 commercial properties to collect information on new
buildings and verify building attributes.
We also provide proprietary analytic measures of the ability of
individual communities to mitigate losses from important perils.
Nearly every property insurer in the United States uses our
evaluations of community firefighting capabilities to help
determine premiums for fire insurance throughout the country. We
provide field-verified and validated data on the fire protection
services for more than 46,000 fire response jurisdictions. We
also offer services to evaluate the effectiveness of community
enforcement of building codes and the efforts of communities to
mitigate damage from flooding. Further, we provide information
on the insurance rating territories, premium taxes, crime risk
and hazards of windstorm, earthquake, wildfire and other perils.
To supplement our data on specific commercial properties and
individual communities, we have assembled, from a variety of
internal and third-party sources, information on hazards related
to geographic locations representing every postal address in the
United States. Insurers use this information not only for policy
quoting but also for analyzing risk concentration in
geographical areas.
Decision
Analytics Segment
In the Decision Analytics segment, we support all four phases of
our Risk Analysis Framework. We develop predictive models to
forecast scenarios and produce both standard and customized
analytics that help our customers better predict loss; select
and price risk; detect fraud before and after a loss event; and
quantify losses.
As we develop our models to quantify loss and detect fraud, we
improve our ability to predict the loss and prevent the fraud
from happening. We believe this provides us with a significant
competitive advantage over firms that do not offer solutions
which operate both before and after loss events.
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For the year ended December 31, 2007 and the six months
ended June 30, 2008, our Decision Analytics segment
produced revenues of $317 million and $184 million,
representing 40% and 42% of our total revenues, respectively,
and EBITDA of $125 million and $74 million,
representing 37% and 40% of our total EBITDA, respectively. This
segments revenues and EBITDA have a CAGR of 27.8% and
55.4%, respectively, for the five-year period ended
December 31, 2007.
Fraud
Detection and Prevention
P&C
Insurance
We are a leading provider of fraud-detection tools for the
P&C insurance industry. Our fraud solutions improve our
customers profitability by both predicting the likelihood
that fraud is occurring and detecting suspicious activity after
it has occurred. When a claim is submitted, our system searches
our database and returns information about other claims filed by
the same individuals or businesses (either as claimants or
insureds) that help our customers determine if fraud has
occurred. The system searches for matches in identifying
information fields, such as name, address, Social Security
number, vehicle identification number, drivers license
number, tax identification number, or other parties to the loss.
Our system also includes advanced name and address searching to
perform intelligent searches and improve the overall quality of
the matches. Information from match reports speeds payment of
meritorious claims while providing a defense against fraud and
can lead to denial of a claim, negotiation of a reduced award,
or further investigation by the insurer or law enforcement.
We have a comprehensive system used by claims adjusters and
investigations professionals to process claims and fight fraud.
Claims databases are one of the key tools in the fight against
insurance fraud. The benefits of a single all-claims database
include improved efficiency in reporting data and searching for
information, enhanced capabilities for detecting suspicious
claims, and superior information for investigating fraudulent
claims, suspicious individuals and possible fraud rings. Our
database contains information on more than 575 million
claims and is the worlds largest database of claims
information. Insurers and other participants submit claim
reports, more than 250,000 a day on average, across all
categories of the U.S. P&C insurance industry.
We also provide a service allowing insurers to report thefts of
automobiles and property, improving the chances of recovering
those items; a service that helps owners and insurers recover
stolen heavy construction and agricultural equipment; an expert
scoring system that helps distinguish between suspicious and
meritorious claims; and products that use link-analysis
technology to help visualize and fight insurance fraud.
We have begun to expand our fraud solutions to overseas markets.
We built and launched a system in Israel in 2006 that provides
claims fraud detection, claims investigation support and some
underwriting services to all Israeli insurers.
Mortgage
We are a leading provider of automated fraud detection,
compliance and decision-support tools for the mortgage industry.
Utilizing our own loan level application database combined with
actual mortgage loan performance data, we have established a
risk scoring system which increases our customers ability
to detect fraud. We provide solutions that detect fraud through
each step of the mortgage lifecycle and provide regulatory
compliance solutions that perform instant compliance reviews of
each mortgage application. Our fraud solutions can improve our
customers profitability by predicting the likelihood that
a customer account is experiencing fraud. Our solution analyzes
customer transactions in real time and generates recommendations
for immediate action which are critical to stopping fraud and
abuse. These applications can also detect some organized fraud
schemes that are too complex and well-hidden to be identified by
other methods.
Effective fraud detection relies on pattern identification,
which in turn requires us to identify, isolate and track
mortgage applications through time. Histories of multiple loans,
both valid and fraudulent, are required to compare a submitted
loan both to actual data and heuristic analyses. For this
reason, unless fraud
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detection solutions are fueled by comprehensive data, their
practicality is limited. Our proprietary database contains more
than 13 million current and historical loan applications
collected over the past three years. This database contains data
from loan applications as well as supplementary third-party data.
Our technology employs sophisticated models to identify patterns
in the data. Our solution provides a score which predicts
whether the information provided by a mortgage applicant is
correct. Working with data obtained through our partnership with
a credit bureau, we have demonstrated a strong correlation
between fraudulent information in the application and the
likelihood of both foreclosure and early payment default on
loans. We believe our solution is based upon a more
comprehensive set of loan level information than any other
provider in the mortgage industry.
We also provide forensic audit services for the mortgage
origination and mortgage insurance industries. Our predictive
screening tools predict which defaulted loans are the most
likely candidates for full audits for the purpose of detecting
fraud. We then generate detailed audit reports on defaulted
mortgage loans. Those reports serve as a key component of the
loss mitigation strategies of mortgage loan insurers. The recent
turmoil in the mortgage industry has created a period of
unprecedented opportunity for growth in demand for our services,
as we believe most mortgage insurers do not have the in-house
capacity to respond to, and properly review, all of their
defaulted loans for evidence of fraud.
Healthcare
We offer solutions that help healthcare claims payors detect
fraud, abuse and overpayment. Our approach combines
computer-based modeling and profiling of claims with analysis
performed by clinical experts. We run our customers claims
through our proprietary analytic system to identify potential
fraud, abuse and overpayment, and then a registered nurse,
physician, or other clinical specialist skilled in coding and
reimbursement decisions reviews all suspect claims and billing
patterns. This combination of system and human review is unique
in the industry and we believe offers improved accuracy for
paying claims.
We analyze the patterns of claims produced by individual
physicians, physicians practices, hospitals, dentists and
pharmacies to locate the sources of fraud. After a suspicious
source of claims is identified, our real-time analytic solutions
investigate each claim individually for particular violations
including upcoding, multiple billings, services claimed but not
rendered and billing by unlicensed providers. By finding the
individual claims with the most cost-recovery potential, and
also minimizing the number of false-positive indications of
fraud, we enable the special investigation units of healthcare
payors to efficiently control their claims costs while
maintaining high levels of customer service to their insureds.
We also offer web-based reporting tools that let payors take
definitive action to prevent overpayments or payment of
fraudulent claims. The tools provide the documentation that
helps to identify, investigate, and prevent abusive and
fraudulent activity by providers.
Prediction
of Loss and Selection and Pricing of Risk
P&C
Insurance
We pioneered the field of probabilistic catastrophe modeling
used by insurers, reinsurers and financial institutions to
manage their catastrophe risk. Our models of global natural
hazards, which form the basis of our solutions, enable companies
to identify, quantify, and plan for the financial consequences
of catastrophic events. We have developed models covering
natural hazards, including hurricanes, earthquakes, winter
storms, tornadoes, hailstorms and flood for potential loss
events in more than 50 countries. We have also developed and
introduced a probabilistic terrorism model capable of
quantifying the risk in the United States from this emerging
threat, which supports pricing and underwriting decisions down
to the level of an individual policy.
Healthcare
We are a leading provider of healthcare business intelligence
and predictive modeling. We provide analytical and reporting
systems to health insurers, provider organizations and
self-insured employers. Those
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organizations use our solutions to review their healthcare data,
including information on claims, membership, providers and
utilization, and provide cost trends, forecasts and actuarial,
financial and utilization analyses.
For example, our solutions allow our customers to predict
medical costs and improve the financing and organization of
health services. Our predictive models help our customers
identify high-cost cases for care- and disease-management
intervention, compare providers adjusting for differences in
health, predict resource use for individuals and populations,
establish health-based and performance-based payments, negotiate
payments and incentives, negotiate premium rates and measure
return on investment.
We also provide our customers healthcare consulting services
using complex clinical analyses to uncover reasons behind cost
and utilization increases. Physicians and hospitals are adopting
and acquiring new technologies, drugs and devices more rapidly
than ever before. We provide financial and actuarial consulting,
clinical consulting, technical and implementation services and
training services to help our customers manage costs and risks
to their practices.
We are also beginning to expand our healthcare business
internationally. We have recently secured an agreement with the
German government to develop a risk-adjustment methodology based
on our solutions. Our diagnosis-based risk-adjustment methods
and predictive modeling tools will support the German healthcare
system in the improvement of quality and efficiency of care.
Quantification
of Loss
P&C
Insurance
We provide data, analytic and networking products for
professionals involved in estimating all phases of building
repair and reconstruction. We provide solutions for every phase
of a buildings life, including:
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estimating replacement costs during the insurance underwriting
process;
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quantifying the ultimate cost of repair or reconstruction of
damaged or destroyed buildings;
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aiding in the settlement of insurance claims; and
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tracking the process of repair or reconstruction and
facilitating communication among insurers, adjusters,
contractors and policyholders.
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To help our customers estimate replacement costs, we also
provide a solution that assists contractors and insurance
adjusters to estimate repairs using a patented plan-sketching
program. The program allows our customers to sketch floor plans,
roof plans and wall-framing plans and automatically calculates
material and labor quantities for the construction of walls,
floors, footings and roofs.
We also offer our customers access to wholesale and retail price
lists, which include structural repair and restoration pricing
for 466 separate economic areas in North America. We revise this
information at least once per quarter and, in the aftermath of a
major disaster, we can update the price lists as often as weekly
to reflect rapid price changes. Our structural repair and
cleaning database contains more than 11,000 unit-cost line
items. For each line item such as smoke cleaning, water
extraction and hazardous cleanup, we provide time and material
pricing, including labor, labor productivity rates (for new
construction and restoration), labor burden and overhead,
material costs and equipment costs. We improve our pricing data
by analyzing the actual claims experience of our customers to
verify our estimates. We estimate that approximately 62% of all
homeowners claims settled in the U.S. in 2007 used
our solution. Such a large percentage of the industrys
claims leads to accurate pricing information which we believe is
unmatched in the industry.
We also estimate industry-wide insured losses from individual
catastrophic events. We report information on disasters and
determine the extent and type of damage, dates of occurrence,
and geographic areas affected. We define a catastrophe as an
event that causes $25 million or more in direct insured
losses to property and that affects a significant number of
policyholders and insurers. For each catastrophe, our loss
estimate represents anticipated industry-wide insurance payments
for property lines of insurance covering fixed property,
building contents, time-element losses, vehicles and inland
marine (diverse goods and properties). We assign a serial number
that allows our customers to track losses and reserves related
to a single, discrete event.
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Under many reinsurance contracts and catastrophe bonds, our
serial number is important for determining which losses will
trigger reinsurance coverage or payment.
Our estimates allow our customers to set loss reserves, deploy
field adjusters and verify internal company estimates. Our
estimates also keep insurers, their customers, regulators, and
other interested parties informed about the total costs of
disasters. We also provide our customers access to daily reports
on severe weather and catastrophes and we maintain a database of
information on catastrophe losses in the United States since
1950.
Healthcare
Bodily injury and workers compensation claims present a
complex array of medical, legal and occupational issues. We
offer a comprehensive claims-management solution that helps our
customers manage bodily injury claims, workers
compensation claims and accident-related comparative-liability
claims. We have a database of our customers claims
histories, including detailed settlements, medical conditions,
provider information and litigation issues, to help them deal
with bodily injury claims. Our system also contains a library of
more than 18,700 medical conditions to help our customers better
understand injuries, treatments, complications and pre-existing
conditions. This allows our customers to identify developing
trends in claims settlements that may lead to changes in
underwriting, legal
and/or
training practices.
Our database also enables our customers to track and direct
their workers compensation cases, including evaluating the
medical and occupational situation of each claimant, maintain
consistency and quality in claims handling and to develop
optimal return-to-work plans. In addition, we have solutions
which assist our customers in better identifying and evaluating
accident-related comparative liability claims. This helps our
customers to manage each claim until settlement.
Our
Customers
Risk
Assessment Customers
The customers in our Risk Assessment segment include the top 100
P&C insurance providers in the United States, including
AIG, Allstate, CNA, Hartford, Liberty Mutual, Nationwide,
Firemans Fund, State Farm, Travelers and Zurich. Our
statistical agent services are used by a substantial majority of
P&C insurance providers in the United States to report to
regulators. Our actuarial services and industry-standard
insurance programs are used by the majority of insurers and
reinsurers in the United States. In addition, certain agencies
of the federal government, including the Federal Emergency
Management Agency, or FEMA, as well as county and state
governmental agencies and organizations, use our solutions to
help satisfy government needs for risk assessment and emergency
response information. In 2007, our largest Risk Assessment
customer accounted for 5.2% of segment revenues, and our top ten
customers accounted for 27.4% of segment revenues. Please see
Certain Relationships and Related Transactions
Customer Relationships for more information on our
relationship with our principal stockholders.
Decision
Analytics Customers
In the Decision Analytics segment, we provide our P&C
insurance solutions to the majority of the P&C insurers in
the United States. Specifically, our claims database serves
thousands of customers, representing more than 92% of the
P&C insurance industry by premium volume, 26 state
workers compensation insurance funds, 607 self-insureds,
465 third-party administrators, several state fraud bureaus, and
many law-enforcement agencies involved in investigation and
prosecution of insurance fraud. In addition, our catastrophe
modeling solutions have been used in approximately 45% of
catastrophe bond securitizations through 2007. Also, P&C
insurance companies using our building and repair solutions
handle over 60% of the property claims in the United States.
More than 80% of insurance repair contractors and service
providers in the United States and Canada with computerized
estimating systems use our building and repair pricing data.
In the U.S. healthcare industry, our customers include
numerous Blue Cross and Blue Shield plans, Kaiser Permanente and
Munich Reinsurance. In 2007, our largest customer in the
Decision Analytics segment
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accounted for 4.6% of segment revenues and our top ten Decision
Analytics customers accounted for 17.8% of segment revenues.
In the U.S. mortgage industry, we have more than 1,100
customers, including Wells Fargo, Bank of America and Wachovia.
We provide our solutions to 14 of the top 20 mortgage lenders
and 4 of the top 6 mortgage insurers, United Guarantee,
RMIC, PMI and Old Republic Insured Credit Services. We have been
providing services to mortgage insurers for over 20 years.
Our
Competitors
We believe no single competitor currently offers the same scope
of services and market coverage we provide. The breadth of
markets we serve exposes us to a broad range of competitors.
Risk
Assessment Competitors
Our Risk Assessment segment operates primarily in the
U.S. P&C insurance industry, where we enjoy a leading
market presence. We have a number of competitors in specific
lines or services.
We encounter competition from a number of sources, including
insurers who develop internal technology and actuarial methods
for proprietary insurance programs. Competitors also include
other statistical agents including the National Independent
Statistical Service, the Independent Statistical Service, and
other advisory organizations providing underwriting rules,
prospective loss costs and coverage language, such as the
American Association of Insurance Services and Mutual Services
Organization.
Competitors for our property-specific rating and underwriting
information are primarily limited to a number of regional
providers of commercial property inspections and surveys,
including Overland Solutions, Inc. and Regional Reporting, Inc.
We also compete with a variety of organizations that offer
consulting services, primarily specialty technology and
consulting firms. In addition, a customer may use its own
internal resources rather than engage an outside firm for these
services. Our competitors also include information technology
product and services vendors including CDS, Inc., management and
strategy consulting firms including Deloitte, and smaller
specialized information technology firms and analytical services
firms including Pinnacle Consulting and EMB.
Decision
Analytics Competitors
In the P&C insurance claims market and catastrophe modeling
market, certain products are offered by a number of companies,
including, ChoicePoint (loss histories and motor vehicle records
for personal lines underwriting), Explore Information Services
(personal automobile underwriting) and Risk Management Solutions
(catastrophe modeling). We believe that our P&C insurance
industry expertise, combined with our ability to offer multiple
applications, services and integrated solutions to individual
customers, enhances our competitiveness against these
competitors with more limited offerings. In the healthcare
market, certain products are offered by a number of companies,
including Computer Sciences Corporation (evaluation of bodily
injury and workers compensation claims), Fair Isaac
Corporation (workers compensation and healthcare claims
cost containment) and Ingenix, McKesson and Medstat (healthcare
predictive modeling and business intelligence). Competitive
factors include application features and functions, ease of
delivery and integration, ability of the provider to maintain,
enhance and support the applications or services and price. In
the mortgage analytics solutions market, our competitors include
First American CoreLogic and DataVerify Corporation (mortgage
lending fraud identification) and ComplianceEase and Mavent
(mortgage regulatory compliance). We believe that none of our
competitors in the mortgage analytics market offers the same
expertise in fraud detection analytics or forensic audit
capabilities.
Development
of New Solutions
We take a market-focused team approach to developing our
solutions. Our operating units are responsible for developing,
reviewing and enhancing our various products and services. Our
data management and production team designs and manages our
processes and systems for market data procurement, proprietary
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data production and quality control. Our Enterprise Data
Management, or EDM, team supports our efforts to create new
information and products from available data and explores new
methods of collecting data. EDM is focused on understanding and
documenting
business-unit
and corporate data assets and data issues; sharing and combining
data assets across the enterprise; creating an enterprise data
strategy; facilitating research and product development; and
promoting cross-enterprise communication.
Our software development team builds the technology used in many
of our solutions. As part of our product-development process, we
continually solicit feedback from our customers on the value of
our products and services and the markets needs. We have
established an extensive system of customer advisory panels,
which meet regularly throughout the year to help us respond
effectively to the needs of our markets. In addition, we use
frequent sales calls, executive visits, user group meetings, and
other industry forums to gather information to match the needs
of the market with our product development efforts. We also use
a variety of market research techniques to enhance our
understanding of our clients and the markets in which they
operate.
We are currently funding 45 product development initiatives for
new and enhanced offerings, including:
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LOCATION Analyst, a new portfolio-assessment system that uses
proprietary insurance industry data, visual maps and
sophisticated reporting to help insurers make better risk
management decisions;
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360Value, an innovative web-based system for estimating
replacement values of residential, commercial and agricultural
properties; and
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Predictive models to help insurers classify, segment and price
risks for a variety of lines of insurance.
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We also add to our offerings through an active acquisition
program. Since 2003, we have acquired 14 businesses, which have
allowed us to enter new markets, offer new products and enhance
the value of existing products with additional proprietary
sources of data.
When we find it advantageous, we augment our proprietary data
sources and systems by forming alliances with other leading
information providers and technology companies and integrating
their product offerings into our offerings. This approach gives
our customers the opportunity to obtain the information they
need from a single source and more easily integrate the
information into their workflows.
Sales,
Marketing and Customer Support
We sell our products and services primarily through direct
interaction with our clients. We employ a three-tier sales
structure that includes salespeople, product specialists and
sales support. As of June 30, 2008, we had a sales force of
181 people. Within the company, several areas have sales
teams that specialize in specific products and services. These
specialized sales teams sell specific, highly technical product
sets to targeted markets.
To provide account management to our largest customers, we
segment the insurance market into two groups. National Accounts
constitutes our 20 largest customers and Strategic Accounts
includes all other insurance companies. Each market segment has
its own sales team. Salespeople are responsible for our overall
relationship with P&C insurance companies.
Salespeople participate in both customer-service and sales
activities. They provide direct support, interacting frequently
with assigned customers to assure a positive experience using
our services. Salespeople also seek out new sales opportunities
and provide support to the rest of the sales team. We believe
our salespeoples product knowledge and local presence
differentiates us from our competition. Product specialists have
product expertise and work with salespeople on specific
opportunities for their assigned products. Both salespeople and
product specialists have responsibility for identifying new
sales opportunities. A team approach and a common customer
relationship management system allow for effective coordination
between the two groups.
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We go to market using a number of brands, including:
Sources
of our Data
The data we use to perform our analytics and power our solutions
are sourced through six different kinds of data arrangements.
First, we gather data from our customers within agreements that
also permit our customers to use the solutions created upon
their data. These agreements remain in effect unless the data
contributor chooses to opt out and represent our primary method
of data gathering. It is very rare that contributors elect not
to continue providing us data. Second, we have agreements with
data contributors in which we specify the particular uses of
their data and provide to the data contributors their required
levels of privacy, protection of data and where necessary
de-identification of data. These agreements represent no cost to
us and generally feature a specified period of time for the data
contributions and require renewal. Third, we mine
data found inside the transactions supported by our solutions;
as an example, we utilize the claims settlement data generated
inside our repair cost estimating solution to improve the cost
factors used in our models. Again, these arrangements represent
no cost to us and we obtain the consent of our customers to make
use of their data in this way. Fourth, we source data generally
at no cost from public sources including federal, state and
local governments. Fifth, we gather data about the physical
characteristics of commercial properties through the direct
observation of our field staff who also perform property surveys
at the request of, and facilitated by, property insurers.
Lastly, we purchase data from data aggregators under contracts
that reflect prevailing market pricing for the data elements
purchased, including county tax assessor records, descriptions
of hazards such as flood plains and professional licenses. In
all our modes of data collection, we are the owners of whatever
derivative solutions we create using the data. Because of the
efficiency of our data gathering methods and the lack of any
cost associated with a large portion of our data, our costs to
source data were 1.9% and 1.8% of revenues for the year ended
December 31, 2007 and six months ended June 30, 2008,
respectively.
Information
Technology
Technology
Our information technology systems are fundamental to our
success. They are used for the storage, processing, access and
delivery of the data which forms the foundation of our business
and the development and delivery of our solutions provided to
our clients. Much of the technology we use and provide to our
clients is developed, maintained and supported by approximately
800 employees. We generally own or have secured ongoing
rights to use for the purposes of our business all the
customer-facing applications which are material to our
operations. We support and implement a mix of technologies,
focused on implementing the most efficient technology for any
give business requirement or task.
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Customers connect to our systems using a number of different
technologies, including internet, VPN, dedicated network
connections, Frame Relay and Value Added Network services
through vendors such as Advantis and IVANS. We utilize Computer
Associates Unicenter, Hewlett Packard Insight Manager, Compuware
Vantage and other best-of-breed point technologies to
aggressively monitor and automate the management of our
environment and applications as well as event-driven operational
alerts.
Data
Centers
We have two primary data centers in Jersey City, New Jersey and
Orem, Utah. In addition, we have data centers dedicated to
certain business units, including AIR and DxCG in Boston and
AISG Claimsearch in Israel. In addition to these key data
centers, we also have a number of smaller data centers located
in other states.
Disaster
Recovery
We are committed to a framework for business continuity
management and carry out annual reviews of the state of
preparedness of each business unit. All of our critical
databases, systems and contracted client services are also
regularly recovered. We also have documented disaster recovery
plans in place for each of our major data centers and each of
our solutions. Our primary data center recovery site is in New
York State, approximately 50 miles northwest of Jersey
City, New Jersey.
Security
We have adopted a wide range of measures to ensure the security
of our IT infrastructure and data. Security measures generally
cover the following key areas: physical security; logical
security of the perimeter; network security such as firewalls;
logical access to the operating systems; deployment of virus
detection software; and appropriate policies and procedures
relating to removable media such as laptops. All laptops are
encrypted and media leaving our premises that is sent to a
third-party storage facility is also encrypted. This commitment
has led us to achieve certification from CyberTrust (an industry
leader in information security certification) since 2002.
Intellectual
Property
We own a significant number of intellectual property rights,
including copyrights, trademarks, trade secrets and patents.
Specifically, our policy language, insurance manuals, software
and databases are protected by both registered and common law
copyrights, and the licensing of those materials to our
customers for their use represents a large portion of our
revenue. We also own in excess of 200 trademarks in the U.S. and
foreign countries, including the names of our products and
services and our logos and tag lines, many of which are
registered. We believe many of our trademarks, trade names,
service marks and logos to be of material importance to our
business as they assist our customers in identifying our
products and services and the quality that stands behind them.
We consider our intellectual property to be proprietary, and we
rely on a combination of statutory (e.g., copyright, trademark,
trade secret and patent) and contractual safeguards in a
comprehensive intellectual property enforcement program to
protect them wherever they are used.
We also own several software method and processing patents and
have several pending patent applications in the U.S. that
complement our products. The patents and patent applications
include claims which pertain to technology, including a patent
for our Claims Outcome Advisor software, our ISO-ITS rating and
policy administration software and for our Xactware Sketch
product. We believe the protection of our proprietary technology
is important to our success and we will continue to seek to
protect those intellectual property assets for which we have
expended substantial research and development capital and which
are material to our business.
In order to maintain control of our intellectual property, we
enter into license agreements with our customers, granting each
customer a license to use our products and services, including
our software and databases. This helps to maintain the integrity
of our proprietary intellectual property and to protect the
embedded information and technology contained in our solutions.
As a general practice, employees,
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contractors and other parties with access to our proprietary
information sign agreements that prohibit the unauthorized use
or disclosure of our proprietary rights, information and
technology.
Employees
As of June 30, 2008 we employed 3,290 full-time and
176 part-time employees. None of our employees are
represented by unions. We consider our relationship with our
employees to be good and have not experienced interruptions of
operations due to labor disagreements.
Properties
Our headquarters are in Jersey City, New Jersey. As of
June 30, 2008, our principal offices consisted of the
following properties:
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Location
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Square Feet
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Lease Expiration Date
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Jersey City, New Jersey
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390,991
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May 21, 2021
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Orem, Utah
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68,343
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January 1, 2017
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Boston, Massachusetts
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47,000
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March 31, 2015
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Agoura Hills, California
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28,666
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October 30, 2011
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South Jordan, Utah
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23,505
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May 31, 2014
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We also lease offices in 15 states in the United States and
the District of Columbia and Puerto Rico and offices outside the
United States to support our international operations in China,
England, Israel, India, Japan and Germany.
We believe that our properties are in good operating condition
and adequately serve our current business operations. We also
anticipate that suitable additional or alternative space,
including those under lease options, will be available at
commercially reasonable terms for future expansion.
Regulation
Because our business involves the distribution of certain
personal, public and non-public data to businesses and
governmental entities that make eligibility, service and
marketing decisions based on such data, certain of our solutions
and services are subject to regulation under federal, state and
local laws in the United States and, to a lesser extent, foreign
countries. Examples of such regulation include the Fair Credit
Reporting Act, which regulates the use of consumer credit report
information; the Gramm-Leach-Bliley Act, which regulates the use
of non-public personal financial information held by financial
institutions and applies indirectly to companies that provide
services to financial institutions; the Health Insurance
Portability and Accountability Act, which restricts the public
disclosure of patient information and applies indirectly to
companies that provide services to healthcare businesses; the
Drivers Privacy Protection Act, which prohibits the public
disclosure, use or resale by any states department of
motor vehicles of personal information about an individual that
was obtained by the department in connection with a motor
vehicle record, except for a permissible purpose and
various other federal, state and local laws and regulations.
These laws generally restrict the use and disclosure of personal
information and provide consumers certain rights to know the
manner in which their personal information is being used, to
challenge the accuracy of such information
and/or
to
prevent the use and disclosure of such information. In certain
instances, these laws also impose requirements for safeguarding
personal information through the issuance of data security
standards or guidelines. Certain state laws impose similar
privacy obligations, as well as obligations to provide
notification of security breaches in certain circumstances.
We are also licensed as a rating, rate service, advisory or
statistical organization under state insurance codes in all
fifty states, Puerto Rico, Guam, the Virgin Islands and the
District of Columbia. As such an advisory organization, we
provide statistical, actuarial, policy language development and
related products and services to property/casualty insurers,
including advisory prospective loss costs, other prospective
cost information, manual rules and policy language. We also
serve as an officially designated statistical agent of
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state insurance regulators to collect policy-writing and loss
statistics of individual insurers and compile that information
into reports used by the regulators.
Many of our products, services and operations as well as insurer
use of our services are subject to state rather than federal
regulation by virtue of the McCarran-Ferguson Act. As a result,
many of our operations and products are subject to review
and/or
approval by state regulators. Furthermore, our operations
involving licensed advisory organization activities are subject
to periodic examinations conducted by state regulators and our
operations and products are subject to state antitrust and trade
practice statutes within or outside state insurance codes, which
are typically enforced by state attorneys general
and/or
insurance regulators.
Legal
Proceedings
We are a party to legal proceedings with respect to a variety of
matters in the ordinary course of business. Except as described
below, we do not believe that any legal proceedings to which we
are a party would have a material impact on our results of
operations, financial position, or cash flows. Although we
believe that we have strong defenses for the proceedings
described below, we could in the future incur judgments or fines
or enter into settlements of claims that could have a material
adverse effect on our results of operations, financial position
or cash flows.
Claims
Outcome Advisor Litigation
Hensley, et al. v. Computer Sciences Corporation et al.
is a putative nationwide class action complaint, filed in
February 2005, in Miller County, Arkansas state court.
Defendants include numerous insurance companies and providers of
software products used by insurers in paying claims. We are
among the named defendants. Plaintiffs allege that certain
software products, including our Claims Outcome Advisor product
and a competing software product sold by Computer Sciences
Corporation, improperly estimated the amount to be paid by
insurers to their policyholders in connection with claims for
bodily injuries. On August 18, 2008, we were voluntarily
dismissed from the case with prejudice.
We have entered into settlement agreements with plaintiffs
asserting claims relating to the use of Claims Outcome Advisor
by defendants Hanover Insurance Group, Progressive Car
Insurance, and Liberty Mutual Insurance Group. Each of these
settlements has been granted final approval by the court and
together they resolve the claims asserted in this case against
us with respect to the above insurance companies, who settled
the claims against them as well. A provision was recorded in
2006 for this proceeding and the total amount we paid in 2008
with respect to these settlements was less than $2 million.
A fourth defendant, The Automobile Club of California, that is
alleged to have used Claims Outcome Advisor has not settled.
Plaintiffs have agreed to dismiss us from the case with
prejudice once a discovery dispute relating to certain documents
is resolved.
Xactware
Litigation
The following two lawsuits have been filed by or on behalf of
groups of Louisiana insurance policyholders who claim, among
other things, that certain insurers who used products and price
information supplied by our Xactware subsidiary (and those of
another provider) did not fully compensate policyholders for
property damage covered under their insurance policies. The
plaintiffs seek to recover compensation for their damages in an
amount equal to the difference between the amount paid by the
defendants and the fair market repair/restoration costs of their
damaged property.
Schafer v. State Farm Fire & Cas. Co.
, et
al. is a putative class action pending against us and State Farm
Fire & Casualty Company filed in March 2007 in
the Eastern District of Louisiana. The complaint alleged
antitrust violations, breach of contract, negligence, bad faith,
and fraud. The court dismissed the antitrust claim as to both
defendants and dismissed all claims against us other than fraud,
which will proceed to the discovery phase along with the
remaining claims against State Farm. Plaintiffs have moved to
certify a class with respect to the fraud and breach of contract
claims which the defendants will oppose.
68
Mornay v. Travelers Ins. Co.
, et al. is a putative
class action pending against us and Travelers Insurance Company
filed in November 2007 in the Eastern District of Louisiana. The
complaint alleged antitrust violations, breach of contract,
negligence, bad faith, and fraud. As in Schafer, the court
dismissed the antitrust claim as to both defendants and
dismissed all claims against us other than fraud. The court has
stayed the proceedings pending an appraisal of the lead
plaintiffs insurance claims.
The third lawsuit,
Louisiana ex rel. Foti v. Allstate
Ins. Co.
, is a putative parens patriae action filed by the
Louisiana Attorney General in November 2007 in Louisiana state
court against numerous insurance companies, the Company, and
other solution providers, and consultants. The complaint
contains allegations of an antitrust conspiracy among the
defendants with respect to the payment of insurance claims for
property damage and seeks the forfeiture of any illegal profits
and treble damages. Defendants removed the case to the Eastern
District of Louisiana. A motion to remand the case to state
court was denied by the district court. That decision was
affirmed by the United States Court of Appeals for the Fifth
Circuit. Defendants have filed a motion to dismiss and
plaintiffs are opposing the motion.
At this time it is not possible to determine the ultimate
resolution of, or estimate the liability related to, these
matters. No provision for losses has been provided in connection
with the Xactware litigation.
iiX
Litigation
In March 2007, our Insurance Information Exchange, or iiX,
subsidiary, as well as other information providers and insurers
in the State of Texas, were served with a summons and class
action complaint filed in the United States District Court for
the Eastern District of Texas alleging violations of the Driver
Privacy Protection Act, or the DPPA. Plaintiffs brought the
action on their own behalf and on behalf of all similarly
situated individuals whose personal information is contained in
any motor vehicle record maintained by the State of Texas and
who have not provided express consent to the State of Texas for
the distribution of their personal information for purposes not
enumerated by the DPPA and whose personal information has been
knowingly obtained and used by the defendants. The complaint
alleges that the defendants knowingly obtained such personal
information and that the obtaining and use of this personal
information was not for a purpose authorized by the DPPA. The
complaint seeks liquidated damages in the amount of $2,500 for
each instance of a violation of DPPA, punitive damages and the
destruction of any illegally obtained personal information. We
have filed a motion to dismiss the complaint based on failure to
state a claim and lack of standing and a decision on that motion
is pending.
69
MANAGEMENT
Executive
Officers and Directors
The following table sets forth information regarding the
executive officers and directors of the Company, as of
June 30, 2008:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Frank J. Coyne
|
|
|
59
|
|
|
Chairman of the Board of Directors, President and Chief
Executive Officer
|
Scott G. Stephenson
|
|
|
51
|
|
|
Executive Vice President and Chief Operating Officer
|
Mark V. Anquillare
|
|
|
42
|
|
|
Senior Vice President and Chief Financial Officer
|
Kenneth E. Thompson
|
|
|
48
|
|
|
Senior Vice President, General Counsel and Corporate Secretary
|
Carole J. Banfield
|
|
|
68
|
|
|
Executive Vice President Information Services and
Government Relations
|
Vincent Cialdella
|
|
|
57
|
|
|
Senior Vice President AISG
|
Kevin B. Thompson
|
|
|
57
|
|
|
Senior Vice President Insurance Services
|
J. Hyatt Brown
|
|
|
71
|
|
|
Director
|
Glen A. Dell
|
|
|
72
|
|
|
Director
|
Henry J. Feinberg
|
|
|
56
|
|
|
Director
|
Christopher M. Foskett
|
|
|
51
|
|
|
Director
|
Constantine P. Iordanou
|
|
|
58
|
|
|
Director
|
John F. Lehman, Jr.
|
|
|
66
|
|
|
Director
|
Stephen W. Lilienthal
|
|
|
58
|
|
|
Director
|
Samuel G. Liss
|
|
|
52
|
|
|
Director
|
Andrew G. Mills
|
|
|
55
|
|
|
Director
|
Arthur J. Rothkopf
|
|
|
73
|
|
|
Director
|
Barbara D. Stewart
|
|
|
65
|
|
|
Director
|
David B. Wright
|
|
|
59
|
|
|
Director
|
A brief biography of each executive officer and director follows.
Executive
Officers
Frank J. Coyne
has been our Chairman, President
and Chief Executive Officer since 2002. From 2000 to 2002,
Mr. Coyne served as our President and Chief Executive
Officer and he served as our President and Chief Operating
Officer from 1999 to 2000. Mr. Coyne joined the Company
from Kemper Insurance Cos. where he was Executive Vice President
Specialty and Risk Management Groups. Previously, he served in a
variety of positions with General Accident Insurance, and was
elected its President and Chief Operating Officer in 1991. He
has also held executive positions with Lynn Insurance Group,
Reliance Insurance Co. and PMA Insurance Co.
Scott G. Stephenson
has been our Chief Operating
Officer since June 2008 and leader of our Decision Analytics
segment. From 2002 to 2008, Mr. Stephenson served as our
Executive Vice President and he served as President of our
Intego Solutions business from 2001 to 2002. Mr. Stephenson
joined the Company from Silver Lake Partners, a
technology-oriented private equity firm, where he was an
executive-in-residence
from 1999 to 2001. From 1989 to 1999 Mr. Stephenson was a
partner with The Boston Consulting Group, eventually rising to
senior partner and member of the firms North American
operating committee.
Mark V. Anquillare
has been our Senior Vice
President and Chief Financial Officer since 2007.
Mr. Anquillare joined the Company as Director of Financial
Systems in 1992 and since joining the Company,
70
Mr. Anquillare has held various management positions,
including Assistant Vice President, Vice President and
Controller and Senior Vice President and Controller. Prior to
1992, Mr. Anquillare was employed by the Prudential
Insurance Company of America. Mr. Anquillare is a Fellow of
the Life Management Institute.
Kenneth E. Thompson
has been our Senior Vice
President, General Counsel and Corporate Secretary since 2006.
Prior to joining the Company in 2006, Mr. Thompson was a
partner of McCarter & English, LLP from 1997 to 2006.
Mr. Thompson also serves on the board of directors of
Measurement Specialties, Inc.
Carole J. Banfield
has been our Executive Vice
President Information Services and Government Relations
Department focused on our Risk Assessment segment since 1996.
Ms. Banfield joined the Company in 1970 as an assistant
actuary in the Homeowners Actuarial Division and since 1977 has
held various management positions, including Vice President
Government and Industry Relations. Ms. Banfield began her
career with the National Bureau of Casualty Underwriters in
1962. Ms. Banfield is a member of the American Academy of
Actuaries and an Associate of the Casualty Actuarial Society.
She currently serves on the board of directors of the American
Society of Workers Compensation Professionals, the
Insurance Data Management Association and on the Industry
Advisory Group of ACORD.
Vincent Cialdella
has been our Senior Vice
President, AISG since April 2008 in our Decision Analytics
segment. Prior to April 2008, Mr. Cialdella served as Vice
President of ISO Claims Solutions, a division of AISG, since
2000. Mr. Cialdellas career at the Company spans
approximately thirty years, during which he has served as
Assistant Vice President of Software Products, Corporate Systems
and Application Development Support Center.
Kevin B. Thompson
has been our Senior Vice
President, Insurance Services since 2003 focused on our Risk
Assessment segment. Mr. Thompson joined the Company in 1974
and has held various management positions, including Vice
President, Insurance Services, Vice President, Personal and
Standard Commercial Lines, Vice President, Standard Commercial
Lines, Assistant Vice President, Commercial Casualty Actuarial.
Mr. Thompson is also a Member of the American Academy of
Actuaries and Fellow of the Casualty Actuarial Society. From
1996 to 1999 he served as Vice President - Admissions of
the Casualty Actuarial Society and as a Member of the Board of
Directors from 1994 to 1996.
Class A
Directors
Christopher M. Foskett
has served as one of our
directors since 1999. Mr. Foskett is a Managing Director
and Global Head of the Financial Institutions Group in
Citigroups Corporate Bank since 2007. From 2003 to 2007,
Mr. Foskett was Head of Sales and Relationship Management
for Citigroup Global Transaction Services. He also served as
Global Industry Head for the Insurance and Investment Industries
in Citigroups Global Corporate Bank from 1999 to 2003.
Previously, he held various roles in Citigroups mergers
and acquisitions group.
David B. Wright
has served as one of our directors
since 1999. Mr. Wright has been Chairman and Chief
Executive Officer of Verari Systems since 2006. Before joining
Verari Systems, he was Executive Vice President, Office of the
CEO, Strategic Alliances and Global Accounts of EMC Corporation
from 2004 to 2006. Between 2001 and 2004 he was Chairman and
Chief Executive Officer of Legato Systems and from 1997 to 2000
Mr. Wright was the President and Chief Executive Officer of
Amdahl Corporation. Mr. Wright is also a director on the
board of VA Software and ActiveIdentity.
John F. Lehman, Jr.
has served as one of our
directors since 1995. Mr. Lehman is Chairman of
J. F. Lehman & Co., an investment firm that
he founded in 1991. Prior to founding J. F. Lehman &
Co., he was Managing Director of Paine Webber, Inc. from 1988 to
1991. In 1981, Mr. Lehman was appointed Secretary of the
Navy by President Reagan and served in that capacity until 1987.
Mr. Lehman was a member of the bipartisan September 11
Commission and serves on the board of directors of Ball Corp.,
EnerSys, Inc., Hawaii Superferry Inc., Atlantic Marine, Oao
Technology Solutions Inc. and Special Devices, Incorporated.
Andrew G. Mills
has served as one of our directors
since 2002. Mr. Mills has been President of The Kings
College in New York, NY since 2007. He is the former Chairman of
Intego Solutions LLC, which he founded in 2000. Mr. Mills
previously served as Chief Executive Officer of The Thomson
Corporations
71
Financial and Professional Publishing unit and as a member of
Thomsons board of directors. In 1984, he lead the
start-up
operations of Business Research Corporation and was responsible
for overseeing its sale and integration into The Thompson
Corporation. He began his career with Courtaulds Ltd. and joined
The Boston Consulting Group in 1979. Mr. Mills is on the
board of directors of The Kings College, Lexington
Christian Academy, Camp of the Woods and Hope Christian Church,
and is a member of the Massachusetts State Board of the
Salvation Army.
Arthur J. Rothkopf
has served as one of our
directors since 1993. Mr. Rothkopf has served as Senior
Vice President and Counselor to the President of the
U.S. Chamber of Commerce since July of 2005. From 1993 to
2005, Mr. Rothkopf was President of Lafayette College in
Easton, Pennsylvania. Prior to serving as President of Lafayette
College, Mr. Rothkopf was General Counsel and Deputy
Secretary of the U.S. Department of Transportation,
appointed by President George H. W. Bush. From 1967 through
1991, he practiced law with the Washington, D.C., firm of
Hogan & Hartson, where he was a senior partner.
Mr. Rothkopf is a Trustee of American University in
Washington D.C.
J. Hyatt Brown
has served as one of our
directors since 2003. Mr. Brown has been Chairman and Chief
Executive Officer of Brown & Brown, Inc. since 1993.
Mr. Brown is a Trustee of Stetson University in Florida, a
past member of the Florida Board of Regents and a member of the
Florida Council of 100. He was elected to the Florida House of
Representatives in 1972 and was elected Speaker in 1978.
Mr. Brown retired as Speaker in 1980. He also serves on the
board of directors of Rock-Tenn Company, the FPL Group Inc. and
the Daytona International Speedway Corporation.
Glen A. Dell
has served as one of our directors
since 1995. Mr. Dell is a retired Partner of MapleWood
Equity Partners LP. Mr. Dell served as a Partner of
MapleWood Equity Partners LP from 1998 to 2007. From 1992 to
1997, Mr. Dell served as President of Investcorp Management
Services Inc., where he was responsible for post-acquisition
management of Investcorps portfolio of companies in North
America. He has also served as a consultant, specializing in
interim management services, and held executive positions with
General Electric Co., International Paper Co., and JWT Group,
Inc. Mr. Dell was a member of the board of directors of
Parts Depot, Inc. until February 28, 2008.
Henry J. Feinberg
has served as one of our
directors since 1996. Since 2000, Mr. Feinberg has been a
Partner of Technology Crossover Ventures, a private equity and
venture capital firm. Previously, Mr. Feinberg was Chairman
and Chief Executive Officer of Rand McNally & Company.
Mr. Feinberg is also a director of Adknowledge, Inc.,
CosmoCom, Inc., eLoyalty Corporation, FXall and Yield Management
Services Ltd.
Barbara D. Stewart
has served as one of our
directors since 1995. Ms. Stewart has been President of
Stewart Economics, Inc., a consulting firm that specializes in
the insurance business and its regulation, since 1981. Before
forming Stewart Economics, Ms. Stewart was Corporate
Economist of the Chubb Group of Insurance Companies.
Ms. Stewart is also a director of The Main Street America
Group; a former director of Capital Re Corporation; a former
overseer of The School of Risk Management, Insurance, and
Actuarial Science of St. Johns University; and a member of
the Editorial Board of
Risk Management and Insurance
Review
.
Class B
Directors
Constantine P. Iordanou
has served as one of our
directors since 2001. Mr. Iordanou has served as President
and Chief Executive Officer of Arch Capital Group Limited, or
ACGL, since August 2003 and as director of ACGL since January
2002. From January 2002 through July 2003, he was Chief
Executive Officer of Arch Capital (U.S.) Inc., a wholly owned
subsidiary of ACGL. Prior to joining ACGL in 2002,
Mr. Iordanou served in various capacities for Zurich
Financial Services and its affiliates, including as Senior
Executive Vice President of Group Operations and Business
Development of Zurich Financial Services, President of
Zurich-American
Specialties Division, Chief Operating Officer and Chief
Executive Officer of Zurich American and Chief Executive Officer
of Zurich North America. Prior to joining Zurich in March of
1992, he served as President of the Commercial Casualty division
of the Berkshire Hathaway Group and
72
served as Senior Vice President with the American Home Insurance
Company, a member of the American International Group.
Samuel G. Liss
has served as one of our directors
since 2005. Mr. Liss has been Executive Vice President at
The Travelers Companies since 2004. Before the merger of The St.
Paul and Travelers Companies, Mr. Liss served as Executive
Vice President at The St. Paul from February 2003 to April 2004.
From 1994 to 2001, Mr. Liss was a Managing Director at
Credit Suisse First Boston, or CSFB, initially focused on equity
research across a range of financial institution sectors and
subsequently serving in a Senior Investment Banking
relationship, advisory and execution role in CSFBs
Financial Institutions Group, including leadership of its asset
management industry practice. Mr. Liss was a senior equity
analyst at Salomon Brothers from 1980 to 1994.
Stephen W. Lilienthal
has served as one of our
directors since 2008. Mr. Lilienthal has been Chairman of
the Board of Directors and Chief Executive Officer of CNA
Financial Corporation, or CNA, and its insurance subsidiaries
since August 2002. Prior to that time, he was President and
Chief Executive Officer, Property and Casualty Operations of the
CNA insurance companies. He is a member of the Executive and
Finance Committees of CNA and has been a director of CNA since
August of 2001. Mr. Lilienthal is also a director of
American Institute for Chartered Property Casualty Underwriters,
After School Matters, Northwestern Memorial Foundation, World
Business Chicago, The Executives Club of Chicago and Boys
and Girls Clubs of Chicago.
Board
Composition
The number of directors will be fixed by our board of directors,
subject to the terms of our amended and restated certificate of
incorporation. From the date of this prospectus until the
earlier of (a) the
30-month
anniversary of the date of this prospectus or (b) the date
on which there are no shares of Class B common stock issued
and outstanding, our board of directors will consist of between
11 and 13 directors, and will be comprised as follows:
|
|
|
|
|
between eight to ten Class A directors; and
|
|
|
|
three Class B directors.
|
See Description of Capital Stock Anti-Takeover
Effects of Delaware Law Staggered Boards.
Director
Independence
Our board of directors currently consists of 13 directors,
12 of which are independent as defined under
applicable listing rules. Currently, the following individuals
serve on our board of directors as independent directors: J.
Hyatt Brown, Glen A. Dell, Henry J. Feinberg, Christopher M.
Foskett, Constantine P. Iordanou, John F. Lehman, Jr.,
Stephen W. Lilienthal, Samuel G. Liss, Andrew G. Mills, Arthur
J. Rothkopf, Barbara D. Stewart and David B. Wright.
Board
Committees
Our by-laws provide that the board of directors may designate
one or more committees. We currently have the following
committees: Executive Committee, Audit Committee, Compensation
Committee, Finance and Investment Committee, and Nominating and
Corporate Governance Committee.
The Executive Committee currently consists of Frank J. Coyne
(Chair), Glen A. Dell, Constantine P. Iordanou, John F.
Lehman, Jr. and Arthur J. Rothkopf. The Executive Committee
exercises all the power and authority of the board of directors
(except those powers and authorities that are reserved to the
full board of directors under Delaware law) between regularly
scheduled board of directors meetings. The Executive Committee
also makes recommendations to the full board of directors on
various matters. The Executive Committee meets as necessary upon
the call of the chairman of the board of directors.
The Audit Committee currently consists of Arthur J. Rothkopf
(Chair), Henry J. Feinberg, Christopher M. Foskett, Andrew G.
Mills and Barbara D. Stewart, all of whom are
independent as defined under
73
applicable listing rules. Each member of our Audit Committee is
financially literate, as such term is interpreted by our board
of directors. Ms. Barbara D. Stewart is an audit
committee financial expert as that term is defined under
the Securities and Exchange Commission rules. The Audit
Committee reviews and, as it deems appropriate, recommends to
the board of directors the internal accounting and financial
controls for the Company and the accounting principles and
auditing practices and procedures to be employed in preparation
and review of the financial statements of the Company. The Audit
Committee also provides assistance to our board of directors in
fulfilling its responsibilities with respect to our compliance
with legal and regulatory requirements. In addition, the Audit
Committee also makes recommendations to the board of directors
concerning the engagement of the independent accounting firm and
the scope of the audit to be undertaken by such auditors.
The Compensation Committee currently consists of John F.
Lehman, Jr. (Chair), Glen A. Dell, Constantine P. Iordanou
and David B. Wright, all of whom are independent as
defined under applicable listing rules. The Compensation
Committee reviews and, as it deems appropriate, recommends to
the board of directors policies, practices and procedures
relating to the compensation of the officers and other
managerial employees and the establishment and administration of
employee benefit plans. The Compensation Committee also
exercises all authority under the Companys employee equity
incentive plans and advises and consults with the officers of
the Company as may be requested regarding managerial personnel
policies.
The Finance and Investment Committee currently consists of Glen
A. Dell (Chair), Frank J. Coyne, Henry J. Feinberg, Christopher
M. Foskett and John F. Lehman, Jr. The Finance and
Investment Committee meets annually and at such other times as
necessary to establish, monitor and evaluate the Companys
investment policies, practices and advisors, and to advise
management and the board of directors on the financial aspects
of strategic and operational directions, including financial
plans, capital planning, financing alternatives, and acquisition
opportunities.
The Nominating and Corporate Governance Committee currently
consists of Constantine P. Iordanou (Chair), Frank J. Coyne,
Arthur J. Rothkopf and David B. Wright. Mr. Constantine P.
Iordanou, Arthur J. Rothkopf and David B. Wright are
independent as defined under applicable listing
rules. Following this offering, we expect that the Nominating
and Corporate Governance Committee will be comprised of
independent directors in accordance with applicable
requirements. The Nominating and Corporate Governance Committee
reviews and, as it deems appropriate, recommends to the board of
directors policies and procedures relating to director and board
of directors committee nominations and corporate governance
policies.
Code of
Business Conduct and Ethics
Our board of directors has established a code of business
conduct and ethics that applies to our employees, agents,
independent contractors, consultants, officers and directors.
Any waiver of the code of business conduct and ethics may be
made only by our board of directors and will be promptly
disclosed as required by law or stock exchange regulations. The
board of directors has not granted any waivers to the code of
business conduct and ethics.
Corporate
Governance Guidelines
Our board of directors has adopted corporate governance
guidelines that comply with the applicable listing requirements
and the regulations of the Securities and Exchange Commission.
Compensation
Committee Interlocks and Insider Participation
No member of the Compensation Committee is a current or former
officer of the Company or any of our subsidiaries. In addition,
there are no compensation committee interlocks with the board of
directors or compensation committee of any other company.
74
Directors
Compensation and Benefits
Annual Retainer.
Effective June 1, 2007,
each non-employee director receives a retainer fee of $50,000
per year for membership on the board of directors. Each
non-employee director who chairs a committee receives an
additional $5,000 retainer fee, with the exception of the
chairpersons of the Audit Committee and Compensation Committee,
each of whom receives an additional $12,500 annual retainer fee.
Each non-employee director may elect to receive his or her
annual retainer in the form of (i) cash, (ii) deferred
cash, (iii) shares of Class A common stock,
(iv) deferred shares of Class A common stock,
(v) options to purchase Class A common stock or
(vi) a combination of (i), (ii), (iii), (iv) and (v),
except that not more than 50% of the Annual Retainer may be paid
in cash.
Meeting Attendance Fees.
Each non-employee
director receives a $1,500 fee for each board of directors or
Committee meeting attended in person. Meeting attendance fees
are payable only in cash or deferred cash.
Stock Option Grants.
Effective as of the 2007
Annual Meeting of Stockholders, each non-employee director
receives an annual option grant having a Black-Scholes value of
$125,000. The initial awarding of such options is being phased
in over a period of three years, so that, from 2007 through
2009, each non-employee director receives (or received) the
initial grant in the year he or she is (or was) re-elected. Such
options, and any portion of the Annual Retainer Fees elected to
be taken as options, are exercisable for a period of
ten years from the date of grant (subject to earlier
termination if the individual ceases to be a director of the
Company), vest on the first anniversary of the date of grant,
and have an exercise price equal to the fair market value of the
Class A common stock on the date of grant. Prior to the
2007 Annual Meeting of Stockholders, each non-employee director
was granted an option to purchase 1,500 shares of
Class A common stock every three years upon his or her
re-election to the Board.
Employee-directors
receive no additional compensation for service on the board of
directors. Mr. Frank J. Coyne is the only
employee-director.
The table below shows compensation paid to or earned by the
directors during 2007. As noted above, directors may elect to
receive compensation in various forms other than cash. Also,
prior to 2007, directors received stock option grants every
three years upon their re-election to the board. We are required
to report equity awards based on accounting expense. The amounts
shown for each director are not uniform because accounting
expense will differ in part depending on how each director
elected to receive his or her compensation and the years in
which they were re-elected to the board.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned or
|
|
|
Stock Awards
|
|
|
Option Awards
|
|
|
Total
|
|
Name
|
|
Paid in Cash ($)
|
|
|
($)(1)
|
|
|
($)(1)
|
|
|
($)
|
|
|
Joseph A. Brandon(2)
|
|
|
7,500
|
|
|
|
25,080
|
|
|
|
52,271
|
|
|
|
84,851
|
|
J. Hyatt Brown(3)
|
|
|
32,500
|
|
|
|
25,080
|
|
|
|
97,725
|
|
|
|
155,305
|
|
Glen A. Dell(4)
|
|
|
10,500
|
|
|
|
|
|
|
|
152,725
|
|
|
|
163,225
|
|
Henry J. Feinberg(5)
|
|
|
10,500
|
|
|
|
|
|
|
|
147,725
|
|
|
|
158,225
|
|
Christopher M. Foskett(6)
|
|
|
31,000
|
|
|
|
12,540
|
|
|
|
|
|
|
|
43,540
|
|
Constantine Iordanou(7)
|
|
|
|
|
|
|
|
|
|
|
117,500
|
|
|
|
117,500
|
|
John F. Lehman, Jr.(8)
|
|
|
|
|
|
|
|
|
|
|
125,000
|
|
|
|
125,000
|
|
Samuel G. Liss(9)
|
|
|
32,000
|
|
|
|
|
|
|
|
149,996
|
|
|
|
181,996
|
|
Andrew G. Mills(10)
|
|
|
4,500
|
|
|
|
|
|
|
|
112,500
|
|
|
|
117,000
|
|
Arthur J. Rothkopf(11)
|
|
|
9,000
|
|
|
|
62,700
|
|
|
|
62,500
|
|
|
|
134,200
|
|
Barbara D. Stewart(12)
|
|
|
9,000
|
|
|
|
|
|
|
|
97,725
|
|
|
|
106,725
|
|
David B. Wright(13)
|
|
|
9,000
|
|
|
|
50,160
|
|
|
|
27,271
|
|
|
|
86,431
|
|
|
|
|
(1)
|
|
For a discussion of the assumptions used to calculate the
amounts shown in the option awards and stock awards columns, see
note 2(j) of the notes to our audited consolidated
financial statements included as part of this prospectus.
|
75
|
|
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(2)
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|
Mr. Brandon received options during 2007 with a fair value
of $25,000, and stock awards with a fair value of $25,080. As of
December 31, 2007, Mr. Brandon owned options covering
3,635 shares. The amount shown in the option column above
includes expense amounts recognized, under FAS 123R, in
2007 relating to option grants made in 2006.
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|
(3)
|
|
Mr. Brown received stock awards during 2007 with a fair
value of $25,080. As of December 31, 2007, Mr. Brown
owned options covering 3,000 shares. The amount shown in
the option column above includes expense amounts recognized,
under FAS 123R, in 2007 relating to option grants made in
2006.
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(4)
|
|
Mr. Dell received options during 2007 with a fair value of
$55,000. As of December 31, 2007, Mr. Dell owned
options covering 1,724 shares. The amount shown in the
option column above includes expense amounts recognized, under
FAS 123R, in 2007 relating to option grants made in 2006.
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(5)
|
|
Mr. Feinberg received options during 2007 with a fair value
of $50,000. As of December 31, 2007, Mr. Feinberg
owned options covering 3,739 shares. The amount shown in
the option column above includes expense amounts recognized,
under FAS 123R, in 2007 relating to option grants made in
2006.
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|
(6)
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|
Mr. Foskett received stock awards during 2007 with a fair
value of $12,540. As of December 31, 2007, Mr. Foskett
owned 47 stock awards and options covering 1,000 shares.
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|
(7)
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|
Mr. Iordanou received options during 2007 with a fair value
of $117,500. As of December 31, 2007, Mr. Iordanou
owned options covering 8,796 shares.
|
|
(8)
|
|
Mr. Lehman received options during 2007 with a fair value
of $125,000. As of December 31, 2007, Mr. Lehman owned
options covering 2,517 shares.
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|
(9)
|
|
Mr. Liss received options during 2007 with a fair value of
$25,000. As of December 31, 2007, Mr. Liss owned
options covering 1,870 shares. The amount shown in the
option column above includes expense amounts recognized, under
FAS 123R, in 2007 relating to option grants made in 2006.
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(10)
|
|
Mr. Mills received options during 2007 with a fair value of
$112,500. As of December 31, 2007, Mr. Mills owned
options covering 5,608 shares.
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|
(11)
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|
Mr. Rothkopf received options during 2007 with a fair value
of $62,500, and stock awards with a fair value of $62,700. As of
December 31, 2007, Mr. Rothkopf owned options covering
2,021 shares.
|
|
(12)
|
|
As of December 31, 2007, Ms. Stewart owned 1,142 stock
awards and options covering 1,500 shares. The amount shown
in the option column above includes expense amounts recognized,
under FAS 123R, in 2007 relating to option grants made in
2006.
|
|
(13)
|
|
Mr. Wright received stock awards during 2007 with a fair
value of $50,160. As of December 31, 2007, Mr. Wright
owned options covering 3,642 shares. The amount shown in
the option column above includes expense amounts recognized,
under FAS 123R, in 2007 relating to option grants made in
2006.
|
Where no information is given as to a particular type of award
with respect to any individual, such individual did not hold or
receive such an award during or as of the end of the last fiscal
year, as the case may be.
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
Our business requires a highly skilled work force. While the
capital intensity of our business is low, our human capital
requirements are great. As noted elsewhere in this prospectus,
our business depends on our senior leadership team, who possess
business and technical capabilities that would be difficult, and
costly, to replace. We have designed our compensation program to
address these needs.
This section discusses the principles underlying our policies
and decisions relating to the compensation of our principal
executive officer, our principal financial officer, and our
other three most highly compensated executive officers. This
information describes the manner and context in which
compensation is earned by and awarded to these Named Executive
Officers, or NEOs, and provides perspective on the tables and
narrative that follow.
76
Compensation
Program Objectives
We believe the compensation program for our NEOs must attract,
reward, motivate and retain the highly-qualified individuals we
need to plan and execute our business strategy. We believe the
program motivates managers by directly linking a portion of
compensation both to the Companys performance and the
individuals performance. To foster this direct link, we
have designed our program so that a significant percentage of a
NEOs compensation is variable rather than fixed. This
percentage increases with seniority, because we believe that the
decisions of more senior managers have a greater impact on our
performance.
Executives will earn variable compensation (cash awards and
stock options) only if warranted by Company and individual
performance. Variable compensation for our NEOs consists of an
annual cash payment pursuant to our Short Term Incentive, or
STI, program and a long-term equity incentive award pursuant to
our Long Term Incentive, or LTI, program. We believe the design
of our compensation program effectively encourages our senior
managers to act in a manner that benefits the Company by
creating long-term value for our stockholders.
Elements
of the Companys Compensation Program
We currently provide the following elements of compensation to
our NEOs:
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base salary;
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annual cash incentive awards;
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long-term equity incentive awards; and
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health, welfare and retirement plans.
|
Each compensation element fulfills one or more of our
compensation program objectives.
Base
Salary
We pay base salaries to attract, reward and retain managers, and
so that in recruiting and retaining senior executives we are not
disadvantaged by being seen as offering a lower level of fixed
compensation for a given position level. We review salaries
annually to maintain competitive market levels, which are based
on the experience and scope of responsibilities of each NEO. We
perform our own analysis of prevailing market levels of salary
for comparable positions, relying on our general knowledge of
the industry, anecdotal evidence gained in the hiring and
termination process and, when available, commercially prepared
market surveys. Also, as noted below, for 2007 we were assisted
in this analysis by our consultant, Frederic W. Cook. The base
salary of our Chief Executive Officer, or CEO, is determined by
the Compensation Committee. The base salary of each of our other
NEOs is determined by the CEO, subject to approval by the
Compensation Committee. Base salary as a percentage of total
compensation differs based on an executives position and
function. Generally, executives with the highest position and
level of responsibility, and thus the greatest ability to
influence our performance through their decision making, have
the smallest percentage of their total compensation fixed as
salary. We have historically placed greater emphasis on the
incentivizing potential of variable compensation; for this
reason we have generally maintained salaries at a level that we
believe is below the prevailing range for similar positions.
Annual
Cash Incentive Awards
At the conclusion of each year, the Compensation Committee
establishes performance goals for the coming year under our STI
program. The specified performance goals relate to growth in
revenue and EBITDA margin, and are derived from our strategic
and business growth plan. We selected revenue growth and EBITDA
margin growth as the criteria for STI because we believe our
businesss ability to generate recurring revenue and
positive cash flow is the key indicator of the successful
execution of our business strategy. For 2007, the Compensation
Committee established these growth targets at 10% and 28%
respectively, with each factor having equal weight. Minimum
thresholds were set at 6% and 25%, respectively, and maximum
levels at 15% and 35%, respectively. In addition to these
pre-determined revenue growth and
77
EBITDA margin goals, the Compensation Committee evaluates the
accomplishment during the year of other financial and
nonfinancial performance measures that we believe position the
Company to achieve long-term future growth. These include
enhancements to productivity, achievement of new sales,
accomplishment of strategic and operational initiatives and
completion of acquisitions and strategic relationships. The
Compensation Committee has discretion to increase or decrease
the size of the STI pool to account for specific considerations
applicable to a particular year.
Funding of the STI pool is determined by the Compensation
Committee, taking into account the recommendation of the CEO, at
the conclusion of the performance year based on the degree to
which goals are achieved during the year.
Within the STI pool, awards are made for each NEO based upon a
subjective review of each individuals performance for the
year. Targets for STI awards are expressed as a percentage of
base salary, which percentage differs based on an
executives position and function. There is discretion to
pay an individual above or below their target STI award based on
the assessment of that individuals performance. Such
discretion might be used, for example, to recognize
extraordinary performance achievement or to take into account
unforeseen events, such as systemic economic conditions that may
influence business results. See Analysis of 2007 Variable
Compensation for a discussion of how we determined 2007
STI. The STI award for our CEO is determined by the Compensation
Committee. The STI awards for each of our other NEOs are
determined by the CEO, subject to approval by the Compensation
Committee. Awards under the STI plan are in the form of cash
payments. Cash STI awards are paid in March, in respect of
performance for the prior year.
Long-Term
Equity Incentive Awards
Awards under the LTI plan are generally in the form of option
grants. The LTI plan also permits us to grant restricted stock
awards, however that has not been our practice because we
believe options provide a more effective incentive to increase
the value of the Company. Also, our Employee Stock Ownership
Plan, or ESOP, described below under Health,
Welfare and Retirement Plans, has enabled us to grant
interests in our stock to our executives, also providing a
directional, less highly leveraged incentive to increase share
value.
The number of shares underlying an option grant under the LTI
program is determined by a grant date value of the option award
using a Black-Scholes formula. The target award value for each
executive is expressed as a percentage of base salary, and is
subject to the achievement of Company and individual performance
goals, in the same way as for STI discussed above.
In general, option awards under the LTI plan are made in March,
and have an exercise price equal to the fair market value of our
Class A common stock on the date of grant, which is
determined pursuant to the most recently conducted appraisal
performed in connection with our ESOP.
Our practice has been to award Mr. Frank J. Coyne option
grants under the LTI plan at irregular intervals. Certain of
Mr. Coynes options have been granted at an exercise
price above the then-current fair market value of our
Class A common stock. Mr. Coynes last option
award was in 2005. We anticipate that after the completion of
this offering, Mr. Coyne will be considered for option
awards annually, with an exercise price at the then-current fair
market value of our shares, in the same manner as other NEOs.
Mr. Mark V. Anquillare was named Chief Financial Officer in
March 2007, and received an additional option award on
June 30, 2007 in connection with that appointment.
Analysis
of 2007 Variable Compensation
The Compensation Committee established the 2007 funding levels
for the STI and LTI award pools by assessing the actual revenue
growth and EBITDA margin growth for the year, and evaluating the
other financial and nonfinancial performance factors described
below that we believe position the Company to achieve
sustainable long-term growth. For 2007, the Companys
revenue growth was slightly (approximately 5%) below target
level, while EBITDA margin growth exceeded target objectives
(approximately 140%). In
78
evaluating these results, we also recognized the challenging
conditions in the mortgage market, and the softening conditions
in the property and casualty markets affecting our core
operations. We believe the Company achieved excellent results in
difficult conditions, and therefore established the STI pool
(total payouts to all employees eligible to participate) at 84%
of the maximum STI amount and established the LTI pool at 76% of
the maximum LTI amount. The LTI pool was funded at a lower level
because there are fewer eligible employees participating the LTI
pool and the CEO, as discussed below did not receive an LTI
award in 2008.
For the individual NEOs, other than Mr. Coyne, the
Compensation Committee considered the additional factors
described below in reaching their STI amounts. The factors noted
were not given any specific weights, but were rather the basis
on which the Compensation Committee exercised its judgment to
determine the STI awards.
Mr. Stephenson: the improvement in focus on our strategic
initiatives and leadership in our business development
initiatives.
Mr. Anquillare: the strong performance Mr. Anquillare
rendered in assuming the new role of CFO and increasing
efficiency in the performance of our financial reporting and
oversight functions.
Mr. Thompson: the achievement of improved corporate
governance and leadership in assuming responsibility for
management of our Internal Audit and Human Resource divisions.
In the case of Mr. Boehning, who retired shortly following
the end of the fiscal year, the Compensation Committee awarded
him an amount that reflected his service to the Company since
its inception.
Mr. Geraghtys employment terminated effective
March 8, 2007 and he received no STI award for 2007.
The 2007 STI award to Mr. Coyne was determined based upon
the Compensation Committees evaluation of Company
performance, and recognized the strong EBITDA margin growth
achieved by the Company, as well as the revenue performance
discussed above. Mr. Coyne did not receive an LTI award,
due to our prior practice of making LTI awards to the CEO at
irregular intervals.
The LTI awards to each of the other NEOs were based on the
Companys performance for the year, as well as the factors
noted above for each individual. Mr. Anquillare received an
additional option grant in June 2007, which specifically
recognized the increased scope of his responsibilities in
connection with his promotion to CFO. Mr. Geraghtys
employment terminated effective March 8, 2007 and he
received no LTI award in 2007.
Health,
Welfare and Retirement Plans
We offer health and welfare benefit programs including medical,
dental, life, accident and disability insurance. The Company
contributes a percentage of the cost of these benefits. These
benefits are available to substantially all employees, and the
percentage of the Companys contribution is the same for
all.
Our tax-qualified retirement plans include:
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|
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|
|
a combined 401(k) Savings Plan and ESOP,
|
|
|
|
a defined benefit pension plan with (i) a traditional final
pay formula applicable to employees who were 49 years old
with 15 years of service as of January 1, 2002, and
(ii) a cash balance formula applicable to other employees
hired prior to March 1, 2005, and
|
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|
|
a profit sharing plan (as a component of the 401(k) plan) which
is available to employees hired on or after March 1, 2005.
|
Our non-qualified retirement plans include a supplemental
pension and savings (401(k)) plan for highly compensated
employees. The combined 401(k) Savings Plan and ESOP and the
pension/profit sharing plans are broad-based plans available to
substantially all of our employees, including the NEOs. The
79
supplemental retirement plans are offered to our highly paid
employees, including our NEOs, to restore to them amounts to
which they would be entitled under our tax qualified plans but
which they are precluded from receiving under those plans by IRS
limits. The supplemental retirement plans are unsecured
obligations of the Company.
We established our ESOP at the time we converted from non-profit
to for-profit status, in order to foster an ownership culture in
the Company, and to strengthen the link between compensation and
value created for stockholders. This plan has enabled our
employees to hold an ownership interest in the Company as well
as providing a stock vehicle for Company matching contributions
to our 401(k) and profit sharing plans, which has allowed
employees to monitor directly, and profit from, the increasing
value of our stock since our conversion in 1997.
Use of
Comparative Compensation Data
To ensure that our compensation levels remain reasonable and
competitive, we have engaged Frederic W. Cook & Co.,
Inc., or Cook, to advise the Compensation Committee on executive
compensation. We have used comparative data available from
market surveys conducted by Cook as one component in our
decision making process relating to the base salary and STI and
LTI targets for our executive team. Cook most recently evaluated
our executive compensation levels in the fall of 2007.
Employment
Agreements
We do not currently have employment agreements with any of our
NEOs. Mr. Coyne and the Company were parties to an
employment agreement that expired on July 1, 2005. We
expect to enter into an employment agreement with Mr. Coyne
and change of control agreements with each of our other NEOs, to
become effective upon the consummation of this offering. We
believe that these agreements are desirable to retain the
services of these individuals in whom the Company has a
significant investment.
Impact
of prior equity awards on current compensation
In general, we do not take into account prior equity grants,
ESOP balances or amounts realized on the exercise or vesting of
prior option grants in determining the number of options to be
granted, because we believe we should pay an annualized market
value for an executives position, sized according to the
performance level of the individual in the position. However,
because our prior practice has been to grant equity awards to
the CEO on an irregular basis, these factors have been
considered in connection with Mr. Coynes
compensation. We anticipate that after the completion of this
offering, Mr. Coyne will be considered for option awards
annually, at the then-current fair market value of our shares,
in the same manner as other NEOs. The Committee also considers
prior equity grants (and related wealth accumulations) of
executives in assessing the recruitment/retention risk for
executives.
Stock
Ownership Requirements for Executives
Senior executives are subject to minimum stock ownership
requirements. The CEO is required to hold stock and
in-the-money
options with a value equal to 200% of his annual salary plus a
STI target. The other NEOs are required to hold stock and
in-the-money
options with a value equal to 100% of their annual salary plus
STI target. This requirement must be met no later than the third
anniversary of the executives first becoming an officer.
As of December 31, 2007, Messrs. Coyne, Stephenson,
Boehning and Anquillare each held common stock and
in-the-money
options in excess of the requirements. Mr. Thompson joined
the Company in 2006 and needs to satisfy the requirement in 2009.
80
Executive
Compensation and Benefits
The following table sets forth information concerning the
compensation paid to and earned by the Companys NEOs for
the year ended December 31, 2007.
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Change in Pension
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Value and
|
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Non-Equity
|
|
Non-qualified
|
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|
Option
|
|
Incentive Plan
|
|
Deferred
|
|
|
|
|
|
|
|
|
Awards ($)
|
|
Compensation ($)
|
|
Compensation
|
|
All Other
|
|
|
Name and Principal Position
|
|
Salary ($)
|
|
(1)
|
|
(2)
|
|
Earnings ($)
|
|
Compensation ($)
|
|
Total ($)
|
Frank J. Coyne
|
|
|
898,654
|
|
|
|
1,062,800
|
|
|
|
2,000,000
|
|
|
|
300,610
|
|
|
|
80,907
|
(3)
|
|
|
4,342,971
|
|
Chairman, President and
Chief Executive Officer
|
|
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|
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Mark V. Anquillare
|
|
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256,769
|
|
|
|
247,512
|
|
|
|
300,000
|
|
|
|
63,668
|
|
|
|
11,868
|
(4)
|
|
|
879,817
|
|
Senior Vice President and
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
Scott G. Stephenson
|
|
|
419,812
|
|
|
|
644,107
|
|
|
|
600,000
|
|
|
|
83,782
|
|
|
|
52,386
|
(5)
|
|
|
1,800,087
|
|
Executive Vice President and Chief Operating Officer
|
|
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|
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|
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Kenneth E. Thompson
|
|
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355,000
|
|
|
|
276,646
|
|
|
|
300,000
|
|
|
|
|
|
|
|
15,173
|
(6)
|
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946,819
|
|
Senior Vice President,
General Counsel and
Corporate Secretary
|
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|
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Richard Boehning(7)
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|
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302,308
|
|
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|
458,546
|
|
|
|
100,000
|
|
|
|
284,068
|
|
|
|
12,044
|
(8)
|
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1,156,966
|
|
Senior Vice President
|
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Kenneth G. Geraghty(9)
|
|
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78,058
|
|
|
|
241,342
|
|
|
|
|
|
|
|
5,485
|
|
|
|
119,738
|
(10)
|
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|
444,623
|
|
Former Chief Financial Officer
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|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
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|
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(1)
|
|
The amounts in this column reflect the expense incurred for
accounting purposes in accordance with FAS 123R for options
granted in 2007 and prior years under the LTI plan. For a
discussion of the assumptions used to calculate the amounts
shown in this column, see note 2(j) of the notes to our
audited consolidated financial statements included as part of
this prospectus.
|
|
(2)
|
|
The amounts in this column are cash incentive awards under the
STI plan in respect of performance for the year ended
December 31, 2007.
|
|
(3)
|
|
Amount includes $15,187 for life insurance premiums, a 401(k)
matching contribution of $10,125 and $55,595 for costs of
personal benefits, including club memberships ($44,439) and
automobile allowance.
|
|
(4)
|
|
Amount includes a 401(k) matching contribution of $11,625.
|
|
(5)
|
|
Amount includes a 401(k) matching contribution of $10,125 and
$41,291 for costs of personal benefits, including commutation
via commercial air carrier between the Companys
headquarters and the executives home, and temporary living
quarters near the Companys headquarters ($25,891). Costs
of commercial air travel were determined using average rates
incurred for such travel.
|
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(6)
|
|
Amount includes a 401(k) matching contribution of $10,125.
|
|
(7)
|
|
Mr. Boehning retired from the Company on January 31,
2008.
|
|
(8)
|
|
Amount includes a 401(k) matching contribution of $10,125.
|
|
(9)
|
|
Mr. Geraghty was Chief Financial Officer until the
termination of his employment effective March 8, 2007.
|
|
(10)
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|
Includes a severance payment of $99,310 and a 401(k) matching
contribution of $10,125.
|
81
Grants
of Plan-Based Awards
The following table sets forth information concerning grants of
plan-based awards made to the NEOs during the Companys
fiscal year ended 2007. We generally grant options in March,
based on performance for the prior year. However, due to SEC
regulations, the options shown in this table as granted in 2007
(other than Mr. Anquillares promotion grant) related
to 2006 performance, and we consider them to be part of the
NEOs 2006 compensation.
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|
|
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
Option
|
|
|
|
|
|
|
|
|
Grant Date
|
|
|
|
|
|
|
|
Future Payouts
|
|
|
Awards:
|
|
|
|
|
|
|
|
|
Fair Value of
|
|
|
|
|
|
|
|
Under Non-Equity
|
|
|
Number of
|
|
|
Exercise or
|
|
|
|
|
|
Stock and
|
|
|
|
|
|
|
|
Incentive Plan
|
|
|
Securities
|
|
|
Base Price
|
|
|
Stock
|
|
|
Option
|
|
|
|
|
|
|
|
Awards
|
|
|
Underlying
|
|
|
of Option
|
|
|
Value on
|
|
|
Awards
|
|
Name
|
|
Grant Date
|
|
Approval Date
|
|
Target ($)
|
|
|
Options
|
|
|
Awards ($/Sh)
|
|
|
Grant Date
|
|
|
($)
|
|
|
Frank J. Coyne
|
|
|
|
|
|
|
|
|
2,700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark V. Anquillare
|
|
March 1, 2007
|
|
|
February 22, 2007
|
|
|
|
486,000
|
|
|
|
2,100
|
|
|
|
755
|
|
|
|
755
|
|
|
|
437,703
|
|
|
|
June 30, 2007
|
|
|
June 18, 2007
|
|
|
|
|
|
|
|
300
|
|
|
|
836
|
|
|
|
836
|
|
|
|
73,443
|
|
Scott G. Stephenson
|
|
March 1, 2007
|
|
|
February 22, 2007
|
|
|
|
756,000
|
|
|
|
5,200
|
|
|
|
755
|
|
|
|
755
|
|
|
|
1,083,836
|
|
Kenneth E. Thompson
|
|
March 1, 2007
|
|
|
February 22, 2007
|
|
|
|
648,000
|
|
|
|
2,000
|
|
|
|
755
|
|
|
|
755
|
|
|
|
416,860
|
|
Richard Boehning(1)
|
|
March 1, 2007
|
|
|
February 22, 2007
|
|
|
|
549,000
|
|
|
|
2,200
|
|
|
|
755
|
|
|
|
755
|
|
|
|
458,546
|
|
Kenneth G. Geraghty(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Mr. Boehning retired from the Company on January 31,
2008.
|
|
(2)
|
|
Mr. Geraghty was Chief Financial Officer until the
termination of his employment effective March 8, 2007.
|
Outstanding
Equity Awards at Fiscal Year End
The following table sets forth information concerning
unexercised options, stock that has not vested and equity
incentive plan awards for the NEOs as of the end of the
Companys fiscal year ended 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards(1)
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Option
|
|
|
|
|
|
Date of
|
|
Options (#)
|
|
|
Options (#)
|
|
|
Exercise
|
|
|
Option
|
Name
|
|
Option Grant
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Price ($)
|
|
|
Expiration Date
|
|
Frank J. Coyne
|
|
July 1, 2000
|
|
|
10,000
|
|
|
|
|
|
|
|
100
|
|
|
July 1, 2010
|
|
|
July 1, 2000
|
|
|
50,000
|
|
|
|
|
|
|
|
110
|
|
|
July 1, 2010
|
|
|
December 18, 2002
|
|
|
75,000
|
|
|
|
|
|
|
|
155
|
|
|
December 18, 2012
|
|
|
June 29, 2005
|
|
|
30,000
|
|
|
|
20,000
|
|
|
|
420
|
|
|
June 29, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark V. Anquillare
|
|
March 1, 2001
|
|
|
1,250
|
|
|
|
|
|
|
|
92
|
|
|
March 1, 2011
|
|
|
March 1, 2002
|
|
|
1,750
|
|
|
|
|
|
|
|
108
|
|
|
March 1, 2012
|
|
|
March 1, 2003
|
|
|
5,000
|
|
|
|
|
|
|
|
144
|
|
|
March 1, 2013
|
|
|
March 1, 2004
|
|
|
3,750
|
|
|
|
1,250
|
|
|
|
231
|
|
|
March 1, 2014
|
|
|
March 1, 2005
|
|
|
1,250
|
|
|
|
1,250
|
|
|
|
437
|
|
|
March 1, 2015
|
|
|
March 1, 2006
|
|
|
525
|
|
|
|
1,575
|
|
|
|
565
|
|
|
March 1, 2016
|
|
|
March 1, 2007
|
|
|
|
|
|
|
2,100
|
|
|
|
755
|
|
|
March 1, 2017
|
|
|
June 1, 2007
|
|
|
|
|
|
|
300
|
|
|
|
836
|
|
|
June 1, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards(1)
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Option
|
|
|
|
|
|
Date of
|
|
Options (#)
|
|
|
Options (#)
|
|
|
Exercise
|
|
|
Option
|
Name
|
|
Option Grant
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Price ($)
|
|
|
Expiration Date
|
|
Scott G. Stephenson
|
|
March 1, 2003
|
|
|
18,750
|
|
|
|
|
|
|
|
144
|
|
|
March 1, 2013
|
|
|
March 1, 2004
|
|
|
9,750
|
|
|
|
3,250
|
|
|
|
231
|
|
|
March 1, 2014
|
|
|
March 1, 2005
|
|
|
4,000
|
|
|
|
4,000
|
|
|
|
437
|
|
|
March 1, 2015
|
|
|
March 1, 2006
|
|
|
1,350
|
|
|
|
4,050
|
|
|
|
565
|
|
|
March 1, 2016
|
|
|
March 1, 2007
|
|
|
|
|
|
|
5,200
|
|
|
|
755
|
|
|
March 1, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth E. Thompson
|
|
October 2, 2006
|
|
|
1,000
|
|
|
|
3,000
|
|
|
|
681
|
|
|
October 2, 2016
|
|
|
March 1, 2007
|
|
|
|
|
|
|
2,000
|
|
|
|
755
|
|
|
March 1, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard Boehning
|
|
March 1, 2003
|
|
|
1,250
|
|
|
|
|
|
|
|
144
|
|
|
March 1, 2013
|
|
|
March 1, 2004
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
231
|
|
|
March 1, 2014
|
|
|
March 1, 2005
|
|
|
625
|
|
|
|
1,250
|
|
|
|
437
|
|
|
March 1, 2015
|
|
|
March 1, 2006
|
|
|
575
|
|
|
|
1,725
|
|
|
|
565
|
|
|
March 1, 2016
|
|
|
March 1, 2007
|
|
|
|
|
|
|
2,200
|
|
|
|
755
|
|
|
March 1, 2017
|
Kenneth G. Geraghty
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The right to exercise stock options vests ratably on the first,
second, third and fourth anniversaries of the date of grant for
options granted to NEOs other than Mr. Coyne. A portion of
Mr. Coynes options with an exercise price above the
grant date fair market value vested immediately.
|
Option
Exercises and Stock Vested
The following table sets forth information concerning each
exercise of stock options and stock appreciation rights for the
NEOs during 2007. No stock, restricted stock or restricted stock
unit awards held by any NEO vested during 2007.
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
|
Number of
|
|
|
|
|
|
|
Shares Acquired
|
|
|
Value
|
|
|
|
on Exercise
|
|
|
Realized on
|
|
Name
|
|
(#)
|
|
|
Exercise ($)
|
|
|
Frank J. Coyne
|
|
|
|
|
|
|
|
|
Mark V. Anquillare
|
|
|
|
|
|
|
|
|
Scott G. Stephenson
|
|
|
|
|
|
|
|
|
Kenneth E. Thompson
|
|
|
|
|
|
|
|
|
Richard Boehning
|
|
|
|
|
|
|
|
|
Kenneth G. Geraghty
|
|
|
4,850
|
|
|
|
2,172,400
|
|
Pension
Plans
The following table sets forth information with respect to each
plan that provides for payments or other benefits at, following,
or in connection with retirement.
Employees hired prior to March 1, 2005 participate in the
Pension Plan for Insurance Organizations, or PPIO, a
multiple-employer pension plan in which we participate. The PPIO
provides a traditional final pay
83
formula pension benefit, payable as an annuity, to employees who
were 49 years old with 15 years of service as of
January 1, 2002. Effective January 1, 2002, this
formula benefit was frozen for all eligible employees. Effective
January 1, 2002, a cash balance pension benefit, also
payable as an annuity, was established under the PPIO. Employees
hired prior to January 1, 2002 receive their frozen
traditional benefit as well as their cash balance benefit.
Employees hired from January 1, 2002 to March 1, 2005
receive only the cash balance benefit. The Supplemental Cash
Balance Plan and Supplemental Executive Retirement Plan (the
Supplemental Plan) provide a benefit to which the
participant would be entitled under the PPIO but which is
subject to caps imposed by IRS regulations. Employees hired on
or after March 1, 2005 are not eligible to participate in
the PPIO or the Supplemental Plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Years
|
|
|
Present Value of
|
|
|
Payments During
|
|
|
|
|
|
Credited Service
|
|
|
Accumulated Benefit
|
|
|
Last Fiscal Year
|
|
Name
|
|
Plan Name
|
|
(#)
|
|
|
($)
|
|
|
($)
|
|
|
Frank J. Coyne
|
|
PPIO
|
|
|
9
|
|
|
|
94,469
|
|
|
|
|
|
|
|
Supplemental Plan
|
|
|
9
|
|
|
|
1,433,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark V. Anquillare
|
|
PPIO
|
|
|
16
|
|
|
|
168,385
|
|
|
|
|
|
|
|
Supplemental Plan
|
|
|
16
|
|
|
|
99,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott G. Stephenson
|
|
PPIO
|
|
|
7
|
|
|
|
90,848
|
|
|
|
|
|
|
|
Supplemental Plan
|
|
|
7
|
|
|
|
249,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth E. Thompson
|
|
|
|
|
NA
|
|
|
|
NA
|
|
|
|
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard Boehning
|
|
PPIO
|
|
|
10
|
|
|
|
867,347
|
|
|
|
|
|
|
|
Supplemental Plan
|
|
|
10
|
|
|
|
1,163,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth G. Geraghty
|
|
PPIO
|
|
|
7
|
|
|
|
41,737
|
|
|
|
65,570
|
|
|
|
Supplemental Plan
|
|
|
7
|
|
|
|
64,364
|
|
|
|
|
|
Nonqualified
Deferred Compensation Table
The following table sets forth information with respect to each
defined contribution or other plan that provides for the
deferral of compensation on a basis that is not tax-qualified.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
Executive
|
|
|
Registrant
|
|
|
Aggregate
|
|
|
Aggregate
|
|
|
Balance
|
|
|
|
Contributions
|
|
|
Contributions
|
|
|
Earnings
|
|
|
Withdrawals/
|
|
|
at end of
|
|
|
|
in Last FY
|
|
|
in Last FY
|
|
|
in Last FY
|
|
|
Distributions
|
|
|
Last FY
|
|
Name
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
Frank J. Coyne
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark V. Anquillare
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott G. Stephenson
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth E. Thompson
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard Boehning
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth G. Geraghty
|
|
|
|
|
|
|
|
|
|
|
54,242
|
|
|
|
|
|
|
|
1,215,357
|
|
2007
Potential Payments upon Termination or Change in
Control
There are no agreements or arrangements in place applicable to
the NEOs relating to payments upon termination or change of
control, other than severance payments upon termination (other
than for cause) available to all salaried employees.
We expect that, prior to completing this offering, we will enter
into an employment agreement with Frank J. Coyne that will
incorporate provisions for payments to be made upon termination
of his employment. Payments will be due in the event
Mr. Coynes employment is involuntarily terminated by
the Company without cause, or is voluntarily terminated by
Mr. Coyne for good reason, which will be
defined in the agreement.
84
We expect the agreement to provide that, upon a qualifying
termination event, Mr. Coyne will be entitled to:
|
|
|
|
(i)
|
a pro rata STI award;
|
|
|
|
|
(ii)
|
a severance payment equal to his base salary plus target bonus
amount multiplied by the lesser of (a) the number of years
remaining in the term of his employment contract or (b) two;
|
|
|
|
|
(iii)
|
continuation of health benefits (at his expense) for
18 months; and
|
|
|
|
|
(iv)
|
immediate vesting of any remaining unvested options.
|
The amount of the pro rata bonus will be at target level if the
termination of employment occurs following a change of control,
and will otherwise be determined by the Compensation Committee
at the end of the year based on Company performance. The
severance and pro-rata bonus amounts will be payable in cash, in
a lump sum. Receipt of these benefits is conditioned upon
Mr. Coyne executing a general release of claims against the
Company, and complying with confidentiality, non-compete and
nonsolicitation agreements for a period of 24 months. If
this agreement had been in place at December 31, 2007, in
the event of a qualifying termination Mr. Coyne would be
entitled to cash payments totaling $4,500,000.
In addition, we expect that, prior to completion of this
Offering, the Company will enter into Severance Agreements with
the other NEOs currently employed by the Company. These
agreements will incorporate provisions for payments to be made
to the NEOs upon termination of their employment. Payments will
be due in the event the executives employment is
involuntarily terminated by the Company without cause, or is
voluntarily terminated by the executive for good
reason, which will be defined in the agreements, within a
two-year period following a change of control.
We expect these agreements to provide that, upon a qualifying
termination event, a NEO (other than Mr. Coyne) will be
entitled to:
|
|
|
|
(i)
|
a pro rata STI award;
|
|
|
|
|
(ii)
|
a severance payment equal to the executives base salary
plus target bonus amount times two;
|
|
|
|
|
(iii)
|
continuation of health benefits (at the executives expense) for
18 months; and
|
|
|
|
|
(iv)
|
immediate vesting of any remaining unvested options.
|
The severance and pro rata bonus amounts will be payable in
cash, in a lump sum. Receipt of these benefits is conditioned
upon the executive executing a general release of claims against
the Company, and complying with confidentiality, non-compete and
nonsolicitation agreements for a period of 24 months. If
these agreements had been in place at December 31, 2007, in
the event of a qualifying termination Mr. Stephenson would
be entitled to cash payments totaling $1,470,000,
Mr. Anquillare would be entitled to cash payments totaling
$945,000, and Mr. Thompson would be entitled to cash
payments totaling $1,260,000.
Mr. Geraghty received $99,310 severance in connection with the
termination if his employment on March 8, 2007. The
unvested portion of LTI awards previously granted to
Mr. Geraghty lapsed upon termination of his employment.
Verisk
Analytics, Inc. 2008 Equity Incentive Plan
We expect to adopt the Verisk Analytics, Inc. 2008 Equity
Incentive Plan, or the Incentive Plan, prior to the consummation
of this offering. The Incentive Plan will replace the Insurance
Services Office, Inc. 1996 Incentive Plan, or the 1996 Plan,
pursuant to which LTI awards are currently granted. The purposes
of the Incentive Plan will be (i) to advance the interests
of the Company by attracting and retaining high caliber
employees and other key individuals, (ii) to continue to
align the interests of recipients of LTI awards with the
interest of the Companys stockholders by increasing the
proprietary interest of such recipients in our growth
85
and success as measured by the value of our stock and
(iii) to motivate award recipients to act in the long-term
best interests of our stockholders.
Shares Available.
shares
of our Class A common stock may be subject to awards under
the Incentive Plan, or the Plan Share Limit, subject to
adjustment in the event of a stock split, reverse stock split,
stock dividend, recapitalization, reorganization, merger,
consolidation, combination, exchange of shares,
split-up,
extraordinary dividend or distribution, spin-off, warrants or
rights offering to purchase common stock at a price
substantially below fair market value, or other similar event.
If, with respect to any award such award is cancelled,
forfeited, or terminates or expires unexercised, or if shares
are tendered or withheld from an award to pay the option price
or satisfy a tax withholding obligation, such shares may again
be issued under the Incentive Plan.
Eligibility.
All employees eligible for
LTI awards under the 1996 Plan will be eligible for awards under
the Incentive Plan.
Administration.
The administration of
the Incentive Plan will be overseen by the Compensation
Committee. The Compensation Committee will have the authority to
interpret the Incentive Plan and make all determinations
necessary or desirable for the administration of the Incentive
Plan. The Compensation Committee will have discretion to select
participants and determine the form, amount and timing of each
award to such persons, the exercise price or base price
associated with the award, the time and conditions of exercise
or settlement of the award and all other terms and conditions of
an award.
Forms of Awards.
Awards under the
Incentive Plan may include one or more of the following types:
(i) stock options (both nonqualified and incentive stock
options), (ii) stock appreciation rights, or SARs,
(iii) restricted stock, (iv) restricted stock units,
(v) performance grants (vi) other share based award
and (vii) cash. Such awards may be for partial-year, annual
or multi-year periods.
Options are rights to purchase a specified number of shares of
our Class A common stock at a price fixed by our
Compensation Committee, but not less than fair market value of
our Class A common stock on the date of grant. Options
generally expire no later than 10 years after the date of
grant. Options will become exercisable at such time and in such
installments as our Compensation Committee will determine, and
the Compensation Committee will determine the period of time, if
any, after termination of employment, death, or disability
during which options may be exercised.
An SAR entitles the holder to receive, upon exercise, an amount
equal to any positive difference between the fair market value
of one share of our Class A common stock on the date the
SAR is exercised and the exercise price, multiplied by the
number of shares of common stock with respect to which the SAR
is exercised. Our Compensation Committee will have the authority
to determine whether the amount to be paid upon exercise of an
SAR will be paid in cash, Class A common stock (including
restricted stock) or a combination of cash and Class A
common stock.
Restricted stock consists of shares of our Class A common
stock subject to a restriction on transfer during a period of
time or until performance measures are satisfied, as established
by our Compensation Committee. Unless otherwise set forth in the
agreement relating to a restricted stock award, the holder will
have all rights as a stockholder, including voting rights, the
right to receive dividends and the right to participate in any
capital adjustment applicable to all holders of common stock.
However, our Compensation Committee may determine that
distributions with respect to shares of common stock will be
deposited with the Company and will be subject to the same
restrictions as the shares of common stock with respect to which
such distribution was made.
A restricted stock unit is a right to receive a specified number
of shares of our Class A common stock (or the fair market
value thereof in cash, or any combination of our common stock
and cash, as determined by our Compensation Committee), subject
to the expiration of a specified restriction period
and/or
the
achievement of any performance measures selected by the
Compensation Committee, consistent with the terms of the
Incentive Plan. The restricted stock unit award agreement will
specify whether the award recipient is entitled to receive
dividend equivalents with respect to the number of shares of our
Class A common stock subject to the award. Prior to the
settlement of a restricted stock unit award in our Class A
86
common stock, the award recipient will have no rights as a
stockholder of our Company with respect to our Class A
common stock subject to the award.
Performance grants are awards whose final value or amount, if
any, is determined by the degree to which specified performance
measures have been achieved during a performance period set by
our Compensation Committee. Performance periods can be
partial-year, annual or multi-year periods, as determined by our
Compensation Committee. Performance measures that may be used
include (without limitation) one or more of the following: the
attainment by a share of Class A common stock of a
specified value within or for a specified period of time,
earnings per share, earnings before interest expense and taxes,
return to stockholders (including dividends), return on equity,
earnings, revenues, cash flow or cost reduction goals, operating
profit, pretax return on total capital, economic value added or
any combination of the foregoing. Such criteria and objectives
may relate to results obtained by the individual, the Company, a
subsidiary, or an affiliate, or any business unit or division
thereof, or may relate to results obtained relative to a
specific industry or a specific index. Payment may be made in
the form of cash, Class A common stock, restricted stock,
restricted stock units or a combination thereof, as specified by
our Compensation Committee.
Annual incentive awards are generally cash awards based on the
degree to which certain of any or all of a combination of
individual, team, department, division, subsidiary, group or
corporate performance objectives are met or not met. Our
Compensation Committee may establish the terms and provisions,
including performance objectives, for any annual incentive award.
An award agreement may contain additional terms and
restrictions, including vesting conditions, not inconsistent
with the terms of the Incentive Plan, as the Compensation
Committee may determine.
We intend to file with the SEC a registration statement on
Form S-8
covering the shares of our Class A common stock issuable
under the Incentive Plan.
87
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Indebtedness
of Directors and Management
As of the date of this offering, we do not have any loans
outstanding with any director or executive officer. Prior to
this offering, we loaned money to certain of our directors and
employees, including certain executive officers, to enable them
to exercise their options to purchase our Class A common
stock. These loans were made pursuant to promissory notes and
stock pledge agreements, whereby the director or employee
pledged shares issued upon the exercise of the options in order
to secure repayment of the loan amount. In addition to the
shares pledged as collateral, the Company would have full
recourse to the personal assets of the borrower in the event of
default.
The loans were made in an amount equal to the purchase price of
the Class A common stock and, in some cases, the amount of
income tax payable upon exercise of the option. The loans had
terms ranging from three to nine years and interest rates based
on the Internal Revenue Service applicable federal rates.
Payments of the principal and interest were deferred until the
end of the loan terms.
The following table sets forth information concerning the
indebtedness owed by our directors and executive officers over
the previous three years. The amounts noted at each date below
represent the largest aggregate amount of indebtedness
outstanding at any time during that period, except that the
amounts for August 12, 2008 represent the amount
outstanding on that date.
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Year Ended
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Year Ended
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Year Ended
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As of
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December 31, 2005
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December 31, 2006
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December 31, 2007
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September 30, 2008
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(In thousands)
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Frank J. Coyne
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$
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$
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6,449
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$
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$
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Scott G. Stephenson
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5,003
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5,160
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5,323
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Mark V. Anquillare
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487
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503
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519
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Carole J. Banfield
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3,466
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4,193
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4,930
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Vincent Cialdella
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528
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766
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1,428
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Kevin B. Thompson
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313
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Glen A. Dell
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1,930
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2,496
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3,107
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Henry J. Feinberg
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1,665
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1,727
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1,791
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John F. Lehman
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1,930
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1,991
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2,054
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Arthur J. Rothkopf
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1,801
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1,862
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1,921
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Barbara D. Stewart
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438
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457
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David B. Wright
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467
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489
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511
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Kenneth G. Geraghty(1)
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7,206
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8,716
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10,588
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(1)
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Mr. Geraghty was Chief Financial Officer of the Company
until termination of his employment effective March 8, 2007.
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Since January 1, 2005, certain of our loans outstanding
with our directors and executive officers have been repaid. On
January 20, 2005, January 2, 2007 and April 2,
2007, Frank J. Coyne repaid loans in the amounts of
$7.7 million, $3.8 million and $2.5 million, plus
interest of $0.4 million $0.2 million and
0.1 million, respectively. On April 4, 2008, Henry J.
Feinberg repaid a loan in the amount of $1.5 million, plus
interest of $0.3 million. On April 15, 2005 and
April 26, 2006, Kevin B. Thompson repaid loans in the
amounts of $0.4 million and $0.3 million, plus
interest of $33 thousand and $13 thousand, respectively. On
January 2, 2008, Kenneth G. Geraghty repaid loans in the
amounts of $9.6 million, plus interest of $1.0 million.
88
Share
Repurchases
Pursuant to the terms of the 1996 Plan, holders of our
Class A common stock, including directors and executive
officers, had a right to require us to repurchase their shares
at the then-current value on the date of repurchase. This right
terminates upon completion of this offering. Since
January 1, 2005, we have repurchased 270,955 shares of
Class A common stock from our ESOP for an aggregate amount
of $169 million. As specified in the 1996 Plan, the price
per share paid for such repurchases, which ranged from $417 to
$867 per share, was equal to the value of our Class A
common stock as most recently established prior to the date of
each repurchase pursuant to our ESOP. Since January 1,
2005, we have repurchased Class A common stock from our
directors, executive officers and holders of greater than five
percent of our Class A common stock for the following
aggregate amounts:
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Year Ended
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Year Ended
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Year Ended
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Six Months Ended
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December 31, 2005
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December 31, 2006
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December 31, 2007
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June 30, 2008
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(In thousands)
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Frank J. Coyne
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$
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70,262
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$
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26,931
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$
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16,436
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$
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Carole J. Banfield
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3,838
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2,511
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8,060
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5,447
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Vincent Cialdella
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55
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838
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|
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413
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15
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Kevin B. Thompson
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546
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1,971
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2,525
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Glen A. Dell
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1,374
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594
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612
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Henry J. Feinberg
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13,417
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Kenneth G. Geraghty(1)
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417
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916
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62,993
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Fred R. Marcon(2)
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1,086
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10,438
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6,019
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83,256
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(1)
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Mr. Geraghty was our Chief Financial Officer until
termination of his employment effective March 8, 2007.
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(2)
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Mr. Marcon was our Chairman and Chief Executive Officer and
was the beneficial owner of greater that 5% of our Class A
common stock
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We have also, from time to time, repurchased shares of our
Class B common stock. Since January 1, 2005, we have
not repurchased any Class B common stock from any
stockholder that owns greater than five percent of our
Class B common stock.
Customer
Relationships
The stockholders who own greater than five percent of our
Class B common stock purchase solutions from both our Risk
Assessment and Decision Analytics segments. They purchase our
solutions in the ordinary course of business pursuant to
agreements on terms substantially similar and not more favorable
to those in our agreements with other customers purchasing the
same solutions. The agreements provide them with a non-exclusive
non-transferable license to use our solutions and are in effect
until the customer chooses to discontinue the use our solutions.
Our customers provide us with data in connection with some of
the solutions they purchase from us. Stockholders who own
greater than five percent of our Class B common stock
provide us with data in connection with those solutions on terms
substantially similar and not more favorable to those under
which our other customers supply us similar data.
We received fees from the Hartford Financial Services Group,
Inc. of $15.1 million, $16.0 million and
$16.4 million for the years ended December 31, 2005,
2006 and 2007, respectively, and $6.9 million for the six
months ended June 30, 2008. We received fees from The
Travelers Companies, Inc. of $27.3 million,
$29.3 million and $31.0 million for the years ended
December 31, 2005, 2006 and 2007, respectively, and
$15.4 million for the six months ended June 30, 2008.
Samuel G. Liss, one of our Class B directors, is Executive
Vice President of Strategic Development and Executive Vice
President of Financial, Professional and International Insurance
at The Travelers Companies. We received fees from CNA Financial
Corporation of $10.7 million, $9.7 million and
$9.3 million for the years ended December 31, 2005,
2006 and 2007, respectively, and $5.2 million for the six
months ended June 30, 2008. Stephen W. Lilienthal, one of
our
89
Class B directors, is Chairman of the Board and Chief
Executive Officer of CNA Financial Corporation. We received fees
from American Financial Group, Inc. of $3.9 million,
$4.3 million and $4.5 million for the years ended
December 31, 2005, 2006 and 2007, respectively, and
$2.8 million for the six months ended June 30, 2008.
We received fees from American International Group, Inc. of
$16.9 million, $18.9 million and $16.7 million
for the years ended December 31, 2005, 2006 and 2007,
respectively, and $9.1 million for the six months ended
June 30, 2008. We received fees from ACE Group Holdings,
Inc. of $5.4 million, $5.6 million and
$6.4 million for the years ended December 31, 2005,
2006 and 2007, respectively, and $3.7 million for the six
months ended June 30, 2008.
We also purchase insurance coverage in the ordinary course of
business from certain of our stockholders who own greater than
five percent of our Class B common stock. We paid insurance
coverage premiums to CNA Financial Corporation of
$0.3 million and $0.3 million for the years ended
December 31, 2006 and 2007, respectively, and
$0.1 million for the six months ended June 30, 2008.
We paid insurance coverage premiums to American International
Group, Inc. of $1.5 million and $0.5 million for the
years ended December 31, 2005 and 2007, respectively, and
$0.3 million for the six months ended June 30, 2008.
We paid insurance coverage premiums to ACE Group Holdings, Inc.
of $0.3 million for the year ended December 31, 2005.
Letter
Agreements
We have entered into letter agreements with each of our
directors and executive officers whereby they have agreed that
50% of their Class A common stock (minus any shares sold in
this offering) not previously sold in a registered public
offering may not be sold until 18 months after the closing
of this offering and the remaining percentage of their shares
not previously sold in a registered public offering may not be
sold until 30 months after the closing of this offering. In
addition, our directors and executive officers have agreed that
during the time periods described above, they will not execute
any hedging agreement or swap or any other arrangement that
transfers or disposes of, directly or indirectly, any of their
shares or any securities convertible into or exercisable or
exchangeable for such stock or any of the economic consequences
of ownership of their shares, whether settled in cash or stock.
Any of our directors or executive officers having reached the
age of 70 will no longer be restricted from selling their shares
pursuant to such letter agreements.
Family
Relationships
We employ Michael Coyne as President of our Urix subsidiary.
From March 27, 2006 to March 9, 2008 we employed
Mr. Coyne as chief operating officer of DXCG, Inc., a
predecessor to Urix. Mr. Coyne received salary and bonus of
$137,923, $172,877 and $226,615 in the aggregate for each of the
years ended December 31, 2005, 2006 and 2007, respectively,
and received options to purchase 760 shares of our
Class A common stock in 2007. Mr. Coyne is the son of
Frank J. Coyne, our Chairman of the Board of Directors,
President and Chief Executive Officer. We believe that the
compensation paid to Mr. Coyne was comparable with
compensation paid to other employees with similar levels of
responsibility and years of service.
We employ Christine Pia as Associate Counsel in our Law
Department. Ms. Pia received salary of $55,288 and $146,535
for the five months ended December 31, 2006 and the year
ended December 2007, respectively. Ms. Pia is the daughter
of Frank J. Coyne, our Chairman of the Board of Directors,
President and Chief Executive Officer. We believe that the
compensation paid to Ms. Pia was comparable with
compensation paid to other employees with similar levels of
responsibility and years of service.
ESOP
We established an ESOP funded with intercompany debt that
includes 401(k), ESOP and profit sharing components to provide
employees with equity participation. The ESOP owns greater than
five percent of our Class A common stock. We make quarterly
cash contributions to the plan equal to the debt service
requirements. As the debt is repaid, shares are released to the
ESOP to fund 401(k) matching and profit sharing
contributions and the remainder is allocated annually to active
employees in proportion to their eligible compensation in
relation to total participant eligible compensation. The amount
of our ESOP costs
90
recognized for the years ended December 31, 2005, 2006 and
2007 were $13.6 million, $18.5 million and
$5.2 million, respectively, and for the six months ended
June 30, 2008 was $11.6 million.
Voting rights with respect to shares of our Class A common
stock owned by the ESOP are exercised by the trustee of the
ESOP. Prior to the completion of this offering, in the case of a
corporate merger or consolidation, recapitalization,
reclassification, liquidation, dissolution, or sale of
substantially all assets, the trustee was required to vote
shares allocated to an ESOP participants account as
directed by the ESOP participant. For shares of stock not
allocated to a participants account, and for all other
corporate matters, the shares were voted in accordance with the
discretion of the trustee. Upon completion of this offering, the
trustee will vote shares allocated to an ESOP participants
account as directed by the ESOP participant for all matters
submitted to a vote of our Class A stockholders. Shares of
stock not allocated to a participants account will
continue to be voted in accordance with the discretion of the
trustee.
Statement
of Policy Regarding Transactions with Related Persons
Prior to the completion of this offering, our board of directors
will adopt a written statement of policy regarding transactions
with related persons. Our related person policy requires that a
related person (as defined as in paragraph
(a) of Item 404 of
Regulation S-K)
must promptly disclose to the corporate secretary any
related person transaction (defined as any
transaction that is reportable by us under Item 404(a) of
Regulation S-K
in which we were or are to be a participant and the amount
involved exceeds $120,000 and in which any related person had or
will have a direct or indirect material interest) and all
material facts with respect thereto. The corporate secretary
will then promptly communicate that information to the board of
directors or the designated board committee. No related person
transaction will be consummated without the approval or
ratification of the board of directors or any committee of the
board of directors consisting exclusively of disinterested
directors. The board of directors has initially designated the
Nominating and Corporate Governance Committee to approve any
related person transaction. It is our policy that directors
interested in a related person transaction will recuse
themselves from any vote of a related person transaction in
which they have an interest.
91
PRINCIPAL
AND SELLING STOCKHOLDERS
The following table sets forth information regarding beneficial
ownership of our Class A common stock and Class B
common stock as
of ,
2008, by:
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each person whom we know to own beneficially more than 5% of our
common stock;
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each of the directors and named executive officers individually;
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all directors and executive officers as a group; and
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each of the selling stockholders, which consist of the entities
and individuals shown as having shares listed in the column
Number of Shares Being Offered.
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In accordance with the rules of the Securities and Exchange
Commission, beneficial ownership includes voting or investment
power with respect to securities and includes the shares
issuable pursuant to stock options that are exercisable within
60 days
of ,
2008. Shares issuable pursuant to stock options are deemed
outstanding for computing the percentage of the person holding
such options but are not outstanding for computing the
percentage of any other person. The percentage of beneficial
ownership for the following table is based
on shares
of Class A common stock and shares of Class B common
stock outstanding as
of ,
2008. Unless otherwise indicated, the address for each listed
stockholder is:
c/o Verisk
Analytics, Inc., 545 Washington Boulevard, Jersey City, New
Jersey,
07310-1686.
To our knowledge, except as indicated in the footnotes to this
table and pursuant to applicable community property laws, the
persons named in the table have sole voting and investment power
with respect to all shares of common stock.
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Shares Beneficially
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Owned After the Offering(1)
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Class of our
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Shares Beneficially Owned Before
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Number
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Common Stock
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Name and Address of
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Common
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the Offering
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of Shares
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Beneficially
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Beneficial Owner
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Stock
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Number
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Percent
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Being Offered
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Owned
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Percent
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Principal Stockholders:
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Employee Stock Ownership Plan
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The Hartford Financial Services Group, Inc.
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The Travelers Companies, Inc.
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CNA Financial Corporation
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American Financial Group, Inc.
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American International Group, Inc.
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ACE Group Holdings, Inc.
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Directors and Executive Officers:
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Frank J. Coyne
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Scott G. Stephenson
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Mark V. Anquillare
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Kenneth E. Thompson
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Carole J. Banfield
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Vincent Cialdella
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Kevin B. Thompson
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J. Hyatt Brown
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Glen A. Dell
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Henry J. Feinberg
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Christopher M. Foskett
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Shares Beneficially
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Owned After the Offering(1)
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Class of our
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Shares Beneficially Owned Before
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Number
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Common Stock
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Name and Address of
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Common
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the Offering
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of Shares
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Beneficially
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Beneficial Owner
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Stock
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Number
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Percent
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Being Offered
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Owned
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Percent
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Constantine P. Iordanou
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John F. Lehman, Jr.
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Stephen W. Lilienthal
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Samuel G. Liss
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Andrew G. Mills
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Arthur J. Rothkopf
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Barbara D. Stewart
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David B. Wright
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All 19 directors and executive officers as a group
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(1)
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Assumes no exercise of the underwriters over-allotment
option. See Underwriting.
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93
DESCRIPTION
OF CAPITAL STOCK
Following this offering, our authorized capital stock will
consist of 1,200,000,000 shares of Class A common
stock, par value $0.001 per share, 800,000,000 shares of
Class B common stock, par value $0.001 per share,
sub-divided into the following two series of Class B common
stock: (1) 400,000,000 shares of Class B
(Series 1) common stock and
(2) 400,000,000 shares of Class B
(Series 2) common stock, and 80,000,000 shares of
preferred stock, par value $0.001 per share.
The following descriptions are summaries of the material terms
of our Amended and Restated Certificate of Incorporation and
Amended and Restated Bylaws, and the descriptions are qualified
by reference to those documents. Please refer to the more
detailed provisions of the Amended and Restated Certificate of
Incorporation and Amended and Restated Bylaws, copies of which
are filed with the Securities and Exchange Commission as
exhibits to our registration statement and applicable law.
Common
Stock
Voting
Rights
Holders of our common stock have the sole right and power to
vote on all matters on which a vote of stockholders is to be
taken, except as provided by statute or resolution of our board
of directors in connection with the issuance of preferred stock
in accordance with our Amended and Restated Certificate of
Incorporation. The holders of Class A common stock and
Class B common stock generally have identical rights,
except that only holders of Class A common stock are
entitled to vote on the election of Class A directors and
only holders of Class B common stock are entitled to vote
on the election of Class B directors.
From the consummation of this offering of our Class A
common stock until the earlier of (a) the
30-month
anniversary of the date of this prospectus or (b) the date
on which there are no shares of Class B common stock issued
and outstanding, the amendment of certain of the provisions in
our amended and restated certificate of incorporation will
require the affirmative vote of at least two-thirds of the votes
cast thereon by the outstanding shares of each of the
Class A common stock and the Class B common stock,
voting separately as a class. These provisions include certain
of the limitations described below under
Dividend Rights,
Liquidation Rights,
Transfer Restrictions,
Conversion, Beneficial
Ownership Limitations and Anti-Takeover Effects of
Delaware Law Staggered Boards. From and after
the earlier of the events described above, the amendment of the
provisions described below under Beneficial
Ownership Limitations in our amended and restated
certificate of incorporation will require the affirmative vote
of at least two-thirds of the voting power of the outstanding
shares of common stock.
Dividend
Rights
Our Class A common stock and Class B common stock will
share equally (on a per share basis) in any dividend declared by
our board of directors, subject to any preferential or other
rights of any outstanding preferred stock and to the distinction
that any stock dividends will be paid in shares of Class A
common stock to the holders of our Class A common stock and
in shares of Class B common stock to the holders of our
Class B common stock.
Liquidation
Rights
Upon liquidation, dissolution or winding up, our Class A
common stock and Class B common stock will be entitled to
receive ratably the assets available for distribution to the
stockholders after payment of liabilities and payment of
preferential and other amounts, if any, payable on any
outstanding preferred stock.
Transfer
Restrictions
Shares of our Class B (Series 1) common stock are
not transferable until 18 months after the date of this
prospectus. Shares of our Class B
(Series 2) common stock are not transferable until
30 months after the
94
date of this prospectus. Upon the consummation of this offering,
the above described limitations on transfer are, however,
subject to the following exceptions:
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any transfer to us by any person or entity;
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any transfer of any shares of Class B common stock of
either series to any other holder of Class B common stock
or its affiliate;
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any transfer of any shares of Class B common stock of any
applicable series to an affiliate of such holder; and
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any transfer by a holder of Class B common stock to any
person that succeeds to all or substantially all of the assets
of such holder, whether by merger, consolidation, amalgamation,
sale of substantially all assets or other similar transactions.
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Our board of directors may approve exceptions to the limitation
on transfers of our Class B common stock in their sole
discretion, in connection with the sale of such Class B
common stock in a public offering registered with the Securities
and Exchange Commission or in such other limited circumstances
as our board of directors may determine. Any Class B common
stock sold to the public will first be converted to Class A
common stock.
Conversion
Our Class A common stock is not convertible into any other
shares of our capital stock. Each share of Class B
(Series 1) common stock shall convert automatically,
without any action by the holder, into one share of Class A
common stock 18 months after the date of this prospectus.
Each share of Class B (Series 2) common stock
shall convert automatically, without any action by the holder,
into one share of Class A common stock 30 months after
the date of this prospectus. The conversion rate applicable to
any conversion of shares of our Class B common stock shall
always be one-to-one (i.e., one share of Class B common
stock will, upon transfer, be converted into one share of
Class A common stock).
Once transferred and converted into Class A common stock,
the Class B common stock shall not be reissued. No class of
common stock may be subdivided or combined unless the other
class of common stock concurrently is subdivided or combined in
the same proportion and in the same manner.
No conversions of shares of Class B common stock will be
effected prior to the expiration of the transfer restrictions
described under Transfer Restrictions,
although our board of directors may make exceptions to such
transfer restrictions.
Beneficial
Ownership Limitations
Our amended and restated certificate of incorporation will
prohibit any insurance company from beneficially owning more
than ten percent of the aggregate outstanding shares of our
common stock. If any transfer is purportedly effected which, if
effected, would result in a violation of this limitation, the
intended transferee will acquire no rights in respect of the
shares in excess of this limitation, and the purported transfer
of such number of excess shares will be null and void. In this
context an insurance company means any insurance company whose
primary activity is the writing of insurance or the reinsuring
of risks underwritten by insurance companies or any other entity
controlling, controlled by or under common ownership, management
or control with such insurer or reinsurer
Preferred
Stock
The board of directors has the authority to issue the preferred
stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the
number of shares constituting any series or the designation of
such series, without further vote or action by the stockholders.
The issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control of
95
the Company without further action by the stockholders and may
adversely affect the voting and other rights of the holders of
common stock. At present, we have no plans to issue any of the
preferred stock.
Anti-Takeover
Effects of Delaware Law
Following consummation of this offering, we will be subject to
the business combination provisions of
Section 203 of the Delaware General Corporation Law. In
general, such provisions prohibit a publicly held Delaware
corporation from engaging in various business
combination transactions with any interested stockholder
for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless
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the transaction is approved by the board of directors prior to
the date the interested stockholder obtained such status;
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upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the stockholder
owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced; or
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on or subsequent to such date the business combination is
approved by the board of directors and authorized at an annual
or special meeting of stockholders by the affirmative vote of at
least
66
2
/
3
%
of the outstanding voting stock which is not owned by the
interested stockholder.
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A business combination is defined to include
mergers, asset sales and other transactions resulting in
financial benefit to a stockholder. In general, an
interested stockholder is a person who, together
with affiliates and associates, owns (or within three years, did
own) 15% or more of a corporations voting stock. The
statute could prohibit or delay mergers or other takeover or
change in control attempts with respect to the Company and,
accordingly, may discourage attempts to acquire us even though
such a transaction may offer the our stockholders the
opportunity to sell their stock at a price above the prevailing
market price.
Advance
Notice of Proposals and Nominations
Our bylaws establish advance notice procedures with regard to
stockholders proposals relating to the nomination of
candidates for election as directors or other business to be
brought before meetings of its stockholders. These procedures
provide that notice of such stockholders proposals must be
timely given in writing to our secretary prior to the meeting at
which the action is to be taken. Generally, to be timely, notice
must be received at our principal executive offices not less
than 60 days nor more than 90 days prior to the first
anniversary date of the annual meeting for the preceding year.
The notice must contain certain information specified in the
bylaws.
Limits
on Written Consents
Our amended and restated certificate of incorporation prohibits
stockholder action by written consent.
Limits
on Special Meetings
Our amended and restated certificate of incorporation and bylaws
provide that special meetings of the stockholders may be called
by our board of directors, the chairman of the board, the Chief
Executive Officer, the President or our Secretary.
Staggered
Boards
Our board of directors is divided into three classes serving
staggered terms. The number of directors will be fixed by our
board of directors, subject to the terms of our amended and
restated certificate of incorporation. From the date of this
prospectus until the earlier of (a) the
30-month
anniversary of the date of this prospectus or (b) the date
on which there are no shares of Class B common stock issued
and outstanding, our board of directors will consist of between
11 and 13 directors, and will be comprised as follows:
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between eight to ten Class A directors; and
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three Class B directors.
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96
Vacancies on our board of directors among the Class A
directors will be filled by a majority of the remaining
Class A directors and vacancies among the Class B
directors will be filled by a majority of the remaining
Class B directors.
From and after the earlier of the events described above, there
will no longer be Class B directors, and each director will
be elected for a three-year term by the holders of a plurality
of the votes cast by the holders of shares of common stock
present in person or represented by proxy at the meeting and
entitled to vote on the election of the directors.
Listing
We expect to list our Class A common stock on the New York
Stock Exchange under the symbol
.
Transfer
Agent and Registrar
The Transfer Agent and Registrar for the Class A common
stock is American Stock Transfer & Trust Company, LLC.
97
MATERIAL
U.S. FEDERAL TAX CONSIDERATIONS FOR
NON-U.S.
HOLDERS OF COMMON STOCK
The following is a general discussion of the material
U.S. federal income and estate tax consequences of the
ownership and disposition of common stock by a beneficial owner
that is a
non-U.S. holder,
other than a
non-U.S. holder
that owns, or has owned, actually or constructively, more than
5% of the Companys common stock. A
non-U.S. holder
is a person or entity that, for U.S. federal income tax
purposes, is:
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a non-resident alien individual, other than certain former
citizens and residents of the United States subject to tax as
expatriates,
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a corporation, or other entity treated as a corporation for
U.S. federal income tax purposes, created or organized in
or under the laws of a jurisdiction other than the United States
or any state or political subdivision thereof; or
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an estate or trust, other than an estate or trust the income of
which is subject to U.S. federal income taxation regardless
of its source.
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A
non-U.S. holder
does not include an individual who is present in the United
States for 183 days or more in the taxable year of
disposition and is not otherwise a resident of the United States
for U.S. federal income tax purposes. Such an individual
should consult his or her own tax advisor regarding the
U.S. federal income tax consequences of the sale, exchange,
or other disposition of common stock.
A
non-U.S. holder
does not include an individual who is present in the United
States for 183 days or more in the taxable year of
disposition and is not otherwise a resident of the United States
for U.S. federal income tax purposes. Such an individual is
urged to consult his or her own tax advisor regarding the
U.S. federal income tax consequences of the sale, exchange
or other disposition of common stock.
This discussion is based on the Internal Revenue Code of 1986,
as amended (the Code), and administrative
pronouncements, judicial decisions and final, temporary and
proposed Treasury Regulations, changes to any of which
subsequent to the date of this prospectus may affect the tax
consequences described herein. This discussion does not address
all aspects of U.S. federal income and estate taxation that
may be relevant to
non-U.S. holders
in light of their particular circumstances or to non
U.S. holders that may be subject to special treatment under
U.S. federal tax laws, such as financial institutions,
insurance companies, tax-exempt organizations, hybrid entities,
partnership and other pass-through entities, stockholders or
beneficiaries of
non-U.S. holders,
broker-dealers, persons subject to the alternative minimum tax,
persons that receive the common stock of the Company as
compensation, or persons that hold the common stock of the
Company as part of a hedge, straddle, conversion transaction,
synthetic security or other integrated investment. Furthermore,
this discussion does not address any tax consequences arising
under the laws of any state, local or foreign jurisdiction.
Prospective holders are urged to consult their tax advisors with
respect to the particular tax consequences to them of owning and
disposing of common stock, including the consequences under the
laws of any state, local or foreign jurisdiction.
Dividends
Distributions will constitute dividends for U.S. federal
income tax purposes to the extent paid from the current or
accumulated earnings and profits of the Company, as determined
under U.S. federal income tax principles. To the extent the
distributions exceed the current and accumulated earnings and
profits of the Company, such distributions will constitute a
return of capital and will first reduce a holders adjusted
tax basis in its common stock and, thereafter, will be treated
as capital gain. Distributions that constitute dividends for
U.S. federal income tax purposes that are paid to a
non-U.S. holder
of common stock generally will be subject to withholding tax at
a 30% rate or a reduced rate specified by an applicable income
tax treaty. In order to obtain a reduced rate of withholding, a
non-U.S. holder
will be required to provide an Internal Revenue Service
Form W-8BEN
certifying its entitlement to benefits under a treaty.
The withholding tax does not apply to dividends paid to a
non-U.S. holder
who provides a
Form W-8ECI,
certifying that the dividends are effectively connected with the
non-U.S. holders
conduct of a
98
trade or business within the United States. Effectively
connected dividends, net of certain deductions and credits, will
be subject to regular U.S. income tax as if the
non-U.S. holder
were a U.S. person, unless an applicable income tax treaty
provides otherwise. A
non-U.S. corporation
receiving effectively connected dividends may also be subject to
an additional branch profits tax imposed at a rate
of 30% (or a lower rate provided by any applicable income tax
treaty).
Gain on
Disposition of Common Stock
A
non-U.S. holder
generally will not be subject to U.S. federal income tax on
gain realized on a sale or other disposition of common stock
unless:
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the gain is effectively connected with a trade or business of
the
non-U.S. holder
in the United States, subject to an applicable income treaty
providing otherwise, or
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the Company is or has been a U.S. real property holding
corporation at any time within the five-year period preceding
the disposition or the
non-U.S. holders
holding period, whichever period is shorter, and its common
stock has ceased to be traded on an established securities
market prior to the beginning of the calendar year in which the
sale or disposition occurs.
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The Company believes that it is not, and does not anticipate
becoming, a U.S. real property holding corporation.
Gain that is effectively connected with a U.S. trade or
business will be subject to regular U.S. income tax as if
the
non-U.S. holder
were a U.S. person, subject to an applicable income tax
treaty providing otherwise. A
non-U.S. corporation
with effectively connected gains may also be subject to
additional branch profits tax imposed at a rate of
30% (or a lower treaty rate).
Information
Reporting Requirements and Backup Withholding
Information returns will be filed with the Internal Revenue
Service in connection with payments of dividends. This
information also may be made available to the tax authorities in
the
non-U.S. holders
country of residence. A
non-U.S. holder
may have to comply with certification procedures to establish
that it is not a U.S. person in order to avoid information
reporting and backup withholding with respect to payments of
dividends and the proceeds from a sale or other disposition of
common stock. The certification procedures required to claim a
reduced rate of withholding under a treaty generally should also
satisfy the certification requirements necessary to avoid the
backup withholding tax as well. The amount of any backup
withholding from a payment to a
non-U.S. holder
will be allowed as a credit against such holders
U.S. federal income tax liability and may entitle such
holder to a refund,
provided
that the required
information is timely furnished to the Internal Revenue Service.
Federal
Estate Tax
Individual
non-United
States Holders and entities the property of which is potentially
includible in such an individuals gross estate for
U.S. federal estate tax purposes (for example, a trust
funded by such an individual and with respect to which the
individual has retained certain interests or powers), should
note that, absent an applicable treaty benefit, the common stock
will be treated as U.S. situs property subject to
U.S. federal estate tax.
99
SHARES
ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common
stock. Future sales of substantial amounts of our Class A
common stock in the public market could adversely affect market
prices prevailing from time to time. Furthermore, because only a
limited number of shares will be available for sale shortly
after this offering due to existing contractual and legal
restrictions on resale as described below, there may be sales of
substantial amounts of our Class A common stock in the
public market after the restrictions lapse. This may adversely
affect the prevailing market price and our ability to raise
equity capital in the future.
Upon completion of this offering, we will
have shares
of Class A common stock outstanding, assuming no exercise
of any options and warrants outstanding as
of ,
2008, and shares of Class B common stock outstanding. Of
these
shares,
shares of Class A common stock,
(or shares
of Class A common stock if the underwriters exercise their
over-allotment option in full), sold in this offering will be
freely transferable without restriction or registration under
the Securities Act, except for any shares purchased by one of
our existing affiliates, as that term is defined in
Rule 144 under the Securities Act. The
remaining shares
of Class A common stock existing are restricted
shares as defined in Rule 144. Restricted shares may
be sold in the public market only if registered or if they
qualify for an exemption from registration under the Securities
Act.
In addition, immediately following this offering, our existing
stockholders will
hold shares
of our Class B (series 1) common stock
(or shares
if the underwriters exercise their over-allotment option in
full), each of which will, on the
18-month
anniversary of the date of this prospectus, be automatically
converted for shares of our Class A common stock on a
one-for-one basis. Also, immediately following this offering,
our existing stockholders will
hold shares
of our Class B (series 2) common stock
(or shares
if the underwriters exercise their over-allotment option in
full), each of which will, on the
30-month
anniversary of the date of this prospectus, be automatically
converted for shares of our Class A common stock on a
one-for-one basis. Any shares of Class A common stock
issuable upon conversion of such shares will be freely tradable
without restriction or registration under the Securities Act by
persons other than our affiliates.
As a result of the contractual
180-day
lock-up
period described below and the provisions of Rules 144 and
701, these shares will be available for sale in the public
market as follows:
|
|
|
Number of Shares of Class A Common Stock
|
|
Date
|
|
|
|
On the date of this prospectus.
|
|
|
After 180 days from the date of this prospectus (subject,
in some cases, to volume limitations).
|
|
|
At various times after 180 days from the date of this
prospectus (subject, in some cases, to volume limitations).
|
Rule 144
In general, under Rule 144 under the Securities Act of
1933, as in effect on the date of this prospectus, beginning
90 days after the effective date of this offering, a person
who is not one of our affiliates who has beneficially owned
shares of our common stock for at least six months may sell
shares without restriction, provided the current public
information requirements of Rule 144 continue to be
satisfied. In addition, any person who is not one of our
affiliates at any time during the three months preceding a
proposed sale, and who has beneficially owned shares of our
common stock for at least one year would be entitled to sell an
unlimited number of shares without restriction. Our affiliates
who have beneficially owned shares of our common stock for at
least six months are entitled to sell within any three-month
period a number of shares that does not exceed the greater of:
|
|
|
|
|
one percent of the number of shares of our common stock then
outstanding, which will equal
approximately shares
immediately after this offering; and
|
100
|
|
|
|
|
the average weekly trading volume of our common stock on
the
during the four calendar weeks preceding the filing of a notice
on Form 144 with respect to the sale.
|
Sales of restricted shares under Rule 144 are also subject
to requirements regarding the manner of sale, notice, and the
availability of current public information about us.
Rule 144 also provides that affiliates relying on
Rule 144 to sell shares of our common stock that are not
restricted shares must nonetheless comply with the same
restrictions applicable to restricted shares, other than the
holding period requirement.
Rule 701
In general, under Rule 701, any of our employees,
directors, officers, consultants or advisors who purchases
shares from us in connection with a compensatory stock or option
plan or other written agreement before the effective date of
this offering is entitled to resell such shares 90 days
after the effective date of this offering in reliance on
Rule 144, without having to comply with the holding period
requirements or other restrictions contained in Rule 701.
The Securities and Exchange Commission has indicated that
Rule 701 will apply to typical stock options granted by an
issuer before it becomes subject to the reporting requirements
of the Securities Exchange Act of 1934, along with the shares
acquired upon exercise of such options, including exercises
after the date of this prospectus. Securities issued in reliance
on Rule 701 are restricted securities and, subject to the
contractual restrictions described above, beginning 90 days
after the date of this prospectus, may be sold by persons other
than affiliates, as defined in Rule 144,
subject only to the manner of sale provisions of Rule 144
and by affiliates under Rule 144 without
compliance with its one-year minimum holding period requirement.
Stock
Options
As
of ,
2008, options to purchase a total
of shares
of Class A common stock were outstanding. All of the shares
subject to options are subject to
lock-up
agreements. An
additional shares
of Class A common stock were available for future option
grants under our stock plans.
Upon completion of this offering, we intend to file a
registration statement under the Securities Act covering all
shares of common stock subject to outstanding options or
issuable pursuant to our 2008 Equity Incentive Plan. Shares
registered under this registration statement will be available
for sale in the open market, subject to Rule 144 volume
limitations applicable to affiliates, vesting restrictions with
us or the contractual restrictions described below.
Lock-up
Agreements
Our officers, directors and substantially all of our
stockholders, who hold an aggregate of
approximately shares
of our Class A common stock
and shares
of our Class B common stock, have agreed, subject to
limited exceptions, not to offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant
to purchase, or otherwise transfer or dispose of, directly or
indirectly, or enter into any swap or other arrangement that
transfers to another, in whole or in part, any of the economic
consequences of ownership of any shares of common stock or any
securities convertible into or exercisable or exchangeable for
shares of common stock for a period of 180 days after the
date of this prospectus, without the prior written consent of
Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Morgan Stanley & Co. Incorporated. We have also agreed
not to waive the provision of our certificate of incorporation
relating to restrictions on transfer for a period of
180 days from the date of this prospectus without first
obtaining the written consent of the representatives.
Of the shares to be
released, shares
will be eligible for sale, in some cases subject only to the
volume, manner of sale and notice requirements of Rule 144.
In addition, Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Morgan Stanley & Co. Incorporated may
in their sole discretion choose to release any or all of these
shares from these restrictions prior to the
180-day
period.
101
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Morgan Stanley & Co. Incorporated are acting as
representatives of the underwriters named below. Under the terms
and subject to the conditions described in an underwriting
agreement among us, the selling stockholders and the
underwriters, the selling stockholders have agreed to sell to
the underwriters, and the underwriters severally have agreed to
purchase from the selling stockholders, the number of shares
indicated below.
|
|
|
|
|
|
|
Number of
|
|
Underwriter
|
|
Shares
|
|
|
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
|
|
|
|
|
Morgan Stanley & Co. Incorporated
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
The underwriters have agreed to purchase all of the shares of
Class A common stock if any of these shares are purchased.
If an underwriter defaults, the underwriting agreement provides
that the purchase commitments of the non-defaulting underwriters
may be increased or the underwriting agreement may be terminated.
The underwriters are offering the shares, subject to prior sale,
when, as and if transferred to and accepted by them, subject to
approval of legal matters by their counsel, including the
validity of the shares, and other conditions contained in the
underwriting agreement, such as the receipt by the underwriters
of officers certificates and legal opinions.
Indemnification
We and the selling stockholders have agreed to indemnify the
underwriters against some liabilities, including liabilities
under the Securities Act of 1933, as amended, or to contribute
to payments the underwriters may be required to make in respect
of those liabilities to the extent set forth in the underwriting
agreement.
Over-allotment
Option
Some of the selling stockholders have granted the underwriters
options to purchase up
to
additional shares of our Class A common stock, at the
public offering price less the underwriting discount. The
underwriters may exercise these options for 30 days from
the date of this prospectus solely to cover any over-allotments.
If the underwriters exercise these options, each will be
obligated, subject to conditions contained in the underwriting
agreement, to purchase a number of additional shares from the
selling stockholders proportionate to that underwriters
initial amount reflected in the above table.
Commissions
and Discounts
The underwriters propose to offer the shares of Class A
common stock to the public at the public offering price on the
cover page of this prospectus and to dealers at that price less
a concession not in excess of $
per share. The underwriters may allow, and the dealers may
re-allow, a discount not in excess of
$ per share to other dealers.
After the public offering, the public offering price, concession
and discount may be changed.
102
The following table shows the per share initial public offering
price, underwriting discount and proceeds before expenses to the
selling stockholders. The information assumes either no exercise
or full exercise by the underwriters of their over-allotment
option.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
Without Option
|
|
|
With Option
|
|
|
Public offering price
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Underwriting discount
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Proceeds, before expenses, to the selling stockholders
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Our expenses related to the offering, not including the
underwriting discount, are estimated to be
$ .
Lock-up
Agreements
We and substantially all our stockholders have agreed, subject
to certain exceptions, not to sell, transfer or otherwise
dispose of or hedge any shares of Class A common stock or
securities convertible or exchangeable into our Class A
common stock for at least 180 days after the date of this
prospectus without first obtaining the written consent of the
representatives. We have also agreed not to waive the provision
of our certificate of incorporation relating to restrictions on
transfer for a period of 180 days from the date of this
prospectus.
Notwithstanding the foregoing, if the 180th day after the
date of this prospectus occurs within 17 days following an
earnings release by us or the occurrence of material news or a
material event related to us, or if we intend to issue an
earnings release within 16 days following the
180th day, the
180-day
period will be extended to the 18th day following such
earnings release or the occurrence of the material news or
material event, unless such extension is waived by the
representatives.
These lockup agreements also apply to Class A common stock
or securities convertible or exchangeable into our Class A
common stock or securities convertible or exchangeable into our
Class A common stock owned now or acquired later by the
person executing the agreement or for which the person executing
the agreement later acquires the power of disposition.
Listing
We have applied to list our Class A common stock on the New
York Stock Exchange under the symbol
.
Offering
Price Determination
Before the offering, there has been no public market for our
Class A common stock. The initial public offering price
will be determined through negotiations among us, the
representatives of the selling stockholders and the
underwriters. In addition to prevailing market conditions, the
factors considered in determining the initial public offering
price will be:
|
|
|
|
|
the valuation multiples of publicly traded companies that the
representatives believe to be comparable with us;
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|
our financial information;
|
|
|
|
the history of, and the prospects for, our company and the
industry in which we compete;
|
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|
an assessment of our management, our past and present
operations, and the prospects for, and timing of, our future
revenues;
|
|
|
|
the present state of our business; and
|
|
|
|
the factors listed above in relation to market values and
various valuation measures of other companies engaged in
activities similar to ours.
|
103
An active trading market for our shares may not develop. It is
also possible that after the offering the shares will not trade
in the public market at or above the public offering price.
Discretionary
Sales
The underwriters do not expect to sell more than 5% of the
shares in the aggregate to accounts over which they exercise
discretionary authority.
Price
Stabilization, Short Positions and Penalty Bids
Until the distribution of the shares is completed, Securities
and Exchange Commission rules may limit the ability of the
underwriters and selling group members from bidding for and
purchasing our Class A common stock. However, the
representatives may engage in transactions that stabilize the
price of our Class A common stock, such as bids or
purchases to peg, fix or maintain that price.
If the underwriters create a short position in the Class A
common stock in connection with the offering, i.e., if they sell
more shares than are listed on the cover of this prospectus, the
representatives may elect to reduce any short position by
purchasing shares in the open market. The representatives may
also elect to reduce any short position by exercising all or
part of the over-allotment option described above. The
underwriters may sell more shares than could be covered by
exercising all of the over-allotment option, in which case they
would have to cover these sales through open market purchases.
Purchases of the Class A common stock to stabilize its
price or to reduce a short position may cause the price of the
Class A common stock to be higher than it might be in the
absence of such purchases.
The representatives may also impose a penalty bid on
underwriters and selling group members. This means that if the
representatives purchase our Class A common stock in the
open market to reduce the underwriters short position or
to stabilize the price of such Class A common stock, they
may reclaim the amount of the selling concession from the
underwriters and selling group members who sold those shares.
The imposition of a penalty bid may also affect the price of the
shares in that it discourages resales of shares.
Neither we nor any of the underwriters makes any representation
or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of
our Class A common stock. In addition, neither we nor any
of the underwriters makes any representation that the
representatives will engage in these transactions or that these
transactions, once commenced, will not be discontinued without
notice.
Electronic
Prospectus Delivery
In connection with this offering, prospectus in electronic
format may be made available on the internet sites or through
other online services maintained by one or more of the
underwriters participating in this offering, or by their
affiliates. In those cases, prospective investors may view
offering terms online. Depending upon the particular
underwriter, prospective investors may be allowed to place
orders online. The underwriters may agree with us to allocate a
specific number of shares for sale to online brokerage account
holders. Any such allocation for online distributions will be
made on the same basis as other allocations.
Other than this prospectus in electronic format, the information
concerning any underwriters web site and any information
contained in any other web site maintained by an underwriter is
not intended to be part of this prospectus or the registration
statement, has not been approved
and/or
endorsed by us or any underwriter in its capacity as
underwriter. Investors should not rely on such information.
Other
Relationships
Each of the underwriters and their affiliates have engaged in,
and may in the future engage in, investment banking and other
commercial dealings in the ordinary course of business with us.
They have received, and they will in the future receive,
customary fees and commissions for these transactions.
104
Sales in
Other Jurisdictions
In relation to each member state of the European Economic Area
which has implemented the Prospectus Directive, or a Relevant
Member State, each underwriter represents and agrees that with
effect from and including the date on which the Prospectus
Directive is implemented in that Relevant Member State, or the
Relevant Implementation Date, it has not made and will not make
an offer of shares to the public in that Relevant Member State
prior to the publication of a prospectus in relation to the
shares which has been approved by the competent authority in
that Relevant Member State or, where appropriate, approved in
another Relevant Member State and notified to the competent
authority in that Relevant Member State, all in accordance with
the Prospectus Directive, except that it may, with effect from
and including the Relevant Implementation Date, make an offer of
shares to the public in that Relevant Member State at any time:
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|
|
to legal entities which are authorized or regulated to operate
in the financial markets or, if not so authorized or regulated,
whose corporate purpose is solely to invest in securities;
|
|
|
|
to any legal entity which has two or more of (1) an average
of at least 250 employees during the last financial year;
(2) a total balance sheet of more than 43,000,000 and
(3) an annual net turnover of more than 50,000,000,
as shown in its last annual or consolidated accounts;
|
|
|
|
to fewer than 100 natural or legal persons (other than qualified
investors as defined in the Prospectus Directive) subject to
obtaining the prior content of the manager for any such offer; or
|
|
|
|
in any other circumstances which do not require the publication
by us of a prospectus pursuant to Article 3 of the
Prospectus Directive.
|
For the purposes of this provision, (i) the expression an
offer of shares to the public in relation to any
shares in any Relevant Member State means the communication in
any form and by any means of sufficient information on the terms
of the offer and the shares to be offered so as to enable an
investor to decide to purchase or subscribe the shares, as the
same may be varied in that Member State by any measure
implementing the Prospectus Directive in that Member State and
(ii) the expression Prospectus Directive means
Directive 2003/71/EC
and includes any relevant implementing measure in such Relevant
Member State.
We have been advised by the underwriters that:
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|
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|
|
they have complied and will comply with all applicable
provisions of the Financial Services and Markets Act 2000, or
FSMA, with respect to anything done by them in relation to our
common stock in, from or otherwise involving the United Kingdom;
they have only communicated or caused to be communicated and
will only communicate or cause to be communicated any invitation
or inducement to engage in investment activity (within the
meaning of Section 21 of the FSMA) received by them in
connection with the issue or sale of our common stock in
circumstances in which Section 21(1) of the FSMA does not
apply to us; and
|
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|
they and each of their affiliates have not (i) offered or
sold and will not offer or sell in Hong Kong, by means of any
document, our common stock other than (a) to
professional investors as defined in the Securities
and Futures Ordinance (Cap. 571) of Hong Kong and any rules
made under that Ordinance or (b) in other circumstances
which do not result in the document being a
prospectus as defined in the Companies Ordinance
(Cap. 32) of Hong Kong or which do not constitute an offer
to the public within the meaning of that Ordinance or
(ii) issued or had in their possession for the purposes of
issue, and will not issue or have in their possession for the
purposes of issue, whether in Hong Kong or elsewhere, any
advertisement, invitation or document relating to our common
stock, which is directed at, or the contents of which are likely
to be accessed or read by, the public of Hong Kong (except if
permitted to do so under the securities laws of Hong Kong) other
than with respect to our common stock which are or are intended
to be disposed of only to persons outside Hong Kong or only to
professional investors as defined in the Securities
and Futures Ordinance and any rules made under that Ordinance.
The contents of this document have not been reviewed by any
regulatory authority
|
105
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|
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|
|
in Hong Kong. You are advised to exercise caution in relation to
the offer. If you are in any doubt about any of the contents of
this document, you should obtain independent professional advice.
|
VALIDITY
OF COMMON STOCK
The validity of the issuance of the shares of common stock
offered hereby will be passed upon for the Company by Davis
Polk & Wardwell, New York, New York. Skadden, Arps,
Slate, Meagher & Flom LLP, New York, New York, is
representing the underwriters.
EXPERTS
The consolidated financial statements of Insurance Services
Office, Inc. as of December 31, 2007 and 2006, and for each
of the three years in the period ended December 31, 2007,
included in this prospectus and the related financial statement
schedule included elsewhere in the registration statement, have
been audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their report
appearing herein and elsewhere in the registration statement
(which report expresses an unqualified opinion on the financial
statements and financial statement schedule and includes
explanatory paragraphs referring to the adoption of FASB
Interpretation No. 48,
Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement
No. 109
and Statement of Financial Accounting Standards
No. 158,
Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans an
amendment of FASB Statements No. 87, 88, 106 and 132
(R)
). Such financial statements and financial statement
schedule have been included in reliance upon the report of such
firm given upon their authority as experts in accounting and
auditing.
The balance sheet of Verisk Analytics, Inc. as of June 30,
2008 included in this prospectus has been audited by Deloitte
& Touche LLP, an independent registered public accounting
firm, as stated in their report appearing herein and elsewhere
in the registration statement. Such balance sheet is included in
reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The consolidated financial statements of Xactware, Inc. at
December 31, 2005 and 2004, and for the years then ended,
appearing in this prospectus and registration statement have
been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report
given on the authority of such firm as experts in accounting and
auditing.
WHERE YOU
CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on
Form S-1
under the Securities Act with respect to the common stock
offered hereby. This prospectus does not contain all of the
information set forth in the registration statement and the
related exhibits and schedules. Statements contained in this
prospectus as to the contents of any contract or other document
are not necessarily complete and in each instance, if such
contract or document is filed as an exhibit, please refer to the
copy of such document, as each statement is qualified in all
respects by such reference. You may read and copy the
registration statement, including the exhibits and schedules at
the Securities and Exchange Commissions Public Reference
Room at 100 F Street, N.E., Washington, D.C.
20549. Information on the operation of the Public Reference Room
may be obtained by calling the Securities and Exchange
Commission at
1-800-SEC-0330.
In addition, the Securities and Exchange Commission maintains an
internet website that contains reports, proxy statements and
other information about issuers, like us, that file
electronically with the Securities and Exchange Commission. The
address of that site is www.sec.gov.
As a result of the offering, we will become subject to the full
informational requirements of the Securities Exchange Act of
1934, as amended. We will fulfill our obligations with respect
to such requirements by filing periodic reports and other
information with the Securities and Exchange Commission. We
intend to furnish our stockholders with annual reports
containing consolidated financial statements certified by an
independent registered public accounting firm. We also maintain
an internet site at www.verisk.com. Our website and the
information contained in it or connected to it shall not be
deemed to be incorporated into this prospectus or the
registration statement.
106
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Page
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Insurance Services Office, Inc. Condensed Consolidated
Financial Statements as of June 30, 2008 and for the Six
Months Ended June 30, 2007 and 2008 (unaudited)
|
|
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|
|
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|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-7
|
|
Verisk Analytics, Inc. Financial Statement as of
June 30, 2008
|
|
|
|
|
|
|
|
F-28
|
|
|
|
|
F-29
|
|
|
|
|
F-30
|
|
Insurance Services Office, Inc. Consolidated Financial
Statements as of December 31, 2006 and 2007 and for the
Years Ended December 31, 2005, 2006 and 2007
|
|
|
|
|
|
|
|
F-31
|
|
|
|
|
F-32
|
|
|
|
|
F-33
|
|
|
|
|
F-34
|
|
|
|
|
F-35
|
|
|
|
|
F-37
|
|
Xactware Consolidated Financial Statements as of
June 30, 2006 and for the Six Months Ended June 30,
2005 and 2006 (unaudited)
|
|
|
|
|
|
|
|
F-83
|
|
|
|
|
F-84
|
|
|
|
|
F-85
|
|
|
|
|
F-86
|
|
Xactware Consolidated Financial Statements as of
December 31, 2005 and for the Years Ended December 31,
2005 and 2004
|
|
|
|
|
|
|
|
F-91
|
|
|
|
|
F-92
|
|
|
|
|
F-93
|
|
|
|
|
F-94
|
|
|
|
|
F-95
|
|
|
|
|
F-96
|
|
F-1
INSURANCE
SERVICES OFFICE, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
December 31,
2007 and June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
December 31,
|
|
|
2008
|
|
|
|
2007
|
|
|
unaudited
|
|
|
|
(In thousands, except for share and per share data)
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
24,049
|
|
|
$
|
50,835
|
|
Available-for-sale securities
|
|
|
28,350
|
|
|
|
6,434
|
|
Accounts receivable, net (including amounts from related parties
of $949 and $2,452, respectively)
|
|
|
86,488
|
|
|
|
90,364
|
|
Notes receivable from stockholders
|
|
|
347
|
|
|
|
9,879
|
|
Prepaid expenses
|
|
|
7,609
|
|
|
|
14,751
|
|
Deferred income taxes
|
|
|
22,654
|
|
|
|
22,654
|
|
Federal and state taxes receivable
|
|
|
3,003
|
|
|
|
14,148
|
|
Other current assets
|
|
|
8,525
|
|
|
|
15,556
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
181,025
|
|
|
|
224,621
|
|
Noncurrent assets:
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
|
85,436
|
|
|
|
88,190
|
|
Intangible assets, net
|
|
|
141,160
|
|
|
|
119,214
|
|
Goodwill
|
|
|
339,891
|
|
|
|
362,354
|
|
Notes receivable from stockholders
|
|
|
12,356
|
|
|
|
|
|
Deferred income taxes
|
|
|
55,679
|
|
|
|
69,820
|
|
Other assets
|
|
|
12,936
|
|
|
|
2,640
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
828,483
|
|
|
$
|
866,839
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
78,234
|
|
|
$
|
65,259
|
|
Acquisition related liabilities
|
|
|
100,300
|
|
|
|
11,850
|
|
Short-term debt
|
|
|
35,171
|
|
|
|
190,192
|
|
Pension and postretirement benefits, current
|
|
|
4,636
|
|
|
|
4,733
|
|
Fees received in advance (including amounts from related parties
of $5,817 and $10,821, respectively)
|
|
|
127,907
|
|
|
|
177,058
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
346,248
|
|
|
|
449,092
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
403,159
|
|
|
|
451,990
|
|
Pension benefits
|
|
|
17,637
|
|
|
|
51,556
|
|
Postretirement benefits
|
|
|
23,894
|
|
|
|
23,044
|
|
Other liabilities
|
|
|
62,085
|
|
|
|
63,817
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
853,023
|
|
|
|
1,039,499
|
|
Redeemable common stock:
|
|
|
|
|
|
|
|
|
Class A redeemable common stock, stated at redemption
value, $.01 par value; 6,700,000 shares authorized;
2,922,253 and 2,999,939 shares issued and 1,163,066 and
946,518 outstanding as of December 31, 2007 and
June 30, 2008, respectively
|
|
|
1,217,942
|
|
|
|
1,058,631
|
|
Class A unearned KSOP shares
|
|
|
(4,129
|
)
|
|
|
(3,751
|
)
|
Notes receivable from stockholders
|
|
|
(42,625
|
)
|
|
|
(48,593
|
)
|
|
|
|
|
|
|
|
|
|
Total redeemable common stock
|
|
|
1,171,188
|
|
|
|
1,006,287
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders deficit :
|
|
|
|
|
|
|
|
|
Class B common stock, $.01 par value;
20,000,000 shares authorized; 10,004,500 shares issued
and 2,873,412 and 2,863,742 outstanding as of December 31,
2007 and June 30, 2008, respectively
|
|
|
100
|
|
|
|
100
|
|
Accumulated other comprehensive loss
|
|
|
(8,699
|
)
|
|
|
(29,915
|
)
|
Accumulated deficit
|
|
|
(508,136
|
)
|
|
|
(465,138
|
)
|
Class B common stock, treasury stock, 7,131,088 and
7,140,758 shares in 2007 and 2008, respectively
|
|
|
(678,993
|
)
|
|
|
(683,994
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(1,195,728
|
)
|
|
|
(1,178,947
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders deficit
|
|
$
|
828,483
|
|
|
$
|
866,839
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
F-2
INSURANCE
SERVICES OFFICE, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the
Six Months Ended June 30, 2007 and 2008
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands, except for share and per share data)
|
|
|
Revenues (including revenues from related parties of $43,156 and
$43,189 for 2007 and 2008, respectively)
|
|
$
|
399,988
|
|
|
$
|
437,690
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of items shown separately below)
|
|
|
176,502
|
|
|
|
190,678
|
|
Selling, general and administrative
|
|
|
55,600
|
|
|
|
59,028
|
|
Depreciation and amortization of fixed assets
|
|
|
15,498
|
|
|
|
16,424
|
|
Amortization of intangible assets
|
|
|
17,240
|
|
|
|
14,937
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
264,840
|
|
|
|
281,067
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
135,148
|
|
|
|
156,623
|
|
Other income/(expense):
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
4,392
|
|
|
|
1,617
|
|
Realized gains/(losses) on securities, net
|
|
|
592
|
|
|
|
(1,286
|
)
|
Interest expense
|
|
|
(11,474
|
)
|
|
|
(14,173
|
)
|
Other expense
|
|
|
(21
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(6,511
|
)
|
|
|
(13,856
|
)
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
128,637
|
|
|
|
142,767
|
|
Provision for income taxes
|
|
|
(52,432
|
)
|
|
|
(61,818
|
)
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
76,205
|
|
|
|
80,949
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax benefit of $423 in
2007
|
|
|
(1,302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
74,903
|
|
|
$
|
80,949
|
|
|
|
|
|
|
|
|
|
|
Basic income/(loss) per share of Class A and Class B:
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
18.69
|
|
|
$
|
21.73
|
|
Loss from discontinued operations
|
|
|
(0.32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$
|
18.37
|
|
|
$
|
21.73
|
|
|
|
|
|
|
|
|
|
|
Diluted income/(loss) per share of Class A and Class B:
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
17.97
|
|
|
$
|
20.87
|
|
Loss from discontinued operations
|
|
|
(0.31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$
|
17.66
|
|
|
$
|
20.87
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,077,259
|
|
|
|
3,724,876
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
4,240,053
|
|
|
|
3,877,906
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic income/(loss) per share of Class A and
Class B (unaudited):
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma diluted income/(loss) per share of Class A and
Class B (unaudited):
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in pro forma per share amounts:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
F-3
INSURANCE
SERVICES OFFICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS DEFICIT
(UNAUDITED)
For the Year Ended December 31, 2007 and the Six Months
Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Class B Common Stock
|
|
|
Treasury
|
|
|
Stockholders
|
|
|
|
Deficit
|
|
|
Loss
|
|
|
Shares
|
|
|
Par Value
|
|
|
Stock
|
|
|
Deficit
|
|
|
|
(In thousands, except for share data)
|
|
|
Balance, January 1, 2007
|
|
$
|
(457,557
|
)
|
|
$
|
(16,017
|
)
|
|
|
10,004,500
|
|
|
$
|
100
|
|
|
$
|
(642,883
|
)
|
|
$
|
(1,116,357
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
150,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,374
|
|
Other comprehensive gains
|
|
|
|
|
|
|
7,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
157,692
|
|
Treasury stock acquired Class B common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,110
|
)
|
|
|
(36,110
|
)
|
Stock options exercised for 72,083 shares (including tax
benefit of $12,798)
|
|
|
(36,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,655
|
)
|
Cumulative effect adjustment to adopt FIN No. 48
|
|
|
(10,338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,338
|
)
|
Increase in redemption value of Class A common stock
|
|
|
(153,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(153,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
(508,136
|
)
|
|
$
|
(8,699
|
)
|
|
|
10,004,500
|
|
|
$
|
100
|
|
|
$
|
(678,993
|
)
|
|
$
|
(1,195,728
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
80,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,949
|
|
Other comprehensive losses
|
|
|
|
|
|
|
(21,216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,733
|
|
Treasury stock acquired Class B common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,001
|
)
|
|
|
(5,001
|
)
|
Stock options exercised for 77,686 shares (including tax
benefit of $17,032)
|
|
|
(10,660
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,660
|
)
|
Decrease in redemption value of Class A common stock
|
|
|
(27,291
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,291
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2008
|
|
$
|
(465,138
|
)
|
|
$
|
(29,915
|
)
|
|
|
10,004,500
|
|
|
$
|
100
|
|
|
$
|
(683,994
|
)
|
|
$
|
(1,178,947
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
F-4
INSURANCE
SERVICES OFFICE, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the
Six Months Ended June 30, 2007 and 2008
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
74,903
|
|
|
$
|
80,949
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization of fixed assets
|
|
|
15,546
|
|
|
|
16,424
|
|
Amortization of intangible assets
|
|
|
17,240
|
|
|
|
14,937
|
|
Allowance for doubtful accounts
|
|
|
1,006
|
|
|
|
1,093
|
|
KSOP compensation expense
|
|
|
10,899
|
|
|
|
11,564
|
|
Acquisition related compensation expense
|
|
|
2,426
|
|
|
|
550
|
|
Stock-based compensation
|
|
|
3,756
|
|
|
|
4,621
|
|
Non-cash charges associated with other employee compensation
plans
|
|
|
1,387
|
|
|
|
2,327
|
|
Accrued interest on notes receivable from stockholders
|
|
|
(1,129
|
)
|
|
|
(980
|
)
|
Non-cash charges associated with the valuation of covered call
options
|
|
|
291
|
|
|
|
|
|
Realized (gains)/losses on securities
|
|
|
(592
|
)
|
|
|
1,286
|
|
Other operating
|
|
|
|
|
|
|
30
|
|
Loss on disposal of fixed assets
|
|
|
1,416
|
|
|
|
|
|
Excess tax benefits from stock options exercised
|
|
|
(12,428
|
)
|
|
|
(17,032
|
)
|
Changes in assets and liabilities, net of effects from
acquisitions and dispositions:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(4,170
|
)
|
|
|
(4,937
|
)
|
Federal and state taxes receivable
|
|
|
6,294
|
|
|
|
5,352
|
|
Prepaid expenses and other assets
|
|
|
(5,182
|
)
|
|
|
(4,426
|
)
|
Accounts payable and accrued liabilities
|
|
|
(15,888
|
)
|
|
|
(16,088
|
)
|
Acquisition related liabilities
|
|
|
(14,007
|
)
|
|
|
(2,200
|
)
|
Fees received in advance
|
|
|
34,777
|
|
|
|
49,151
|
|
Other liabilities
|
|
|
591
|
|
|
|
(692
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
117,136
|
|
|
|
141,929
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
F-5
INSURANCE
SERVICES OFFICE, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (UNAUDITED)
For the
Six Months Ended June 30, 2007 and 2008
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007
|
|
|
June 30, 2008
|
|
|
|
(In thousands)
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
(713
|
)
|
|
|
(41
|
)
|
Earnout payments
|
|
|
(2,590
|
)
|
|
|
(98,100
|
)
|
Proceeds from release of contingent escrows
|
|
|
86
|
|
|
|
549
|
|
Acquisition related escrow distributions
|
|
|
|
|
|
|
(3,320
|
)
|
Purchases of available-for-sale securities
|
|
|
(41,571
|
)
|
|
|
(78
|
)
|
Proceeds from sales of available-for-sale securities
|
|
|
20,016
|
|
|
|
21,457
|
|
Purchases of fixed assets
|
|
|
(23,050
|
)
|
|
|
(17,810
|
)
|
Proceeds from repayment of notes receivable from stockholders
|
|
|
37
|
|
|
|
184
|
|
Issuance of notes receivable from stockholders
|
|
|
(1,618
|
)
|
|
|
(1,243
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(49,403
|
)
|
|
|
(98,402
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
|
|
|
|
150,000
|
|
Proceeds from issuance of short-term debt
|
|
|
55,000
|
|
|
|
70,000
|
|
Redemption of Class A common stock
|
|
|
(89,900
|
)
|
|
|
(232,144
|
)
|
Repurchase of Class B common stock
|
|
|
(2,506
|
)
|
|
|
(5,001
|
)
|
Repayment of short-term debt
|
|
|
(102,564
|
)
|
|
|
(17,587
|
)
|
Excess tax benefits from stock options exercised
|
|
|
12,428
|
|
|
|
17,032
|
|
Proceeds from exercises of stock options
|
|
|
348
|
|
|
|
941
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(127,194
|
)
|
|
|
(16,759
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes
|
|
|
135
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
(Decrease)/increase in cash and cash equivalents
|
|
|
(59,326
|
)
|
|
|
26,786
|
|
Cash and cash equivalents, beginning of period
|
|
|
99,152
|
|
|
|
24,049
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
39,826
|
|
|
$
|
50,835
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
Taxes paid
|
|
$
|
45,715
|
|
|
$
|
55,127
|
|
Interest paid
|
|
$
|
11,634
|
|
|
$
|
12,609
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Loans made to directors and officers in connection with the
exercise of stock options
|
|
$
|
13,190
|
|
|
$
|
20,148
|
|
|
|
|
|
|
|
|
|
|
Redemption of Class A common stock used to repay notes
receivable from stockholders
|
|
$
|
20,874
|
|
|
$
|
18,663
|
|
|
|
|
|
|
|
|
|
|
Redemption of Class A common stock used to fund the
exercise of stock options
|
|
$
|
2,752
|
|
|
$
|
2,827
|
|
|
|
|
|
|
|
|
|
|
KSOP stock redemption funded in the prior year
|
|
$
|
2,643
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of fixed assets funded through capital lease
|
|
$
|
566
|
|
|
$
|
1,368
|
|
|
|
|
|
|
|
|
|
|
Accrual of acquisition related liabilities
|
|
$
|
49,293
|
|
|
$
|
11,300
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
F-6
(Amounts in thousands, except for share and per share
data, unless otherwise stated)
Insurance Services Office, Inc. and its consolidated
subsidiaries (the Company) enable risk-bearing
businesses to better understand and manage their risks. The
Company provides its customers proprietary data that, combined
with analytic methods, creates embedded decision support
solutions. The Company is one of the largest aggregators and
providers of data pertaining to U.S. property and casualty
(P&C) or P&C insurance risks. The Company
offers solutions for detecting fraud in the U.S. P&C
insurance, mortgage and healthcare industries and sophisticated
methods to predict and quantify loss in diverse contexts ranging
from natural catastrophes to health insurance. The Company
provides solutions, including data, statistical models or
tailored analytics, all designed to allow clients to make more
logical decisions.
The Company was formed in 1971 as an advisory and rating
organization for the P&C insurance industry to provide
statistical and actuarial services, to develop insurance
programs and to assist insurance companies in meeting state
regulatory requirements. Over the past decade, the Company has
broadened its data assets, entered new markets, placed a greater
emphasis on analytics, and pursued strategic acquisitions.
On June 27, 2008, the Companys stockholders approved
certain corporate governance changes necessary to allow the
Company to proceed with a proposed initial public offering
(IPO). Immediately prior to the completion of the
proposed IPO, the Company will undergo a corporate
reorganization whereby the Class A and Class B common
stock of the Company will be exchanged by the current
stockholders for the common stock of Verisk Analytics, Inc.
(Verisk) on a one-for-one basis. Verisk, formed on
May 23, 2008, was established to serve as the parent
holding company of Insurance Services Office, Inc.
All stock options granted under the Insurance Services Office,
Inc. 1996 Incentive Plan will be transferred to Verisk, without
modification to the terms of the options other than such options
will be exercisable for Class A common stock of Verisk.
Class A common stock of Verisk will not be redeemable by
the holder and only Class A common stock will be offered to
the public.
Upon consummation of the IPO, two new series of Class B
common stock, Class B (Series 1) common stock (the
Class B-1)
and Class B (Series 2) common stock (the
Class B-2)
will be formed and 50 percent of each Class B
stockholders existing Class B common stock will be
converted into shares of new
Class B-1
common stock and the remaining 50 percent of each
Class B stockholders existing Class B common
stock will be converted into shares of new
Class B-2
common stock. Each share of
Class B-1
common stock shall convert automatically, without any action by
the stockholder, into one share of Class A common stock
18 months after the date of the IPO. Each share of
Class B-2 common stock shall convert automatically, without
any action by the stockholder, into one share of Class A
common stock 30 months after the date of the IPO. In
conjunction with the IPO, Verisk plans to effect a stock split
of both classes of common stock. The strike price of stock
options will be adjusted based on the effect of the stock split.
|
|
2.
|
Basis of
Presentation and Summary of Significant Accounting
Policies:
|
The accompanying financial statements have been prepared on the
basis of accounting principles generally accepted in the United
States of America (U.S. GAAP). The preparation
of financial statements in conformity with these accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Significant estimates
include acquisition purchase price allocations, the fair value
of goodwill, the realization of deferred tax assets, acquisition
related liabilities, fair value of stock based compensation,
liabilities for pension and postretirement benefits, fair value
of the Companys common stock, and the estimate for the
allowance for doubtful accounts. Actual results may ultimately
differ from those estimates.
The condensed consolidated financial statements as of
June 30, 2008 and for the six months ended June 30,
2007 and 2008 in the opinion of management, include all
adjustments, consisting only of normal
F-7
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
recurring accruals, to present fairly the Companys
financial position, results of operations and cash flows. The
operating results for the six months ended June 30, 2008
are not necessarily indicative of the results to be expected for
the full year. The financial statements and related notes for
the six months ended June 30, 2008 have been prepared on
the same basis as and should be read in conjunction with the
consolidated financial statements as of December 31, 2006
and 2007 and for each of the three years ended December 31,
2005, 2006 and 2007. Certain information and footnote
disclosures normally included in financial statements prepared
in accordance with U.S. GAAP have been condensed or omitted
pursuant to the rules of the Securities and Exchange Commission.
The Company believes the disclosures made are adequate to keep
the information presented from being misleading.
Recent
Accounting Pronouncements
In June 2007, the Emerging Issues Task Force (EITF)
reached a consensus on EITF
No. 06-11,
Accounting for Income Tax Benefits of Dividends on
Share-Based Payment Awards
, (EITF
No. 06-11),
that an entity should recognize a realized tax benefit
associated with dividends on affected securities charged to
retained earnings as an increase in Additional Paid in Capital
(APIC). The amount recognized in APIC should be
included in the APIC pool. When an entitys estimate of
forfeitures increases or actual forfeitures exceed its
estimates, the amount of tax benefits previously recognized in
APIC should be reclassified into the statement of operations.
The amount reclassified is limited to the APIC pool balance on
the reclassification date. EITF
No. 06-11
applies prospectively to the income tax benefits of dividends
declared on affected securities. The adoption of EITF
No. 06-11,
effective January 1, 2008, did not have an impact on the
financial statements as the Company does not currently pay
dividends on its common stock.
In December 2007, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standard (FAS) No. 141 (revised 2007),
Business Combinations
(FAS No. 141(R)).
FAS No. 141(R) replaces
FAS No. 141,
Business Combinations
(FAS No. 141).
FAS No. 141(R) primarily requires an acquirer to
recognize the assets acquired and the liabilities assumed,
measured at their fair values as of that date. This replaces
FAS No. 141s cost-allocation process, which
required the cost of an acquisition to be allocated to the
individual assets acquired and liabilities assumed based on
their estimated fair values. Generally, FAS No. 141(R)
will become effective for business combinations for which the
acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15,
2008, except for tax provisions which apply to business
combinations regardless of acquisition date. The majority of the
impact of adopting FAS No. 141(R) will be dependent on
the business combinations that the Company may pursue and
complete after its effective date. The Company is currently
evaluating any impact related to the accounting for tax
contingencies for business combinations completed prior to the
effective date and the related impact on the consolidated
financial statements.
In December 2007, the FASB issued FAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51,
(FAS No. 160). FAS No. 160
requires that a noncontrolling interest in a subsidiary be
reported as equity and the amount of consolidated net income
specifically attributable to the noncontrolling interest be
identified in the consolidated financial statements. It also
calls for consistency in the manner of reporting changes in the
parents ownership interest and requires fair value
measurement of any noncontrolling equity investment retained in
a deconsolidation. FAS No. 160 is effective for the
Company on January 1, 2009 except the presentation and
disclosure requirements, which are required to be applied
retrospectively for all periods presented. Earlier adoption of
FAS No. 160 is prohibited. The Company is currently
evaluating the impact that the adoption of FAS No. 160
will have on its consolidated financial statements.
In February 2008, the FASB issued FASB Staff Position
(FSP)
FAS No. 157-2,
Effective Date of FASB Statement No. 157
(FSP
FAS No. 157-2),
which delays the effective date of FAS No. 157,
Fair Value
F-8
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
Instruments
, for non-recurring non-financial assets and
liabilities, except those recognized or disclosed at fair value
in the financial statements on a recurring basis, until fiscal
years beginning after November 15, 2008. Non-financial
assets and liabilities include, among others: intangible assets
acquired through business combinations; long-lived assets when
assessing potential impairment; and liabilities associated with
restructuring activities. The Company is currently assessing the
impact the adoption of FSP
FAS No. 157-2
for non-recurring non-financial assets and liabilities will
have, if any, on its consolidated financial statements.
In March 2008, the FASB issued FAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities An Amendment of FAS No. 133
(FAS No. 161). FAS No. 161
seeks to improve financial reporting for derivative instruments
and hedging activities by requiring enhanced disclosures
regarding their impact on financial position, financial
performance, and cash flows. To achieve this increased
transparency, FAS No. 161 requires the disclosure of
the fair value of derivative instruments and gains and losses in
a tabular format; the disclosure of derivative features that are
credit risk-related; and cross-referencing within the footnotes.
FAS No. 161 is effective prospectively for financial
statements issued for fiscal years and interim periods beginning
after November 15, 2008, with early application permitted.
The Company is currently assessing the impact the adoption of
FAS No. 161 will have, if any, on its consolidated
financial statements.
In April 2008, the FASB issued FSP
No. 142-3,
Determination of the Useful Life of Intangible Assets
(FSP
No. 142-3).
FSP
No. 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under
FAS No. 142,
Goodwill and Other Intangible Assets
(FAS No. 142)
. The intent of this FSP
is to improve the consistency between the useful life of a
recognized intangible asset under FAS No. 142 and the
period of expected cash flows used to measure the fair value of
the asset under FAS No. 141(R), and other
U.S. GAAP. FSP
No. 142-3
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years. Early adoption is prohibited. The
Company is evaluating the potential impact, if any, the adoption
of FSP
No. 142-3
will have on its consolidated financial statements.
|
|
3.
|
Concentration
of Credit Risk:
|
Financial instruments that potentially expose the Company to
credit risk consist primarily of cash and cash equivalents,
available-for-sale securities and accounts receivable, which are
generally not collateralized. The Company maintains its cash and
cash equivalents with higher credit quality financial
institutions in order to limit the amount of credit exposure.
The total cash balances are insured by the Federal Deposit
Insurance Corporation (FDIC) to a maximum amount of
$100 per bank. At June 30, 2008, the Company had cash
balances on deposit with five banks that exceeded the balance
insured by the FDIC limit by approximately $38,764. At
June 30, 2008 the Company also had cash on deposit with
foreign banks of approximately $11,592.
The Company considers the concentration of credit risk
associated with its trade accounts receivable to be commercially
reasonable and believes that such concentration does not result
in the significant risk of near-term severe adverse impacts. The
Companys top fifty customers for the six months ended
June 30, 2007 and June 30, 2008, represent
approximately 45% and 43% of revenue, respectively, with no
individual customer accounting for more than 4% of revenue
during the six month periods ended June 30, 2007 and 2008.
No individual customer comprised more than 10% of accounts
receivable as of December 31, 2007 and June 30, 2008.
F-9
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
Accounts receivables consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
Billed receivables
|
|
$
|
88,370
|
|
|
$
|
93,977
|
|
Unbilled receivables
|
|
|
6,365
|
|
|
|
3,808
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
|
94,735
|
|
|
|
97,785
|
|
Less allowance for doubtful accounts
|
|
|
(8,247
|
)
|
|
|
(7,421
|
)
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
86,488
|
|
|
$
|
90,364
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Notes
Receivable from Stockholders:
|
Notes receivable from stockholders consists of recourse loans
issued by the Company to directors and senior management in
connection with exercising stock options. These loans for the
exercise price are classified as a component of Redeemable
common stock on the accompanying condensed consolidated
balance sheets. These loans may also include loans for the tax
liability and accrued interest incurred in connection with
exercising stock options and these loans are included in
Notes receivable from stockholders as a component of
total assets on the accompanying condensed consolidated balance
sheets. As of December 31, 2007 and June 30, 2008
approximately $55,328 and $58,472, respectively, of notes
receivable from stockholders were outstanding. These notes were
issued at rates approximating market rates of interest. Payments
of principal and interest related to the notes are generally
deferred until the end of the loan terms, which range from three
to nine years. Interest income on notes receivable from
stockholders was $1,129 and $980 during the six months ended
June 30, 2007 and 2008, respectively. At December 31,
2007 and June 30, 2008, $2,776 and $2,872, respectively, of
notes receivable from stockholders had maturities of one year or
less. As of June 30, 2008 the Company reclassified an
additional $8,582 of notes receivable from stockholders from
long-term to current as the loan program was terminated and the
outstanding loans repaid in August 2008, with the exception of
$722.
The following is a summary of available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
December 31, 2007
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Registered investment companies
|
|
$
|
29,036
|
|
|
$
|
|
|
|
$
|
(686
|
)
|
|
$
|
28,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
June 30, 2008
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Registered investment companies
|
|
$
|
6,370
|
|
|
$
|
64
|
|
|
$
|
|
|
|
$
|
6,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of investments were $20,016 and $21,457 for
the six month periods ended June 30, 2007 and 2008,
respectively. Realized gains and losses on registered investment
companies for the six month periods ended June 30, 2007 and
2008 were $592 and ($1,286), respectively.
Investment income during the six months ended June 30, 2007
includes interest income from cash and cash equivalents,
interest income from notes receivable from stockholders, and
dividend income from investments of $2,850, $1,129 and $164,
respectively. Investment income during the six months ended
F-10
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
June 30, 2008 includes interest income from cash and cash
equivalents, interest income from notes receivable from
stockholders, and dividend income from investments of $494,
$980, and $143, respectively.
From time to time, the Company has entered into certain
derivative transactions involving covered call options on
underlying investments held by the Company. As of June 30,
2007, the fair value of the derivative liability associated with
the covered call options was $291, which was recognized as a
reduction to Investment income in the accompanying
condensed consolidated statement of operations for the six
months ended June 30, 2007. The gain on call premiums of
$540 was recognized as investment income for the six months
ended June 30, 2007. The Company did not enter into any
derivative transactions during the six months ended
June 30, 2008.
|
|
7.
|
Fair
Value Measurements:
|
Effective January 1, 2008, the Company adopted the
provisions of FAS No. 157,
Fair Value
Measurements
, (FAS No. 157), which
defines fair value, establishes a framework for measuring fair
value under U.S. GAAP and expands fair value measurement
disclosures. In February 2008, the FASB delayed the effective
date of FAS No. 157 until fiscal years beginning after
November 15, 2008 for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or
disclosed at least annually. Therefore, effective
January 1, 2008 the Company has adopted the provisions of
FAS No. 157 only for its financial assets and
liabilities recognized or disclosed at fair value on a recurring
basis.
To increase consistency and comparability in fair value
measures, FAS No. 157 establishes a three-level fair
value hierarchy to prioritize the inputs used in valuation
techniques between observable inputs that reflect quoted prices
in active markets, inputs other than quoted prices with
observable market data, and unobservable data (e.g., a
companys own data). FAS No. 157 requires
disclosures detailing the extent to which companies
measure assets and liabilities at fair value, the methods and
assumptions used to measure fair value, and the effect of fair
value measurements on earnings. In accordance with
FAS No. 157, the Company applied the following fair
value hierarchy:
Level 1 Assets or liabilities for which the
identical item is traded on an active exchange, such as
publicly-traded instruments.
Level 2 Assets and liabilities valued based on
observable market data for similar instruments.
Level 3 Assets or liabilities for which
significant valuation assumptions are not readily observable in
the market; instruments valued based on the best available data,
some of which is internally-developed, and considers risk
premiums that a market participant would require.
The following table summarizes fair value measurements by level
at June 30, 2008 for assets and other balances measured at
fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active Markets
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
June 30,
|
|
|
for Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
2008
|
|
|
Assets (Level 1)
|
|
|
Inputs (Level 2)
|
|
|
Inputs (Level 3)
|
|
|
Available-for-sale securities(1)
|
|
$
|
6,434
|
|
|
$
|
6,434
|
|
|
$
|
|
|
|
$
|
|
|
Redeemable common stock(2)
|
|
|
1,058,631
|
|
|
|
|
|
|
|
|
|
|
|
1,058,631
|
|
|
|
|
(1)
|
|
Available-for-sale equity securities are valued using quoted
market prices multiplied by the number of shares owned.
|
F-11
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
|
|
|
(2)
|
|
The fair value of the Companys Class A redeemable
common stock is established for purposes of the ISO 401(K)
Savings and Employee Stock Ownership Plan (the KSOP)
on the final day of the quarter and such price is utilized for
all share transactions in the subsequent quarter. The current
valuation in effect for the KSOP is also considered the fair
value for Class A redeemable common stock and related
transactions within the Insurance Services Office, Inc. 1996
Incentive Plan. See Note 12 for a description of the
valuation process and a reconciliation of the beginning and
ending balance for the redeemable common stock for the six
months ended June 30, 2008.
|
Effective January 1, 2008, the Company adopted
FAS No. 159,
The Fair Value Option for Financial
Assets and Financial Liabilities Including an Amendment of FASB
Statement No. 115
(FAS No. 159).
FAS No. 159 permits companies to choose to measure
certain financial instruments and other items at fair value. The
standard requires that unrealized gains and losses are reported
in earnings for items measured using the fair value option. The
Company has elected not to apply the fair value option to its
eligible financial assets and liabilities, and accordingly, the
adoption of FAS No. 159 had no impact on the
consolidated financial statements.
|
|
8.
|
Goodwill
and Intangible Assets:
|
The following is a summary of the change in goodwill from
December 31, 2007 through June 30, 2008, both in total
and as allocated to the Companys operating segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk
|
|
|
Decision
|
|
|
|
|
|
|
Assessment
|
|
|
Analytics
|
|
|
Total
|
|
|
Goodwill at December 31, 2007
|
|
$
|
27,908
|
|
|
$
|
311,983
|
|
|
$
|
339,891
|
|
Escrow distribution
|
|
|
|
|
|
|
3,320
|
|
|
|
3,320
|
|
Accrual of acquisition related liabilities
|
|
|
|
|
|
|
11,300
|
|
|
|
11,300
|
|
Finalization of purchase accounting
|
|
|
|
|
|
|
7,843
|
|
|
|
7,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill at June 30, 2008
|
|
$
|
27,908
|
|
|
$
|
334,446
|
|
|
$
|
362,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2008, the Company finalized the purchase
price allocation associated with the acquisitions of HealthCare,
Insight, LLC (HCI) and NIA Consulting, LTD
(NIA). The finalization of the purchase accounting
for HCI resulted in a reduction primarily of customer-related
intangible assets and corresponding increase to goodwill of
$7,009, and the final working capital adjustment of $825. The
finalization of the purchase accounting for NIA, which includes
the final working capital and other adjustments resulted in an
increase to goodwill of $9.
In April 2008, the Company paid $98,100 for Xactware contingent
payments previously recorded within Acquisition related
liabilities. Certain other acquisitions include contingent
payment provisions that are not related to continuing employment
and are payable upon the achievement of certain financial
results for 2008. As of June 30, 2008, based on estimated
2008 operating results, the Company has recorded an increase to
goodwill and a corresponding increase to Acquisition
related liabilities of $11,300 for contingent payments
that are probable.
F-12
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
As of December 31, 2007 and June 30, 2008, the
Companys intangible assets and related accumulated
amortization consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Accumulated
|
|
|
|
|
December 31, 2007
|
|
Useful Life
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
Technology-based
|
|
|
5 years
|
|
|
$
|
164,317
|
|
|
$
|
(80,419
|
)
|
|
$
|
83,898
|
|
Marketing-related
|
|
|
4 years
|
|
|
|
25,846
|
|
|
|
(13,667
|
)
|
|
|
12,179
|
|
Contract-based
|
|
|
6 years
|
|
|
|
6,555
|
|
|
|
(5,596
|
)
|
|
|
959
|
|
Customer-related
|
|
|
13 years
|
|
|
|
57,906
|
|
|
|
(13,782
|
)
|
|
|
44,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
$
|
254,624
|
|
|
$
|
(113,464
|
)
|
|
$
|
141,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Accumulated
|
|
|
|
|
June 30, 2008
|
|
Useful Life
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
Technology-based
|
|
|
5 years
|
|
|
$
|
164,128
|
|
|
$
|
(90,345
|
)
|
|
$
|
73,783
|
|
Marketing-related
|
|
|
4 years
|
|
|
|
25,846
|
|
|
|
(15,818
|
)
|
|
|
10,028
|
|
Contract-based
|
|
|
6 years
|
|
|
|
6,555
|
|
|
|
(5,843
|
)
|
|
|
712
|
|
Customer-related
|
|
|
13 years
|
|
|
|
51,086
|
|
|
|
(16,395
|
)
|
|
|
34,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
$
|
247,615
|
|
|
$
|
(128,401
|
)
|
|
$
|
119,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated amortization expense related to intangible assets
for the six month periods ended June 30, 2007 and 2008, was
approximately $17,240 and $14,937, respectively. Estimated
amortization expense through 2012 and thereafter for intangible
assets subject to amortization is as follows:
|
|
|
|
|
Year
|
|
Amount
|
|
|
2008 (remainder of)
|
|
$
|
14,212
|
|
2009
|
|
|
27,232
|
|
2010
|
|
|
22,034
|
|
2011
|
|
|
15,816
|
|
2012
|
|
|
13,675
|
|
Thereafter
|
|
|
26,245
|
|
|
|
9.
|
Acquisitions
and Discontinued Operations:
|
On January 11, 2007, the Company acquired the remaining 20%
of the stock of National Equipment Register (NER),
resulting in 100% ownership, in order to more closely align
operations with existing businesses. The purchase includes a
contingent payment provision subject to the achievement of
certain predetermined financial results for 2007 and 2008. NER
is a provider of solutions to increase the recovery rate of
stolen equipment and reduce the costs associated with theft for
owners and insurers.
On March 23, 2007, the Company acquired the rights, title,
the name, trade name, and service mark, Rex Depot
and other intangible assets of Smith Sekelsky Web Products, LLC.
The assets associated with this acquisition further enhance the
capability of the Companys appraisal software offerings.
In 2007, the Company discontinued operations of its claims
consulting business located in New Hope, PA and the United
Kingdom. The results for this business were accounted for as
discontinued operations in the condensed consolidated financial
statements for the six months ended June 30, 2007. There
was no impact of discontinued operations on the results of
operations for the six months ended June 30, 2008. The
summarized,
F-13
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
combined statements of income from discontinued operations for
the six months ended June 30, 2007 is as follows:
|
|
|
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
Revenues
|
|
$
|
1,650
|
|
|
|
|
|
|
Loss from discontinued operations before income taxes
|
|
$
|
(1,725
|
)
|
Income tax benefit
|
|
|
423
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax benefit
|
|
$
|
(1,302
|
)
|
|
|
|
|
|
Depreciation expense related to the discontinued operations for
the six months ended June 30, 2007 was $48.
The Companys annual estimated effective tax rate for
fiscal year 2007 is 40.0% compared to the estimated effective
tax rate for fiscal year 2008 of 42.3%.
Effective January 1, 2007, the Company adopted
FIN No. 48, which prescribes a comprehensive model for
the financial statement recognition, measurement, presentation
and disclosure of uncertain tax positions taken or expected to
be taken in income tax returns. For each tax position, the
Company must determine whether it is more likely than not that
the position will be sustained upon examination based on the
technical merits of the position, including resolution of any
related appeals or litigation. A tax position that meets the
more likely than not recognition threshold is then measured to
determine the amount of benefit to recognize within the
financial statements. No benefits may be recognized for tax
positions that do not meet the more likely than not threshold.
Included in the total unrecognized tax benefits of $32,030 at
June 30, 2008 was $24,368 that, if recognized, would have a
favorable effect on the Companys effective tax rate. The
remaining unrecognized tax benefits would not affect the
Companys effective tax rate. The Companys practice
is to recognize interest and penalties associated with income
taxes as a component of income tax expense. At December 31,
2007 and June 30, 2008, approximately $7,033 and $8,371,
respectively, was accrued in the Companys condensed
consolidated balance sheet for the payment of interest and
penalties associated with income taxes. The Company files
federal income tax returns in the U.S. and various state,
local and foreign income tax returns. All of the
U.S. federal, state and local income tax returns filed by
the Company are subject to examination by the Internal Revenue
Service and the state and local tax authorities until the
expiration of the relevant statute of limitations.
F-14
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
The following table presents short-term and long-term debt by
issuance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
|
|
|
Maturity
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
Date
|
|
|
Date
|
|
|
2007
|
|
|
2008
|
|
|
Short-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank of America
|
|
|
10/25/2007
|
|
|
|
4/25/2008
|
|
|
$
|
15,000
|
|
|
$
|
|
|
Bank of America
|
|
|
4/25/2008
|
|
|
|
7/25/2008
|
|
|
|
|
|
|
|
15,000
|
|
Bank of America
|
|
|
6/16/2008
|
|
|
|
7/16/2008
|
|
|
|
|
|
|
|
10,000
|
|
JPMorgan Chase
|
|
|
12/31/2007
|
|
|
|
1/3/2008
|
|
|
|
15,000
|
|
|
|
|
|
JPMorgan Chase
|
|
|
6/30/2008
|
|
|
|
7/30/2008
|
|
|
|
|
|
|
|
20,000
|
|
JPMorgan Chase
|
|
|
6/27/2008
|
|
|
|
7/11/2008
|
|
|
|
|
|
|
|
20,000
|
|
Citibank
|
|
|
6/13/2008
|
|
|
|
7/14/2008
|
|
|
|
|
|
|
|
20,000
|
|
Prudential: 4.46% Series D senior notes
|
|
|
6/14/2005
|
|
|
|
6/13/2009
|
|
|
|
|
|
|
|
100,000
|
|
Capital lease obligations
|
|
|
Various
|
|
|
|
Various
|
|
|
|
4,408
|
|
|
|
4,734
|
|
Other
|
|
|
Various
|
|
|
|
Various
|
|
|
|
763
|
|
|
|
458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
|
|
|
|
|
|
|
$
|
35,171
|
|
|
$
|
190,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prudential senior notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.46% Series D senior notes
|
|
|
6/14/2005
|
|
|
|
6/13/2009
|
|
|
$
|
100,000
|
|
|
$
|
|
|
4.60% Series E senior notes
|
|
|
6/14/2005
|
|
|
|
6/13/2011
|
|
|
|
50,000
|
|
|
|
50,000
|
|
6.00% Series F senior notes
|
|
|
8/8/2006
|
|
|
|
8/8/2011
|
|
|
|
25,000
|
|
|
|
25,000
|
|
6.13% Series G senior notes
|
|
|
8/8/2006
|
|
|
|
8/8/2013
|
|
|
|
75,000
|
|
|
|
75,000
|
|
5.84% Series H senior notes
|
|
|
10/26/2007
|
|
|
|
10/26/2013
|
|
|
|
17,500
|
|
|
|
17,500
|
|
5.84% Series H senior notes
|
|
|
10/26/2007
|
|
|
|
10/26/2015
|
|
|
|
17,500
|
|
|
|
17,500
|
|
6.28% Series I senior notes
|
|
|
4/29/2008
|
|
|
|
4/29/2013
|
|
|
|
|
|
|
|
15,000
|
|
6.28% Series I senior notes
|
|
|
4/29/2008
|
|
|
|
4/29/2015
|
|
|
|
|
|
|
|
85,000
|
|
Principal senior notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.03% Series A senior notes
|
|
|
8/8/2006
|
|
|
|
8/8/2011
|
|
|
|
50,000
|
|
|
|
50,000
|
|
6.16% Series B senior notes
|
|
|
8/8/2006
|
|
|
|
8/8/2013
|
|
|
|
25,000
|
|
|
|
25,000
|
|
New York Life senior notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.87% Series A senior notes
|
|
|
3/16/2007
|
|
|
|
10/26/2013
|
|
|
|
17,500
|
|
|
|
17,500
|
|
5.87% Series A senior notes
|
|
|
3/16/2007
|
|
|
|
10/26/2015
|
|
|
|
17,500
|
|
|
|
17,500
|
|
6.35% Series B senior notes
|
|
|
4/29/2008
|
|
|
|
4/29/2015
|
|
|
|
|
|
|
|
50,000
|
|
Other obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
|
Various
|
|
|
|
Various
|
|
|
|
7,299
|
|
|
|
6,145
|
|
Other
|
|
|
Various
|
|
|
|
Various
|
|
|
|
860
|
|
|
|
845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
$
|
403,159
|
|
|
$
|
451,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest associated with the Companys outstanding
master shelf debt obligations was $2,548 and $4,138 as of
December 31, 2007 and June 30, 2008, respectively.
Consolidated interest expense associated
F-15
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
with the Companys outstanding master shelf debt
obligations was $11,474 and $14,173 for the six month periods
ended June 30, 2007 and 2008, respectively.
During the six months ended June 30, 2008, the Company
utilized additional short-term borrowings from revolving credit
facilities with Bank of America, JPMorgan Chase and Citibank to
repurchase Class A common stock. As of June 30, 2008,
the interest on the outstanding borrowings under the revolving
credit facilities with Bank of America, JPMorgan Chase and
Citibank is payable monthly at weighted average rates of 4.24%,
3.63% and 3.78%, respectively.
The Company had $85,000 of short-term borrowings that matured in
July 2008. The Company repaid $30,000 of their outstanding
short-term debt balance in July 2008. The Company renewed
$55,000 of the short-term debt at various interest rates ranging
from 2.65% to 3.14%. These borrowings mature at various times
ranging from August 1, 2008 through October 13, 2008.
|
|
12.
|
Redeemable
Common Stock:
|
On November 18, 1996, the Company authorized
6,700,000 shares of Class A redeemable common stock.
The Class A stock is reserved for the use in incentive
plans for key employees and directors under the Option Plan, and
for issuance to the ISO 401(k) Savings and Employee Stock
Ownership Plan (the KSOP). The Class A stock
has voting rights to elect nine of the thirteen members of the
board of directors. The Companys Certificate of
Incorporation limits those who may own Class A stock to
current and former employees or directors, the KSOP and trusts
by or for the benefit of immediate family members of employees
and former employees.
Under the terms of the Option Plan, Class A stock resulting
from exercised options that are held by the employee for more
than six months and one day may be put to the Company and
redeemed at the then current fair value at the date of the
redemption request of the Class A stock. For options
granted in 2002 through 2004, the Company has the ability to
defer the cash settlement of the redemption up to one year. For
options granted after 2004, the Company has the ability to defer
the cash settlement of the redemption for up to two years. Under
the terms of the KSOP, eligible participants may elect to
diversify 100% of their 401(k) and up to 35% of their ESOP
contributions that were made in the form of Class A stock.
In addition, upon retirement or termination participants in the
KSOP are required to liquidate their ownership in Class A
common stock. Since the Class A stock distributed under the
Option Plan and KSOP is subject to the restrictions above, the
participant currently has the right to require the Company to
repurchase stock based on the then current fair value of the
Class A stock.
The fair value of the Companys Class A redeemable
common stock is established for purposes of the KSOP on the
final day of the quarter and such price is utilized for all
share transactions in the subsequent quarter. The current
valuation in effect for the KSOP is also considered fair value
for Class A redeemable common stock and related
transactions within the Insurance Services Office, Inc. 1996
Incentive Plan.
The valuation methodology is based on a variety of qualitative
and quantitative factors including the nature of the business
and history of the enterprise, the economic outlook in general
and the condition of the specific industries in which the
Company operates, the financial condition of the business, the
Companys ability to generate free cash flow, and goodwill
or other intangible asset value. The determination of the fair
market value employs both a comparable public company analysis,
which examines the valuation multiples of companies deemed
comparable, in whole or in part, to the Company and a discounted
cash flow analysis that determines a present value of the
projected future cash flows of the business. The Company
regularly assesses the underlying assumptions used in the
valuation methodologies. As a result, the Company has utilized
this quarterly fair value for all its Class A redeemable
common stock transactions, as required by terms of the KSOP and
the Insurance Services Office, Inc. 1996 Incentive Plan.
F-16
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
The Company follows SEC Accounting Series Release
(ASR) No. 268,
Presentation in Financial
Statements of Preferred Redeemable Stock
(ASR
No. 268). ASR No. 268 requires the Company to
record Class A stock and vested stock options at full
redemption value at each balance sheet date as the redemption of
these securities is not solely within the control of the
Company. Redemption value for the Class A stock is
determined quarterly for purposes of the KSOP. At
December 31, 2007 and June 30, 2008, the fair value
was $862 and $892 per share, respectively. The redemption value
of the Class A stock at December 31, 2007 and
June 30, 2008 totaled $1,217,942 and $1,058,631,
respectively, which includes $215,380 and $213,896, respectively
of aggregate intrinsic value of outstanding unexercised vested
stock options.
During the six month periods ended June 30, 2007 and 2008,
151,702 and 294,234 Class A shares were redeemed by the
Company at a weighted average price of $762.25 and $862.01 per
share, respectively. Included in Class A repurchased shares
were $13,345 and $20,157 for shares primarily utilized to
satisfy minimum tax withholdings on options exercised during the
six month periods ended June 30, 2007 and 2008,
respectively.
Subsequent changes to the redemption value of the securities is
charged first to retained earnings; once retained earnings is
depleted, then to additional
paid-in-capital,
if additional
paid-in-capital
is also depleted, then to accumulated deficit. During the six
months ended June 30, 2008 the balance of redeemable common
stock decreased by $159,311 primarily due to the redemptions
discussed above. Additional information regarding the changes in
redeemable common stock for the six months ended June 30,
2008 is provided in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
|
Total
|
|
|
|
Class A Redeemable Common Stock
|
|
|
Receivable
|
|
|
Redeemable
|
|
|
|
Outstanding
|
|
|
Redemption
|
|
|
Unearned
|
|
|
Additional
|
|
|
from
|
|
|
Common
|
|
|
|
Shares
|
|
|
Value
|
|
|
KSOP
|
|
|
Paid in Capital
|
|
|
Stockholders
|
|
|
Stock
|
|
|
Balance, January 1, 2008
|
|
|
1,163,066
|
|
|
$
|
1,217,942
|
|
|
$
|
(4,129
|
)
|
|
$
|
|
|
|
$
|
(42,625
|
)
|
|
$
|
1,171,188
|
|
Redemption of Class A common stock
|
|
|
(294,234
|
)
|
|
|
(253,635
|
)
|
|
|
|
|
|
|
|
|
|
|
14,180
|
|
|
|
(239,455
|
)
|
KSOP shares earned
|
|
|
|
|
|
|
|
|
|
|
378
|
|
|
|
11,186
|
|
|
|
|
|
|
|
11,564
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,621
|
|
|
|
|
|
|
|
4,621
|
|
Stock options exercised (including tax benefit of $17,032)
|
|
|
77,686
|
|
|
|
67,033
|
|
|
|
|
|
|
|
(15,807
|
)
|
|
|
(20,148
|
)
|
|
|
31,078
|
|
Increase in redemption value of Class A common stock
|
|
|
|
|
|
|
27,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2008
|
|
|
946,518
|
|
|
$
|
1,058,631
|
|
|
$
|
(3,751
|
)
|
|
$
|
|
|
|
$
|
(48,593
|
)
|
|
$
|
1,006,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.
|
Stockholders
Deficit:
|
On November 18, 1996, the Company authorized 20,000,000
Class B shares. The Class B shares have the same
rights as Class A shares with respect to dividends and
economic ownership, but have voting rights to elect three of the
thirteen directors. The thirteenth seat on the board of
directors is held by the chief executive officer of the Company.
The Company repurchased 5,475 and 9,670 Class B shares
during the six month periods ended June 30, 2007 and 2008
at an average price of $457.78 and $517.20 per share,
respectively.
Earnings
Per Share
Basic earnings per common share is computed by dividing income
available to common stockholders by the weighted average number
of common shares outstanding during the period, less the
weighted average ESOP shares of common stock that have not been
committed to be released. The computation of diluted earnings
per share is similar to the computation of basic earnings per
share except that the denominator is increased to include the
number of additional common shares that would have been
outstanding using the
F-17
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
treasury stock method, if the dilutive potential common shares,
such as stock options, had been issued. The following is a
reconciliation of the numerator and denominator of the basic and
diluted earnings per share computations for the six month
periods ended June 30, 2007 and 2008:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
Numerator used in basic and diluted EPS:
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
76,205
|
|
|
$
|
80,949
|
|
Loss from discontinued operations, net of tax benefit
|
|
|
(1,302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
74,903
|
|
|
$
|
80,949
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average number of common shares used in basic EPS
|
|
|
4,077,259
|
|
|
|
3,724,876
|
|
Effect of dilutive shares:
|
|
|
|
|
|
|
|
|
Potential Class A redeemable common stock issuable upon the
exercise of stock options
|
|
|
162,794
|
|
|
|
153,030
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares and dilutive potential
common shares used in diluted EPS
|
|
|
4,240,053
|
|
|
|
3,877,906
|
|
|
|
|
|
|
|
|
|
|
Basic EPS:
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
18.69
|
|
|
$
|
21.73
|
|
Loss from discontinued operations, net of tax benefit
|
|
|
(0.32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
18.37
|
|
|
$
|
21.73
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
17.97
|
|
|
$
|
20.87
|
|
Loss from discontinued operations, net of tax benefit
|
|
|
(0.31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$
|
17.66
|
|
|
$
|
20.87
|
|
|
|
|
|
|
|
|
|
|
The potential shares of common stock that were excluded from
diluted earnings per share were 99,170 and 102,511 for the six
month periods ended June 30, 2007 and 2008, respectively,
because the effect of including these potential shares was
antidilutive.
Unaudited pro forma net income/(loss) per share is presented for
additional information only. As disclosed in
Note 1 Organization, Verisk
Analytics, Inc. (Verisk) will become the new holding
company of Insurance Services Office, Inc. In connection with
the initial public offering, the stock of Insurance Services
Office, Inc. be exchanged for the stock of Verisk and Verisk
plans to affect a stock split of its common stock. Pro forma net
income/(loss) per share is computed as if this stock split
occurred at the beginning of 2007.
F-18
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
Accumulated
Other Comprehensive Loss
The following is a summary of accumulated other comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
Unrealized (losses)/gains on investments
|
|
$
|
(412
|
)
|
|
$
|
36
|
|
Unrealized foreign currency gains
|
|
|
154
|
|
|
|
172
|
|
Pension and postretirement unfunded liability adjustment
|
|
|
(8,441
|
)
|
|
|
(30,123
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(8,699
|
)
|
|
$
|
(29,915
|
)
|
|
|
|
|
|
|
|
|
|
The before tax and after tax amounts for these categories, and
the related tax benefit (expense) included in other
comprehensive loss are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
|
|
|
|
|
|
|
|
|
|
Benefit
|
|
|
|
|
June 30, 2007
|
|
Before Tax
|
|
|
(Expense)
|
|
|
After Tax
|
|
|
Unrealized holding gains on investments arising during the year
|
|
$
|
962
|
|
|
$
|
(375
|
)
|
|
$
|
587
|
|
Reclassification adjustment for amounts included in net income
|
|
|
(843
|
)
|
|
|
329
|
|
|
|
(514
|
)
|
Unrealized foreign currency gains
|
|
|
135
|
|
|
|
|
|
|
|
135
|
|
Pension and postretirement unfunded liability adjustment
|
|
|
8,320
|
|
|
|
(2,799
|
)
|
|
|
5,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive gain
|
|
$
|
8,574
|
|
|
$
|
(2,845
|
)
|
|
$
|
5,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses on investments arising during the year
|
|
$
|
(370
|
)
|
|
$
|
146
|
|
|
$
|
(224
|
)
|
Reclassification adjustment for amounts included in net income
|
|
|
1,120
|
|
|
|
(448
|
)
|
|
|
672
|
|
Unrealized foreign currency gains
|
|
|
18
|
|
|
|
|
|
|
|
18
|
|
Pension and postretirement unfunded liability adjustment
|
|
|
(35,589
|
)
|
|
|
13,907
|
|
|
|
(21,682
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss
|
|
$
|
(34,821
|
)
|
|
$
|
13,605
|
|
|
$
|
(21,216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 1998, the Company adopted the Insurance Services Office,
Inc. 1996 Incentive Plan (the Option Plan). The
Option Plan provides for the granting of options to key
employees and directors of the Company. Options granted have
varying exercise dates within four years after grant date and
expire after ten years. Stock obtained through the exercise of
options that are held by the employee for more than six months
and one day may be put to the Company and redeemed at the then
current fair value of the Class A common stock. For options
granted in 2002 through 2004, the Company has the ability to
defer the redemption for one year. For options granted after
2004, the Company has the ability to defer the redemption for up
to two years. During the six months ended June 30, 2008 and
the year ended December 31, 2007, stock options granted had
an exercise price equal to fair value of the Class A common
stock on date of grant. There are 1,992,795 shares of
Class A common stock approved for issuance under the plan,
of which up to 18,010 options to purchase shares were authorized
for future grants at June 30, 2008. Cash received from
stock option exercises for the six months ended June 30,
2008 was $1,209.
F-19
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
A summary of option activity under the Option Plan as of
June 30, 2008, and changes from the year ended
December 31, 2007 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
Number
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
of Options
|
|
|
Exercise Price
|
|
|
Value
|
|
|
Outstanding at December 31, 2007
|
|
|
496,753
|
|
|
$
|
320.46
|
|
|
$
|
269,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
56,990
|
|
|
$
|
862.00
|
|
|
|
|
|
Exercised
|
|
|
(77,686
|
)
|
|
$
|
302.94
|
|
|
$
|
43,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled or expired
|
|
|
(8,688
|
)
|
|
$
|
687.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2008
|
|
|
467,369
|
|
|
$
|
382.58
|
|
|
$
|
238,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at June 30, 2008
|
|
|
329,583
|
|
|
$
|
243.01
|
|
|
$
|
213,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise prices for options outstanding and exercisable at
June 30, 2008 ranged from $71 to $862 as outlined in the
following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options Outstanding
|
|
|
Stock Options Exercisable
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Stock
|
|
|
Weighted-
|
|
|
Average
|
|
|
Stock
|
|
|
Weighted-
|
|
Range of
|
|
Remaining
|
|
|
Options
|
|
|
Average
|
|
|
Remaining
|
|
|
Options
|
|
|
Average
|
|
Exercise Prices
|
|
Contractual Life
|
|
|
Outstanding
|
|
|
Exercise Price
|
|
|
Contractual Life
|
|
|
Exercisable
|
|
|
Exercise Price
|
|
|
$ 71 to $110
|
|
|
2.3
|
|
|
|
77,079
|
|
|
$
|
106.43
|
|
|
|
2.3
|
|
|
|
77,079
|
|
|
$
|
106.43
|
|
$116 to $148
|
|
|
4.6
|
|
|
|
45,352
|
|
|
$
|
141.90
|
|
|
|
4.6
|
|
|
|
45,352
|
|
|
$
|
141.90
|
|
$155 to $231
|
|
|
4.9
|
|
|
|
113,875
|
|
|
$
|
180.27
|
|
|
|
4.9
|
|
|
|
113,875
|
|
|
$
|
180.27
|
|
$240 to $445
|
|
|
6.8
|
|
|
|
88,860
|
|
|
$
|
415.87
|
|
|
|
6.8
|
|
|
|
66,720
|
|
|
$
|
411.41
|
|
$482 to $681
|
|
|
7.7
|
|
|
|
42,601
|
|
|
$
|
593.15
|
|
|
|
7.7
|
|
|
|
17,621
|
|
|
$
|
603.57
|
|
$755 to $862
|
|
|
9.2
|
|
|
|
99,602
|
|
|
$
|
817.38
|
|
|
|
8.6
|
|
|
|
8,936
|
|
|
$
|
765.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
467,369
|
|
|
|
|
|
|
|
|
|
|
|
329,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the six months ended June 30, 2008, the Company
granted the following stock options with exercise prices and
Black-Scholes values as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Fair Value
|
|
|
|
|
|
Black-Scholes
|
|
|
|
Stock Options
|
|
|
of Common
|
|
|
Exercise
|
|
|
Value of
|
|
Grant Dates
|
|
Granted
|
|
|
Stock(1)
|
|
|
Price
|
|
|
Options
|
|
|
March 1, 2008
|
|
|
56,990
|
|
|
$
|
862.00
|
|
|
$
|
862.00
|
|
|
$
|
204.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The fair value for these shares is the current valuation in
effect for the KSOP. This fair value is also utilized for all
Class A share transactions for the Insurance Services
Office, Inc. 1996 Incentive Plan.
|
F-20
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
The fair value of the stock options granted during the six
months ended June 30, 2008 was estimated on the date of
grant using a Black-Scholes option valuation model that used the
assumptions noted in the following table.
|
|
|
|
|
June 30, 2008
|
|
Option pricing model
|
|
Black-Scholes
|
Expected volatility
|
|
28.15%
|
Risk-free interest rate
|
|
2.50%
|
Expected term in years
|
|
5.1
|
Dividend yield
|
|
1.90%
|
Weighted average grant date fair value per stock option
|
|
$204.72
|
The expected term (estimated period of time outstanding) for
awards granted subsequent to January 1, 2008 was estimated
based on studies of historical experience and projected exercise
behavior. The risk-free interest rate is based on the yield of
U.S. Treasury zero coupon securities with a maturity equal
to the expected term of the equity award. Expected volatility
for awards prior to January 1, 2008 was based on historical
volatility for a period equal to the stock options
expected term, ending on the day of grant, and calculated on a
quarterly basis for purposes of the KSOP. For awards granted
after January 1, 2008, the volatility factor was based on
an average of the historical stock prices of a group of the
Companys peers over the most recent period commensurate
with the expected term of the stock option award. The expected
dividends yield was based on the Companys expected annual
dividend rate on the date of grant.
The Company estimates expected forfeitures of equity awards at
the date of grant and recognizes compensation expense only for
those awards expected to vest. The forfeiture assumption is
ultimately adjusted to the actual forfeiture rate. Changes in
the forfeiture assumptions may impact the total amount of
expense ultimately recognized over the requisite service period,
and may impact the timing of expense recognized over the
requisite service period.
As of June 30, 2008, there was $24,477 of total
unrecognized compensation cost related to nonvested share-based
compensation arrangements granted under the Option Plan. That
cost is expected to be recognized over a weighted-average period
of 3.01 years. The total grant date fair value of shares
vested during the six month periods ended June 30, 2007 and
2008 was $3,940 and $5,526, respectively.
|
|
15.
|
Pension
and Postretirement Benefits:
|
Prior to January 1, 2002, the Company maintained a
qualified defined benefit pension plan for substantially all of
its employees through membership in the Pension Plan for
Insurance Organizations (the Pension Plan), a
multiple-employer trust. The Company has applied the projected
unit credit cost method for its pension plan, which attributes
an equal portion of total projected benefits to each year of
employee service. Effective January 1, 2002, the Company
amended the Pension Plan to determine future benefits using a
cash balance formula. Under the cash balance formula, each
participant has an account which is credited annually based on
salary rates determined by years of service, as well as the
interest earned on their previous year-end cash balance. Prior
to December 31, 2001, pension plan benefits were based on
years of service and the average of the five highest consecutive
years earnings of the last ten years. Effective
March 1, 2005, the Company established the Profit Sharing
Plan, a defined contribution plan, to replace the Pension Plan
for all eligible employees hired on or after March 1, 2005.
The Company also has a non-qualified supplemental cash balance
plan (SERP) for certain employees. The SERP is
funded from the general assets of the Company.
The Company also provides certain healthcare and life insurance
benefits for both active and retired employees. The
Postretirement Health and Life Insurance Plan (the
Postretirement Plan) is contributory,
F-21
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
requiring participants to pay a stated percentage of the premium
for coverage. As of October 1, 2001, the Postretirement
Plan was amended to freeze benefits for current retirees and
certain other employees at the January 1, 2002 level. Also,
as of October 1, 2001, the Postretirement Plan had a
curtailment, which eliminated retiree life insurance for all
active employees and healthcare benefits for almost all future
retirees, effective January 1, 2002.
The components of the net periodic benefit cost for the Pension
Plan and the Postretirement Plan are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30,
|
|
|
|
Pension Benefits
|
|
|
Postretirement Plan
|
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
Service cost
|
|
$
|
4,076
|
|
|
$
|
3,876
|
|
|
$
|
|
|
|
$
|
|
|
Interest cost
|
|
|
10,476
|
|
|
|
10,844
|
|
|
|
834
|
|
|
|
850
|
|
Amortization of transition obligation
|
|
|
|
|
|
|
|
|
|
|
82
|
|
|
|
100
|
|
Recognized net actuarial loss
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
Expected return on plan assets
|
|
|
(13,730
|
)
|
|
|
(13,720
|
)
|
|
|
|
|
|
|
|
|
Amortization of prior year service cost
|
|
|
(400
|
)
|
|
|
(400
|
)
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss
|
|
|
286
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic expense
|
|
$
|
708
|
|
|
$
|
850
|
|
|
$
|
918
|
|
|
$
|
950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
$
|
88
|
|
|
$
|
2,405
|
|
|
$
|
2,255
|
|
|
$
|
1,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments to the Pension Plan and the Postretirement Plan are
consistent with the amounts disclosed as of December 31,
2007.
The Company has two operating segments, Risk Assessment and
Decision Analytics. These designations have been made as the
discrete operating results are reviewed by the Companys
chief decision maker to assess profitability. The Company does
not allocate investment income, interest income, interest
expense or income tax expense, since these items are not
considered in evaluating the segments overall operating
performance. The Company does not evaluate the financial
performance of each segment based on assets.
Risk Assessment:
The Company is the
leading provider of statistical, actuarial and underwriting data
for the U.S. P&C insurance industry. The
Companys databases include cleansed and standardized
records describing premiums and losses in insurance
transactions, casualty and property risk attributes for
commercial buildings and their occupants and fire suppression
capabilities of municipalities. The Company uses this data to
create policy language and proprietary risk classifications that
are industry standards and to generate prospective loss cost
estimates used to price insurance policies.
Decision Analytics:
The Company
develops solutions that its customers use to analyze the four
key processes in managing risk: prediction of loss,
selection and pricing of risk, detection and
prevention of fraud and quantification of
loss. The Companys combination of algorithms and
analytic methods incorporates its proprietary data to generate
solutions in each of these four categories.
In most cases, the Companys customers integrate the
solutions into their models, formulas or underwriting criteria
in order to predict potential loss events, ranging from
hurricanes and earthquakes to unanticipated healthcare claims.
The Company develops catastrophe and extreme event models and
offer solutions covering natural and man-made risks, including
acts of terrorism. The Company also develops
F-22
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
solutions that allow customers to quantify costs after loss
events occur. Fraud solutions include data on claim histories,
analysis of mortgage applications to identify misinformation,
analysis of claims to find emerging patterns of fraud and
identification of suspicious claims in the insurance, mortgage
and healthcare sectors.
The following table provides the Companys revenue and
operating income performance by reportable segment for the six
month periods ended June 30, 2007 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007
|
|
|
|
Risk
|
|
|
Decision
|
|
|
|
|
|
|
Assessment
|
|
|
Analytics
|
|
|
Total
|
|
|
Revenues
|
|
$
|
244,556
|
|
|
$
|
155,432
|
|
|
$
|
399,988
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
104,917
|
|
|
|
71,585
|
|
|
|
176,502
|
|
Selling, general, and administrative
|
|
|
34,820
|
|
|
|
20,780
|
|
|
|
55,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment EBITDA
|
|
|
104,819
|
|
|
|
63,067
|
|
|
|
167,886
|
|
Depreciation and amortization of fixed assets
|
|
|
9,541
|
|
|
|
5,957
|
|
|
|
15,498
|
|
Amortization of intangible assets
|
|
|
572
|
|
|
|
16,668
|
|
|
|
17,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
94,706
|
|
|
|
40,442
|
|
|
|
135,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
|
|
|
|
|
|
|
|
4,392
|
|
Realized gains on securities, net
|
|
|
|
|
|
|
|
|
|
|
592
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(11,474
|
)
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income from continuing operations before income
taxes
|
|
|
|
|
|
|
|
|
|
$
|
128,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
12,185
|
|
|
$
|
10,865
|
|
|
$
|
23,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
|
Risk
|
|
|
Decision
|
|
|
|
|
|
|
Assessment
|
|
|
Analytics
|
|
|
Total
|
|
|
Revenues
|
|
$
|
253,356
|
|
|
$
|
184,334
|
|
|
$
|
437,690
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
103,140
|
|
|
|
87,538
|
|
|
|
190,678
|
|
Selling, general, and administrative
|
|
|
36,716
|
|
|
|
22,312
|
|
|
|
59,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment EBITDA
|
|
|
113,500
|
|
|
|
74,484
|
|
|
|
187,984
|
|
Depreciation and amortization of fixed assets
|
|
|
9,278
|
|
|
|
7,146
|
|
|
|
16,424
|
|
Amortization of intangible assets
|
|
|
427
|
|
|
|
14,510
|
|
|
|
14,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
103,795
|
|
|
|
52,828
|
|
|
|
156,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
|
|
|
|
|
|
|
|
1,617
|
|
Realized losses on securities, net
|
|
|
|
|
|
|
|
|
|
|
(1,286
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(14,173
|
)
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income from continuing operations before income
taxes
|
|
|
|
|
|
|
|
|
|
$
|
142,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
6,481
|
|
|
$
|
11,329
|
|
|
$
|
17,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating segment revenue by type of service is provided below:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
Risk Assessment:
|
|
|
|
|
|
|
|
|
Industry standard insurance programs
|
|
|
157,045
|
|
|
|
165,719
|
|
Property-specific rating and underwriting information
|
|
|
63,786
|
|
|
|
63,344
|
|
Statistical agency and data services
|
|
|
13,643
|
|
|
|
13,820
|
|
Actuarial services
|
|
|
10,082
|
|
|
|
10,473
|
|
|
|
|
|
|
|
|
|
|
Total Risk Assessment
|
|
$
|
244,556
|
|
|
$
|
253,356
|
|
|
|
|
|
|
|
|
|
|
Decision Analytics:
|
|
|
|
|
|
|
|
|
Fraud identification and detection solutions
|
|
$
|
88,532
|
|
|
$
|
102,858
|
|
Loss prediction solutions
|
|
|
38,025
|
|
|
|
46,260
|
|
Loss quantification solutions
|
|
|
28,875
|
|
|
|
35,216
|
|
|
|
|
|
|
|
|
|
|
Total Decision Analytics
|
|
$
|
155,432
|
|
|
$
|
184,334
|
|
|
|
|
|
|
|
|
|
|
|
|
17.
|
Research
and Development Costs:
|
Research and development costs, which primarily relate to the
personnel and related overhead costs incurred in developing new
products and services, are expensed as incurred. Such costs were
$4,096 and $4,535 for the six month periods ended June 30,
2007 and 2008, respectively, and were included in selling,
general and administrative expenses.
F-24
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
The Company considers its Class A and Class B
stockholders that own more than 5% of the outstanding stock
within the respective class to be related parties as defined
within FAS No. 57,
Related Party Disclosures
.
At June 30, 2008, there were six Class B stockholders
each owning more than 5% of the outstanding Class B common
stock. Two of these six Class B stockholders have employees
who serve on the Companys board of directors.
The Company incurred expenses associated with the payment of
insurance coverage premiums to certain of the largest
stockholders aggregating $350 and $408 for the six month periods
ended June 30, 2007 and 2008, respectively. These expenses
are included in Cost of revenues and Selling,
general and administrative in the condensed consolidated
statements of operations.
|
|
19.
|
Commitments
and Contingencies:
|
The Company is a party to legal proceedings with respect to a
variety of matters in the ordinary course of business. Including
those matters described below, the Company is unable, at the
present time, to determine the ultimate resolution of or provide
a reasonable estimate of the range of possible loss attributable
to these matters or the impact they may have on the
Companys results of operations, financial position, or
cash flows. This is primarily because many of these cases remain
in their early stages and only limited discovery has taken
place. Although the Company believes it has strong defenses for
the proceedings described below, the Company could in the future
incur judgments or enter into settlements of claims that could
have a material adverse effect on its results of operations,
financial position or cash flows.
Claims
Outcome Advisor Litigation
Hensley, et al. v. Computer Sciences Corporation et al.
is a putative nationwide class action complaint, filed in
February 2005, in Miller County, Arkansas state court.
Defendants include numerous insurance companies and providers of
software products used by insurers in paying claims. The Company
is among the named defendants. Plaintiffs allege that certain
software products, including our Claims Outcome Advisor product
and a competing software product sold by Computer Sciences
Corporation, improperly estimated the amount to be paid by
insurers to their policyholders in connection with claims for
bodily injuries. On August 18, 2008, the Company was
voluntarily dismissed from the case with prejudice.
The Company has entered into settlement agreements with
plaintiffs asserting claims relating to the use of Claims
Outcome Advisor by defendants Hanover Insurance Group,
Progressive Car Insurance, and Liberty Mutual Insurance Group.
Each of these settlements has been granted final approval by the
court and together they resolve the claims asserted in this case
against us with respect to the above insurance companies, who
settled the claims against them as well. A provision was
recorded in 2006 for this proceeding and the total amount we
paid in 2008 with respect to these settlements was less than
$2 million. A fourth defendant, The Automobile Club of
California, that is alleged to have used Claims Outcome Advisor
has not settled. Plaintiffs have agreed to dismiss us from the
case with prejudice once a discovery dispute relating to certain
documents is resolved.
Xactware
Litigation
The following two lawsuits have been filed by or on behalf of
groups of Louisiana insurance policyholders who claim, among
other things, that certain insurers who used products and price
information supplied by our Xactware subsidiary (and those of
another provider) did not fully compensate policyholders for
property damage covered under their insurance policies. The
plaintiffs seek to recover compensation for their damages in an
amount equal to the difference between the amount paid by the
defendants and the fair market repair/restoration costs of their
damaged property.
F-25
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
Schafer v. State Farm Fire & Cas. Co.
, et
al. is a putative class action pending against the Company and
State Farm Fire & Casualty Company filed in
March 2007 in the Eastern District of Louisiana. The
complaint alleged antitrust violations, breach of contract,
negligence, bad faith, and fraud. The court dismissed the
antitrust claim as to both defendants and dismissed all claims
against us other than fraud, which will proceed to the discovery
phase along with the remaining claims against State Farm.
Plaintiffs have moved to certify a class with respect to the
fraud and breach of contract claims which the defendants will
oppose.
Mornay v. Travelers Ins. Co.
, et al. is a putative
class action pending against the Company and Travelers Insurance
Company filed in November 2007 in the Eastern District of
Louisiana. The complaint alleged antitrust violations, breach of
contract, negligence, bad faith, and fraud. As in Schafer, the
court dismissed the antitrust claim as to both defendants and
dismissed all claims against us other than fraud. The court has
stayed the proceedings pending an appraisal of the lead
plaintiffs insurance claims.
The third lawsuit,
Louisiana ex rel. Foti v. Allstate
Ins. Co.
, is a putative parens patriae action filed by the
Louisiana Attorney General in November 2007 in Louisiana state
court against numerous insurance companies, the Company, and
other solution providers, and consultants. The complaint
contains allegations of an antitrust conspiracy among the
defendants with respect to the payment of insurance claims for
property damage and seeks the forfeiture of any illegal profits
and treble damages. Defendants removed the case to the Eastern
District of Louisiana. A motion to remand the case to state
court was denied by the district court. That decision was
affirmed by the United States Court of Appeals for the Fifth
Circuit. Defendants have filed a motion to dismiss and
plaintiffs are opposing the motion.
At this time it is not possible to determine the ultimate
resolution of, or estimate the liability related to, these
matters. No provision for losses has been provided in connection
with the Xactware litigation.
iiX
Litigation
In March 2007, our Insurance Information Exchange, or iiX,
subsidiary, as well as other information providers and insurers
in the State of Texas, were served with a summons and class
action complaint filed in the United States District Court for
the Eastern District of Texas alleging violations of the Driver
Privacy Protection Act, or the DPPA. Plaintiffs brought the
action on their own behalf and on behalf of all similarly
situated individuals whose personal information is contained in
any motor vehicle record maintained by the State of Texas and
who have not provided express consent to the State of Texas for
the distribution of their personal information for purposes not
enumerated by the DPPA and whose personal information has been
knowingly obtained and used by the defendants. The complaint
alleges that the defendants knowingly obtained such personal
information and that the obtaining and use of this personal
information was not for a purpose authorized by the DPPA. The
complaint seeks liquidated damages in the amount of $2,500 for
each instance of a violation of DPPA, punitive damages and the
destruction of any illegally obtained personal information. The
Company has filed a motion to dismiss the complaint based on
failure to state a claim and lack of standing and a decision on
that motion is pending.
F-26
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
The Company provided full recourse loans, callable at the
Companys discretion, to directors and senior management in
connection with exercising their stock options. As of
June 30, 2008, the Notes receivable from
stockholders included within Total assets in
the accompanying condensed consolidated balance sheet have been
reclassified to current after the Company received Board
approval for corporate governance changes necessary to allow the
Company to proceed with a proposed IPO. As of August 7,
2008, this loan program has been terminated and the loans were
called by the Company. All of the notes receivable classified as
assets and classified as components of Total redeemable
common stock have subsequently been repaid, with the
exception of $722, which will be repaid by October 2008.
**************
F-27
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of
Verisk Analytics, Inc.
Jersey City, New Jersey
We have audited the accompanying balance sheet for Verisk
Analytics, Inc. (the Company) as of June 30,
2008. This financial statement is the responsibility of the
Companys management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet,
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
balance sheet presentation. We believe that our audit of the
balance sheet provides a reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all
material respects, the financial position of Verisk Analytics,
Inc. at June 30, 2008, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
August 12, 2008
F-28
VERISK
ANALYTICS, INC.
BALANCE
SHEET
June 30,
2008
|
|
|
|
|
ASSETS
|
Cash
|
|
$
|
1,000
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,000
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Total liabilities
|
|
$
|
|
|
Commitments and contingencies
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
Common stock, $.01 par value; 1,000 shares authorized;
100 shares issued
|
|
$
|
1
|
|
Additional paid-in capital
|
|
|
999
|
|
|
|
|
|
|
Total stockholders equity
|
|
$
|
1,000
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,000
|
|
|
|
|
|
|
The accompanying notes are an integral part of this financial
statement.
F-29
VERISK
ANALYTICS, INC.
NOTES TO
FINANCIAL STATEMENT
On June 27, 2008, the Companys stockholders approved
certain corporate governance changes necessary to allow the
Company to proceed with a proposed initial public offering
(IPO). Immediately prior to the completion of the
proposed IPO, the Company will undergo a corporate
reorganization whereby the Class A and Class B common
stock of the Company will be exchanged by the current
stockholders for the common stock of Verisk Analytics, Inc.
(Verisk) on a one-for-one basis. Verisk, formed on
May 23, 2008, was established to serve as the parent
holding company of Insurance Services Office, Inc.
All stock options granted under the Insurance Services Office,
Inc. 1996 Incentive Plan will be transferred to Verisk, without
modification to the terms of the options other than such options
will be exercisable for Class A common stock of Verisk.
Class A common stock of Verisk will not be redeemable by
the holder and only Class A common stock will be offered to
the public.
Upon consummation of the IPO, two new series of Class B
common stock, Class B (Series 1) common stock (the
Class B-1)
and Class B (Series 2) common stock (the
Class B-2)
will be formed and 50 percent of each Class B
stockholders existing Class B common stock will be
converted into shares of new
Class B-1
common stock and the remaining 50 percent of each
Class B stockholders existing Class B common
stock will be converted into shares of new
Class B-2
common stock. Each share of
Class B-1
common stock shall convert automatically, without any action by
the stockholder, into one share of Class A common stock
18 months after the date of the IPO. Each share of
Class B-2 common stock shall convert automatically, without
any action by the stockholder, into one share of Class A
common stock 30 months after the date of the IPO. In
conjunction with the IPO, Verisk plans to effect a stock split
of both classes of common stock. The strike price of stock
options will be adjusted based on the effect of the stock split.
|
|
2.
|
Basis of
Presentation:
|
The accompanying financial statements have been prepared on the
basis of accounting principles generally accepted in the United
States of America.
|
|
3.
|
Commitments
and Contingencies:
|
The Company does not have any commitments and contingencies.
F-30
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board
of Directors and Stockholders of
Insurance Services Office, Inc.
Jersey City, New Jersey
We have audited the accompanying consolidated balance sheets of
Insurance Services Office, Inc. and subsidiaries (the
Company) as of December 31, 2007 and 2006, and
the related consolidated statements of operations, changes in
stockholders deficit, and cash flows for each of the three
years in the period ended December 31, 2007. Our audits
also included the financial statement schedule listed in the
Index at Item 16. These financial statements and financial
statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also 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, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as of December 31, 2007 and 2006, and the results
of its operations and its cash flows for each of the three years
in the period ended December 31, 2007, in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial
statements, effective January 1, 2007, the Company adopted
Financial Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
.
As discussed in Note 2 to the consolidated financial
statements, the Company adopted the recognition and disclosure
provisions of Statement of Financial Accounting Standards
No. 158,
Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans an amendment
of FASB Statements No. 87, 88, 106 and 132(R)
,
effective December 31, 2006.
/s/ Deloitte & Touche LLP
Parsippany,
New Jersey
August 12, 2008
F-31
INSURANCE
SERVICES OFFICE, INC.
CONSOLIDATED
BALANCE SHEETS
December 31, 2006
and 2007
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands, except for share and per share data)
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
99,152
|
|
|
$
|
24,049
|
|
Available-for-sale securities
|
|
|
7,257
|
|
|
|
28,350
|
|
Accounts receivable, net (including amounts from related parties
of $1,364 and $949, respectively)
|
|
|
91,725
|
|
|
|
86,488
|
|
Notes receivable from stockholders
|
|
|
4,271
|
|
|
|
347
|
|
Prepaid expenses
|
|
|
8,929
|
|
|
|
7,609
|
|
Deferred income taxes
|
|
|
19,019
|
|
|
|
22,654
|
|
Federal and state taxes receivable
|
|
|
5,449
|
|
|
|
3,003
|
|
Other current assets
|
|
|
13,191
|
|
|
|
8,525
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
248,993
|
|
|
|
181,025
|
|
Noncurrent assets:
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
|
70,470
|
|
|
|
85,436
|
|
Intangible assets, net
|
|
|
139,718
|
|
|
|
141,160
|
|
Goodwill
|
|
|
224,680
|
|
|
|
339,891
|
|
Notes receivable from stockholders
|
|
|
11,883
|
|
|
|
12,356
|
|
Deferred income taxes
|
|
|
37,294
|
|
|
|
55,679
|
|
Other assets
|
|
|
11,693
|
|
|
|
12,936
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
744,731
|
|
|
$
|
828,483
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
66,710
|
|
|
$
|
78,234
|
|
Acquisition related liabilities
|
|
|
13,414
|
|
|
|
100,300
|
|
Short-term debt
|
|
|
120,851
|
|
|
|
35,171
|
|
Pension and postretirement benefits, current
|
|
|
4,324
|
|
|
|
4,636
|
|
Fees received in advance (including amounts from related parties
of $8,677 and $5,817, respectively)
|
|
|
124,136
|
|
|
|
127,907
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
329,435
|
|
|
|
346,248
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
327,847
|
|
|
|
403,159
|
|
Pension benefits
|
|
|
29,185
|
|
|
|
17,637
|
|
Postretirement benefits
|
|
|
26,525
|
|
|
|
23,894
|
|
Other liabilities
|
|
|
22,163
|
|
|
|
62,085
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
735,155
|
|
|
|
853,023
|
|
Redeemable common stock
|
|
|
|
|
|
|
|
|
Class A redeemable common stock, stated at redemption
value, $.01 par value; 6,700,000 shares authorized;
2,849,885 and 2,922,253 shares issued and 1,347,540 and
1,163,066 outstanding in 2006 and 2007, respectively
|
|
|
1,183,049
|
|
|
|
1,217,942
|
|
Unearned Class A common stock KSOP shares
|
|
|
(4,913
|
)
|
|
|
(4,129
|
)
|
Notes receivable from stockholders
|
|
|
(52,203
|
)
|
|
|
(42,625
|
)
|
|
|
|
|
|
|
|
|
|
Total redeemable common stock
|
|
|
1,125,933
|
|
|
|
1,171,188
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders deficit:
|
|
|
|
|
|
|
|
|
Class B common stock, $.01 par value;
20,000,000 shares authorized; 10,004,500 shares issued
and 2,945,900 and 2,873,412 outstanding in 2006 and 2007,
respectively
|
|
|
100
|
|
|
|
100
|
|
Accumulated other comprehensive loss
|
|
|
(16,017
|
)
|
|
|
(8,699
|
)
|
Accumulated deficit
|
|
|
(457,557
|
)
|
|
|
(508,136
|
)
|
Class B common stock, treasury stock, 7,058,600 and
7,131,088 shares in 2006 and 2007, respectively
|
|
|
(642,883
|
)
|
|
|
(678,993
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(1,116,357
|
)
|
|
|
(1,195,728
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders deficit
|
|
$
|
744,731
|
|
|
$
|
828,483
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-32
INSURANCE
SERVICES OFFICE, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
For The
Years Ended December 31, 2005, 2006 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands, except for share
|
|
|
|
and per share data)
|
|
|
Revenues (includes revenues from related parties of $79,269,
$83,919 and $84,891 for 2005, 2006 and 2007, respectively)
|
|
$
|
645,660
|
|
|
$
|
730,133
|
|
|
$
|
802,195
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of items shown separately below)
|
|
|
294,911
|
|
|
|
331,804
|
|
|
|
357,191
|
|
Selling, general and administrative
|
|
|
88,723
|
|
|
|
100,124
|
|
|
|
107,576
|
|
Depreciation and amortization of fixed assets
|
|
|
22,024
|
|
|
|
28,007
|
|
|
|
31,745
|
|
Amortization of intangible assets
|
|
|
19,800
|
|
|
|
26,854
|
|
|
|
33,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
425,458
|
|
|
|
486,789
|
|
|
|
530,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
220,202
|
|
|
|
243,344
|
|
|
|
271,767
|
|
Other income/(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
2,919
|
|
|
|
6,585
|
|
|
|
8,442
|
|
Realized gains (losses) on securities, net
|
|
|
27
|
|
|
|
(375
|
)
|
|
|
857
|
|
Interest expense
|
|
|
(10,465
|
)
|
|
|
(16,668
|
)
|
|
|
(22,928
|
)
|
Other income (expense)
|
|
|
(14
|
)
|
|
|
(109
|
)
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(7,533
|
)
|
|
|
(10,567
|
)
|
|
|
(13,620
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
212,669
|
|
|
|
232,777
|
|
|
|
258,147
|
|
Provision for income taxes
|
|
|
(85,722
|
)
|
|
|
(86,921
|
)
|
|
|
(103,184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
126,947
|
|
|
|
145,856
|
|
|
|
154,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax benefit of $721,
$712 and $1,496 in 2005, 2006 and 2007, respectively
|
|
|
(2,574
|
)
|
|
|
(1,805
|
)
|
|
|
(4,589
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
124,373
|
|
|
$
|
144,051
|
|
|
$
|
150,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income/(loss) per share of Class A and Class B:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
29.81
|
|
|
$
|
35.31
|
|
|
$
|
38.58
|
|
Loss from discontinued operations
|
|
|
(0.61
|
)
|
|
|
(0.44
|
)
|
|
|
(1.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$
|
29.20
|
|
|
$
|
34.87
|
|
|
$
|
37.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income/(loss) per share of Class A and Class B:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
28.45
|
|
|
$
|
33.85
|
|
|
$
|
37.03
|
|
Loss from discontinued operations
|
|
|
(0.58
|
)
|
|
|
(0.42
|
)
|
|
|
(1.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$
|
27.87
|
|
|
$
|
33.43
|
|
|
$
|
35.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,258,989
|
|
|
|
4,130,962
|
|
|
|
4,016,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
4,462,109
|
|
|
|
4,308,976
|
|
|
|
4,185,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic income/(loss) per share of Class A and
Class B (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma diluted income/(loss) per share of Class A and
Class B (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in pro forma per share amounts
(unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-33
INSURANCE
SERVICES OFFICE, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS DEFICIT
For The
Years Ended December 31, 2005, 2006 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Class B Common Stock
|
|
|
Treasury
|
|
|
Stockholders
|
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Shares
|
|
|
Par Value
|
|
|
Stock
|
|
|
Deficit
|
|
|
|
(In thousands, except for share data)
|
|
|
Balance, January 1, 2005
|
|
$
|
(135,830
|
)
|
|
$
|
191
|
|
|
|
10,004,500
|
|
|
$
|
100
|
|
|
$
|
(602,390
|
)
|
|
$
|
(737,929
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
124,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124,373
|
|
Other comprehensive losses
|
|
|
|
|
|
|
(2,925
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,925
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121,448
|
|
Treasury stock acquired Class B common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,378
|
)
|
|
|
(39,378
|
)
|
Stock options exercised for 233,608 shares (including tax
benefit of $27,852)
|
|
|
(70,854
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(70,854
|
)
|
Increase in redemption value of Class A common stock
|
|
|
(211,581
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(211,581
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
$
|
(293,892
|
)
|
|
$
|
(2,734
|
)
|
|
|
10,004,500
|
|
|
$
|
100
|
|
|
$
|
(641,768
|
)
|
|
$
|
(938,294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
144,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144,051
|
|
Other comprehensive gains
|
|
|
|
|
|
|
2,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,352
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
146,403
|
|
Incremental adjustment to adopt FAS No. 158, net of
tax of $9,317
|
|
|
|
|
|
|
(15,635
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,635
|
)
|
Treasury stock acquired Class B common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,115
|
)
|
|
|
(1,115
|
)
|
Stock options exercised for 179,967 shares (including tax
benefit of $31,964)
|
|
|
(81,516
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(81,516
|
)
|
Increase in redemption value of Class A common stock
|
|
|
(226,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(226,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
$
|
(457,557
|
)
|
|
$
|
(16,017
|
)
|
|
|
10,004,500
|
|
|
$
|
100
|
|
|
$
|
(642,883
|
)
|
|
$
|
(1,116,357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
150,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,374
|
|
Other comprehensive gains
|
|
|
|
|
|
|
7,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
157,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock acquired Class B common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,110
|
)
|
|
|
(36,110
|
)
|
Stock options exercised for 72,083 shares (including tax
benefit of $12,798)
|
|
|
(36,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,655
|
)
|
Cumulative effect adjustment to adopt FIN No. 48
|
|
|
(10,338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,338
|
)
|
Increase in redemption value of Class A common stock
|
|
|
(153,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(153,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
(508,136
|
)
|
|
$
|
(8,699
|
)
|
|
|
10,004,500
|
|
|
$
|
100
|
|
|
$
|
(678,993
|
)
|
|
$
|
(1,195,728
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-34
INSURANCE
SERVICES OFFICE, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For The
Years Ended December 31, 2005, 2006 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
124,373
|
|
|
$
|
144,051
|
|
|
$
|
150,374
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of fixed assets
|
|
|
22,123
|
|
|
|
28,119
|
|
|
|
31,843
|
|
Amortization of intangible assets
|
|
|
19,800
|
|
|
|
26,854
|
|
|
|
33,916
|
|
KSOP compensation expense
|
|
|
13,793
|
|
|
|
18,779
|
|
|
|
22,247
|
|
Stock-based compensation
|
|
|
4,094
|
|
|
|
6,148
|
|
|
|
8,244
|
|
Non-cash charges associated with other employee compensation
plans
|
|
|
601
|
|
|
|
1,909
|
|
|
|
2,182
|
|
Goodwill impairment
|
|
|
1,500
|
|
|
|
|
|
|
|
1,744
|
|
Accrued interest on notes receivable from stockholders
|
|
|
(1,516
|
)
|
|
|
(2,190
|
)
|
|
|
(2,454
|
)
|
Realized (gains) losses on securities
|
|
|
(27
|
)
|
|
|
375
|
|
|
|
(857
|
)
|
Deferred income taxes
|
|
|
(7,776
|
)
|
|
|
(11,848
|
)
|
|
|
(5,698
|
)
|
Other operating
|
|
|
185
|
|
|
|
216
|
|
|
|
298
|
|
Loss on disposal of fixed assets
|
|
|
|
|
|
|
2,374
|
|
|
|
1,791
|
|
Excess tax benefits from exercised stock options
|
|
|
(27,852
|
)
|
|
|
(31,964
|
)
|
|
|
(12,798
|
)
|
Changes in assets and liabilities, net of effects from
acquisitions and dispositions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(12,263
|
)
|
|
|
(3,987
|
)
|
|
|
7,194
|
|
Prepaid expenses and other assets
|
|
|
(3,486
|
)
|
|
|
(1,751
|
)
|
|
|
2,213
|
|
Federal and state taxes receivable
|
|
|
25,938
|
|
|
|
19,262
|
|
|
|
13,062
|
|
Accounts payable and accrued liabilities
|
|
|
9,656
|
|
|
|
(7,014
|
)
|
|
|
(8,294
|
)
|
Fees received in advance
|
|
|
3,682
|
|
|
|
27,219
|
|
|
|
3,751
|
|
Other liabilities
|
|
|
1,246
|
|
|
|
6,947
|
|
|
|
(237
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
174,071
|
|
|
|
223,499
|
|
|
|
248,521
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-35
INSURANCE
SERVICES OFFICE, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
For the
Years Ended December 31, 2005, 2006 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired of $3,466, $532 and $120,
respectively
|
|
|
(59,249
|
)
|
|
|
(201,617
|
)
|
|
|
(50,658
|
)
|
Earnout payments
|
|
|
(10,771
|
)
|
|
|
|
|
|
|
(3,191
|
)
|
Proceeds from release of contingent escrows
|
|
|
2,024
|
|
|
|
297
|
|
|
|
3,039
|
|
Escrow funding associated with acquisitions
|
|
|
(14,354
|
)
|
|
|
(14,600
|
)
|
|
|
(4,375
|
)
|
Purchases of available-for-sale securities
|
|
|
(496
|
)
|
|
|
(35,081
|
)
|
|
|
(44,101
|
)
|
Proceeds from sales and maturities of available-for-sale
securities
|
|
|
402
|
|
|
|
34,893
|
|
|
|
22,872
|
|
Purchases of fixed assets
|
|
|
(24,019
|
)
|
|
|
(25,742
|
)
|
|
|
(32,941
|
)
|
Proceeds from receipt of notes receivable from stockholders
|
|
|
4
|
|
|
|
|
|
|
|
301
|
|
Issuance of notes receivable from stockholders
|
|
|
(985
|
)
|
|
|
(1,602
|
)
|
|
|
(1,777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(107,444
|
)
|
|
|
(243,452
|
)
|
|
|
(110,831
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of short-term debt
|
|
|
15,000
|
|
|
|
15,000
|
|
|
|
30,000
|
|
Proceeds from issuance of long-term debt
|
|
|
220,000
|
|
|
|
175,000
|
|
|
|
85,000
|
|
Redemption of Class A common stock
|
|
|
(141,857
|
)
|
|
|
(126,857
|
)
|
|
|
(168,660
|
)
|
Repurchase of Class B common stock
|
|
|
(39,378
|
)
|
|
|
(1,115
|
)
|
|
|
(36,110
|
)
|
Proceeds from issuance of Class A common stock
|
|
|
100
|
|
|
|
|
|
|
|
|
|
Repayment of short-term debt
|
|
|
(172,884
|
)
|
|
|
(18,356
|
)
|
|
|
(136,008
|
)
|
Excess tax benefits from exercised stock options
|
|
|
27,852
|
|
|
|
31,964
|
|
|
|
12,798
|
|
Proceeds from exercised stock options
|
|
|
213
|
|
|
|
271
|
|
|
|
389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(90,954
|
)
|
|
|
75,907
|
|
|
|
(212,591
|
)
|
Effect of exchange rate changes
|
|
|
(551
|
)
|
|
|
376
|
|
|
|
(202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(24,878
|
)
|
|
|
56,330
|
|
|
|
(75,103
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
67,700
|
|
|
|
42,822
|
|
|
|
99,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
42,822
|
|
|
$
|
99,152
|
|
|
$
|
24,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes paid
|
|
$
|
66,841
|
|
|
$
|
78,800
|
|
|
$
|
94,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
9,814
|
|
|
$
|
14,901
|
|
|
$
|
22,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans made to directors and officers in connection with the
exercise of stock options
|
|
$
|
(12,573
|
)
|
|
$
|
(24,438
|
)
|
|
$
|
(15,130
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock redemptions used to repay notes receivable from
stockholders maturities and to exercise stock options
|
|
$
|
32,720
|
|
|
$
|
13,854
|
|
|
$
|
35,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KSOP stock redemption funded in the prior year
|
|
$
|
|
|
|
$
|
10,001
|
|
|
$
|
2,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax (liability) asset established on date of acquisition
|
|
$
|
(8,918
|
)
|
|
$
|
7,542
|
|
|
$
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
$
|
8,712
|
|
|
$
|
|
|
|
$
|
9,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures included in accounts payable and accrued
liabilities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in goodwill due to acquisition related liabilities
|
|
$
|
1,000
|
|
|
$
|
4,362
|
|
|
$
|
98,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-36
INSURANCE
SERVICES OFFICE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in thousands, except for share and per share data, unless
otherwise stated)
Insurance Services Office, Inc. and its consolidated
subsidiaries (the Company) enable risk-bearing
businesses to better understand and manage their risks. The
Company provides its customers proprietary data that, combined
with analytic methods, creates embedded decision support
solutions. The Company is one of the largest aggregators and
providers of data pertaining to U.S. property and casualty
(P&C) insurance risks. The Company offers
solutions for detecting fraud in the U.S. P&C
insurance, mortgage and healthcare industries and sophisticated
methods to predict and quantify loss in diverse contexts ranging
from natural catastrophes to health insurance. The Company
provides solutions, including data, statistical models or
tailored analytics, all designed to allow clients to make more
logical decisions.
The Company was formed in 1971 as an advisory and rating
organization for the P&C insurance industry to provide
statistical and actuarial services, to develop insurance
programs and to assist insurance companies in meeting state
regulatory requirements. Over the past decade, the Company has
broadened its data assets, entered new markets, placed a greater
emphasis on analytics, and pursued strategic acquisitions.
|
|
2.
|
Basis of
Presentation and Summary of Significant Accounting
Policies:
|
The accompanying financial statements have been prepared on the
basis of accounting principles generally accepted in the United
States of America (U.S. GAAP). The preparation
of financial statements in conformity with these accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Significant estimates
include acquisition purchase price allocations, the fair value
of goodwill, the realization of deferred tax assets, acquisition
related liabilities, fair value of stock based compensation,
liabilities for pension and postretirement benefits, fair value
of the Companys common stock, and the estimate for the
allowance for doubtful accounts. Actual results may ultimately
differ from those estimates. Reclassifications from
Accounts payable and accrued liabilities to
Acquisition related liabilities, and from
Noncurrent pension benefits to Pension and
postretirement benefits, current in an amount of $254 have
been made in the 2006 consolidated balance sheet to conform to
the 2007 presentation. Significant accounting policies include
the following:
(a)
Intercompany Accounts and Transactions
The consolidated financial statements include the accounts of
Insurance Services Office, Inc. and subsidiaries. All
intercompany accounts and transactions have been eliminated.
(b)
Revenue Recognition
The following describes the Companys primary types of
revenues and the applicable revenue recognition policies. The
Companys revenues are primarily derived from sales of
services and revenue is recognized as services are performed and
information is delivered to our customers. Revenue is recognized
when persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, fees
and/or
price
is fixed or determinable and collectability is reasonably
assured.
Industry Standard Insurance Programs, Statistical Agent and
Data Services, and Actuarial Services
Industry standard insurance programs, statistical agent and data
services and actuarial services are sold to participating
insurance company customers under annual agreements covering a
calendar year where the price is determined at the inception of
the agreement. In accordance with SEC Staff Accounting
Bulletin No. 104
Revenue Recognition
(SAB No. 104), the Company
F-37
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
recognizes revenue ratably over the term of these annual
agreements, as services are performed and continuous access to
information is provided over the entire term of the agreements.
Property-Specific Rating and Underwriting Information
The Company provides property specific rating information
through reports issued for specific commercial properties, for
which revenue is recognized when the report is delivered to the
customer, assuming all other revenue recognition criteria are
met.
In addition, the Company provides hosting or software solutions
that provide continuous access to information about the
properties being insured and underwriting information in the
form of standard policy forms to be used by customers. As the
customer has a contractual right to take possession of the
software without significant penalty, revenues from these
arrangements are recognized in accordance with American
Institute of Certified Public Accountants (AICPA)
Statement of Position (SOP)
No. 97-2,
Software Revenue Recognition, as amended by
SOP No. 98-9,
Modification of
SOP 97-2,
Software Revenue Recognition, With Respect to Certain
Transactions
(SOP No. 97-2).
The Company recognizes software license revenue when the
arrangement does not require significant production,
customization, or modification of the software and the following
criteria are met: persuasive evidence of an agreement exists,
delivery has occurred, fees are fixed or determinable, and
collections are probable. These software arrangements include
post-contract customer support (PCS). Currently, the
Company recognizes software license revenue ratably over the
duration of the annual license term as vendor specific objective
evidence (VSOE) of PCS the only remaining
undelivered element, cannot be established in accordance with
SOP
No. 97-2.
Fraud Identification and Detection Solutions
Fraud identification and detection solutions are comprised of
transaction-based fees recognized as information is delivered to
customers, assuming all other revenue recognition criteria have
been met.
Loss Prediction
Loss prediction solutions consist of term-based software
licenses and revenues are recognized in accordance with
SOP No. 97-2.
These software arrangements include PCS, which includes
unspecified upgrades on a when and if available basis. The
Company recognizes software license revenue ratably over the
duration of the annual license term as VSOE of PCS, the only
remaining undelivered element, cannot be established in
accordance with
SOP No. 97-2.
The Company also provides software hosting arrangements to
customers whereby the customer does not have the right to take
possession of the software. Revenues from these contracts are
recognized in accordance with EITF
No. 00-03,
Application of AICPA Statement of Position
97-2
to
Arrangements that Include the Right to Use Software Stored on
Another Entitys Hardware
(EITF
No. 00-03).
As these arrangements include PCS throughout the hosting term,
revenues from these multiple element arrangements are recognized
in accordance with EITF
No. 00-21,
Revenue Arrangements with Multiple Deliverables
(EITF
No. 00-21).
The Company recognizes revenue ratably over the duration of the
license term, which range from one to five years, since the
elements do not have stand alone value.
Loss Quantification Solutions
Loss quantification solutions consist of term-based software
subscription licenses and revenues are recognized in accordance
with
SOP No. 97-2.
These software arrangements include PCS,
F-38
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
which includes unspecified upgrades on a when and if available
basis. Customers are billed for access on a monthly basis and
the Company recognizes revenue accordingly.
With respect to an insignificant percentage of revenues, the
Company uses contract accounting, as required by
SOP No. 97-2,
when the arrangement with the customer includes significant
customization, modification, or production of software. For
these elements, revenue is recognized in accordance with
SOP No. 81-1,
Accounting for Performance of Construction Type and Certain
Production-Type Contracts,
using the
percentage-of-completion method, which requires the use of
estimates. In such instances, management is required to estimate
the input measures, based on hours incurred to date compared to
total estimated hours of the project, with consideration also
given to output measures, such as contract milestones, when
applicable. Adjustments to estimates are made in the period in
which the facts requiring such revisions become known and,
accordingly, recognized revenues and profits are subject to
revisions as the contract progresses to completion. The Company
considers the contract substantially complete when there is
compliance with all performance specifications and there are no
remaining costs or potential risk.
(c)
Fees Received in Advance
The Company invoices its customers in annual, quarterly,
monthly, or milestone installments. Amounts billed and collected
in advance of contract terms are recorded as a fees received in
advance on the balance sheet and are recognized as the services
are performed and the applicable revenue recognition criteria
are met.
(d)
Fixed Assets
Property and equipment, internal-use software and finite-lived
intangibles are stated at cost less accumulated depreciation and
amortization which are computed on a straight-line basis over
their estimated useful lives. Leasehold improvements are
amortized over the shorter of the useful life of the asset or
the lease term.
The Companys internal software development costs primarily
relate to internal-use software. Such costs are capitalized in
the application development stage in accordance with AICPA
SOP No. 98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use
. Software development costs are
amortized on a straight-line basis over a three year period
which management believes represents the useful life of these
capitalized costs.
In accordance with FAS No. 144,
Accounting for the
Impairment or Disposal of Long-Lived Assets
, whenever events
or changes in circumstances indicate that the carrying amount of
long-lived assets may not be recoverable, the Company reviews
its long-lived assets for impairment by first comparing the
carrying value of the assets to the sum of the undiscounted cash
flows expected to result from the use and eventual disposition
of the assets. If the carrying value exceeds the sum of the
assets undiscounted cash flows, the Company estimates an
impairment loss by taking the difference between the carrying
value and fair value of the assets.
(e)
Capital and Operating Leases
The Company leases various property, plant and equipment. Leased
property is accounted for under FAS No. 13,
Accounting for Leases
(FAS No. 13).
Accordingly, leased property that meets certain criteria is
capitalized and the present value of the related lease payments
is recorded as a liability. Amortization of assets under capital
leases is computed utilizing the straight-line method over the
shorter of the remaining lease term or the estimated useful life
(principally 3 to 4 years for computer equipment and
automobiles).
F-39
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
All other leases are accounted for as operating leases. Rent
expense for operating leases, which may have rent escalation
provisions or rent holidays, are recorded on a straight-line
basis over the non-cancelable bases lease period in accordance
with FAS No. 13. The initial lease term generally
includes the build-out period, where no rent payments are
typically due under the terms of the lease. The difference
between rent expense and rent paid is recorded as deferred rent.
Construction allowances received from landlords are recorded as
a deferred rent credit and amortized to rent expense over the
term of the lease.
(f)
Investments
The Companys investments at December 31, 2006 and
2007 included registered investment companies, private equity
securities, and U.S. common stock. All investments with
readily determinable market values are classified as
available-for-sale as defined in FAS No. 115,
Accounting
for Certain Investments in Debt and Equity Securities.
While
these investments are not held with the specific intention to
sell them, they may be sold to support the Companys
investment strategies. All available-for-sale investments are
carried at fair value. The cost of all investments sold is based
on the specific identification method. Dividend income is
accrued on the ex-dividend date.
The Company performs periodic reviews of its investment
portfolio when individual holdings have experienced a decline in
fair value below their respective cost. The Company considers a
number of factors in the evaluation of whether a decline in
value is other-than-temporary including: (a) the financial
condition and near term prospects of the issuer; (b) the
Companys ability and intent to retain the investment for a
period of time sufficient to allow for an anticipated recovery
in value; and (c) the period and degree to which the market
value has been below cost. Where the decline is deemed to be
other-than-temporary, a charge is recorded to realized
investment losses and a new cost basis is established for the
investment.
In November 2005, the Financial Accounting Standard Board
(FASB) released Staff Position (FSP)
Nos.
FAS 115-1
and
FAS 124-1,
The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments.
The FSP addresses the
determination as to when an investment is considered impaired,
whether that impairment is other-than-temporary, and the
measurement of an impairment loss. It also includes accounting
considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures
about unrealized losses that have not been recognized as
other-than-temporary impairments. The Company adopted these new
pronouncements for its other-than-temporary impairment analysis
as of January 1, 2006. The adoption of these did not have a
significant impact on the financial position or results of
operations of the Company.
The Companys investments in private equity securities are
included in Other Assets. Those securities are
carried at cost, as the Company owns less than 20% and does not
otherwise have the ability to exercise significant influence.
These securities are written down to their estimated realizable
value, when management considers there is an
other-than-temporary decline in value, based on financial
information received and the business prospects of the entity.
(g)
Fair Value of Financial Instruments
The fair values of cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities, and
acquisition related liabilities are approximately equal to their
carrying amounts because of the short-term maturity of these
instruments. The fair value of stockholders note
receivables was estimated at $65,002 and $55,553 and is based on
the Applicable Federal Rates as published by the Internal
Revenue Service as of December 31, 2006 and 2007,
respectively. The fair value of the long-term debt was estimated
at $329,725 and $407,784 and is based on an estimate of
F-40
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
interest rates available to the Company for debt with similar
features as of December 31, 2006 and 2007, respectively.
(h)
Accounts Receivable and Allowance for Doubtful
Accounts
Accounts receivable is generally recorded at the invoiced
amount. The allowance for doubtful accounts is estimated based
on an analysis of the aging of the accounts receivable,
historical write-offs, customer payment patterns, individual
customer creditworthiness, current economic trends,
and/or
establishment of specific reserves for customers in adverse
financial condition. The Company reassesses the adequacy of the
allowance for doubtful accounts on a periodic basis.
(i)
Foreign Currency
The Company has determined local currencies are the functional
currencies of the foreign operations. The assets and liabilities
of foreign subsidiaries are translated at the year-end rate of
exchange and statement of income items are translated at the
average rates prevailing during the year. The resulting
translation adjustment is recorded as a component of accumulated
other comprehensive income (loss) in stockholders deficit.
(j)
Stock Based Compensation
The Company follows FAS No. 123(R),
Share-Based
Payment
(FAS No. 123(R)).
FAS No. 123(R) is a revision of FAS No. 123,
as amended,
Accounting for Stock-Based Compensation
, and
supersedes Accounting Principles Board (APB) Opinion
No. 25,
Accounting for Stock Issued to Employees
(APB No. 25). Under
FAS No. 123(R), stock-based compensation cost is
measured at the grant date, based on the fair value of the
options granted, and is recognized as expense over the requisite
service period. On January 1, 2005, the Company adopted
FAS No. 123(R) using a prospective approach, as
required under FAS No. 123(R). Under this application,
the Company is required to record compensation expense for all
awards granted after the date of adoption.
FAS No. 123(R) requires that stock-based compensation
expense be recognized over the period from the date of grant to
the date when the award is no longer contingent on the employee
providing additional service (the substantive vesting
period). The Companys 1996 Incentive Plan Stock
Option Agreement (the Option Plan) provides an
accelerated vesting for awards provided to employees who retire
at the minimum age of 62 and completes at least five years of
prior service. For these awards the Company follows the
substantive vesting period approach.
The fair value of the stock options granted is estimated on the
date of grant using a Black-Scholes option valuation model that
uses the assumptions noted in the following table. The expected
term (estimated period of time outstanding) was estimated using
the simplified method as defined in SAB No. 107, in
which the expected term equals the average of graded vesting
term and the contractual term. The risk-free interest rate is
based on the yield of U.S. Treasury zero coupon securities
with a maturity equal to the expected term of the equity award.
Expected volatility was based on historical volatility for a
period equal to the stock options expected term, ending on
the day of grant, and calculated on a quarterly basis as
determined for purposes of the KSOP. The Company estimates the
expected volatility based on the fair value of its Class A
common shares as determined quarterly. These values are utilized
by the Company to provide liquidity to stockholders under the
provisions of the Companys defined contribution plan and
Option Plan. The expected dividend yield has not been included
in the fair value calculation as the Company has not and does
not expect to pay dividends. The Company estimates expected
forfeitures of equity awards at the date of grant and recognizes
compensation expense only for those awards expected to vest. The
forfeiture assumption is ultimately adjusted to the actual
forfeiture rate. Changes in the forfeiture assumptions may
impact the
F-41
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
total amount of expense ultimately recognized over the requisite
service period, and may impact the timing of expense recognized
over the requisite service period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Option pricing model
|
|
|
Black-Scholes
|
|
|
|
Black-Scholes
|
|
|
|
Black-Scholes
|
|
Expected volatility
|
|
|
13.77
|
%
|
|
|
13.53
|
%
|
|
|
13.40
|
%
|
Risk-free interest rate
|
|
|
4.08
|
%
|
|
|
4.59
|
%
|
|
|
4.54
|
%
|
Expected term in years
|
|
|
6.13
|
|
|
|
6.18
|
|
|
|
6.19
|
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
The per option weighted average grant date fair value of stock
options granted during 2005, 2006 and 2007 was $103.94, $167.49
and $210.69, respectively. Stock-based compensation expense in
2005 caused income before income taxes to decrease by $4,094 and
net income to decrease by $2,432. Stock-based compensation
expense in 2006 caused income before income taxes to decrease by
$6,148 and net income to decrease by $3,846. Stock-based
compensation expense in 2007 caused income before income taxes
to decrease by $8,244 and net income to decrease by $4,988.
(k)
Research and development costs
Research and development costs, which primarily relate to the
personnel and related overhead costs incurred in developing new
services for our customers, are expensed as incurred. Such costs
were $5,191, $7,007 and $8,944 in 2005, 2006 and 2007,
respectively, and were included in selling, general and
administrative expenses.
(l)
Income Taxes
The Company accounts for income taxes under the asset and
liability method under FAS No. 109,
Accounting for
Income Taxes
(FAS No. 109), which
requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have
been included in the financial statements. Under this method,
deferred tax assets and liabilities are determined based on the
differences between the financial statements and tax basis of
assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse. The
effect of a change in tax rates on deferred tax assets and
liabilities is recognized in income in the period that includes
the enactment date.
Deferred tax assets are recorded to the extent these assets are
more likely than not to be realized. In making such
determination, the Company considers all available positive and
negative evidence, including future reversals of existing
taxable temporary differences, projected future taxable income,
tax planning strategies and recent financial operations.
Valuation allowances are recognized to reduce deferred tax
assets if it is determined to be more likely than not that all
or some of the potential deferred tax assets will not be
realized.
In July 2006, the FASB issued Financial Interpretation
(FIN) No. 48,
Accounting for Uncertainty in
Income Taxes
(FIN No. 48), which
clarifies the accounting for uncertainty in income taxes
recognized in the financial statements in accordance with
FAS No. 109. FIN No. 48 provides that a tax
benefit from an uncertain tax position may be recognized based
on the technical merits when it is more-likely than not that the
position will be sustained upon examination, including
resolutions of any related appeals or litigation processes.
Income tax positions must meet a more likely than not
recognition threshold at the effective date to be recognized
upon the adoption of FIN No. 48 and in subsequent
periods. This interpretation also provides guidance on
measurement, derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and
transition.
F-42
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company adopted the provisions of FIN No. 48
,
on January 1, 2007. As a result of the implementation
of FIN No. 48, the Company recognized approximately a
$10,338 increase in the liability for unrecognized tax benefits,
which was accounted for as an increase to the January 1,
2007, balance of accumulated deficit. The balance sheet line
items impacted by this increase are as follows:
|
|
|
|
|
Increase in non-current deferred income taxes
|
|
$
|
13,933
|
|
Increase in federal and state taxes receivable
|
|
$
|
7,620
|
|
Increase in other liabilities
|
|
$
|
31,891
|
|
Increase in accumulated deficit
|
|
$
|
10,338
|
|
The Company recognizes interest and penalties related to
unrecognized tax benefits within the income tax expense line in
the accompanying consolidated statements of operations. Accrued
interest and penalties are included within Other
liabilities on the accompanying consolidated balance
sheets.
Prior to adopting FIN No. 48, the Companys
policy was to maintain tax contingency liabilities for potential
audit issues. The tax contingency liabilities were based on an
estimate of the probable amount of additional taxes that may be
due in the future. Any additional taxes due would be determined
only upon completion of current and future federal state and
international tax audits. At December 31, 2006, the Company
had $7,620 of tax contingency liabilities included in
Foreign and state taxes receivable.
(l)
Earnings Per Share
Basic and diluted earnings per share (EPS) are
determined in accordance with FAS No. 128,
Earnings
per Share
, which specifies the computation, presentation and
disclosure requirements for earnings per share. Basic EPS
excludes all dilutive common stock equivalents. It is based upon
the weighted average number of common shares outstanding during
the period. Diluted EPS, as calculated using the treasury stock
method, reflects the potential dilution that would occur if the
Companys dilutive outstanding stock options were
exercised. For purposes of calculating earnings per share,
Class A and Class B common shares are combined since
both classes have identical rights to earnings.
(m)
Pension and Postretirement Benefits
In September 2006, the FASB issued FAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans
(FAS No. 158). FAS No. 158
requires the recognition of the funded status of a benefit plan
in the balance sheet; the recognition in other comprehensive
income of gains or losses and prior service costs or credits
arising during the period, but which are not included as
components of periodic benefit cost and the measurement of
defined benefit plan assets and obligations as of the balance
sheet date. The Company adopted FAS No. 158 as of
December 31, 2006. See Note 17
Pension and Postretirement Benefits for additional
disclosures required by FAS No. 158 and the effects of
adoption.
(n) Product Warranty Obligations
The Company provides warranty coverage for certain of its
products. The Company recognizes a product warranty obligation
when claims are probable and can be reasonably estimated. As of
December 31, 2006 and 2007, product warranty obligations
were not significant.
In the ordinary course of business, the Company enters into
numerous agreements that contain standard indemnities whereby
the Company indemnifies another party for breaches of
confidentiality, infringement of intellectual property or gross
negligence. Such indemnifications are primarily granted under
licensing of computer software. Most agreements contain
provisions to limit
F-43
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the maximum potential amount of future payments that the Company
could be required to make under these indemnifications, however
the Company is not able to develop an estimate of the maximum
potential amount of future payments to be made under these
indemnifications as the triggering events are not subject to
predictability.
(o) Loss contingencies
The Company accrues for costs relating to litigation, claims and
other contingent matters when such liabilities become probable
and reasonably estimable. Such estimates are based on
managements judgment. Actual amounts paid may differ from
amounts estimated, and such differences will be charged to
operations in the period in which the final determination of the
liability is made.
(p) Recent Accounting Pronouncements
In September 2006, the FASB issued FAS No. 157,
Fair Value Measurements.
This statement enhances existing
guidance for measuring assets and liabilities using fair value,
such as emphasizing that fair value is a market-based
measurement, not an entity-specific measurement, and sets out a
fair value hierarchy with the highest priority being quoted
prices in active markets. FAS No. 157 is effective for
financial statements issued for fiscal years beginning after
November 15, 2007; however, the FASB provided a one-year
deferral for implementation of this standard for non-financial
assets and liabilities. The adoption of FAS No. 157 will
not have a material impact on how we measure fair value, but
will require additional disclosures.
In February 2008, the FASB issued FSP
FAS 157-2,
Effective Date of FASB Statement No. 157
(FSP
FAS 157-2),
which delays the effective date of FAS No. 157 for
non-recurring non-financial assets and liabilities, except those
recognized or disclosed at fair value in the financial
statements on a recurring basis, until fiscal years beginning
after November 15, 2008. Non-financial assets and
liabilities include, among others: intangible assets acquired
through business combinations; long-lived assets when assessing
potential impairment; and liabilities associated with
restructuring activities. The Company is currently assessing the
impact the adoption of FSP
FAS 157-2
for non-recurring non-financial assets and liabilities will
have, if any, on its consolidated financial statements.
In February 2007, the FASB issued FAS No. 159,
The
Fair Value Option for Financial Assets & Financial
Liabilities Including an Amendment of FAS
No. 115
(FAS No. 159).
FAS No. 159 permits companies to choose to measure
certain financial instruments and other items at fair value. The
standard requires that unrealized gains and losses are reported
in earnings for items measured using the fair value option.
FAS No. 159 is effective for fiscal years beginning
after November 15, 2007. FAS No. 159 was
effective for the Company on January 1, 2008 and it did not
elect the fair value option for any of its qualifying financial
instruments.
In June 2007, the Emerging Issues Task Force (EITF)
reached a consensus on EITF
No. 06-11,
Accounting for Income Tax Benefits of Dividends on
Share-Based Payment Awards
, (EITF
No. 06-11),
that an entity should recognize a realized tax benefit
associated with dividends on affected securities charged to
retained earnings as an increase in Additional Paid in Capital
(APIC). The amount recognized in APIC should be
included in the APIC pool. When an entitys estimate of
forfeitures increases or actual forfeitures exceed its
estimates, the amount of tax benefits previously recognized in
APIC should be reclassified into the statement of operations.
The amount reclassified is limited to the APIC pool balance on
the reclassification date. EITF
No. 06-11
applies prospectively to the income tax benefits of dividends
declared on affected securities. The adoption of EITF
No. 06-11,
effective January 1, 2008, did not have an impact on the
financial statements as the Company does not currently pay
dividends on its common stock.
F-44
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In December 2007, the FASB issued FAS No. 141 (revised
2007),
Business Combinations
(FAS No. 141(R)).
FAS No. 141(R) replaces FAS No. 141,
Business Combinations
(FAS No. 141).
FAS No. 141(R) primarily requires an acquirer to
recognize the assets acquired and the liabilities assumed,
measured at their fair values as of that date. This replaces
FAS No. 141s cost-allocation process, which required
the cost of an acquisition to be allocated to the individual
assets acquired and liabilities assumed based on their estimated
fair values. Generally, FAS No. 141(R) will become
effective for business combinations for which the acquisition
date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The impact
of adopting FAS No. 141(R) will be dependent on the
business combinations that the Company may pursue and complete
after its effective date.
In December 2007, the FASB issued FAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51,
(FAS No. 160). FAS No. 160
requires that a noncontrolling interest in a subsidiary be
reported as equity and the amount of consolidated net income
specifically attributable to the noncontrolling interest be
identified in the consolidated financial statements. It also
calls for consistency in the manner of reporting changes in the
parents ownership interest and requires fair value
measurement of any noncontrolling equity investment retained in
a deconsolidation. FAS No. 160 is effective for the
Company on January 1, 2009 except the presentation and
disclosure requirements which are required to be applied
retrospectively for all periods presented. Earlier adoption of
FAS No. 160 is prohibited. The Company is currently
evaluating the impact that the adoption of FAS No. 160
will have on its consolidated financial statements.
In March 2008, the FASB issued FAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities An Amendment of FAS No. 133
(FAS No. 161). FAS No. 161 seeks
to improve financial reporting for derivative instruments and
hedging activities by requiring enhanced disclosures regarding
their impact on financial position, financial performance, and
cash flows. To achieve this increased transparency,
FAS No. 161 requires the disclosure of the fair value
of derivative instruments and gains and losses in a tabular
format; the disclosure of derivative features that are credit
risk-related; and cross-referencing within the footnotes.
FAS No. 161 is effective prospectively for financial
statements issued for fiscal years and interim periods beginning
after November 15, 2008, with early application permitted.
The Company is currently assessing the impact the adoption of
FAS No. 161 will have, if any, on the Companys
consolidated financial statements.
In April 2008, the FASB issued FSP
No. 142-3,
Determination of the Useful Life of Intangible Assets
(FSP
No. 142-3).
FSP
No. 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under
FAS No. 142,
Goodwill and Other Intangible Assets
(FAS No. 142)
. The intent of this FSP is to
improve the consistency between the useful life of a recognized
intangible asset under FAS No. 142 and the period of
expected cash flows used to measure the fair value of the asset
under FAS No. 141(R), and other U.S. GAAP.
FSP
No. 142-3
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years. Early adoption is prohibited. The
Company is evaluating the potential impact, if any, the adoption
of FSP
No. 142-3
will have on its consolidated financial statements.
|
|
3.
|
Concentration
of Credit Risk:
|
Financial instruments that potentially expose the Company to
credit risk consist primarily of cash and cash equivalents,
available for sale securities and accounts receivable, which are
generally not collateralized. The Company maintains its cash and
cash equivalents with higher credit quality financial
institutions in order to limit the amount of credit exposure.
The total cash balances are insured by the Federal Deposit
Insurance
F-45
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Corporation (FDIC) to a maximum amount of $100 per
bank. At December 31, 2007, the Company had cash balances
on deposit with five banks that exceeded the balance insured by
the FDIC limit by approximately $11,567. At December 31,
2007, the Company also had cash on deposit with foreign banks of
approximately $8,385.
The Company considers the concentration of credit risk
associated with its trade accounts receivable to be commercially
reasonable and believes that such concentration does not result
in the significant risk of near-term severe adverse impacts. The
Companys top fifty customers for the year ended
December 31, 2007, represent approximately 44% of revenue,
with no individual customer accounting for more than 4% of
revenue. No individual customer comprised more than 10% of
accounts receivable at December 31, 2006 and 2007.
|
|
4.
|
Cash and
Cash Equivalents:
|
Cash and cash equivalents consist of cash in banks, money market
funds, commercial paper and other liquid instruments with
original maturities of 90 days or less at the time of
purchase.
Accounts receivables consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
Billed receivables
|
|
$
|
90,366
|
|
|
$
|
88,370
|
|
Unbilled receivables
|
|
|
6,632
|
|
|
|
6,365
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
|
96,998
|
|
|
|
94,735
|
|
Less allowance for doubtful accounts
|
|
|
(5,273
|
)
|
|
|
(8,247
|
)
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
91,725
|
|
|
$
|
86,488
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Notes
Receivable from Stockholders:
|
Notes receivable from stockholders consists of recourse loans
issued by the Company to directors and senior management in
connection with exercising stock options. These loans for the
exercise price are classified as a component of Redeemable
common stock on the accompanying consolidated balance
sheets. These loans may also include loans for the tax liability
and accrued interest incurred in connection with exercising
stock options are included in Notes receivable from
stockholders as a component of total assets on the
accompanying consolidated balance sheets. As of
December 31, 2006 and 2007, approximately $68,357 and
$55,328, respectively, of notes receivable from stockholders
were outstanding. At December 31, 2006 and 2007, $9,913 and
$2,776, respectively, of notes receivable from stockholders were
due within one year. These notes were issued at rates
approximating market rates of interest. Payments of principal
and interest related to these notes are generally deferred until
the end of the loan terms, which range from three to nine years.
Interest income on notes receivable from shareholders was
$1,516, $2,190 and $2,454 during the years ended
December 31, 2005, 2006 and 2007, respectively.
F-46
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a summary of available-for-sale securities at
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. common stock
|
|
$
|
15
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
15
|
|
Registered investment companies
|
|
|
6,736
|
|
|
|
506
|
|
|
|
|
|
|
|
7,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
|
$
|
6,751
|
|
|
$
|
506
|
|
|
$
|
|
|
|
$
|
7,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered investment companies
|
|
$
|
29,036
|
|
|
$
|
|
|
|
$
|
(686
|
)
|
|
$
|
28,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent other assets include private equity securities for
which no readily determinable market value exists. At
December 31, 2006, and 2007, the carrying value which
approximated the estimated fair value of such securities was
approximately $200 and $0, respectively.
Proceeds from sales and maturities of investments were $402,
$34,893 and $22,872 for 2005, 2006 and 2007, respectively.
Realized gains, including write downs related to
other-than-temporary impairments of available-for-sale
securities and noncurrent other assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Gross realized gains on U.S. common stock
|
|
$
|
|
|
|
$
|
|
|
|
$
|
135
|
|
Gross realized gains on registered investment companies
|
|
|
27
|
|
|
|
114
|
|
|
|
922
|
|
Impairment of U.S. common stock
|
|
|
|
|
|
|
(205
|
)
|
|
|
|
|
Impairment of private equity securities
|
|
|
|
|
|
|
(284
|
)
|
|
|
(200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains (losses) on securities, net
|
|
$
|
27
|
|
|
$
|
(375
|
)
|
|
$
|
857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income in 2005 includes interest income from cash and
cash equivalents, interest income from notes receivable from
stockholders, and dividend income from investments of $1,306,
$1,516, and $96, respectively. Investment income in 2006
includes interest income from cash and cash equivalents,
interest income from notes receivable from stockholders, and
dividend income from investments of $3,315, $2,190, and $424,
respectively. Investment income in 2007 includes interest income
from cash and cash equivalents, interest income from notes
receivable from stockholders, and dividend income from
investments of $4,096, $2,456, and $435, respectively.
From time to time, the Company has entered into certain
derivative transactions involving the sale of covered call
options on underlying investments held by the Company. As of
December 31, 2006 and 2007, these call options either
expired or were exercised. The gain on the call premiums of $656
and $1,455 was recognized as investment income in 2006 and 2007,
respectively.
F-47
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a summary of fixed assets at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
|
|
|
|
|
|
|
Useful Life
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture and office equipment
|
|
|
3-10 years
|
|
|
$
|
77,372
|
|
|
$
|
(56,252
|
)
|
|
$
|
21,120
|
|
Leasehold improvements
|
|
|
Lease term
|
|
|
|
23,573
|
|
|
|
(6,271
|
)
|
|
|
17,302
|
|
Purchased software
|
|
|
3 years
|
|
|
|
25,663
|
|
|
|
(20,759
|
)
|
|
|
4,904
|
|
Software development costs
|
|
|
3 years
|
|
|
|
58,047
|
|
|
|
(38,048
|
)
|
|
|
19,999
|
|
Leased equipment
|
|
|
3-4 years
|
|
|
|
21,093
|
|
|
|
(13,948
|
)
|
|
|
7,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed assets
|
|
|
|
|
|
$
|
205,748
|
|
|
$
|
(135,278
|
)
|
|
$
|
70,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture and office equipment
|
|
|
3-10 years
|
|
|
$
|
102,745
|
|
|
$
|
(67,687
|
)
|
|
$
|
35,058
|
|
Leasehold improvements
|
|
|
Lease term
|
|
|
|
24,049
|
|
|
|
(7,876
|
)
|
|
|
16,173
|
|
Purchased software
|
|
|
3 years
|
|
|
|
30,918
|
|
|
|
(25,431
|
)
|
|
|
5,487
|
|
Software development costs
|
|
|
3 years
|
|
|
|
69,758
|
|
|
|
(45,632
|
)
|
|
|
24,126
|
|
Leased equipment
|
|
|
3-4 years
|
|
|
|
17,080
|
|
|
|
(12,488
|
)
|
|
|
4,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed assets
|
|
|
|
|
|
$
|
244,550
|
|
|
$
|
(159,114
|
)
|
|
$
|
85,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated depreciation and amortization expense on fixed
assets for the years ended December 31, 2005, 2006 and
2007, was approximately $22,024, $28,007 and $31,745, of which
$5,281, $6,403 and $7,584 related to capitalized software
development costs, respectively. Leased equipment includes
amounts held under capital leases for automobiles, computer
software, and computer equipment.
|
|
9.
|
Goodwill
and Intangible Assets:
|
Goodwill represents the excess of acquisition costs over the
fair value of tangible net assets and identifiable intangible
assets of the businesses acquired. Goodwill and intangible
assets deemed to have indefinite lives and are not amortized.
Intangible assets determined to have finite lives are amortized
over their useful lives. Goodwill and intangible assets with
indefinite lives are subject to impairment testing annually as
of June 30, or whenever events or changes in circumstances
indicate that the carrying amount may not be fully recoverable.
This testing compares carrying values to fair values and, when
fair value is lower than carrying value, the carrying value of
these assets is reduced to fair value. For the years ended
December 31, 2005, 2006, and 2007, the Company recorded an
impairment charge of $1,500, $0, and $1,744, respectively,
included in Loss from discontinued operations, net of
tax in the consolidated statements of operations.
F-48
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a summary of the change in goodwill for the
years ended December 31, 2006 and 2007, both in total and
as allocated to the Companys operating segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk
|
|
|
Decision
|
|
|
|
|
|
|
Assessment
|
|
|
Analytics
|
|
|
Total
|
|
|
Goodwill at December 31, 2005
|
|
$
|
23,303
|
|
|
$
|
126,295
|
|
|
$
|
149,598
|
|
Current year acquisitions
|
|
|
|
|
|
|
69,328
|
|
|
|
69,328
|
|
Earnout related payments
|
|
|
4,362
|
|
|
|
8,934
|
|
|
|
13,296
|
|
Reclassifications to deferred income taxes
|
|
|
|
|
|
|
(7,542
|
)
|
|
|
(7,542
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill at December 31, 2006
|
|
|
27,665
|
|
|
|
197,015
|
|
|
|
224,680
|
|
Current year acquisitions
|
|
|
|
|
|
|
14,157
|
|
|
|
14,157
|
|
Earnout related payments
|
|
|
243
|
|
|
|
102,555
|
|
|
|
102,798
|
|
Impairment charge
|
|
|
|
|
|
|
(1,744
|
)
|
|
|
(1,744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill at December 31, 2007
|
|
$
|
27,908
|
|
|
$
|
311,983
|
|
|
$
|
339,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006 and 2007, the Companys
intangible assets and related accumulated amortization consisted
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Useful Life
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology-based
|
|
|
6 years
|
|
|
$
|
157,946
|
|
|
$
|
(55,869
|
)
|
|
$
|
102,077
|
|
Marketing-related
|
|
|
4 years
|
|
|
|
16,990
|
|
|
|
(10,678
|
)
|
|
|
6,312
|
|
Contract-based
|
|
|
6 years
|
|
|
|
6,555
|
|
|
|
(4,641
|
)
|
|
|
1,914
|
|
Customer-related
|
|
|
9 years
|
|
|
|
37,775
|
|
|
|
(8,360
|
)
|
|
|
29,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
$
|
219,266
|
|
|
$
|
(79,548
|
)
|
|
$
|
139,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Useful Life
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology-based
|
|
|
5 years
|
|
|
$
|
164,317
|
|
|
$
|
(80,419
|
)
|
|
$
|
83,898
|
|
Marketing-related
|
|
|
4 years
|
|
|
|
25,846
|
|
|
|
(13,667
|
)
|
|
|
12,179
|
|
Contract-based
|
|
|
6 years
|
|
|
|
6,555
|
|
|
|
(5,596
|
)
|
|
|
959
|
|
Customer-related
|
|
|
13 years
|
|
|
|
57,906
|
|
|
|
(13,782
|
)
|
|
|
44,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
$
|
254,624
|
|
|
$
|
(113,464
|
)
|
|
$
|
141,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-49
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidated amortization expense related to intangible assets
for the years ended December 31, 2005, 2006 and 2007, was
approximately $19,800, $26,854 and $33,916, respectively.
Estimated amortization expense through 2012 and thereafter for
intangible assets subject to amortization is as follows:
|
|
|
|
|
Year
|
|
Amount
|
|
|
2008
|
|
$
|
30,025
|
|
2009
|
|
$
|
27,920
|
|
2010
|
|
$
|
22,721
|
|
2011
|
|
$
|
16,455
|
|
2012
|
|
$
|
14,319
|
|
Thereafter
|
|
$
|
29,720
|
|
|
|
10.
|
Acquisitions
and Discontinued Operations:
|
2007
Acquisitions
In 2007, the Company acquired five entities for an aggregate
cash purchase price of approximately $50,538 and funded
indemnity and contingent payment escrows totaling $3,344 and
$1,031, respectively. At December 31, 2007, the current and
long-term portions of these escrows amounted to $3,513 and $900
and have been included in Other current assets and
Other assets, respectively. These acquisitions were
accounted for under the purchase method. Accordingly, the
purchase price, excluding contingency escrows, was allocated to
assets acquired based on their estimated fair values as of the
acquisition dates. Each entitys operating results have
been included in the Companys consolidated results from
the respective dates of acquisition. A description of the five
entities purchased in 2007 is as follows:
On January 11, 2007, the Company acquired the remaining 20%
of the stock of National Equipment Register (NER),
resulting in 100% ownership, in order to more closely align
operations with existing businesses. The purchase includes a
contingent payment provision subject to the achievement of
certain predetermined financials results for 2007 and 2008. NER
is a provider of solutions to increase the recovery rate of
stolen equipment and reduce the costs associated with theft for
owners and insurers.
On March 23, 2007, the Company acquired the rights, title,
and interest of the name, trade name, and service mark,
Rex Depot and other intangible assets of Smith
Sekelsky Web Products, LLC. The assets associated with this
acquisition further enhance the capability of the Companys
appraisal software offerings.
On October 3, 2007, the Company acquired 100% of the net
assets of HealthCare Insight, LLC (HCI), a Salt Lake
City, UT based company whose solutions enable healthcare claims
payors to prevent fraud, abuse, and overpayment. The acquisition
of HCI further supports the Companys objective as the
leading provider of data, analytics, and decision-support
solutions for healthcare claims payors. The purchase includes a
contingent payment provision subject to the achievement of
certain predetermined financial results for 2008. HCI combines
automated modeling and profiling of claims with the enhanced
accuracy available through clinical validation.
On October 12, 2007, the Company acquired 100% of the net
assets of NIA Consulting, LTD (NIA), a Mason, TX
based company, which is a leading provider of fraud detection
and forensic audit services for the home mortgage and mortgage
insurance industries. Adding NIA and its proprietary database to
the Companys fraud protection solution strengthens the
Companys search capacity and positions the Company to
incorporate more real-world fraud schemes into the
Companys automated solutions. The purchase includes a
contingent payment provision subject to the achievement of
certain predetermined financial results for 2008.
F-50
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On December 19, 2007, the Company acquired 100% of the net
assets of Predicted Solutions, a leading provider of computer
software applications and algorithms for commercial and
governmental health plans and Medicaid to help health plan
administrators detect and recover losses due to fraud, waste and
abuse. The acquisition integrates with the Companys
analytic methodology to provide customers with the information
needed to ensure their program integrity through better pharmacy
and payment analysis.
The allocation of purchase price for the 2007 acquisitions
resulted in finite lived intangible assets of $35,358 with no
residual value, goodwill of $14,157, and fair value of tangible
assets acquired of $581. The goodwill associated with the 2007
acquisitions is included within the Decision Analytics segment.
The Company did not assume significant liabilities related to
these acquisitions. The goodwill for all acquisitions is
expected to be deductible for tax purposes over 15 years.
As of December 31, 2007, the Company has not finalized the
working capital adjustments related to the HCI and NIA
acquisitions due to the timeframe established within the
agreements relative to timing of year-end reporting.
The amounts assigned to intangible assets by type for the 2007
acquisitions are summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Useful Life
|
|
|
Total
|
|
|
Technology-based
|
|
|
4 years
|
|
|
$
|
6,371
|
|
Marketing-related
|
|
|
4 years
|
|
|
|
8,856
|
|
Customer-related
|
|
|
19 years
|
|
|
|
20,131
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
$
|
35,358
|
|
|
|
|
|
|
|
|
|
|
2006
Acquisitions
In 2006, the Company acquired four entities for an aggregate
cash purchase price of approximately $202,149, of which $187,956
relates to Xactware, and funded indemnity and contingent payment
escrows totaling $11,100 and $3,500, respectively. At
December 31, 2006, the current and long-term portions of
these escrows amounted to $4,100 and $10,500 and have been
included in Other current assets and Other
assets, respectively. At December 31, 2007, the
current and long-term portions of these escrows amounted to $543
and $10,700 and have been included in Other current
assets and Other assets, respectively. These
acquisitions were accounted for under the purchase method.
Accordingly, the purchase price, excluding contingency escrows,
was allocated to assets acquired based on their estimated fair
values as of the dates of acquisition. Each entitys
operating results have been included in the Companys
consolidated results from the respective dates of acquisition. A
description of the four entities purchased in 2006 follows:
On March 28, 2006, the Company acquired 100% of the net
assets of RegsData, Inc. (RegsData), a Milford, CT
based provider of automated mortgage-licensing compliance
services allowing the ability to manage and monitor third-party
relationships and provide a comprehensive solution for the
mortgage industry. The purchase includes a contingent payment
provision subject to the achievement of certain predetermined
financial results for the trailing
15-month
period ending June 30, 2007.
On August 8, 2006, the Company acquired 100% of the net
assets of Xactware, Inc. (Xactware), an Orem, UT
based provider of repair estimation and data analysis to assist
property insurance carriers and their business partners in
adjusting property claims, thus delivering more comprehensive
products and services to the Companys property insurance
claims customers. The purchase includes a contingent payment
provision subject to the achievement of certain predetermined
financial results for 2007 and 2008.
F-51
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On August 23, 2006, the Company acquired 100% of the net
assets of Domus Systems, Inc. (Domus), an Agoura
Hills, CA based provider of automated compliance and reporting
services to the affordable-housing industry. The purchase
includes a contingent payment provision subject to the
achievement of certain predetermined financial results for 2007.
On October 11, 2006, the Company acquired 100% of the net
assets of Urix LLC (Urix), a Cheshire, CT based
provider of cutting-edge healthcare and employer reporting
solutions. Urix is a leading developer of web-based healthcare
analytic solutions that are both scalable and cost-effective on
a national level. The purchase includes a contingent payment
provision subject to the achievement of certain predetermined
financial results for 2007.
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the date of
acquisition for the acquisitions that occurred in 2006. The
goodwill associated with the 2006 acquisitions is included in
the Decision Analytics segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xactware
|
|
|
All other
|
|
|
Total
|
|
|
Current assets
|
|
$
|
7,061
|
|
|
$
|
926
|
|
|
$
|
7,987
|
|
Property and equipment
|
|
|
2,320
|
|
|
|
107
|
|
|
|
2,427
|
|
Other assets
|
|
|
11
|
|
|
|
|
|
|
|
11
|
|
Intangible assets
|
|
|
121,603
|
|
|
|
7,234
|
|
|
|
128,837
|
|
Goodwill
|
|
|
63,309
|
|
|
|
6,019
|
|
|
|
69,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
194,304
|
|
|
|
14,286
|
|
|
|
208,590
|
|
Current liabilities
|
|
|
6,348
|
|
|
|
93
|
|
|
|
6,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
6,348
|
|
|
|
93
|
|
|
|
6,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
187,956
|
|
|
$
|
14,193
|
|
|
$
|
202,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information on an unaudited pro forma basis is
presented below as if the acquisition of Xactware occurred at
the beginning of the years 2005 and 2006. The pro forma
information presented below is based on estimates and
assumptions, which the Company believes are reasonable and is
not necessarily indicative of the consolidated financial
position or results of operations in future periods or the
results that actually would have been realized had this
acquisition been completed at the beginning of 2005 and 2006.
The unaudited pro forma information includes intangible asset
amortization charges and incremental borrowing costs as result
of the acquisition, net of related tax impacts, estimated using
the Companys effective tax rate for continuing operations
for each period.
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(unaudited)
|
|
|
Pro forma revenues
|
|
$
|
686,851
|
|
|
$
|
761,192
|
|
Pro forma net income
|
|
$
|
122,901
|
|
|
$
|
148,009
|
|
Pro forma basic income per share of Class A and Class B
|
|
$
|
28.86
|
|
|
$
|
35.83
|
|
Pro forma diluted income per share of Class A and
Class B
|
|
$
|
27.54
|
|
|
$
|
34.35
|
|
F-52
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The amounts assigned to intangible assets by type for the 2006
acquisitions are summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
|
Xactware
|
|
|
All other
|
|
|
Total
|
|
|
Technology-based
|
|
|
6 years
|
|
|
$
|
94,604
|
|
|
$
|
5,221
|
|
|
$
|
99,825
|
|
Marketing-related
|
|
|
3 years
|
|
|
|
4,640
|
|
|
|
1,074
|
|
|
|
5,714
|
|
Customer-related
|
|
|
12 years
|
|
|
|
22,359
|
|
|
|
939
|
|
|
|
23,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
$
|
121,603
|
|
|
$
|
7,234
|
|
|
$
|
128,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, the Company had estimated the
allocation of purchase price to goodwill and deferred taxes for
the RegsData, Xactware, Domus Systems and Urix acquisitions. In
2007, the Company finalized the RegsData, Xactware, Domus
Systems and Urix purchase allocations. The goodwill for all
acquisitions is expected to be deductible for tax purposes over
15 years. The acquired intangible assets have useful lives
ranging from 2 to 14 years with no residual value.
2005
Acquisitions
In 2005, the Company acquired three entities within the Decision
Analytics segment for an aggregate cash purchase price of
approximately $62,715 and funded contingency escrows totaling
$14,354. These acquisitions were accounted for under the
purchase method. Accordingly, the purchase price, excluding
contingency escrows, was allocated to assets acquired based on
their estimated fair values as of the dates of acquisition. Each
entitys operating results have been included in the
Companys consolidated results from the respective dates of
acquisition. A description of the three entities purchased in
2005 follows:
In 2005, the Company made two acquisitions in order to expand
its decision analytics services into the mortgage industry. On
January 14, 2005, the Company entered into an agreement and
plan of merger to purchase 100% of the stock of Appintelligence,
Inc. (Appintelligence), a Weldon Spring, MO based
provider of data integrity, fraud prevention and risk assessment
and mitigation tools, designed to maximize loss mitigation and
recovery efforts for lenders in the mortgage industry.
On March 31, 2005, the Company entered into an agreement
and plan of merger to purchase 100% of the stock of Sysdome,
Inc. (Sysdome), a Calabasas, CA based provider of
fraud-detection and decision-support tools, enabling mortgage
professionals to detect identity and property fraud quickly and
accurately.
On August 10, 2005, the Company acquired 100% of the net
assets of eLiens, a College Station, TX based provider of fast,
easy, and economical lien holder and mortgagee notification
services to insurance carriers. This acquisition utilized the
Companys expertise of data management for the insurance
industry.
As of December 31, 2005, the Company had estimated the
allocation of purchase price for deferred taxes and goodwill for
the Appintelligence, Sysdome and eLiens acquisitions. In 2006,
the Company finalized the Appintelligence, Sysdome and eLiens
purchase allocations, resulting in a reallocation of $7,542 from
goodwill to deferred taxes. Goodwill and intangible assets
recognized in these transactions amounted to approximately
$39,663 and $29,343, respectively. The goodwill for
Appintelligence and Sysdome is not expected to be deductible for
tax purposes, while goodwill for eLiens of $2,816 is expected to
be deductible over 15 years. The acquired intangible assets
have useful lives ranging from 1 to 7 years with no
residual value.
F-53
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Acquisition
Contingent Payments
The annual aggregate maximum contingent payment, subject to the
achievement of certain predetermined financial results, for the
year ending December 31, 2008 would be $240,931, of which
$191,800 relates to Xactware. A condition of the additional
payments for certain of the acquisitions, is the continued
employment of key employees resulting in the treatment of such
additional payments as compensation expense. Compensation
expense related to earn out payments for fiscal 2005, 2006 and
2007 was $9,734, $9,027 and $3,605, respectively. Based on the
actual results of operations and agreements which required the
continuing employment of key employees the Company was required
to make payments of $13,414 and $2,200, in 2006 and 2007,
respectively. For Xactware, contingent payments were not related
to continuing employment of key employees, and as such the
amount due of $98,100 was treated as additional purchase price.
These amounts, which are included in Acquisition related
liabilities in the accompanying consolidated balance sheet
were paid the year after they were accrued.
Acquisition
Contingent Escrows
Pursuant to the related acquisition agreements, the Company has
funded various escrow accounts to satisfy pre-acquisition
indemnity and tax claims arising subsequent to the acquisition
date, as well as a portion of the contingent payments. The
future additional payments that may be required pursuant to the
terms of the purchase agreements are not reflected as
liabilities in the accompanying consolidated balance sheets, as
the final payments are contingent on future events. At
December 31, 2006 and 2007, the current portion of the
escrow amounted to $11,465 and $5,767 respectively, and has been
included in Other current assets. The
indemnification portion of these escrows were $600 and $4,083 at
December 31, 2006 and 2007, respectively. At
December 31, 2006 and 2007, the noncurrent portion of the
escrow, all of which are indemnification escrows, amounted to
$10,510 and $11,596, of which $10,000 relates to Xactware, and
has been included in Other assets at
December 31, 2006 and 2007.
Discontinued
Operations
As of December 31, 2007, the Company discontinued
operations of its claims consulting business located in New
Hope, PA and the United Kingdom. The results for this business
were accounted for as discontinued operations in the
consolidated financial statements for each of the years in the
three year period ended December 31, 2007. Within the 2007
pre-tax loss are $2,786 of expenses directly related to the exit
activity, which primarily consist of goodwill impairment of
$1,744, other current asset write-off of $445, fixed asset
disposals of $265, and employee separation costs of $119. The
summarized, combined statements of operations from discontinued
operations for the years ended December 31, 2005, 2006 and
2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Revenues
|
|
$
|
4,249
|
|
|
$
|
4,456
|
|
|
$
|
2,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax loss
|
|
$
|
(3,295
|
)
|
|
$
|
(2,517
|
)
|
|
$
|
(6,085
|
)
|
Tax benefit
|
|
|
721
|
|
|
|
712
|
|
|
|
1,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax
|
|
$
|
(2,574
|
)
|
|
$
|
(1,805
|
)
|
|
$
|
(4,589
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expenses related to the discontinued operations for
years ending 2005, 2006 and 2007 were $99, $112 and $98,
respectively.
F-54
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The tax effects of significant items comprising the
Companys deferred tax assets, as of December 31 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
Employee wages, pensions and other benefits
|
|
$
|
12,633
|
|
|
$
|
18,118
|
|
Postretirement benefits
|
|
|
11,923
|
|
|
|
11,231
|
|
Fixed assets
|
|
|
(4,700
|
)
|
|
|
(3,281
|
)
|
Deferred revenue adjustment
|
|
|
4,632
|
|
|
|
7,391
|
|
Deferred rent adjustment
|
|
|
3,289
|
|
|
|
3,598
|
|
Net operating loss carryover
|
|
|
5,768
|
|
|
|
6,383
|
|
Pension and postretirement unfunded liability adjustment
|
|
|
9,947
|
|
|
|
5,621
|
|
Adjustment for unrealized (gains) losses
|
|
|
(189
|
)
|
|
|
274
|
|
State tax adjustments
|
|
|
|
|
|
|
15,686
|
|
Goodwill amortization
|
|
|
13,159
|
|
|
|
8,586
|
|
Other
|
|
|
1,995
|
|
|
|
6,260
|
|
Valuation allowance
|
|
|
(2,144
|
)
|
|
|
(1,534
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
56,313
|
|
|
$
|
78,333
|
|
|
|
|
|
|
|
|
|
|
As a result of certain realization requirements of
FAS No. 123(R), the table of deferred tax assets and
liabilities shown above does not include certain deferred tax
assets at December 31, 2007 that arose directly from tax
deductions related to equity compensation in excess of
compensation recognized for financial reporting. Equity will be
increased by $13,436 if and when such deferred tax assets are
ultimately realized. The Company uses tax law ordering for
purposes of determining when excess tax benefits have been
realized.
As of December 31, 2007, a deferred tax asset in the amount
of $24 was recorded in connection with the acquisition of HCI.
As of December 31, 2006, deferred tax assets in the amount
of $823 and $6,719 were recorded in connection with the
acquisition of AppIntelligence and Sysdome, respectively. The
ultimate realization of the deferred tax assets depends on the
Companys ability to generate sufficient taxable income in
the future. The Company has provided for a valuation allowance
against the deferred tax asset associated with the capital loss
carryforwards expiring in 2012 and the net operating losses of
certain foreign subsidiaries. The Companys net operating
loss carryforwards expire as follows:
|
|
|
|
|
20082015
|
|
$
|
78.8 million
|
|
20162020
|
|
|
0.6 million
|
|
20212027
|
|
|
31.4 million
|
|
|
|
|
|
|
|
|
$
|
110.8 million
|
|
|
|
|
|
|
A valuation allowance has been established based on
managements evaluation of the likelihood of utilizing the
capital loss carryforwards before they expire. Management has
determined that the generation of future foreign taxable income
to realize the deferred tax assets is uncertain. Other than
these items, management has determined, based on the
Companys historical operating performance, that taxable
income of the Company will more likely than not be sufficient to
fully realize the deferred tax assets.
F-55
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The income tax provision for the years ended December 31 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal and foreign
|
|
$
|
82,723
|
|
|
$
|
86,297
|
|
|
$
|
96,277
|
|
State and local
|
|
|
10,718
|
|
|
|
12,663
|
|
|
|
17,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
93,441
|
|
|
$
|
98,960
|
|
|
$
|
114,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal and foreign
|
|
$
|
(5,944
|
)
|
|
$
|
(9,800
|
)
|
|
$
|
(7,041
|
)
|
State and local
|
|
|
(1,775
|
)
|
|
|
(2,239
|
)
|
|
|
(3,895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(7,719
|
)
|
|
$
|
(12,039
|
)
|
|
$
|
(10,936
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
85,722
|
|
|
$
|
86,921
|
|
|
$
|
103,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys income tax benefit for discontinued
operations for fiscal 2005, 2006 and 2007 was $721, $712 and
$1,496, respectively.
The reconciliation between the Companys effective tax rate
on income from continuing operations and the statutory tax rate
is as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State and local taxes, net of federal tax benefit
|
|
|
2.7
|
%
|
|
|
2.9
|
%
|
|
|
3.2
|
%
|
Non-deductible KSOP expenses
|
|
|
2.1
|
%
|
|
|
2.7
|
%
|
|
|
2.9
|
%
|
State tax adjustments
|
|
|
(0.1
|
)%
|
|
|
(3.1
|
)%
|
|
|
(0.3
|
)%
|
Other
|
|
|
0.6
|
%
|
|
|
(0.2
|
)%
|
|
|
(0.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate for continuing operations
|
|
|
40.3
|
%
|
|
|
37.3
|
%
|
|
|
40.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective January 1, 2007, the Company adopted
FIN No. 48, which prescribes a comprehensive model for
the financial statement recognition, measurement, presentation
and disclosure of uncertain tax positions taken or expected to
be taken in income tax returns. For each tax position, the
Company must determine whether it is more likely than not that
the position will be sustained upon examination based on the
technical merits of the position, including resolution of any
related appeals or litigation. A tax position that meets the
more likely than not recognition threshold is then measured to
determine the amount of benefit to recognize within the
financial statements. No benefits may be recognized for tax
positions that do not meet the more likely than not threshold. A
reconciliation of the beginning and ending amount of
unrecognized tax benefit is as follows:
|
|
|
|
|
Unrecognized tax benefit at January 1, 2007
|
|
$
|
27,052
|
|
Gross increase in tax positions in prior period
|
|
|
|
|
Gross decrease in tax positions in prior period
|
|
|
|
|
Gross increase in tax positions in current period
|
|
|
7,662
|
|
Settlements
|
|
|
|
|
Lapse of statute of limitations
|
|
|
(2,684
|
)
|
|
|
|
|
|
Unrecognized tax benefit, December 31, 2007
|
|
$
|
32,030
|
|
|
|
|
|
|
Included in the total unrecognized tax benefits of $32,030 was
$24,368 that, if recognized, would have a favorable effect on
the Companys effective tax rate. The remaining
unrecognized tax benefits would
F-56
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
not affect the Companys effective tax rate. The
Companys practice is to recognize interest and penalties
associated with income taxes as a component of income tax
expense. At January 1, 2007 and December 31, 2007,
approximately $4,879 and $7,033, respectively, was accrued in
the Companys consolidated balance sheet for the payment of
interest and penalties associated with income taxes. The
Companys unrecognized tax benefits largely include state
exposures from allocation of income between jurisdictions, not
filing a state tax return, the methods of filing state tax
returns, and the utilization of tax credits. The Company does
not expect an increase in unrecognized benefits related to state
tax exposures within the coming year. In addition, the Company
believes that it is reasonably possible that approximately
$3,394 of its currently remaining unrecognized tax positions,
each of which is individually insignificant, may be recognized
by the end of 2008 as a result of a lapse of the statute of
limitations.
The Company is subject to taxation in the U.S. (for both
Federal and multiple states) and in certain foreign
jurisdictions. The Companys 2004, 2005 and 2006 tax years
are subject to examination by the U.S. and foreign tax
authorities. With some exceptions, the Company is no longer
subject to U.S. Federal, state or foreign examinations by
tax authorities for tax years before 2004.
|
|
12.
|
Composition
of Certain Financial Statement Captions:
|
The following table presents the components of Other
current assets, Accounts payable and accrued
liabilities and Other liabilities at December
31:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
Other current assets:
|
|
|
|
|
|
|
|
|
Acquisition contingent escrows
|
|
$
|
11,465
|
|
|
$
|
5,767
|
|
Other current assets
|
|
|
1,726
|
|
|
|
2,758
|
|
|
|
|
|
|
|
|
|
|
Total other current assets
|
|
$
|
13,191
|
|
|
$
|
8,525
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities:
|
|
|
|
|
|
|
|
|
Accrued salaries, benefits and other related costs
|
|
$
|
43,175
|
|
|
$
|
48,417
|
|
Other current liabilities
|
|
|
23,535
|
|
|
|
29,817
|
|
|
|
|
|
|
|
|
|
|
Total accounts payable and accrued liabilities
|
|
$
|
66,710
|
|
|
$
|
78,234
|
|
|
|
|
|
|
|
|
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits
|
|
$
|
|
|
|
$
|
39,023
|
|
Deferred rent
|
|
|
10,044
|
|
|
|
11,028
|
|
Other liabilities
|
|
|
12,119
|
|
|
|
12,034
|
|
|
|
|
|
|
|
|
|
|
Total other liabilities
|
|
$
|
22,163
|
|
|
$
|
62,085
|
|
|
|
|
|
|
|
|
|
|
F-57
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents short-term and long-term debt by
issuance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
Issuance Date
|
|
|
Maturity Date
|
|
|
2006
|
|
|
2007
|
|
|
Short-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prudential senior notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.11% Series B senior notes
|
|
|
6/10/2004
|
|
|
|
6/10/2007
|
|
|
$
|
60,000
|
|
|
$
|
|
|
4.12% Series C senior notes
|
|
|
6/28/2004
|
|
|
|
6/28/2007
|
|
|
|
40,000
|
|
|
|
|
|
Bank of America
|
|
|
10/25/2006
|
|
|
|
4/25/2007
|
|
|
|
15,000
|
|
|
|
|
|
Bank of America
|
|
|
10/25/2007
|
|
|
|
4/25/2008
|
|
|
|
|
|
|
|
15,000
|
|
JPMorgan Chase
|
|
|
12/31/2007
|
|
|
|
1/3/2008
|
|
|
|
|
|
|
|
15,000
|
|
Capital lease obligations
|
|
|
Various
|
|
|
|
Various
|
|
|
|
5,463
|
|
|
|
4,408
|
|
Other
|
|
|
Various
|
|
|
|
Various
|
|
|
|
388
|
|
|
|
763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
|
|
|
|
|
|
|
$
|
120,851
|
|
|
$
|
35,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prudential senior notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.46% Series D senior notes
|
|
|
6/14/2005
|
|
|
|
6/13/2009
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
4.60% Series E senior notes
|
|
|
6/14/2005
|
|
|
|
6/13/2011
|
|
|
|
50,000
|
|
|
|
50,000
|
|
6.00% Series F senior notes
|
|
|
8/8/2006
|
|
|
|
8/8/2011
|
|
|
|
25,000
|
|
|
|
25,000
|
|
6.13% Series G senior notes
|
|
|
8/8/2006
|
|
|
|
8/8/2013
|
|
|
|
75,000
|
|
|
|
75,000
|
|
5.84% Series H senior notes
|
|
|
10/26/2007
|
|
|
|
10/26/2013
|
|
|
|
|
|
|
|
17,500
|
|
5.84% Series H senior notes
|
|
|
10/26/2007
|
|
|
|
10/26/2015
|
|
|
|
|
|
|
|
17,500
|
|
Principal senior notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.03% Series A senior notes
|
|
|
8/8/2006
|
|
|
|
8/8/2011
|
|
|
|
50,000
|
|
|
|
50,000
|
|
6.16% Series B senior notes
|
|
|
8/8/2006
|
|
|
|
8/8/2013
|
|
|
|
25,000
|
|
|
|
25,000
|
|
New York Life senior notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.87% Series A senior notes
|
|
|
3/16/2007
|
|
|
|
10/26/2013
|
|
|
|
|
|
|
|
17,500
|
|
5.87% Series A senior notes
|
|
|
3/16/2007
|
|
|
|
10/26/2015
|
|
|
|
|
|
|
|
17,500
|
|
Other obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
|
Various
|
|
|
|
Various
|
|
|
|
1,814
|
|
|
|
7,299
|
|
Other
|
|
|
Various
|
|
|
|
Various
|
|
|
|
1,033
|
|
|
|
860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
$
|
327,847
|
|
|
$
|
403,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest associated with the Companys outstanding
debt obligations was $2,239 and $2,548 as of December 2006 and
2007, respectively. Consolidated interest expense associated
with the Companys outstanding debt obligations was
$10,238, $16,184, and $22,590 for the years ended
December 31, 2005, 2006, and 2007, respectively.
Prudential
Master Shelf Agreement
On June 13, 2003, the Company authorized the issuance of
senior promissory notes (Prudential Shelf Notes)
under an uncommitted master shelf agreement with Prudential
Capital Group (Prudential) in the aggregate
principal amount of $200,000. On February 1, 2005, the
Company amended the shelf agreement to increase the
authorization of additional senior promissory notes in the
aggregate principal amount by
F-58
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$150,000. On February 1, 2007, the Company amended the
shelf agreement to increase the authorization of additional
senior promissory notes in the aggregate principal amount by
$100,000. Prudential Shelf Notes may be issued and sold until
the earliest of (i) February 28, 2010 (ii) the
thirtieth day after receiving written notice to terminate; or
(iii) the last closing day after which there is no
remaining facility available. Interest is payable at a fixed
rate or variable floating rate. Fixed rate Prudential Shelf
Notes are subject to final maturities not to exceed ten years
and, in the case of floating rate Prudential Shelf Notes, not to
exceed five years. The Prudential Shelf Note agreement is
uncommitted with a one time facility fee of $50. The net
proceeds from the notes were utilized to repurchase Class B
Company stock, to repay certain maturing notes and revolving
credit facilities, and to fund acquisitions. Interest on the
notes is payable quarterly.
Principal
Master Shelf Agreement
On July 10, 2006, the Company authorized the issuance of
senior promissory notes (Principal Shelf Notes)
under an uncommitted master shelf agreement with Principal
Global Investors, LLC (Principal) in the aggregate
principal amount of $75,000. Principal Shelf Notes may be issued
and sold until the earliest of (i) July 10, 2009
(ii) the thirtieth day after receiving written notice to
terminate; or (iii) the last closing day after which there
is no remaining facility available. Interest is payable at a
fixed rate or variable floating rate. Fixed rate Principal Shelf
Notes are subject to final maturities not to exceed ten years
and, in the case of floating rate Principal Shelf Notes, not to
exceed five years. The Principal Shelf Note is uncommitted with
a one time facility fee of $25, no fees for the first issuance,
and fees in the amount equal to 0.125% of the aggregate
principal amount for subsequent issuances. The net proceeds from
the notes issued were utilized to fund acquisitions. Interest on
the notes is payable quarterly.
As of December 31, 2006 and 2007, $75,000 was outstanding
under this agreement. The Principal Shelf Notes contain
covenants that, among other things, require the Company to
maintain certain leverage and fixed charge ratios.
New York
Life Master Shelf Agreement
On March 16, 2007, the Company authorized the issuance of
senior promissory notes (New York Life Shelf Notes)
under an uncommitted master shelf agreement with New York Life
in the aggregate principal amount of $100,000. New York Life
Shelf Notes may be issued and sold until the earliest of
(i) March 16, 2010 (ii) the thirtieth day after
receiving written notice to terminate; or (iii) the last
closing day after which there is no remaining facility
available. Interest is payable at a fixed rate or variable
floating rate. Fixed rate New York Life Shelf Notes are subject
to final maturities not to exceed ten years and, in the case of
floating rate Shelf Notes, not to exceed five years. The New
York Life Shelf Note is uncommitted with no fees for the first
issuance, and fees in the amount equal to 0.125% of the
aggregate principal amount for subsequent issuances. The net
proceeds from the notes issued were utilized to fund
acquisitions. Interest on the notes is payable quarterly.
As of December 31, 2007, $35,000 was outstanding under this
agreement. The New York Life Shelf Notes contain covenants that,
among other things, require the Company to maintain certain
leverage and fixed charge ratios.
F-59
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Debt
Maturities
The following table reflects the Companys debt maturities:
|
|
|
|
|
Year
|
|
Amount
|
|
|
2008
|
|
$
|
35,171
|
|
2009
|
|
|
104,272
|
|
2010
|
|
|
3,548
|
|
2011
|
|
|
125,305
|
|
2012
|
|
|
34
|
|
2013 and thereafter
|
|
|
170,000
|
|
Revolving
Credit Facilities
The following table presents the revolving credit facilities
outstanding at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
|
|
Effective
|
|
|
Expiration
|
|
|
Available
|
|
|
|
|
|
Interest
|
|
Borrowings
|
|
Description
|
|
Date
|
|
|
Date
|
|
|
Committed
|
|
|
Uncommitted
|
|
|
Rate
|
|
Outstanding
|
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JPMorgan Chase
|
|
|
9/30/2006
|
|
|
|
9/30/2007
|
|
|
$
|
25,000
|
|
|
$
|
50,000
|
|
|
LIBOR + .65%
|
|
$
|
|
|
Bank of America
|
|
|
9/30/2006
|
|
|
|
9/30/2007
|
|
|
|
10,000
|
|
|
|
40,000
|
|
|
LIBOR + .75%
|
|
|
15,000
|
|
Citibank
|
|
|
10/1/2006
|
|
|
|
10/31/2007
|
|
|
|
20,000
|
|
|
|
30,000
|
|
|
PRIME −1.0%
|
|
|
|
|
Morgan Stanley
|
|
|
8/29/2006
|
|
|
|
8/28/2007
|
|
|
|
|
|
|
|
50,000
|
|
|
Determined at the
time of borrowing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
55,000
|
|
|
$
|
170,000
|
|
|
|
|
$
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JPMorgan Chase
|
|
|
10/1/2007
|
|
|
|
9/30/2008
|
|
|
$
|
25,000
|
|
|
$
|
50,000
|
|
|
LIBOR + .65%
|
|
$
|
15,000
|
|
Bank of America
|
|
|
9/30/2007
|
|
|
|
9/30/2008
|
|
|
|
10,000
|
|
|
|
50,000
|
|
|
LIBOR + .65%
|
|
|
15,000
|
|
Citibank
|
|
|
10/31/2007
|
|
|
|
10/29/2008
|
|
|
|
20,000
|
|
|
|
30,000
|
|
|
LIBOR + .65%
|
|
|
|
|
Morgan Stanley
|
|
|
8/29/2007
|
|
|
|
8/28/2008
|
|
|
|
|
|
|
|
50,000
|
|
|
Determined at the
time of borrowing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
55,000
|
|
|
$
|
180,000
|
|
|
|
|
$
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2006, the Company amended its uncommitted master shelf
agreements and revolving credit facilities to have four of its
100% owned subsidiaries, including ISO Claims Services, Inc.,
ISO Investment Holdings, Inc., AIR Worldwide Corporation, and
ISO Services, Inc., fully and unconditionally, and jointly and
severally guarantee all of its obligations under the credit
facilities. In connection with this amendment, a sharing
agreement was created between the Company and a syndicate of
lenders in consideration of the exercise of set-off rights in
connection with the guaranties. On September 30, 2007, the
Company renegotiated the Bank of America credit facility to
increase the availability to $60,000 and extend the maturity
through September 2008.
The Bank of America committed line has an annual facility fee of
$25 and interest on outstanding borrowings is payable monthly,
at a rate of 5.59% at December 31, 2007. As of
December 31, 2007 and 2006, $15,000 of borrowings was
outstanding under this credit facility.
In October 2005, the Company renegotiated the revolving credit
facility with JPMorganChase to increase the availability to
$75,000. Interest on outstanding borrowings is payable monthly,
at a rate of 4.90% at December 31, 2007. The committed line
has an annual facility fee of 0.10% of the unused portion and
F-60
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
interest on outstanding borrowings is payable monthly. On
September 30, 2007, the Company renegotiated the facility
to extend the maturity through September 30, 2008. As of
December 31, 2007, $15,000 of borrowings was outstanding
under this credit facility.
On January 23, 2006, the Company entered into a $50,000
revolving credit agreement with Citibank, of which $20,000 is
committed. Interest is payable monthly at the Prime rate minus
1%. The Company has the option on the commitment termination
date to convert the revolver to a one year term loan at a cost
of a 10 basis point fee on the converted amount. On
October 31, 2007, the agreement was amended to change the
interest rate and extend the maturity until October 29,
2008.
In August 2006, the Company entered into a $50,000 revolving
credit facility with Morgan Stanley Bank. Interest is payable
monthly at a rate to be determined at the time of borrowing. On
August 29, 2007, the Company renegotiated the facility to
extend the maturity through August 28, 2008.
|
|
14.
|
Redeemable
Common Stock:
|
On November 18, 1996, the Company authorized 6,700,000
Class A shares. The Class A shares are reserved for
the use in incentive plans for key employees and directors under
the Option Plan, and for issuance to the KSOP. The Class A
shares have voting rights to elect nine of the thirteen members
of the board of directors. The Companys Certificate of
Incorporation limits those who may own Class A shares to
current and former employees or directors, the KSOP and trusts
by or for the benefit of immediate family members of employees
and former employees.
Under the terms of the Option Plan, Class A shares
resulting from exercised options that are held by the employee
for more than six months and one day may be put to the Company
and redeemed at the then current fair value at the date of the
redemption request of the Class A shares. For options
granted in 2002 through 2004, the Company has the ability to
defer the cash settlement of the redemption up to one year. For
options granted after 2004, the Company has the ability to defer
the cash settlement of the redemption for up to two years. Under
the terms of the KSOP, eligible participants may elect to
diversify 100% of their 401(k) and up to 35% of their ESOP
contributions that were made in the form of Class A stock.
In addition, upon retirement or termination participants in the
KSOP are required to liquidate their ownership in Class A
common shares. Since the Class A shares distributed under
the Option Plan and KSOP is subject to the restrictions above,
the participant has the right to require the Company to
repurchase shares based on the then current fair value of the
Class A shares.
The fair value of the Companys Class A redeemable
common stock is established for purposes of the KSOP on the
final day of the quarter and such price is utilized for all
share transactions in the subsequent quarter. The current
valuation in effect for the KSOP is also considered fair value
for Class A redeemable common stock and related
transactions within the Insurance Services Office, Inc. 1996
Incentive Plan.
The valuation methodology is based on a variety of qualitative
and quantitative factors including the nature of the business
and history of the enterprise, the economic outlook in general
and the condition of the specific industries in which the
Company operates, the financial condition of the business, the
Companys ability to generate free cash flow, and goodwill
or other intangible asset value. The determination of the fair
market value employs both a comparable public company analysis,
which examines the valuation multiples of companies deemed
comparable, in whole or in part, to the Company and a discounted
cash flow analysis that determines a present value of the
projected future cash flows of the business. The Company
regularly assesses the underlying assumptions used in the
valuation methodologies. As a result, the Company has utilized
this quarterly fair value for all its Class A redeemable
common stock transactions, as required by terms of the KSOP and
the Insurance Services Office, Inc. 1996 Incentive Plan.
The Company follows SEC Accounting Series Release
(ASR) No. 268,
Presentation in Financial
Statements of Preferred Redeemable Stock
(ASR No.
268). ASR No. 268 requires the Company to record
F-61
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Class A shares and vested stock options at full redemption
value at each balance sheet date as the redemption of these
securities is not solely within the control of the Company.
Redemption value for the Class A shares is determined
quarterly for purposes of the KSOP. At December 31, 2006
and 2007, the fair value was $755 and $862 per Class A
share, respectively. The redemption value of the Class A shares
at December 31, 2006 and 2007 totaled $1,183,049 and
$1,217,942, respectively, which includes $165,656 and $215,380,
respectively, of aggregate intrinsic value of outstanding
unexercised vested stock options.
During 2005, 2006, and 2007, 405,743, 253,000, and 256,842
Class A shares were redeemed by the Company at an average
price per share of $430.26, $595.70, $803.73, respectively.
Included in Class A shares redeemed were $86,271, $45,042
and $16,096 for shares utilized to satisfy minimum tax
withholdings on options exercised during the years ended
December 31, 2005, 2006, and 2007 respectively.
Subsequent changes to the redemption value of the securities is
charged first to retained earnings; once retained earnings is
depleted, then to additional
paid-in-capital,
if additional
paid-in-capital
is also depleted, then to accumulated deficit. During the years
ended December 31, 2005, 2006 and 2007, the increases in
redemption value of redeemable common stock totaled $178,881,
$239,195 and $34,893, respectively. Additional information
regarding the changes in redeemable common stock for the years
ended December 31, 2005, 2006 and 2007 are provided in the
table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
|
Total
|
|
|
|
Class A Redeemable Common Stock
|
|
|
Receivable
|
|
|
Redeemable
|
|
|
|
|
|
|
Redemption
|
|
|
Unearned
|
|
|
Additional
|
|
|
from
|
|
|
Common
|
|
|
|
Shares
|
|
|
Value
|
|
|
KSOP
|
|
|
Pain-in-Capital
|
|
|
Stockholders
|
|
|
Stock
|
|
|
Balance, January 1, 2005
|
|
|
2,435,584
|
|
|
$
|
764,973
|
|
|
$
|
(6,561
|
)
|
|
$
|
|
|
|
$
|
(35,880
|
)
|
|
$
|
722,532
|
|
Redemption of Class A common stock
|
|
|
|
|
|
|
(88,305
|
)
|
|
|
|
|
|
|
|
|
|
|
11,411
|
|
|
|
(76,894
|
)
|
KSOP shares earned
|
|
|
|
|
|
|
|
|
|
|
838
|
|
|
|
12,955
|
|
|
|
|
|
|
|
13,793
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,094
|
|
|
|
|
|
|
|
4,094
|
|
Stock options exercised
|
|
|
233,608
|
|
|
|
10,484
|
|
|
|
|
|
|
|
27,852
|
|
|
|
(12,573
|
)
|
|
|
25,763
|
|
Other stock issuances
|
|
|
494
|
|
|
|
220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
220
|
|
Increase in redemption value of Class A common stock
|
|
|
|
|
|
|
256,482
|
|
|
|
|
|
|
|
(44,901
|
)
|
|
|
|
|
|
|
211,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
2,669,686
|
|
|
$
|
943,854
|
|
|
$
|
(5,723
|
)
|
|
$
|
|
|
|
$
|
(37,042
|
)
|
|
$
|
901,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of Class A common stock
|
|
|
|
|
|
|
(105,670
|
)
|
|
|
|
|
|
|
|
|
|
|
9,277
|
|
|
|
(96,393
|
)
|
KSOP shares earned
|
|
|
|
|
|
|
|
|
|
|
810
|
|
|
|
17,969
|
|
|
|
|
|
|
|
18,779
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,148
|
|
|
|
|
|
|
|
6,148
|
|
Stock options exercised
|
|
|
179,967
|
|
|
|
62,435
|
|
|
|
|
|
|
|
31,964
|
|
|
|
(24,438
|
)
|
|
|
69,961
|
|
Other stock issuances
|
|
|
232
|
|
|
|
149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149
|
|
Increase in redemption value of Class A common stock
|
|
|
|
|
|
|
282,281
|
|
|
|
|
|
|
$
|
(56,081
|
)
|
|
|
|
|
|
|
226,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
2,849,885
|
|
|
$
|
1,183,049
|
|
|
$
|
(4,913
|
)
|
|
$
|
|
|
|
$
|
(52,203
|
)
|
|
$
|
1,125,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-62
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
|
Total
|
|
|
|
Class A Redeemable Common Stock
|
|
|
Receivable
|
|
|
Redeemable
|
|
|
|
|
|
|
Redemption
|
|
|
Unearned
|
|
|
Additional
|
|
|
from
|
|
|
Common
|
|
|
|
Shares
|
|
|
Value
|
|
|
KSOP
|
|
|
Pain-in-Capital
|
|
|
Stockholders
|
|
|
Stock
|
|
|
Redemption of Class A common stock
|
|
|
|
|
|
|
(190,336
|
)
|
|
|
|
|
|
|
|
|
|
|
24,708
|
|
|
|
(165,628
|
)
|
KSOP shares earned
|
|
|
|
|
|
|
|
|
|
|
784
|
|
|
|
21,463
|
|
|
|
|
|
|
|
22,247
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,244
|
|
|
|
|
|
|
|
8,244
|
|
Stock options exercised
|
|
|
72,083
|
|
|
|
28,526
|
|
|
|
|
|
|
|
12,798
|
|
|
|
(15,130
|
)
|
|
|
26,194
|
|
Other stock issuances
|
|
|
285
|
|
|
|
238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
238
|
|
Increase in redemption value of Class A common stock
|
|
|
|
|
|
|
196,465
|
|
|
|
|
|
|
|
(42,505
|
)
|
|
|
|
|
|
|
153,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
2,922,253
|
|
|
$
|
1,217,942
|
|
|
$
|
(4,129
|
)
|
|
$
|
|
|
|
$
|
(42,625
|
)
|
|
$
|
1,171,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.
|
Stockholders
Deficit:
|
On November 18, 1996, the Company authorized 20,000,000
Class B shares. The Class B shares have the same
rights as Class A shares with respect to dividends and
economic ownership, but have voting rights to elect three of the
thirteen directors. The thirteenth seat on the board of
directors is held by the chief executive officer of the Company.
The Company repurchased 161,837, 2,895, and 72,488 Class B
shares in 2005, 2006, and 2007 at an average price of $243.32,
$385.20, and $498.15 per share, respectively.
Earnings
Per Share
Basic earnings per common share is computed by dividing income
available to common stockholders by the weighted average number
of common shares outstanding during the period, less the
weighted average ESOP shares of common stock that have not been
committed to be released. The computation of diluted earnings
per share is similar to the computation of basic earnings per
share except that the denominator is increased to include the
number of additional common shares that would have been
outstanding using the treasury stock method, if the dilutive
potential common shares, such as stock awards and stock options,
had been issued.
The following is a reconciliation of the numerators and
denominators of the basic and diluted earnings per share
(EPS) computations for the years ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Numerator used in basic and diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
126,947
|
|
|
$
|
145,856
|
|
|
$
|
154,963
|
|
Loss from discontinued operations, net of tax benefit
|
|
|
(2,574
|
)
|
|
|
(1,805
|
)
|
|
|
(4,589
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
124,373
|
|
|
$
|
144,051
|
|
|
$
|
150,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-63
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares used in basic EPS
|
|
|
4,258,989
|
|
|
|
4,130,962
|
|
|
|
4,016,928
|
|
Effect of dilutive shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential Class A redeemable common stock issuable upon
exercise of stock options
|
|
|
203,120
|
|
|
|
178,014
|
|
|
|
168,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares and dilutive potential
common shares used in diluted EPS
|
|
|
4,462,109
|
|
|
|
4,308,976
|
|
|
|
4,185,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
29.81
|
|
|
$
|
35.31
|
|
|
$
|
38.58
|
|
Loss from discontinued operations, net of tax benefit
|
|
|
(0.61
|
)
|
|
|
(0.44
|
)
|
|
|
(1.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
29.20
|
|
|
$
|
34.87
|
|
|
$
|
37.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operation
|
|
$
|
28.45
|
|
|
$
|
33.85
|
|
|
$
|
37.03
|
|
Loss from discontinued operations, net of tax benefit
|
|
|
(0.58
|
)
|
|
|
(0.42
|
)
|
|
|
(1.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$
|
27.87
|
|
|
$
|
33.43
|
|
|
$
|
35.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The potential shares of common stock that were excluded from
diluted earnings per share were 119,857, 66,570 and 60,661 for
2005, 2006 and 2007, respectively, because the effect of
including these potential shares was antidilutive.
Unaudited pro forma net income (loss) per share is presented for
additional information only. As disclosed in
Note 21 Subsequent Events, Verisk
Analytics, Inc. (Verisk) will become the new holding
company of Insurance Services Office, Inc. In connection with
the initial public offering, the stock of Insurance Services
Office, Inc. will convert to stock of Verisk and Verisk plans to
affect a stock split of its common stock. Pro forma net income
(loss) per share is computed as if this stock split occurred at
the beginning of 2007.
Accumulated
Other Comprehensive Loss
The following is a summary of accumulated other comprehensive
loss at December 31:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
Unrealized gains (losses) on investments
|
|
$
|
318
|
|
|
$
|
(412
|
)
|
Unrealized foreign currency gains
|
|
|
357
|
|
|
|
154
|
|
Pension and postretirement unfunded liability adjustment
|
|
|
(16,692
|
)
|
|
|
(8,441
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(16,017
|
)
|
|
$
|
(8,699
|
)
|
|
|
|
|
|
|
|
|
|
F-64
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The before tax and after tax amounts for these categories, and
the related tax benefit (expense) included in other
comprehensive loss are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Benefit
|
|
|
|
|
2005
|
|
Before Tax
|
|
|
(Expense)
|
|
|
After Tax
|
|
|
Unrealized holding gains on investments arising during the year
|
|
$
|
176
|
|
|
$
|
(70
|
)
|
|
$
|
106
|
|
Reclassification adjustment for amounts included in net income
|
|
|
(27
|
)
|
|
|
9
|
|
|
|
(18
|
)
|
Unrealized foreign currency losses
|
|
|
(549
|
)
|
|
|
|
|
|
|
(549
|
)
|
Minimum pension liability adjustment
|
|
|
(4,126
|
)
|
|
|
1,662
|
|
|
|
(2,464
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss
|
|
$
|
(4,526
|
)
|
|
$
|
1,601
|
|
|
$
|
(2,925
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains on investments arising during the year
|
|
$
|
467
|
|
|
$
|
(176
|
)
|
|
$
|
291
|
|
Reclassification adjustment for amounts included in net income
|
|
|
91
|
|
|
|
(34
|
)
|
|
|
57
|
|
Unrealized foreign currency gain
|
|
|
376
|
|
|
|
|
|
|
|
376
|
|
Minimum pension liability adjustment
|
|
|
2,814
|
|
|
|
(1,186
|
)
|
|
|
1,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive gain
|
|
$
|
3,748
|
|
|
$
|
(1,396
|
)
|
|
$
|
2,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses on investments arising during the year
|
|
$
|
(2,250
|
)
|
|
$
|
885
|
|
|
$
|
(1,365
|
)
|
Reclassification adjustment for amounts included in net income
|
|
|
1,057
|
|
|
|
(422
|
)
|
|
|
635
|
|
Unrealized foreign currency losses
|
|
|
(203
|
)
|
|
|
|
|
|
|
(203
|
)
|
Pension and postretirement unfunded liability adjustment
|
|
|
12,577
|
|
|
|
(4,326
|
)
|
|
|
8,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive gain
|
|
$
|
11,181
|
|
|
$
|
(3,863
|
)
|
|
$
|
7,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KSOP
The Company has established the KSOP for the benefit of eligible
employees in the U.S. and Puerto Rico. The KSOP includes
both an employee savings component and an employee stock
ownership component. The purpose of the combined plan is to
enable the Companys employees to participate in a
tax-deferred savings arrangement under Code Sections 401(a)
and 401(k), and to provide employee equity participation in the
Company through the ESOP accounts.
Under the KSOP, eligible employees may make pre-tax and
after-tax cash contributions as a percentage of their
compensation, subject to certain limitations under the
applicable provisions of the Code. The maximum pre-tax
contribution that can be made to the 401(k) account as
determined under the provisions of Code Section 401(g) is
$14, $15 and $16 for 2005, 2006 and 2007, respectively. Certain
eligible participants (age 50 and older) may contribute an
additional $4, $5 and $5 on a pre-tax basis for 2005, 2006 and
2007, respectively. After-tax contributions are limited to 10%
of a participants compensation. The Company provides
quarterly matching contributions in ISO Class A common
stock. The quarterly matching contributions are equal to 75% of
the first 6% of the participants contribution.
The Company established the ESOP component as a funding vehicle
for the KSOP. This leveraged ESOP acquired 1,143,800 shares
of the Companys Class A common stock at a cost of
approximately $33,170 ($29 per share) in January 1997. The ESOP
borrowed $33,170 from an unrelated third party to finance the
purchase of the ESOP Shares. The common shares were pledged as
collateral for its debt. The Company makes annual cash
contributions to the KSOP equal to the ESOPs debt service.
As the debt is repaid, shares are released from collateral and
are allocated to active employees in proportion to their annual
salaries in
F-65
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
relation to total participant salaries. The Company accounts for
its ESOP in accordance with AICPA
SOP No. 93-6,
Accounting Practices for Certain Employee Stock Ownership
Plans
(SOP No. 93-6)
.
Accordingly, the shares pledged as collateral are reported as
unearned ESOP shares in a contra-temporary equity account in the
balance sheets. As shares are committed to be released from
collateral, the Company reports compensation expense at the
current fair value of the shares, and the shares become
outstanding for EPS computations.
In 2004, the Company renegotiated the ESOP loan to require
interest only payments for the third and fourth quarters of
2004. In December 2004, the Company repaid the ESOP loan and
issued a new loan agreement between the Company and the KSOP,
thereby extending the allocation of the remaining unreleased
shares as of July 1, 2004 through 2013.
In 2005, the Company established the ISO Profit Sharing Plan
(the Profit Sharing Plan), a defined contribution
plan, to replace the pension plan for all eligible employees
hired on or after March 1, 2005. The Profit Sharing Plan is
a component of the KSOP. Eligible employees will participate in
the Profit Sharing Plan if they complete 1,000 hours of
service each plan year and are employed on December 31 of that
year. The Company will make an annual contribution to the Profit
Sharing Plan based on the Companys performance.
Participants vest once they have completed four years and
1,000 hours of service. In 2007, the profit sharing
contribution was funded using Class A common stock. In 2005
and 2006, compensation expense related to the Profit Sharing
Plan amounted to $99 and $393, respectively, and was contributed
to the KSOP in the form of cash.
The KSOP shares as of December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
Shares released for ESOP allocation
|
|
|
848,730
|
|
|
|
865,166
|
|
Shares released for 401(k) matching
|
|
|
125,670
|
|
|
|
135,382
|
|
Shares released for the Profit Sharing Plan
|
|
|
|
|
|
|
860
|
|
Unreleased shares
|
|
|
169,400
|
|
|
|
142,392
|
|
|
|
|
|
|
|
|
|
|
Total KSOP shares
|
|
|
1,143,800
|
|
|
|
1,143,800
|
|
|
|
|
|
|
|
|
|
|
Fair value of unreleased shares
|
|
$
|
127,897
|
|
|
$
|
122,742
|
|
|
|
|
|
|
|
|
|
|
The fair value of the Class A shares is determined
quarterly as determined for purposes of the KSOP. Upon
retirement or termination under the terms of the KSOP, an
eligible participant may require the Company to repurchase
vested shares based on the then current fair value of the
Class A shares. At December 31, 2006 and 2007, the
appraised fair value was $755 and $862 per share, respectively.
KSOP compensation expense for 2005, 2006 and 2007 was
approximately $13,793, $18,779 and $22,247, respectively. At
December 31, 2006, the Company pre-funded anticipated KSOP
share redemptions and recorded a prepaid asset in the
consolidated balance sheets of $2,643.
Stock
Option Plan
The Insurance Services Office, Inc. 1996 Incentive Plan (the
Option Plan) provides for the granting of options to
key employees and directors of the Company. Options granted have
varying exercise dates within four years after grant date and
expire after ten years. Shares obtained through the exercise of
stock options that are held by the employee for more than six
months and one day may be put to the Company and redeemed at the
then current fair value of the Class A shares. For options
granted in 2002 through 2004, the Company has the ability to
defer the redemption for one year. For options granted after
2004, the Company has the ability to defer the redemption for up
to two years. In 2005, stock options granted had an exercise
price in excess of the fair value of the stock on the grant
date. In 2006 and 2007, stock options granted had an
F-66
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
exercise price equal to the fair value of the stock on the grant
date. There were 1,992,795 shares of Class A common
stock approved for issuance under the plan, of which up to
62,800, 60,000 and 75,000 options to purchase shares were
authorized for future grants at December 31, 2005, 2006 and
2007, respectively. Cash received from stock option exercises
for the years ended December 31, 2005, 2006 and 2007 was
$213, $271 and $389, respectively.
A summary of options outstanding under the Option Plan as of
December 31, 2007, and changes during the three years then
ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
Number
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
of Options
|
|
|
Exercise Price
|
|
|
Value
|
|
|
Outstanding at January 1, 2005
|
|
|
765,800
|
|
|
$
|
135.40
|
|
|
$
|
215,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
129,303
|
|
|
$
|
431.03
|
|
|
|
|
|
Exercised
|
|
|
(233,608
|
)
|
|
$
|
110.96
|
|
|
$
|
70,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled or expired
|
|
|
(14,467
|
)
|
|
$
|
247.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005
|
|
|
647,028
|
|
|
$
|
200.89
|
|
|
$
|
235,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
69,441
|
|
|
$
|
586.53
|
|
|
|
|
|
Exercised
|
|
|
(179,967
|
)
|
|
$
|
144.16
|
|
|
$
|
81,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled or expired
|
|
|
(12,734
|
)
|
|
$
|
360.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
|
523,768
|
|
|
$
|
267.64
|
|
|
$
|
255,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
55,979
|
|
|
$
|
760.35
|
|
|
|
|
|
Exercised
|
|
|
(72,083
|
)
|
|
$
|
257.46
|
|
|
$
|
36,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled or expired
|
|
|
(10,911
|
)
|
|
$
|
458.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
496,753
|
|
|
$
|
320.46
|
|
|
$
|
269,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2007
|
|
|
329,503
|
|
|
$
|
208.35
|
|
|
$
|
215,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2006
|
|
|
287,617
|
|
|
$
|
179.04
|
|
|
$
|
165,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-67
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the status of the Companys nonvested options
as of December 31, 2006 and 2007, and changes during the
three years ended December 31, 2005, 2006 and 2007, is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Grant-Date
|
|
|
|
of Options
|
|
|
Fair Value
|
|
|
Nonvested balance at January 1, 2005
|
|
|
449,486
|
|
|
$
|
42.71
|
|
Granted
|
|
|
129,303
|
|
|
$
|
103.94
|
|
Vested
|
|
|
(248,810
|
)
|
|
$
|
51.18
|
|
Cancelled or expired
|
|
|
(14,467
|
)
|
|
$
|
53.39
|
|
|
|
|
|
|
|
|
|
|
Nonvested balance at December 31, 2005
|
|
|
315,512
|
|
|
$
|
60.63
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
69,441
|
|
|
$
|
167.49
|
|
Vested
|
|
|
(136,068
|
)
|
|
$
|
54.86
|
|
Cancelled or expired
|
|
|
(12,734
|
)
|
|
$
|
89.34
|
|
|
|
|
|
|
|
|
|
|
Nonvested balance at December 31, 2006
|
|
|
236,151
|
|
|
$
|
93.83
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
55,979
|
|
|
$
|
210.69
|
|
Vested
|
|
|
(113,969
|
)
|
|
$
|
76.89
|
|
Cancelled or expired
|
|
|
(10,911
|
)
|
|
$
|
117.45
|
|
|
|
|
|
|
|
|
|
|
Nonvested balance at December 31, 2007
|
|
|
167,250
|
|
|
$
|
142.94
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, there was $18,336 of total
unrecognized compensation cost related to nonvested share-based
compensation arrangements granted under the Option Plan. That
cost is expected to be recognized over a weighted-average period
of 2.44 years. As of December 31, 2007, there are
167,250 nonvested stock options of which 157,485 are expected to
vest. The total grant date fair value of shares vested during
the years ended December 31, 2005, 2006 and 2007 was
$12,734, $7,465 and $8,763, respectively.
Exercise prices for options outstanding and exercisable at
December 31, 2007 ranged from $71 to $836 as outlined in
the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Stock
|
|
|
Weighted-
|
|
|
Average
|
|
|
Stock
|
|
|
Weighted-
|
|
Range of
|
|
Remaining
|
|
|
Options
|
|
|
Average
|
|
|
Remaining
|
|
|
Options
|
|
|
Average
|
|
Exercise Prices
|
|
Contractual Life
|
|
|
Outstanding
|
|
|
Exercise Price
|
|
|
Contractual Life
|
|
|
Exercisable
|
|
|
Exercise Price
|
|
|
$ 71 to $110
|
|
|
2.9
|
|
|
|
97,260
|
|
|
$
|
104.45
|
|
|
|
2.9
|
|
|
|
97,260
|
|
|
$
|
104.45
|
|
$111 to $144
|
|
|
5.2
|
|
|
|
53,460
|
|
|
$
|
142.01
|
|
|
|
5.2
|
|
|
|
53,460
|
|
|
$
|
142.01
|
|
$145 to $231
|
|
|
5.5
|
|
|
|
135,117
|
|
|
$
|
186.53
|
|
|
|
5.3
|
|
|
|
109,967
|
|
|
$
|
176.36
|
|
$232 to $445
|
|
|
7.3
|
|
|
|
101,504
|
|
|
$
|
418.50
|
|
|
|
7.3
|
|
|
|
53,369
|
|
|
$
|
408.19
|
|
$446 to $681
|
|
|
8.2
|
|
|
|
54,337
|
|
|
$
|
586.88
|
|
|
|
8.3
|
|
|
|
13,776
|
|
|
$
|
607.84
|
|
$682 to $836
|
|
|
9.1
|
|
|
|
55,075
|
|
|
$
|
760.11
|
|
|
|
9.4
|
|
|
|
1,671
|
|
|
$
|
807.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
496,753
|
|
|
|
|
|
|
|
|
|
|
|
329,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-68
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the twelve months ended December 31, 2007, the
Company granted the following stock options with exercise prices
and Black-Scholes values as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Fair Value
|
|
|
|
|
|
Black-Scholes
|
|
|
|
Stock Options
|
|
|
of Common
|
|
|
Exercise
|
|
|
Value of
|
|
Grant Dates
|
|
Granted
|
|
|
Stock
(1)
|
|
|
Price
|
|
|
Options
|
|
|
March 1, 2007
|
|
|
52,280
|
|
|
$
|
755.00
|
|
|
$
|
755.00
|
|
|
$
|
208.43
|
|
June 30, 2007
|
|
|
300
|
|
|
$
|
836.00
|
|
|
$
|
836.00
|
|
|
$
|
244.81
|
|
July 1, 2007
|
|
|
1,315
|
|
|
$
|
836.00
|
|
|
$
|
836.00
|
|
|
$
|
245.91
|
|
July 1, 2007
|
|
|
2,084
|
|
|
$
|
836.00
|
|
|
$
|
836.00
|
|
|
$
|
240.26
|
|
|
|
|
(1)
|
|
The fair value for these shares is the current valuation in
effect for the KSOP. This fair value is also utilized for all
Class A share transactions for the Insurance Services
Office, Inc. 1996 Incentive Plan.
|
Performance
Based Appreciation Awards
In connection with the Companys acquisition of Applied
Insurance Research Inc., Intellicorp, Ltd, AscendantOne, Inc,
DxCG, Appintelligence and Sysdome, the Company issued
performance based appreciation awards to key employees of these
companies. These awards represent the right to receive cash
equal to an amount by which each companys award unit value
exceeds the award unit value on the date of grant. Performance
is measured on income from continuing operations before
investment expense and interest income, income taxes,
depreciation and amortization (EBITDA). Each
companys award unit value is based on a multiple of
EBITDA. Units granted prior to December 31, 2004 vest at
25% per year and expire after ten years. Units granted after
December 31, 2004 vest at 25% per year and expire after
four years. In 2005, 2006 and 2007, compensation expense related
to these units amounted to $721, $1,360 and $2,296,
respectively. There were no redemptions in 2005, two redemptions
in 2006 totaling $59 and four redemptions in 2007 totaling $342.
The liability for these performance based awards of $2,183 and
$4,137 at December 31, 2006 and 2007, respectively, is
included in accounts payable and accrued liabilities.
Phantom
ESOP Plan
In 2001, the Company established the ISO Phantom ESOP
(phantom ESOP) for eligible employees of the
Companys foreign subsidiaries. Eligible employees will
participate in the phantom ESOP if they complete
1,000 hours of service each plan year and are employed on
December 31 of that year. The Company provides annual
contributions to eligible participants in notional shares based
on the value of ISO Class A common stock. Participants vest
once they have completed four years and 1,000 hours of
service. In 2005, 2006 and 2007, compensation expense related to
the phantom ESOP amounted to $601, $608 and $228, respectively.
A phantom ESOP liability of $2,153 and $1,785 at
December 31, 2006 and 2007, respectively, is included in
accounts payable and accrued liabilities.
|
|
17.
|
Pension
and Postretirement Benefits:
|
Prior to January 1, 2002, the Company maintained a
qualified defined benefit pension plan for substantially all of
its employees through membership in the Pension Plan for
Insurance Organizations (the Pension Plan), a
multiple-employer trust. The Company has applied the projected
unit credit cost method for its pension plan, which attributes
an equal portion of total projected benefits to each year of
employee service. Effective January 1, 2002, the Company
amended the Pension Plan to determine future benefits using a
cash balance formula. Under the cash balance formula, each
participant has an account which is credited annually based on
salary rates determined by years of service, as well as the
interest earned on their previous year end cash balance. Prior
to December 31, 2001, pension plan benefits were based on
years of service and the average of the five highest consecutive
years earnings of the last ten years. Effective
March 1, 2005, the
F-69
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company established the Profit Sharing Plan, a defined
contribution plan, to replace the Pension Plan for all eligible
employees hired on or after March 1, 2005. The Company also
has a non-qualified supplemental cash balance plan
(SERP) for certain employees. The SERP is funded
from the general assets of the Company. The SERP liability of
$190 and $10,333 is included in short-term pension and
postretirement benefits and pension benefits, respectively at
December 31, 2007.
The Pension Plans funding policy is to contribute annually
at an amount between the minimum funding requirements set forth
in the Employee Retirement Income Security Act of 1974 and the
maximum amount that can be deducted for federal income tax
purposes. The Company contributed $167, $224 and $178 to the
SERP in 2005, 2006 and 2007, respectively, and expects to
contribute $339 in 2008. There was no minimum required funding
for the Pension Plan for the years ended December 31, 2006
and 2007. The Company expects to contribute $5,500 to the
Pension Plan in 2008.
The Pension Plan assets consist primarily of investments in
various fixed income and equity funds. Investment guidelines are
established with each investment manager. These guidelines
provide the parameters within which the investment managers
agree to operate, including criteria that determine eligible and
ineligible securities, diversification requirements and credit
quality standards, where applicable. Investment managers are
prohibited from entering into any speculative hedging
transactions. The investment objective is to achieve a maximum
total return with strong emphasis on preservation of capital in
real terms. The domestic equity portion of the total portfolio
should range between 40% and 60%. The international equity
portion of the total portfolio should range between 10% and 20%.
The fixed income portion of the total portfolio should range
between 20% and 40%. The asset allocation at December 31,
2006 and 2007, and target allocation for 2008 by asset category
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Plan Assets
|
|
|
Target
|
|
Asset Category
|
|
2006
|
|
|
2007
|
|
|
Allocation
|
|
|
Equity securities
|
|
|
62
|
%
|
|
|
62
|
%
|
|
|
60
|
%
|
Debt securities
|
|
|
36
|
%
|
|
|
36
|
%
|
|
|
40
|
%
|
Other
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
The expected rate of return on plan assets for 2006 and 2007 of
8.25% is determined by examining expected long term rates of
return for each asset class.
The Company also provides certain healthcare and life insurance
benefits for both active and retired employees. The
Postretirement Health and Life Insurance Plan (the
Postretirement Plan) is contributory, requiring
participants to pay a stated percentage of the premium for
coverage. As of October 1, 2001, the Postretirement Plan
was amended to freeze benefits for current retirees and certain
other employees at the January 1, 2002 level. Also, as of
October 1, 2001, the Postretirement Plan had a curtailment,
which eliminated retiree life insurance for all active employees
and healthcare benefits for almost all future retirees,
effective January 1, 2002.
As discussed in Note 2 Basis of
Presentation and Summary of Significant Accounting
Policies, the Company adopted FAS No. 158 as of
December 31, 2006. FAS No. 158 requires the
recognition of the funded status of a benefit plan pension and
other post retirement benefit in the balance sheet; the
recognition in other comprehensive income of gains or losses and
prior service costs or credits arising during the period, but
which are not included as components of periodic benefit cost
and the measurement of defined benefit
F-70
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
plan assets and obligations as of the balance sheet date.
Additional minimum pension liabilities were derecognized upon
adoption. The adoption of FAS No. 158 affected the
consolidated balance sheet as follows:
|
|
|
|
|
|
|
December 31, 2006
|
|
|
Decrease in accrued and minimum pension liability
|
|
$
|
1,687
|
|
Increase in postretirement benefits obligations
current
|
|
|
(4,070
|
)
|
Decrease in postretirement benefits obligations
noncurrent
|
|
|
679
|
|
Increase in pension benefits obligation
|
|
|
(23,248
|
)
|
|
|
|
|
|
Increase in accumulated other comprehensive loss, pre-tax
|
|
|
(24,952
|
)
|
Increase in deferred income tax
|
|
|
9,317
|
|
|
|
|
|
|
Increase in accumulated other comprehensive loss, net of tax
|
|
$
|
(15,635
|
)
|
|
|
|
|
|
The following tables set forth the changes in the benefit
obligations and the plan assets, the unfunded status of the
Pension Plan and Postretirement Plan, and the amounts recognized
in the Companys consolidated balance sheets at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan
|
|
|
Postretirement Plan
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
373,375
|
|
|
$
|
373,674
|
|
|
$
|
32,561
|
|
|
$
|
30,595
|
|
Service cost
|
|
|
8,464
|
|
|
|
8,152
|
|
|
|
5
|
|
|
|
|
|
Interest cost
|
|
|
20,054
|
|
|
|
20,952
|
|
|
|
1,716
|
|
|
|
1,669
|
|
Actuarial (gain) loss
|
|
|
(8,612
|
)
|
|
|
(15,934
|
)
|
|
|
(476
|
)
|
|
|
441
|
|
Plan participants contributions
|
|
|
|
|
|
|
|
|
|
|
1,894
|
|
|
|
2,227
|
|
Benefits paid
|
|
|
(19,607
|
)
|
|
|
(23,004
|
)
|
|
|
(5,497
|
)
|
|
|
(6,936
|
)
|
Federal subsidy on benefits paid
|
|
|
|
|
|
|
|
|
|
|
392
|
|
|
|
344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
373,674
|
|
|
$
|
363,840
|
|
|
$
|
30,595
|
|
|
$
|
28,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation at end of year
|
|
$
|
350,378
|
|
|
$
|
341,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions as of December 31, used to
determine benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.75
|
%
|
|
|
6.25
|
%
|
|
|
5.75
|
%
|
|
|
5.75
|
%
|
Rate of compensation increase
|
|
|
3.75
|
%
|
|
|
4.25
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
338,338
|
|
|
$
|
344,235
|
|
|
$
|
|
|
|
$
|
|
|
Actual return on plan assets, net of expenses
|
|
|
25,280
|
|
|
|
24,604
|
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
224
|
|
|
|
178
|
|
|
|
3,211
|
|
|
|
4,365
|
|
Plan participants contributions
|
|
|
|
|
|
|
|
|
|
|
1,894
|
|
|
|
2,227
|
|
Benefits paid
|
|
|
(19,607
|
)
|
|
|
(23,004
|
)
|
|
|
(5,497
|
)
|
|
|
(6,936
|
)
|
Subsidies received/receivable
|
|
|
|
|
|
|
|
|
|
|
392
|
|
|
|
344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
344,235
|
|
|
$
|
346,013
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded status at end of year
|
|
$
|
(29,439
|
)
|
|
$
|
(17,827
|
)
|
|
$
|
(30,595
|
)
|
|
$
|
(28,340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-71
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The pre-tax components affecting accumulated other comprehensive
loss as of December 31, 2006 and 2007 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan
|
|
|
Postretirement Plan
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
Transition obligation
|
|
$
|
|
|
|
$
|
|
|
|
$
|
997
|
|
|
$
|
831
|
|
Prior service benefit
|
|
|
(4,918
|
)
|
|
$
|
(4,117
|
)
|
|
|
|
|
|
$
|
|
|
Actuarial losses
|
|
|
28,166
|
|
|
|
14,515
|
|
|
|
2,394
|
|
|
|
2,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss, pretax
|
|
$
|
23,248
|
|
|
$
|
10,398
|
|
|
$
|
3,391
|
|
|
$
|
3,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of net periodic benefit cost are summarized below
for the years ended December 31, 2005, 2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan
|
|
|
Postretirement Plan
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Service cost
|
|
$
|
8,413
|
|
|
$
|
8,464
|
|
|
$
|
8,152
|
|
|
$
|
18
|
|
|
$
|
5
|
|
|
$
|
|
|
Interest cost
|
|
|
19,755
|
|
|
|
20,054
|
|
|
|
20,952
|
|
|
|
1,866
|
|
|
|
1,716
|
|
|
|
1,669
|
|
Amortization of transition obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166
|
|
|
|
166
|
|
|
|
166
|
|
Recognized net actuarial loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
4
|
|
|
|
2
|
|
Expected return on plan assets
|
|
|
(27,219
|
)
|
|
|
(26,430
|
)
|
|
|
(27,458
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
(801
|
)
|
|
|
(801
|
)
|
|
|
(801
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss
|
|
|
607
|
|
|
|
901
|
|
|
|
572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic expense
|
|
$
|
755
|
|
|
$
|
2,188
|
|
|
$
|
1,417
|
|
|
$
|
2,071
|
|
|
$
|
1,891
|
|
|
$
|
1,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts recognized in other comprehensive income at
December 31, 2005, 2006 and 2007 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan
|
|
|
Postretirement Plan
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Transition obligation
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
(166
|
)
|
Amortization of actuarial (gains) losses
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
(572
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
Amortization of prior service benefit
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
801
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
Actuarial (gains) losses
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
(13,079
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other comprehensive income
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
(12,850
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in net periodic expense and other comprehensive
income
|
|
$
|
755
|
|
|
$
|
2,188
|
|
|
$
|
(11,433
|
)
|
|
$
|
2,071
|
|
|
$
|
1,891
|
|
|
$
|
2,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-72
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The estimated amounts in accumulated other comprehensive loss
that is expected to be recognized as components of net periodic
benefit cost (credit) during 2008 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Postretirement
|
|
|
|
|
|
|
Plan
|
|
|
Plan
|
|
|
Total
|
|
|
Transition obligation
|
|
$
|
|
|
|
$
|
166
|
|
|
$
|
166
|
|
Prior service benefit
|
|
|
(801
|
)
|
|
|
|
|
|
|
(801
|
)
|
Actuarial losses
|
|
|
470
|
|
|
|
|
|
|
|
470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(331
|
)
|
|
$
|
166
|
|
|
$
|
(165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average assumptions as of January 1, 2005,
2006 and 2007 used to determine net periodic benefit cost and
the amount recognized in the accompanying consolidated balance
sheets are provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan
|
|
|
Postretirement Plan
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Weighted-average assumptions as of January 1, used to
determine net benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.75
|
%
|
|
|
5.50
|
%
|
|
|
5.75
|
%
|
|
|
5.75
|
%
|
|
|
5.50
|
%
|
|
|
5.75
|
%
|
Expected return on plan assets
|
|
|
8.50
|
%
|
|
|
8.25
|
%
|
|
|
8.25
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Rate of compensation increase
|
|
|
3.75
|
%
|
|
|
3.75
|
%
|
|
|
3.75
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Amounts recognized in the consolidated balance sheets consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term accrued benefit liability
|
|
|
|
|
|
$
|
(254
|
)
|
|
$
|
(190
|
)
|
|
|
|
|
|
$
|
(4,070
|
)
|
|
$
|
(4,446
|
)
|
Accrued benefit liability
|
|
|
|
|
|
|
(29,185
|
)
|
|
|
(17,637
|
)
|
|
|
|
|
|
|
(26,525
|
)
|
|
|
(23,894
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued benefit liability
|
|
|
|
|
|
$
|
(29,439
|
)
|
|
$
|
(17,827
|
)
|
|
|
|
|
|
$
|
(30,595
|
)
|
|
$
|
(28,340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the estimated future benefit
payments for the respective plans. The future benefit payments
for the postretirement plan are net of the federal Medicare
subsidy.
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Postretirement
|
|
|
|
Plan
|
|
|
Plan
|
|
|
2008
|
|
$
|
22,139
|
|
|
$
|
4,574
|
|
2009
|
|
$
|
23,051
|
|
|
$
|
4,368
|
|
2010
|
|
$
|
24,184
|
|
|
$
|
4,062
|
|
2011
|
|
$
|
25,522
|
|
|
$
|
3,722
|
|
2012
|
|
$
|
26,998
|
|
|
$
|
3,291
|
|
2013-2017
|
|
$
|
164,039
|
|
|
$
|
11,156
|
|
The healthcare cost trend rate for 2007 was 11% gradually
decreasing to 5% in 2013. Assumed healthcare cost trend rates
have a significant effect on the amounts reported for the
healthcare plan. A 1% change in assumed healthcare cost trend
rates would have the following effects:
|
|
|
|
|
|
|
|
|
|
|
1% Decrease
|
|
|
1% Increase
|
|
|
Effect on total of service and interest cost components of net
periodic postretirement healthcare benefit cost
|
|
$
|
(7
|
)
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
Effect on the healthcare component of the accumulated
postretirement benefit obligation
|
|
$
|
(136
|
)
|
|
$
|
76
|
|
|
|
|
|
|
|
|
|
|
F-73
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The expected subsidy from the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 reduced the
Companys accumulated postretirement benefit obligation by
approximately $11,911 and $9,500 as of December 31, 2006
and 2007, and the net periodic benefit cost by approximately
$1,407, $1,315 and $946 in fiscal 2005, 2006 and 2007,
respectively.
FAS No. 131,
Disclosures About Segments of an
Enterprise and Related Information
(FAS No. 131), establishes standards
for reporting information about operating segments.
FAS No. 131 requires that a public business enterprise
report financial and descriptive information about its
reportable operating segments. Operating segments are components
of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in
assessing performance. The Companys CEO and Chairman of
the Board is identified as the chief operating decision maker
(CODM) as defined by FAS No. 131. To align with
the internal management of the Companys business
operations based on product and service offerings, the Company
is organized into the following two operating segments:
Risk Assessment:
The Company is a
leading provider of statistical, actuarial and underwriting data
for the U.S. P&C insurance industry. The
Companys databases include cleansed and standardized
records describing premiums and losses in insurance
transactions, casualty and property risk attributes for
commercial buildings and their occupants and fire suppression
capabilities of municipalities. The Company uses this data to
create policy language and proprietary risk classifications that
are industry standards and to generate prospective loss cost
estimates used to price insurance policies.
Decision Analytics:
The Company
develops solutions that its customers use to analyze the four
key processes in managing risk: prediction of loss,
selection and pricing of risk, detection and
prevention of fraud and quantification of
loss. The Companys combination of algorithms and
analytic methods incorporates its proprietary data to generate
solutions in each of these four categories. In most cases, the
Companys customers integrate the solutions into their
models, formulas or underwriting criteria in order to predict
potential loss events, ranging from hurricanes and earthquakes
to unanticipated healthcare claims. The Company develops
catastrophe and extreme event models and offer solutions
covering natural and man-made risks, including acts of
terrorism. The Company also develops solutions that allow
customers to quantify costs after loss events occur. Fraud
solutions include data on claim histories, analysis of mortgage
applications to identify misinformation, analysis of claims to
find emerging patterns of fraud and identification of suspicious
claims in the insurance, mortgage and healthcare sectors.
The two aforementioned operating segments represent the segments
for which separate discrete financial information is available
and upon which operating results are regularly evaluated by the
CODM in order to assess performance and allocate resources. The
Company uses segment EBITDA as the profitability measure for
making decisions regarding ongoing operations. Segment EBITDA is
income from continuing operations before investment income and
interest expense, income taxes, depreciation and amortization.
Segment EBITDA is used to assess corporate performance and is
the measure of operating results and to assess optimal
utilization of debt and acquisitions by operating segment.
Segment operating expenses consist of direct and indirect costs
principally related to personnel, facilities, software license
fees, consulting, travel, and third-party information services.
Indirect costs are generally allocated to the segments using
fixed rates established by management based upon estimated
expense contribution levels and other assumptions that
management considers reasonable. The Company does not allocate
investment income, realized gains/(losses), interest income,
interest expense or income tax expense, since these items are
not considered in evaluating the segments overall
operating performance. The CODM does not evaluate the financial
performance of each
F-74
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
segment based on assets. On a geographic basis, no individual
country outside of the United States accounted for 1% or more of
the Companys consolidated revenue for the years ending
December 31, 2005, 2006 or 2007. No individual country
outside of the United States accounted for 1% or more of total
consolidated long-term assets as of December 31, 2006 or
2007.
The following table provides the Companys revenue and
operating income performance by reportable segment for the years
ended December 31, 2005, 2006 and 2007, as well as a
reconciliation to Income from continuing operations before
income taxes for all years presented in the accompanying
consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
Risk
|
|
|
Decision
|
|
|
|
|
|
|
Assessment
|
|
|
Analytics
|
|
|
Total
|
|
|
Revenues
|
|
$
|
448,875
|
|
|
$
|
196,785
|
|
|
$
|
645,660
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of items shown separately below)
|
|
|
191,516
|
|
|
|
103,395
|
|
|
|
294,911
|
|
Selling, general, and administrative
|
|
|
61,408
|
|
|
|
27,315
|
|
|
|
88,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment EBITDA
|
|
|
195,951
|
|
|
|
66,075
|
|
|
|
262,026
|
|
Depreciation and amortization of fixed assets
|
|
|
14,373
|
|
|
|
7,651
|
|
|
|
22,024
|
|
Amortization of intangible assets
|
|
|
3,239
|
|
|
|
16,561
|
|
|
|
19,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
178,339
|
|
|
|
41,863
|
|
|
|
220,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
|
|
|
|
|
|
|
|
2,919
|
|
Realized gains on securities, net
|
|
|
|
|
|
|
|
|
|
|
27
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(10,465
|
)
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income from continuing operations before income
taxes
|
|
|
|
|
|
|
|
|
|
$
|
212,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
24,379
|
|
|
$
|
8,352
|
|
|
$
|
32,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-75
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
Risk
|
|
|
Decision
|
|
|
|
|
|
|
Assessment
|
|
|
Analytics
|
|
|
Total
|
|
|
Revenues
|
|
$
|
472,634
|
|
|
$
|
257,499
|
|
|
$
|
730,133
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of items shown separately below)
|
|
|
203,878
|
|
|
|
127,926
|
|
|
|
331,804
|
|
Selling, general, and administrative
|
|
|
65,884
|
|
|
|
34,240
|
|
|
|
100,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment EBITDA
|
|
|
202,872
|
|
|
|
95,333
|
|
|
|
298,205
|
|
Depreciation and amortization of fixed assets
|
|
|
17,931
|
|
|
|
10,076
|
|
|
|
28,007
|
|
Amortization of intangible assets
|
|
|
3,001
|
|
|
|
23,853
|
|
|
|
26,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
181,940
|
|
|
|
61,404
|
|
|
|
243,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
|
|
|
|
|
|
|
|
6,585
|
|
Realized losses on securities, net
|
|
|
|
|
|
|
|
|
|
|
(375
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(16,668
|
)
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income from continuing operations before income
taxes
|
|
|
|
|
|
|
|
|
|
$
|
232,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
11,753
|
|
|
$
|
13,989
|
|
|
$
|
25,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
Risk
|
|
|
Decision
|
|
|
|
|
|
|
Assessment
|
|
|
Analytics
|
|
|
Total
|
|
|
Revenues
|
|
$
|
485,160
|
|
|
$
|
317,035
|
|
|
$
|
802,195
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of items shown separately below)
|
|
|
204,182
|
|
|
|
153,009
|
|
|
|
357,191
|
|
Selling, general, and administrative
|
|
|
68,198
|
|
|
|
39,378
|
|
|
|
107,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment EBITDA
|
|
|
212,780
|
|
|
|
124,648
|
|
|
|
337,428
|
|
Depreciation and amortization of fixed assets
|
|
|
19,397
|
|
|
|
12,348
|
|
|
|
31,745
|
|
Amortization of intangible assets
|
|
|
1,047
|
|
|
|
32,869
|
|
|
|
33,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
192,336
|
|
|
|
79,431
|
|
|
|
271,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
|
|
|
|
|
|
|
|
8,442
|
|
Realized gains on securities, net
|
|
|
|
|
|
|
|
|
|
|
857
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(22,928
|
)
|
Other income
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income from continuing operations before income
taxes
|
|
|
|
|
|
|
|
|
|
$
|
258,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
33,059
|
|
|
$
|
14,124
|
|
|
$
|
47,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-76
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Operating segment revenue by type of service is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Risk Assessment
|
|
|
|
|
|
|
|
|
|
|
|
|
Industry standard insurance programs
|
|
|
290,204
|
|
|
|
303,957
|
|
|
|
311,087
|
|
Property-specific rating and underwriting information
|
|
|
114,467
|
|
|
|
123,627
|
|
|
|
126,291
|
|
Statistical agency and data services
|
|
|
25,228
|
|
|
|
25,793
|
|
|
|
27,282
|
|
Actuarial services
|
|
|
18,976
|
|
|
|
19,257
|
|
|
|
20,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk Assessment
|
|
|
448,875
|
|
|
|
472,634
|
|
|
|
485,160
|
|
Decision Analytics
|
|
|
|
|
|
|
|
|
|
|
|
|
Fraud identification and detection solutions
|
|
|
143,258
|
|
|
|
168,189
|
|
|
|
172,726
|
|
Loss prediction solutions
|
|
|
53,527
|
|
|
|
67,129
|
|
|
|
81,110
|
|
Loss quantification solutions
|
|
|
|
|
|
|
22,181
|
|
|
|
63,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Decision Analytics
|
|
|
196,785
|
|
|
|
257,499
|
|
|
|
317,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated revenues
|
|
$
|
645,660
|
|
|
$
|
730,133
|
|
|
$
|
802,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company considers its Class A and Class B
stockholders that own more than 5% of the outstanding stock
within the respective class to be related parties as defined
within FAS No. 57 Related Party Disclosures. At
December 31, 2007, there were six Class B stockholders
each owning more than 5% of the outstanding Class B shares.
Two of these six Class B stockholders have employees that
serve on the Companys board of directors.
The Company incurred expenses associated with the payment of
insurance coverage premiums to certain of the largest
stockholders aggregating $1,911, $487, and $827 in 2005, 2006,
and 2007, respectively. These expenses are included in cost of
revenues and selling, general and administrative in the
consolidated statements of operations.
At December 31, 2007, there were three Class A
stockholders each owning more than 5% of the outstanding
Class A shares. One of these stockholders had total
indebtedness to the Company of $10,588 at December 31,
2007. This indebtedness was repaid subsequent to
December 31, 2007. Another of these stockholders is the
ESOP. As discussed in Note 16, in December 2004, the
Company repaid the prior ESOP loan with an unrelated third party
and entered into a loan agreement with the KSOP, which requires
quarterly payments through December 31, 2013. As debt is
repaid, shares are released to the ESOP to fund 401(k)
matching and profit sharing contributions and the remainder is
allocated annually to active employees in proportion to their
eligible compensation in relation to total participant eligible
compensation.
F-77
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
20.
|
Commitments
and Contingencies:
|
The Companys operations are conducted on leased premises.
Approximate minimum rentals under long-term noncancelable leases
for all leased premises, computer equipment and automobiles are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Capital
|
|
|
|
|
Years Ending
|
|
Leases
|
|
|
Leases
|
|
|
|
|
|
2008
|
|
$
|
19,285
|
|
|
$
|
4,818
|
|
|
|
|
|
2009
|
|
|
18,900
|
|
|
|
4,136
|
|
|
|
|
|
2010
|
|
|
18,215
|
|
|
|
3,283
|
|
|
|
|
|
2011
|
|
|
18,250
|
|
|
|
164
|
|
|
|
|
|
2012
|
|
|
17,312
|
|
|
|
|
|
|
|
|
|
2013-2017
|
|
|
75,445
|
|
|
|
|
|
|
|
|
|
2018-2022
|
|
|
42,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net minimum lease payments
|
|
$
|
209,409
|
|
|
$
|
12,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less amount representing interest
|
|
|
|
|
|
|
(694
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of net minimum lease capital payments
|
|
|
|
|
|
$
|
11,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Most of the leases require payment of property taxes and
utilities and, in certain cases, contain renewal options.
Operating leases consist of office space. Capital leases consist
of computer equipment, office equipment, and leased automobiles.
Rent expense on operating leases approximated $19,083, $19,258
and $19,833 in 2005, 2006 and 2007, respectively.
In addition, the Company is a party to legal proceedings with
respect to a variety of matters in the ordinary course of
business. Including those matters described below, the Company
is unable, at the present time, to determine the ultimate
resolution of or provide a reasonable estimate of the range of
possible loss attributable to these matters or the impact they
may have on the Companys results of operations, financial
position, or cash flows. This is primarily because many of these
cases remain in their early stages and only limited discovery
has taken place. Although the Company believes it has strong
defenses for the litigations proceedings described below, the
Company could in the future incur judgments or enter into
settlements of claims that could have a material adverse effect
on its results of operations, financial position or cash flows.
Claims
Outcome Advisor Litigation
Hensley, et al. v. Computer Sciences Corporation et al.
is a putative nationwide class action complaint, filed in
February 2005, in Miller County, Arkansas state court.
Defendants include numerous insurance companies and providers of
software products used by insurers in paying claims. The Company
is among the named defendants. Plaintiffs allege that certain
software products, including the Companys Claims Outcome
Advisor product and a competing software product sold by
Computer Sciences Corporation, improperly estimated the amount
to be paid by insurers to their policyholders in connection with
claims for bodily injuries. On August 18, 2008, the Company
was voluntarily dismissed from the case with prejudice.
The Company has entered into settlement agreements with
plaintiffs asserting claims relating to the use of Claims
Outcome Advisor by defendants Hanover Insurance Group,
Progressive Car Insurance, and Liberty Mutual Insurance Group.
Each of these settlements has been granted final approval by the
court and together they resolve the claims asserted in this case
against the Company with respect to the above insurance
companies, who settled the claims against them as well. A
provision was recorded in 2006 for this proceeding and the total
amount the Company paid in 2008 with respect to these
settlements was less than $2 million. A fourth defendant,
The Automobile Club of California that is alleged to have used
Claims Outcome Advisor
F-78
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
has not settled. Plaintiffs have agreed to dismiss the Company
from the case with prejudice once a discovery dispute relating
to certain documents is resolved.
Xactware
Litigation
The following two have been filed by or on behalf of groups of
Louisiana insurance policyholders who claim, among other things,
that certain insurers who used products and price information
supplied by the Companys Xactware subsidiary (and those of
another provider) did not fully compensate policyholders for
property damage covered under their insurance policies. The
plaintiffs seek to recover compensation for their damages in an
amount equal to the difference between the amount paid by the
defendants and the fair market repair/restoration costs of their
damaged property.
Schafer v. State Farm Fire & Cas. Co.
, et
al. is a putative class action pending against the Company and
State Farm Fire & Casualty Company filed in
March 2007 in the Eastern District of Louisiana. The
complaint alleged antitrust violations, breach of contract,
negligence, bad faith, and fraud. The court dismissed the
antitrust claim as to both defendants and dismissed all claims
against the Company other than fraud, which will proceed to the
discovery phase along with the remaining claims against State
Farm. Plaintiffs have moved to certify a class with respect to
the fraud and breach of contract claims which the defendants
will oppose.
Mornay v. Travelers Ins. Co.
, et al. is a putative
class action pending against the Company and Travelers Insurance
Company filed in November 2007 in the Eastern District of
Louisiana. The complaint alleged antitrust violations, breach of
contract, negligence, bad faith, and fraud. As in Schafer, the
court dismissed the antitrust claim as to both defendants and
dismissed all claims against the Company other than fraud. The
court has stayed all proceedings pending an appraisal of the
lead plaintiffs insurance claims.
The third lawsuit,
Louisiana ex rel. Foti v. Allstate
Ins. Co.
, is a putative parens patriae action filed by the
Louisiana Attorney General filed in November 2007 in
Louisiana state court against numerous insurance companies, the
Company, and other solution providers, and consultants. The
complaint contains allegations of an antitrust conspiracy among
the defendants with respect to the payment of insurance claims
for property damage and seeks the forfeiture of any illegal
profits and treble damages. Defendants removed the case to the
Eastern District of Louisiana. A motion to remand the case to
state court was denied by the district court and that denial was
affirmed by the United States Court of Appeals for the Fifth
Circuit. Defendants have filed a motion to dismiss and
plaintiffs are opposing the motion.
At this time it is not possible to determine the ultimate
resolution of, or estimate the liability related to, these
matters. No provision for losses has been provided in connection
with the Xactware Litigation.
iiX
Litigation
In March 2007, the Companys Insurance Information
Exchange, or iiX, subsidiary, as well as other information
providers and insurers in the State of Texas, were served with a
summons and class action complaint filed in the United States
District Court for the Eastern District of Texas alleging
violations of the Driver Privacy Protection Act, or the DPPA.
Plaintiffs brought the action on their own behalf and on behalf
of all similarly situated individuals whose personal information
is contained in any motor vehicle record maintained by the State
of Texas and who have not provided express consent to the State
of Texas for the distribution of their personal information for
purposes not enumerated by the DPPA and whose personal
information has been knowingly obtained and used by the
defendants. The complaint alleges that the defendants knowingly
obtained such personal information and that the obtaining and
use of this personal information was not for a purpose
authorized by the DPPA. The complaint seeks liquidated damages
in the amount of $2,500 for each instance of a violation of
DPPA, punitive damages and the destruction of any illegally
obtained personal information. The Company has filed a motion to
dismiss the complaint based on failure to state a claim and lack
of standing and a decision on that motion is pending.
F-79
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On June 27, 2008, the Companys stockholders approved
certain corporate governance changes necessary to allow the
Company to proceed with a proposed initial public offering
(IPO). Immediately prior to the completion of the
proposed IPO, the Company will undergo a corporate
reorganization whereby the Class A and Class B common
stock of the Company will be exchanged by the current
stockholders for the common stock of Verisk Analytics, Inc.
(Verisk) on a one-for-one basis. Verisk, formed on
May 23, 2008, was established to serve as the parent
holding company of Insurance Services Office, Inc.
All stock options granted under the Insurance Services Office,
Inc. 1996 Incentive Plan will be transferred to Verisk, without
modification to the terms of the options other than such options
will be exercisable for Class A common stock of Verisk.
Class A common stock of Verisk will not be redeemable by
the holder and only Class A common stock will be offered to
the public.
Upon consummation of the IPO, two new series of Class B
common stock, Class B (Series 1) common stock (the
Class B-1)
and Class B (Series 2) common stock (the
Class B-2)
will be formed and 50 percent of each Class B
stockholders existing Class B common stock will be
converted into shares of new
Class B-1
common stock and the remaining 50 percent of each
Class B stockholders existing Class B common
stock will be converted into shares of new
Class B-2
common stock. Each share of
Class B-1
common stock shall convert automatically, without any action by
the stockholder, into one share of Class A common stock
18 months after the date of the IPO. Each share of
Class B-2 common stock shall convert automatically, without
any action by the stockholder, into one share of Class A
common stock 30 months after the date of the IPO. In
conjunction with the IPO, Verisk plans to effect a stock split
of both classes of common stock. The strike price of stock
options will be adjusted based on the effect of the stock split.
The Company provided full recourse loans to directors and senior
management in connection with exercising their stock options.
This loan program has been terminated and all of such loans have
been repaid.
|
|
22.
|
Correction
of an Error
|
In preparation for the initial public offering, the Company
undertook a comprehensive review of its revenue recognition
policies. As a result of this review conducted subsequent to
issuance of the Companys 2007 consolidated financial
statements, it was decided that the revenue recognition for
certain license agreements under the provision of SOP No.
97-2
were
not correctly applied. As a result, the Company overstated
Revenues and understated Fees received in
advance related to these license agreements.
F-80
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following financial statement line items were impacted by
the correction in the respective periods presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2005
|
|
|
|
|
|
|
Adjustment for
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
Discontinued
|
|
|
Correction
|
|
|
As
|
|
Caption of Consolidated Statement of Operations
|
|
Reported
|
|
|
Operations
|
|
|
of Errors
|
|
|
Corrected
|
|
|
Revenues
|
|
$
|
651,340
|
|
|
$
|
(4,249
|
)
|
|
$
|
(1,431
|
)
|
|
$
|
645,660
|
|
Operating income
|
|
|
218,275
|
|
|
|
3,358
|
|
|
|
(1,431
|
)
|
|
|
220,202
|
|
Income from continuing operations before income taxes
|
|
|
210,805
|
|
|
|
3,295
|
|
|
|
(1,431
|
)
|
|
|
212,669
|
|
Provision for income taxes
|
|
|
(85,534
|
)
|
|
|
(721
|
)
|
|
|
533
|
|
|
|
(85,722
|
)
|
Income from continuing operations
|
|
|
125,271
|
|
|
|
2,574
|
|
|
|
(898
|
)
|
|
|
126,947
|
|
Net income
|
|
|
125,271
|
|
|
|
|
|
|
|
(898
|
)
|
|
|
124,373
|
|
Basic income per share of Class A and Class B from
continuing operations
|
|
|
29.41
|
|
|
|
0.61
|
|
|
|
(0.21
|
)
|
|
|
29.81
|
|
Basic net income per share of Class A and Class B
|
|
|
29.41
|
|
|
|
|
|
|
|
(0.21
|
)
|
|
|
29.20
|
|
Diluted income per share of Class A and Class B from
continuing operations
|
|
|
28.08
|
|
|
|
0.58
|
|
|
|
(0.21
|
)
|
|
|
28.45
|
|
Diluted net income per share of Class A and Class B
|
|
|
28.08
|
|
|
|
|
|
|
|
(0.21
|
)
|
|
|
27.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2006
|
|
|
|
As Previously
|
|
|
Correction
|
|
|
|
|
Caption of Consolidated Statement of Operations
|
|
Reported
|
|
|
of Errors
|
|
|
As Corrected
|
|
|
Revenues
|
|
$
|
731,636
|
|
|
$
|
(1,503
|
)
|
|
$
|
730,133
|
|
Operating income
|
|
|
244,847
|
|
|
|
(1,503
|
)
|
|
|
243,344
|
|
Income from continuing operations before income taxes
|
|
|
234,280
|
|
|
|
(1,503
|
)
|
|
|
232,777
|
|
Provision for income taxes
|
|
|
(87,498
|
)
|
|
|
577
|
|
|
|
(86,921
|
)
|
Income from continuing operations
|
|
|
146,782
|
|
|
|
(926
|
)
|
|
|
145,856
|
|
Net income
|
|
|
144,977
|
|
|
|
(926
|
)
|
|
|
144,051
|
|
Basic income per share of Class A and Class B from
continuing operations
|
|
|
35.54
|
|
|
|
(0.23
|
)
|
|
|
35.31
|
|
Basic net income per share of Class A and Class B
|
|
|
35.10
|
|
|
|
(0.23
|
)
|
|
|
34.87
|
|
Diluted income per share of Class A and Class B from
continuing operations
|
|
|
34.07
|
|
|
|
(0.22
|
)
|
|
|
33.85
|
|
Diluted net income per share of Class A and Class B
|
|
|
33.65
|
|
|
|
(0.22
|
)
|
|
|
33.43
|
|
F-81
INSURANCE
SERVICES OFFICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2007
|
|
|
|
As Previously
|
|
|
Other
|
|
|
Correction
|
|
|
As
|
|
Caption of Consolidated Statement of Operations
|
|
Reported
|
|
|
Adjustments(1)
|
|
|
of Errors
|
|
|
Corrected
|
|
|
Revenues
|
|
$
|
803,700
|
|
|
$
|
|
|
|
$
|
(1,505
|
)
|
|
$
|
802,195
|
|
Operating income
|
|
|
273,272
|
|
|
|
|
|
|
|
(1,505
|
)
|
|
|
271,767
|
|
Income from continuing operations before income taxes
|
|
|
259,652
|
|
|
|
|
|
|
|
(1,505
|
)
|
|
|
258,147
|
|
Provision for income taxes
|
|
|
(102,546
|
)
|
|
|
(1,221
|
)
|
|
|
583
|
|
|
|
(103,184
|
)
|
Income from continuing operations
|
|
|
157,106
|
|
|
|
(1,221
|
)
|
|
|
(922
|
)
|
|
|
154,963
|
|
Net income
|
|
|
152,517
|
|
|
|
(1,221
|
)
|
|
|
(922
|
)
|
|
|
150,374
|
|
Basic income per share of Class A and Class B from
continuing operations
|
|
|
39.11
|
|
|
|
(0.30
|
)
|
|
|
(0.23
|
)
|
|
|
38.58
|
|
Basic net income per share of Class A and Class B
|
|
|
37.97
|
|
|
|
(0.30
|
)
|
|
|
(0.23
|
)
|
|
|
37.44
|
|
Diluted income per share of Class A and Class B from
continuing operations
|
|
|
37.53
|
|
|
|
(0.28
|
)
|
|
|
(0.22
|
)
|
|
|
37.03
|
|
Diluted net income per share of Class A and Class B
|
|
|
36.43
|
|
|
|
(0.28
|
)
|
|
|
(0.22
|
)
|
|
|
35.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
As Previously
|
|
|
Other
|
|
|
Correction
|
|
|
|
|
Caption of Consolidated Balance Sheet
|
|
Reported
|
|
|
Adjustments(1)
|
|
|
of Errors
|
|
|
As Corrected
|
|
|
Current deferred income taxes
|
|
$
|
14,387
|
|
|
$
|
|
|
|
$
|
4,632
|
|
|
$
|
19,019
|
|
Total current assets
|
|
|
244,361
|
|
|
|
|
|
|
|
4,632
|
|
|
|
248,993
|
|
Deferred income taxes
|
|
|
37,315
|
|
|
|
|
|
|
|
(21
|
)
|
|
|
37,294
|
|
Total assets
|
|
|
740,120
|
|
|
|
|
|
|
|
4,611
|
|
|
|
744,731
|
|
Fees received in advance
|
|
|
112,509
|
|
|
|
|
|
|
|
11,627
|
|
|
|
124,136
|
|
Total current liabilities
|
|
|
317,554
|
|
|
|
254
|
|
|
|
11,627
|
|
|
|
329,435
|
|
Total liabilities
|
|
|
723,528
|
|
|
|
|
|
|
|
11,627
|
|
|
|
735,155
|
|
Accumulated other comprehensive loss
|
|
|
(15,996
|
)
|
|
|
|
|
|
|
(21
|
)
|
|
|
(16,017
|
)
|
Retained earnings (accumulated deficit)
|
|
|
729,971
|
|
|
|
(1,180,533
|
)
|
|
|
(6,995
|
)
|
|
|
(457,557
|
)
|
Total stockholders equity (deficit)
|
|
|
16,592
|
|
|
|
(1,125,933
|
)
|
|
|
(7,016
|
)
|
|
|
(1,116,357
|
)
|
Total liabilities and stockholders deficit
|
|
|
740,120
|
|
|
|
|
|
|
|
4,611
|
|
|
|
744,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
|
As Previously
|
|
|
Other
|
|
|
Correction
|
|
|
|
|
Caption of Consolidated Balance Sheet
|
|
Reported
|
|
|
Adjustments(1)
|
|
|
of Errors
|
|
|
As Corrected
|
|
|
Current deferred income taxes
|
|
$
|
17,373
|
|
|
$
|
66
|
|
|
$
|
5,215
|
|
|
$
|
22,654
|
|
Total current assets
|
|
|
172,741
|
|
|
|
3,069
|
|
|
|
5,215
|
|
|
|
181,025
|
|
Deferred income taxes
|
|
|
37,859
|
|
|
|
17,756
|
|
|
|
64
|
|
|
|
55,679
|
|
Total assets
|
|
|
802,379
|
|
|
|
20,825
|
|
|
|
5,279
|
|
|
|
828,483
|
|
Fees received in advance
|
|
|
114,776
|
|
|
|
|
|
|
|
13,131
|
|
|
|
127,907
|
|
Total current liabilities
|
|
|
339,566
|
|
|
|
(6,449
|
)
|
|
|
13,131
|
|
|
|
346,248
|
|
Total liabilities
|
|
|
807,507
|
|
|
|
32,385
|
|
|
|
13,131
|
|
|
|
853,023
|
|
Accumulated other comprehensive loss
|
|
|
(8,763
|
)
|
|
|
|
|
|
|
64
|
|
|
|
(8,699
|
)
|
Retained earnings (accumulated deficit)
|
|
|
882,488
|
|
|
|
(1,382,708
|
)
|
|
|
(7,916
|
)
|
|
|
(508,136
|
)
|
Total stockholders deficit
|
|
|
(5,128
|
)
|
|
|
(1,182,748
|
)
|
|
|
(7,852
|
)
|
|
|
(1,195,728
|
)
|
Total liabilities and stockholders deficit
|
|
|
802,379
|
|
|
|
20,825
|
|
|
|
5,279
|
|
|
|
828,483
|
|
|
|
|
(1)
|
|
The Other Adjustments were required to prepare the
financial statements for the initial public offering and do not
represent a change from non-GAAP or incorrect GAAP to GAAP.
These adjustments related to the adoption of FIN No. 48
(See note 11) and the classification of Class A shares
as redeemable common stock (See note 14).
|
F-82
Xactware,
Inc.
Condensed
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
12,289,605
|
|
|
$
|
12,636,914
|
|
Accounts receivable, net
|
|
|
4,682,223
|
|
|
|
3,450,648
|
|
Unbilled receivables
|
|
|
|
|
|
|
117,267
|
|
Prepaid expenses and other current assets
|
|
|
721,689
|
|
|
|
433,839
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
17,693,517
|
|
|
|
16,638,668
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
|
60,034
|
|
|
|
156,078
|
|
Computer equipment and software
|
|
|
13,402,836
|
|
|
|
13,574,229
|
|
Leasehold improvements
|
|
|
304,765
|
|
|
|
316,463
|
|
Other
|
|
|
314,526
|
|
|
|
228,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,082,161
|
|
|
|
14,275,301
|
|
Accumulated depreciation
|
|
|
(9,172,370
|
)
|
|
|
(9,298,899
|
)
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
|
4,909,791
|
|
|
|
4,976,402
|
|
Long-term portion of notes receivable from related parties
|
|
|
270,320
|
|
|
|
145,320
|
|
Other non-current assets
|
|
|
285,750
|
|
|
|
368,616
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
23,159,378
|
|
|
$
|
22,129,006
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
782,137
|
|
|
$
|
1,097,437
|
|
Accrued compensation
|
|
|
2,759,008
|
|
|
|
1,884,386
|
|
Other accrued expenses
|
|
|
131,336
|
|
|
|
101,825
|
|
Deferred revenue
|
|
|
4,963,189
|
|
|
|
3,822,190
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
8,635,670
|
|
|
|
6,905,838
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
Common stock no par value, 100,000,000 shares
authorized; 20,836,870 shares issued and outstanding as of
June 30, 2006 and December 31, 2005
|
|
|
304,347
|
|
|
|
304,347
|
|
Retained earnings
|
|
|
14,219,361
|
|
|
|
14,918,821
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
14,523,708
|
|
|
|
15,223,168
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
23,159,378
|
|
|
$
|
22,129,006
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes
F-83
Xactware,
Inc.
Condensed
Consolidated Statements of Income (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
Net revenues
|
|
$
|
25,249,061
|
|
|
$
|
17,121,476
|
|
Cost of revenues
|
|
|
2,851,550
|
|
|
|
2,183,987
|
|
Research and development expenses
|
|
|
5,855,078
|
|
|
|
5,707,097
|
|
Sales and marketing expenses
|
|
|
2,046,968
|
|
|
|
1,532,302
|
|
General and administrative expenses
|
|
|
4,906,775
|
|
|
|
3,768,258
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
15,660,371
|
|
|
|
13,191,644
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
9,588,690
|
|
|
|
3,929,832
|
|
Interest and other expense
|
|
|
(44,891
|
)
|
|
|
(94,993
|
)
|
Interest and other income
|
|
|
289,588
|
|
|
|
88,541
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,833,387
|
|
|
$
|
3,923,380
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes
F-84
Xactware,
Inc.
Condensed
Consolidated Statements of Cash Flows (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,833,387
|
|
|
$
|
3,923,380
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,102,842
|
|
|
|
1,356,968
|
|
Gain/Loss on disposal of assets
|
|
|
34,666
|
|
|
|
8,037
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,231,575
|
)
|
|
|
857,714
|
|
Unbilled Receivables
|
|
|
117,267
|
|
|
|
995,062
|
|
Prepaid expenses and other current assets
|
|
|
(287,850
|
)
|
|
|
(156,427
|
)
|
Other non-current assets
|
|
|
82,866
|
|
|
|
(92,416
|
)
|
Accounts payable
|
|
|
(315,300
|
)
|
|
|
(688,882
|
)
|
Other accrued expenses
|
|
|
29,511
|
|
|
|
345,739
|
|
Accrued compensation
|
|
|
874,622
|
|
|
|
276,134
|
|
Deferred revenue
|
|
|
1,140,999
|
|
|
|
(414,647
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
11,381,435
|
|
|
|
6,410,662
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Change in notes receivable from related parties
|
|
|
(125,000
|
)
|
|
|
(65,310
|
)
|
Purchase of property and equipment
|
|
|
(1,070,897
|
)
|
|
|
(1,632,330
|
)
|
Proceeds from sale of assets
|
|
|
|
|
|
|
9,500
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(1,195,897
|
)
|
|
|
(1,688,140
|
)
|
Cash flow from financing activities:
|
|
|
|
|
|
|
|
|
Payments on long-term debt
|
|
|
|
|
|
|
(2,262,606
|
)
|
Distributions paid to stockholders
|
|
|
(10,532,847
|
)
|
|
|
(3,616,533
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(10,532,847
|
)
|
|
|
(5,879,139
|
)
|
Net decrease in cash and cash equivalents
|
|
|
(347,309
|
)
|
|
|
(1,156,617
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
12,636,914
|
|
|
|
7,619,555
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
12,289,605
|
|
|
|
6,462,938
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
10,225
|
|
|
$
|
76,750
|
|
See accompanying notes
F-85
Xactware,
Inc.
Notes to
Condensed Consolidated Financial Statements
June 30,
2006 (Unaudited)
|
|
1.
|
Summary
of Significant Accounting Policies
|
Nature
of Operations
Founded in 1986, Xactware, Inc. (the Company) is a
privately held technology services company specializing in the
property insurance, remodeling, and restoration industries.
Xactwares technology tools include software estimating
programs for personal computers as well as powerful online
systems for replacement cost calculations, estimate tracking,
data trending in real time and multimedia construction training
tools.
Basis
of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with
U.S. generally accepted accounting principles
(GAAP) for interim financial information.
Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In
the opinion of management, all adjustments, consisting only of
normal recurring accruals, considered necessary for a fair
presentation have been included.
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from these estimates. The results of
operations for the six months ended June 30, 2006 are not
necessarily indicative of results that can be expected for the
full year.
Consolidation
The consolidated financial statements include the financial
statements of the Company and its wholly owned subsidiaries
Xactware Business Services, LLC, Xactware Information Services,
Inc., iSkills, Inc., Xactnet, Inc., and XactSites, Inc. All
inter-company accounts and transactions have been eliminated in
consolidation.
Revenue
Recognition
The Company generates net revenues through software
subscriptions, contracted development of software products,
automated assignment workflow, online structural value
estimates, support and maintenance of software products, and
training.
Sales of software not under specific development contracts are
recognized upon shipment provided that persuasive evidence of an
agreement exists, the fee is fixed or determinable and
collectibility is probable. The Company records amounts billed
to customers related to shipping as revenue and all expenses
related to shipping as a cost of revenues. Software
subscriptions and renewals of support and maintenance revenues
are deferred and recognized ratably over the contract periods.
Transaction fee revenues associated with online structural value
estimation and automated assignment workflow are recognized when
transactions are completed. Training revenues are recognized
when services are provided.
For development contracts involving a significant amount of
services related to installation, modification, or customization
of the software product, the Company recognizes revenue in
accordance with the provisions of
SOP No. 81-1,
Accounting for Performance of Construction-Type and Certain
Production-Type Contracts
(SOP 81-1).
As prescribed by
SOP 81-1,
the Company recognizes revenue using the
percentage-of-completion method based upon available reliable
estimates for the costs and effort necessary to complete the
services.
F-86
Xactware,
Inc.
Notes to
Condensed Consolidated Financial Statements
June 30,
2006 (Unaudited) (Continued)
Accounts
Receivable
Accounts receivable are stated at cost, net of allowances for
doubtful accounts. The Company makes judgments as to its ability
to collect outstanding receivables and provide allowances when
collection becomes doubtful. Provisions are made based upon a
specific review of all significant outstanding invoices.
Unbilled receivables result from our recognition of contract
revenue in advance of contractual billing or progress billing
terms.
Property
and Equipment
Property and equipment is stated at cost net of accumulated
depreciation. Depreciation is computed using the straight-line
method over the useful lives of the related assets. Leasehold
improvements are amortized over the term of the lease or the
useful life of the improvement, whichever is shorter. Other
property and equipment includes recreational property and
equipment. Maintenance and repairs that do not extend the life
or improve the asset are expensed in the year incurred. Weighted
average estimated useful lives are as follows:
|
|
|
|
|
Furniture and fixtures
|
|
|
7 years
|
|
Computer equipment and software
|
|
|
5 years
|
|
Leasehold improvements
|
|
|
13 years
|
|
Other
|
|
|
14 years
|
|
Research
and Development
Research and development expenditures are charged to operations
as incurred. SFAS No. 86,
Accounting for the Costs
of Computer Software to Be Sold, Leased or Otherwise
Marketed
, requires capitalization of certain software
development costs subsequent to the establishment of
technological feasibility. Based on the Companys product
development process, technological feasibility is established
upon the completion of a working model. For the year ended
December 31, 2005 and the six months ended June 30,
2006 costs incurred by the Company between the completion of the
working model and the point at which the product is ready for
general release have been insignificant. Accordingly, the
Company has charged all such costs to research and development
expense in the period incurred.
Income
Taxes
The Company elects to file its federal and state income tax
returns under the provisions of Subchapter S for Federal
and Utah Revenue Codes, under which income and losses are passed
through to the individual stockholders. Accordingly, no
provision has been made for federal or state income taxes in the
accompanying financial statements.
Cash
and Cash Equivalents
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
Concentration
of Business and Credit Risk
The Companys revenues are concentrated in the development
of software programs for the insurance industry and software
sales to insurance agents, independent adjusters, and
contractors. Significant technological changes in customer
requirements, or the emergence of competitive products with new
capabilities or technologies, could adversely affect the
Companys operating results.
F-87
Xactware,
Inc.
Notes to
Condensed Consolidated Financial Statements
June 30,
2006 (Unaudited) (Continued)
During the six months ended June 30, 2006, sales to one
major customer accounted for approximately $3.9 million or
15% of revenues. During the six months ended June 30, 2005,
sales to one major customer accounted for approximately
$2.7 million or 15% of revenues.
December 31, 2005, two customers accounted for 8% and 6% of
total accounts receivable, respectively. At June 30, 2006,
two customers accounted for 15% and 13% of total accounts
receivable, respectively.
The Company maintains 100% of its cash and cash equivalents in a
federally insured bank. The Companys deposits may at
times, exceed federal insurance limits. The Company has not
experienced any losses in such accounts. The Company believes it
is not exposed to any significant credit risk related to its
cash and cash equivalents.
The Company grants credit to substantially all of its customers
without requiring collateral. This credit risk is mitigated by
the financial stability of its major customers and the
Companys reserves for estimated losses. Historical credit
losses have not been significant.
Stock-Based
Compensation
Prior to January 1, 2006, the Company accounted for
stock-based employee compensation under the recognition and
measurement provisions of Accounting Principles Board
(APB) Opinion No. 25,
Accounting for Stock
Issued to Employees
, as permitted by SFAS No. 123,
Accounting for Stock-Based Compensation
. Prior to
January 1, 2006, the Company measured stock-based
compensation expense as the difference, if any, between the
estimated fair value of the Companys common stock on the
date of grant and the exercise price.
Pro forma information for the year ended December 31, 2005,
regarding the effect of issuing stock options during the year on
net income (loss) is required by SFAS No. 123, and has
been determined as if the Company had accounted for its employee
stock options under the fair value method. The fair value of
these options was estimated at the date of grant using the
minimum value method, which assumes zero volatility, with the
following weighted-average assumptions: risk-free interest rate
of 4.93%; dividend yield of 0%; and a weighted-average expected
life of the option of 8 years. The weighted-average
grant-date fair value of options granted during the year ended
December 31, 2005 is $.30.
If the Company had elected to account for employee stock option
grants based on their fair value, as prescribed by
SFAS No. 123, net income would have been changed to
the pro forma amounts as follows for the six months ended
June 30, 2005:
|
|
|
|
|
Net Income, as reported
|
|
$
|
9,833,387
|
|
Pro forma stock compensation expense
|
|
|
(8,033
|
)
|
|
|
|
|
|
Pro forma net income
|
|
$
|
9,825,354
|
|
|
|
|
|
|
Effective January 1, 2006, the Company adopted the fair
value recognition provisions of SFAS No. 123R,
Share-Based Payment
, using the prospective transition
method, which requires the Company to apply its provisions only
to awards granted, modified, repurchased or cancelled after the
effective date. Under this transition method, stock-based
compensation expense recognized beginning January 1, 2006
is based on the following: (a) the grant-date fair value of
stock option awards granted or modified after January 1,
2006; and (b) the balance of deferred stock-based
compensation related to stock option awards granted prior to
January 1, 2006, which was calculated using the
intrinsic-value method as previously permitted under APB Opinion
No. 25. Results for prior periods have not been restated.
During the six month period ended June 30, 2006, the
Company did not grant, modify, repurchase, or cancel any
employee stock options. As of June 30, 2006, the Company
did not have any deferred stock-based
F-88
Xactware,
Inc.
Notes to
Condensed Consolidated Financial Statements
June 30,
2006 (Unaudited) (Continued)
compensation related to stock option awards granted prior to
January 1, 2006. Therefore, as a result of adopting
SFAS No. 123R,
Share-Based Payment
, using the
prospective transition method, the Company did not record any
stock-based compensation for the six month period ending
June 30, 2006.
|
|
2.
|
Notes
Receivable from Related Parties
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Note receivable from a related party, unsecured, due in full
plus accrued interest at 8.25% in December 2008
|
|
$
|
20,320
|
|
|
$
|
20,320
|
|
Note receivable from a related party, unsecured, due in full
plus accrued interest at 3.83% in December 2014
|
|
|
250,000
|
|
|
|
125,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
270,320
|
|
|
$
|
145,320
|
|
|
|
|
|
|
|
|
|
|
|
|
3.
|
Operating
Lease Obligations
|
The Company leases vehicles under non-cancelable operating
leases, which expire through December 2008. Lease terms are
generally 24 to 39 months. In managements opinion,
the risk of loss on residual value guarantees is minimal. Total
vehicle lease expense paid for the six months ended
June 30, 2006 and 2005 was $76,762 and $75,683 respectively.
The Company leases office facilities under renewable
month-to-month operating leases from limited liability
corporations (LLC) owned by the stockholders of the
Company. Total rent expense paid to these LLCs for the six
months ended June 30, 2006 and 2005 was $202,980 and
$202,980, respectively. The Company also leases temporary office
space under a 2 year operating lease agreement and
additional temporary office space under month-to-month operating
leases from third parties. Total rent expense for the temporary
office space for the six months ended June 30, 2006 and
2005 was $68,572 and $60,057 respectively.
Future minimum lease payments under non-cancellable operating
leases at June 30, 2006 are as follows:
|
|
|
|
|
July through December 2006
|
|
$
|
95,414
|
|
2007
|
|
|
116,077
|
|
2008
|
|
|
49,886
|
|
2009
|
|
|
16,385
|
|
2010 and thereafter
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
277,762
|
|
|
|
|
|
|
Common
Stock
Authorized common stock consists of 90,000,000 shares of no
par voting stock and 10,000,000 shares of no par non-voting
stock. All shares have equal rights to distributions and have
equal rights in the event of dissolution or liquidation. There
were 20,836,870 no par voting shares outstanding at
June 30, 2006 and December 31, 2005.
F-89
Xactware,
Inc.
Notes to
Condensed Consolidated Financial Statements
June 30,
2006 (Unaudited) (Continued)
Stock
Option Plan
The Company has adopted an Employee Stock Option Plan (the Plan)
under which employees, officers, directors, and consultants of
the Company or an affiliate or subsidiary are eligible for stock
options. The Company has reserved 5,300,000 common shares under
the Plan. The Plan allows grants of incentive options and
nonqualified options to purchase common shares at a price that
is not less than the fair market value on the date of grant. The
Board of Directors determines the option price. Generally, the
options have a
10-year
life
from the date of grant and vest 20% each year until fully vested.
A summary of stock option activity and related information is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
Shares
|
|
|
Stock Options
|
|
|
Weighted-
|
|
|
|
Available
|
|
|
Number of
|
|
|
Price per
|
|
|
Average
|
|
|
|
for Grant
|
|
|
Shares
|
|
|
Share
|
|
|
Exercise Price
|
|
|
Balance at January 1, 2005
|
|
|
4,737,521
|
|
|
|
562,479
|
|
|
$
|
0.93
|
|
|
$
|
0.93
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
19,114
|
|
|
|
(19,114
|
)
|
|
$
|
0.93
|
|
|
$
|
0.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
4,756,635
|
|
|
|
543,365
|
|
|
$
|
0.93
|
|
|
$
|
0.93
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2006
|
|
|
4,756,635
|
|
|
|
543,365
|
|
|
$
|
0.93
|
|
|
$
|
0.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were 486,496 options exercisable as of June 30, 2006
and December 31, 2005. The weighted-average remaining
contractual life of the options is three years.
|
|
5.
|
Related
Party Transactions
|
The Company leases its office facilities from LLCs owned by the
stockholders. During 2005, the Company issued two long-term
notes receivable to a related parties in the amounts of $20,320
and $125,000, respectively.
The Company has a qualified 401(k) profit sharing plan that
allows employees to contribute an elected percentage of earnings
to the plan. The Company makes a matching contribution of 75% of
the contribution up to a maximum of 8% of eligible compensation.
Additionally, the Company can make discretionary contributions.
Employees are eligible to participate in the plan after three
months of service and attainment of age 18.
The Company contributed $312,703 and $229,178 to the plan for
the six months ended June 30, 2006 and 2005, respectively.
Matching contributions are accrued monthly and paid annually on
or about December 31. On August 9, 2006, the Xactware,
Inc. 401k plan was terminated. All accrued matching
contributions were paid through that date.
On August 8, 2006, approximately 100% of the assets of the
Company were acquired by Insurance Services Office, Inc., a
Delaware based corporation. The sale includes a contingent
payment provision subject to the achievement of certain
predetermined financial results for 2007 and 2008. In April
2008, the contingent payment provision for fiscal year ended
December 31, 2007 resulted in an additional payment. In
connection with this acquisition, all outstanding stock options
were cancelled in exchange for a one time cash payment.
F-90
Report of
Independent Auditors
To the Board of Directors and Stockholders
Xactware, Inc.
We have audited the accompanying consolidated balance sheets of
Xactware, Inc. and subsidiaries as of December 31, 2005 and
2004 and the related consolidated statements of income,
stockholders equity, and cash flows for the years then
ended. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. We were not engaged to perform an audit
of the Companys internal control over financial reporting.
Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting.
Accordingly we express no such opinion. An audit also 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 our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Xactware, Inc. and subsidiaries at
December 31, 2005 and 2004, and the consolidated results of
their operations and their cash flows for the years then ended
in conformity with accounting principles generally accepted in
the United States.
/s/ Ernst & Young LLP
Salt Lake City, Utah
May 5, 2006
F-91
Xactware,
Inc.
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2005
|
|
|
2004
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
12,636,914
|
|
|
$
|
7,560,755
|
|
Marketable securities
|
|
|
|
|
|
|
58,800
|
|
Accounts receivable, net of allowance of $170,000 and $85,000 in
2005 and 2004, respectively
|
|
|
3,450,648
|
|
|
|
2,600,970
|
|
Unbilled receivables
|
|
|
117,267
|
|
|
|
995,062
|
|
Current portion of notes receivable from related parties
|
|
|
|
|
|
|
99,513
|
|
Prepaid expenses and other current assets
|
|
|
433,839
|
|
|
|
320,369
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
16,638,668
|
|
|
|
11,635,469
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
|
156,078
|
|
|
|
174,867
|
|
Computer equipment and software
|
|
|
13,574,229
|
|
|
|
14,126,285
|
|
Leasehold improvements
|
|
|
316,463
|
|
|
|
269,461
|
|
Other
|
|
|
228,531
|
|
|
|
527,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,275,301
|
|
|
|
15,098,112
|
|
Accumulated depreciation
|
|
|
(9,298,899
|
)
|
|
|
(8,415,292
|
)
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
|
4,976,402
|
|
|
|
6,682,820
|
|
Long-term portion of notes receivable from related parties
|
|
|
145,320
|
|
|
|
107,652
|
|
Other non-current assets
|
|
|
368,616
|
|
|
|
302,892
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
22,129,006
|
|
|
$
|
18,728,833
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,097,437
|
|
|
$
|
832,608
|
|
Accrued compensation
|
|
|
1,884,386
|
|
|
|
1,628,702
|
|
Other accrued expenses
|
|
|
101,825
|
|
|
|
35,088
|
|
Deferred revenue
|
|
|
3,822,190
|
|
|
|
2,394,736
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
2,003,746
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
6,905,838
|
|
|
|
6,894,880
|
|
Long-term debt
|
|
|
|
|
|
|
1,700,243
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
6,905,838
|
|
|
|
8,595,123
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
Common stock no par value, 100,000,000 shares
authorized; 20,836,870 shares issued and outstanding in
2005 and 2004
|
|
|
304,347
|
|
|
|
304,347
|
|
Retained earnings
|
|
|
14,918,821
|
|
|
|
9,829,363
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
15,223,168
|
|
|
|
10,133,710
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
22,129,006
|
|
|
$
|
18,728,833
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-92
Xactware,
Inc.
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2005
|
|
|
2004
|
|
|
Net revenues
|
|
$
|
41,190,993
|
|
|
$
|
32,700,070
|
|
Cost of revenues
|
|
|
4,964,774
|
|
|
|
4,307,031
|
|
Research and development expenses
|
|
|
12,133,116
|
|
|
|
10,617,525
|
|
Sales and marketing expenses
|
|
|
3,387,532
|
|
|
|
2,566,494
|
|
General and administrative expenses
|
|
|
7,350,424
|
|
|
|
6,808,460
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
27,835,846
|
|
|
|
24,299,510
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
13,355,147
|
|
|
|
8,400,560
|
|
Interest expense
|
|
|
(135,013
|
)
|
|
|
(252,524
|
)
|
Interest and other income
|
|
|
213,228
|
|
|
|
98,477
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,433,362
|
|
|
$
|
8,246,513
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-93
Xactware,
Inc,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
Total
|
|
|
|
Number
|
|
|
|
|
|
Retained
|
|
|
Stockholders
|
|
|
|
of Shares
|
|
|
Amount
|
|
|
Earnings
|
|
|
Equity
|
|
|
Balance at January 1, 2004
|
|
|
20,836,870
|
|
|
$
|
304,347
|
|
|
$
|
7,938,264
|
|
|
$
|
8,242,611
|
|
Distributions paid to stockholders
|
|
|
|
|
|
|
|
|
|
|
(6,355,414
|
)
|
|
|
(6,355,414
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
8,246,513
|
|
|
|
8,246,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
20,836,870
|
|
|
|
304,347
|
|
|
|
9,829,363
|
|
|
|
10,133,710
|
|
Distributions paid to stockholders
|
|
|
|
|
|
|
|
|
|
|
(8,343,904
|
)
|
|
|
(8,343,904
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
13,433,362
|
|
|
|
13,433,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
20,836,870
|
|
|
$
|
304,347
|
|
|
$
|
14,918,821
|
|
|
$
|
15,223,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-94
Xactware,
Inc.
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2005
|
|
|
2004
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,433,362
|
|
|
$
|
8,246,513
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
2,528,710
|
|
|
|
2,602,690
|
|
Gain (loss) on disposal of assets
|
|
|
37,755
|
|
|
|
(55
|
)
|
(Gain) loss on marketable securities
|
|
|
(1,817
|
)
|
|
|
(33,572
|
)
|
Purchase of marketable securities classified as trading
|
|
|
|
|
|
|
(37,741
|
)
|
Proceeds from sale of marketable securities classified as trading
|
|
|
60,617
|
|
|
|
58,013
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(849,678
|
)
|
|
|
(281,675
|
)
|
Unbilled Receivables
|
|
|
877,795
|
|
|
|
(995,062
|
)
|
Prepaid expenses and other current assets
|
|
|
(113,470
|
)
|
|
|
(19,028
|
)
|
Other non-current assets
|
|
|
(65,724
|
)
|
|
|
(74,559
|
)
|
Accounts payable
|
|
|
264,829
|
|
|
|
(423,275
|
)
|
Other accrued expenses
|
|
|
66,737
|
|
|
|
15,558
|
|
Accrued compensation
|
|
|
255,684
|
|
|
|
242,661
|
|
Deferred revenue
|
|
|
1,427,454
|
|
|
|
197,181
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
17,922,254
|
|
|
|
9,497,649
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Change in notes receivable from related parties
|
|
|
61,845
|
|
|
|
52,838
|
|
Purchase of property and equipment
|
|
|
(2,262,854
|
)
|
|
|
(2,588,874
|
)
|
Proceeds from sale of assets
|
|
|
158,600
|
|
|
|
1,087
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(2,042,409
|
)
|
|
|
(2,534,949
|
)
|
Cash flow from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt
|
|
|
|
|
|
|
3,334,739
|
|
Payment on long-term debt
|
|
|
(3,703,989
|
)
|
|
|
(2,655,553
|
)
|
Distributions paid to stockholders
|
|
|
(7,099,697
|
)
|
|
|
(6,355,414
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(10,803,686
|
)
|
|
|
(5,676,228
|
)
|
Net increase in cash and cash equivalents
|
|
|
5,076,159
|
|
|
|
1,286,472
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
7,560,755
|
|
|
|
6,274,283
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
12,636,914
|
|
|
$
|
7,560,755
|
|
|
|
|
|
|
|
|
|
|
Noncash and supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
135,013
|
|
|
$
|
244,053
|
|
|
|
|
|
|
|
|
|
|
Distribution of assets to stockholders
|
|
$
|
1,244,207
|
|
|
|
|
|
See accompanying notes.
F-95
Xactware,
Inc.
December 31,
2005
|
|
1.
|
Summary
of Significant Accounting Policies
|
Nature
of Operations
Founded in 1986, Xactware, Inc. is a privately held technology
services company specializing in the property insurance,
remodeling, and restoration industries. Xactwares
technology tools include software estimating programs for
personal computers as well as powerful online systems for
replacement cost calculations, estimate tracking, data trending
in real time and multimedia construction training tools.
Consolidation
The consolidated financial statements include the financial
statements of the Company and its wholly owned subsidiaries
Xactware Business Services, LLC, Xactware Information Services,
Inc., iSkills, Inc., Xactnet, Inc., and XactSites, Inc. All
intercompany accounts and transactions have been eliminated in
consolidation.
Reclassifications
Certain previously reported amounts have been reclassified to
conform to the current presentation.
Estimates
The preparation of financial statements in accordance with
generally accepted accounting principles requires management to
use certain estimates and assumptions. Those estimates and
assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and
liabilities, and the reported revenues and expenses during the
reporting period. Although management believes its estimates are
appropriate, changes in assumptions utilized in preparing such
estimates could cause these estimates to change in the future.
Revenue
Recognition
The Company generates net revenues through software
subscriptions, contracted development of software products,
automated assignment workflow, online structural value
estimates, support and maintenance of software products, and
training.
Sales of software licenses not under specific development
contracts are recognized upon shipment provided that persuasive
evidence of an agreement exists, the fee is fixed or
determinable and collectibility is probable. The Company records
amounts billed to customers related to shipping as revenue and
all expenses related to shipping as a cost of revenues. Software
subscriptions and renewals of support and maintenance revenues
are deferred and recognized ratably over the contract periods.
Transaction fee revenues associated with online structural value
estimation and automated assignment workflow are recognized when
transactions are completed. Training revenues are recognized
when services are provided.
For development contracts involving a significant amount of
services related to installation, modification, or customization
of the software licensed product, the Company recognizes revenue
in accordance with the provisions of
SOP No. 81-1,
Accounting for Performance of Construction-Type and Certain
Production-Type Contracts
(SOP 81-1).
As prescribed by
SOP 81-1,
the Company recognizes revenue using the
percentage-of-completion method based upon available reliable
estimates for the costs and effort necessary to complete the
services.
F-96
Xactware,
Inc.
Notes to
Consolidated Financial
Statement (Continued)
Accounts
Receivable
Accounts receivable are stated at cost, net of allowances for
doubtful accounts. The Company makes judgments as to its ability
to collect outstanding receivables and provides allowances when
collection becomes doubtful. Provisions are made based upon a
specific review of all significant outstanding invoices.
Unbilled receivables result from our recognition of contract
revenue in advance of contractual billing or progress billing
terms.
Property
and Equipment
Property and equipment is stated at cost net of accumulated
depreciation. Depreciation is computed using the straight-line
method over the useful lives of the related assets. Leasehold
improvements are amortized over the term of the lease or the
useful life of the improvement, whichever is shorter. Other
property and equipment includes recreational property and
equipment. Maintenance and repairs that do not extend the life
or improve the asset are expensed in the year incurred. Weighted
average estimated useful lives are as follows:
|
|
|
|
|
Furniture and fixtures
|
|
|
7 years
|
|
Computer equipment and software
|
|
|
5 years
|
|
Leasehold improvements
|
|
|
13 years
|
|
Other
|
|
|
14 years
|
|
The Company purchased additional recreational property and
equipment during the year that had a carrying value of
approximately $760,000 when it was distributed to stockholders.
The Company distributed recreational property and equipment that
had a total carrying value of approximately $1.2 million to
its stockholders during 2005.
Research
and Development
Research and development expenditures are charged to operations
as incurred. SFAS No. 86,
Accounting for the Costs
of Computer Software to Be Sold, Leased or Otherwise
Marketed
, requires capitalization of certain software
development costs subsequent to the establishment of
technological feasibility. Based on the Companys product
development process, technological feasibility is established
upon the completion of a working model. For the years ended
December 31, 2005 and 2004 costs incurred by the Company
between the completion of the working model and the point at
which the product is ready for general release have been
insignificant. Accordingly, the Company has charged all such
costs to research and development expense in the period incurred.
Income
Taxes
The Company elects to file its federal and state income tax
returns under the provisions of Subchapter S for Federal and
Utah Revenue Codes, under which income and losses are passed
through to the individual stockholders. Accordingly, no
provision has been made for federal or state income taxes in the
accompanying financial statements.
Cash
and Cash Equivalents
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
F-97
Xactware,
Inc.
Notes to
Consolidated Financial
Statement (Continued)
Concentration
of Business and Credit Risk
The Companys revenues are concentrated in the development
of software programs for the insurance industry and software
sales to insurance agents, independent adjusters, and
contractors. Significant technological changes in customer
requirements, or the emergence of competitive products with new
capabilities or technologies, could adversely affect the
Companys operating results.
During the year ended December 31, 2005, sales to one major
customer accounted for approximately $7.2 million or 17% of
revenues. During the year ended December 31, 2004, sales to
one major customer accounted for approximately $6.0 million
or 18% of revenues. At December 31, 2005, two customers
accounted for 8% and 6% of total accounts receivable,
respectively. At December 31, 2004, two customers accounted
for 29% and 12% of total accounts receivable, respectively.
The Company maintains 100% of its cash and cash equivalents in a
federally insured bank. The Companys deposits may at
times, exceed federal insurance limits. The Company has not
experienced any losses in such accounts. The Company believes it
is not exposed to any significant credit risk related to its
cash and cash equivalents.
The Company grants credit to substantially all of its customers
without requiring collateral. This credit risk is mitigated by
the financial stability of its major customers and the
Companys reserves for estimated losses. Historical credit
losses have not been significant.
Advertising
Advertising costs are expensed as incurred. Advertising expense
for the years ended December 31, 2005 and 2004 were $84,635
and $41,758, respectively. Trade show expenses were $78,878 and
$65,402 for 2005 and 2004, respectively.
Stock-Based
Compensation
The Company has elected to follow Accounting Principles Board
Opinion No. 25,
Accounting for Stock Issued to Employees
(APB 25) and related Interpretations in accounting for
its employee stock options rather than adopting the alternative
fair value accounting provided for under SFAS No. 123,
Accounting for Stock-based Compensation
. Under APB 25,
because the exercise price of the Companys stock options
equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
Pro forma information regarding the net income effect of issuing
stock options is required by SFAS No. 123 as if the
Company had accounted for its employee stock options under the
fair value method. The Company did not grant any stock options
for the years ended December 31, 2005 and 2004.
For purposes of pro forma disclosures, the estimated fair value
of the options is amortized over the options vesting
period. The stock compensation expense included in the pro forma
disclosure below reflects the amortization of the estimated fair
value of options granted prior to the years ended
December 31, 2005 and 2004. The full impact on pro forma
net income may not be representative of compensation expense in
future years.
F-98
Xactware,
Inc.
Notes to
Consolidated Financial
Statement (Continued)
The following table illustrates the effect on net loss if the
Company had applied the fair-value recognition provisions of
SFAS 123 to stock-based employee compensation.
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2005
|
|
|
2004
|
|
|
Net income, as reported
|
|
$
|
13,433,362
|
|
|
$
|
8,246,513
|
|
Less stock compensation expense determined under the fair value
method
|
|
|
(16,066
|
)
|
|
|
(17,327
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
13,417,296
|
|
|
$
|
8,229,186
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income
The Company has adopted the provisions of
SFAS No. 130,
Reporting Comprehensive Income
.
There are no items of other comprehensive income in any of the
periods presented and, therefore, net income equals total
comprehensive income for all periods.
Recent
Accounting Pronouncements
In December 2004, the FASB issued Statement of Financial
Accounting Standards No. 123, as revised,
Share-Based
Payment
(FAS 123R), which requires the cost resulting
from all stock-based payment transactions to be recognized in
the consolidated financial statements. That cost will be
measured based on the fair value of the equity instruments
issued. Under FAS 123R, the fair value based method for
recognition of compensation expense is required to be applied
using the prospective transition method. The Company currently
measures compensation expense for stock-based employee and
director compensation under the intrinsic value method and, as
such, generally recognize no compensation costs for these
options. The adoption of FAS 123R is not expected to have a
material impact on The Companys consolidated financial
statements. The adoption of FAS 123R is effective for the
Company beginning on January 1, 2006.
F-99
Xactware,
Inc.
Notes to
Consolidated Financial
Statement (Continued)
|
|
2.
|
Notes
Receivable from Related Parties
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2005
|
|
|
2004
|
|
|
Note receivable from a limited liability corporation owned by
the Companys majority stockholder, unsecured, due in
monthly installments of $526, including interest at 10.00%, due
July 2006
|
|
$
|
|
|
|
$
|
9,209
|
|
Note receivable from a limited liability corporation owned by
the Companys majority stockholder, unsecured, due in
monthly installments of $1,373, including interest at 10.00%,
due July 2006
|
|
|
|
|
|
|
24,040
|
|
Note receivable from a stockholder, unsecured, due in annual
installments of $17,751, plus accrued interest at 2.88%, due in
April 2005
|
|
|
|
|
|
|
17,710
|
|
Note receivable from a stockholder, unsecured, due in annual
installments of $27,465, plus accrued interest at 2.88%, due in
April 2005
|
|
|
|
|
|
|
27,399
|
|
Note receivable from a related party, unsecured, due in full
plus accrued interest at 4% in August 2005
|
|
|
|
|
|
|
10,000
|
|
Note receivable from a related party, unsecured, due in full
plus accrued interest at 4.5% in September 2005
|
|
|
|
|
|
|
12,000
|
|
Note receivable from a limited liability corporation owned by
the Companys majority stockholder, unsecured, due in
monthly installments of $1,461, including interest at 5.44%, due
May 2012
|
|
|
|
|
|
|
106,807
|
|
Note receivable from a related party, unsecured, due in full
plus accrued interest at 8.25% in December 2008
|
|
|
20,320
|
|
|
|
|
|
Note receivable from a related party, unsecured, due in full
plus accrued interest at 3.83% in December 2014
|
|
|
125,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145,320
|
|
|
|
207,165
|
|
Current portion
|
|
|
|
|
|
|
(99,513
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
145,320
|
|
|
$
|
107,652
|
|
|
|
|
|
|
|
|
|
|
In 2005 and 2004, the Company purchased equity securities
classified as trading securities totaling $0 and $37,741,
respectively. Also, in 2005 and 2004 the Company sold equity
securities classified as trading securities totaling $60,617 and
$58,013, respectively. These securities were valued at their
fair value at December 31, 2004, based on quoted market
prices on a national stock exchange. In accordance with
SFAS No. 115,
Accounting for Certain Investments in
Debt and Equity Securities,
unrealized and realized holding
gains and losses were included in net income. The Company
recognized a gain of $1,817 and $33,572 on the securities in
2005 and 2004 respectively. At December 31, 2004, $2,859 of
the gain relates to trading securities held by the Company. The
Company sold its remaining equity securities during 2005.
F-100
Xactware,
Inc.
Notes to
Consolidated Financial
Statement (Continued)
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2005
|
|
|
2004
|
|
|
Note payable to bank, collateralized by equipment, guaranteed by
majority stockholder, payable in monthly installments of $44,935
including interest at the banks prime rate plus 0.75%, due
June 2006
|
|
$
|
|
|
|
$
|
893,258
|
|
Note payable to bank, collateralized by equipment, guaranteed by
majority stockholder, payable in quarterly principal
installments of $28,571, with interest payable monthly at the
banks prime rate plus 1.00%, due July 2006
|
|
|
|
|
|
|
198,925
|
|
Note payable to bank, collateralized by equipment, guaranteed by
majority stockholder, payable in monthly installments of
$45,872, including interest at the banks prime rate plus 1.5%,
due May 2005
|
|
|
|
|
|
|
223,968
|
|
Note payable to bank, collateralized by equipment, guaranteed by
majority stockholder, payable in monthly installments including
interest at the banks prime rate plus 0.5%, due March 2007
|
|
|
|
|
|
|
1,155,475
|
|
Note payable to bank, collateralized by equipment, guaranteed by
majority stockholder, payable in monthly installments of $44,815
including interest at 4.75%, due March 2007
|
|
|
|
|
|
|
1,142,523
|
|
Note payable to financial institution, collateralized by a
software license, payable in quarterly installments of $30,842,
including interest at 5.92%, due August 2005
|
|
|
|
|
|
|
89,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,703,989
|
|
Current maturities
|
|
|
|
|
|
|
(2,003,746
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
1,700,243
|
|
|
|
|
|
|
|
|
|
|
The Company repaid to the bank the remaining balance of the long
term debt principal and related accrued interest during 2005.
The Company did not record any gain or loss on the transaction.
|
|
5.
|
Operating
Lease Obligations
|
The Company leases vehicles under non-cancelable operating
leases, which expire through December 2008. Lease terms are
generally 24 to 39 months. In managements opinion,
the risk of loss on residual value guarantees is minimal. Total
vehicle lease expense paid for the years ended December 31,
2005 and 2004 was $157,262 and $126,726, respectively.
The Company leases office facilities under renewable
month-to-month operating leases from limited liability
corporations (LLC) owned by the stockholders of the
Company. Total rent expense paid to these LLCs for the
years ended December 31, 2005 and 2004 was $372,130 and
$437,210, respectively. The Company also leases temporary office
space under month-to-month operating leases from third parties.
Total rent expense for the temporary office space for the years
ended December 31, 2005 and 2004 was $118,304 and $96,021,
respectively.
F-101
Xactware,
Inc.
Notes to
Consolidated Financial
Statement (Continued)
Future minimum lease payments under non-cancellable operating
leases at December 31, 2005 are as follows:
|
|
|
|
|
2006
|
|
$
|
189,549
|
|
2007
|
|
|
106,356
|
|
2008
|
|
|
40,166
|
|
2009
|
|
|
12,335
|
|
2010 and thereafter
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
348,406
|
|
|
|
|
|
|
Common
Stock
Authorized common stock consists of 90,000,000 shares of no
par voting stock and 10,000,000 shares of no par nonvoting
stock. All shares have equal rights to distributions and have
equal rights in the event of dissolution or liquidation. There
were 20,836,870 no par voting shares outstanding at
December 31, 2005 and 2004.
Stock
Option Plan
The Company has adopted an Employee Stock Option Plan (the Plan)
under which employees, officers, directors, and consultants of
the Company or an affiliate or subsidiary are eligible for stock
options. The Company has reserved 5,300,000 common shares under
the Plan. The Plan allows grants of incentive options and
nonqualified options to purchase common shares at a price that
is not less than the fair market value on the date of grant. The
Board of Directors determines the option price. Generally, the
options have a
10-year
life
from the date of grant and vest 20% each year until fully vested.
A summary of stock option activity and related information is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Outstanding Stock Options
|
|
|
Weighted-
|
|
|
|
Available
|
|
|
Number of
|
|
|
Price per
|
|
|
Average
|
|
|
|
for Grant
|
|
|
Shares
|
|
|
Share
|
|
|
Exercise Price
|
|
|
Balance at December 31, 2003
|
|
|
4,725,283
|
|
|
|
574,717
|
|
|
$
|
0.93
|
|
|
$
|
0.93
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
12,238
|
|
|
|
(12,238
|
)
|
|
$
|
0.93
|
|
|
$
|
0.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
4,737,521
|
|
|
|
562,479
|
|
|
$
|
0.93
|
|
|
$
|
0.93
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
19,114
|
|
|
|
(19,114
|
)
|
|
$
|
0.93
|
|
|
$
|
0.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
4,756,635
|
|
|
|
543,365
|
|
|
$
|
0.93
|
|
|
$
|
0.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2005 and 2004 were
486,496 and 443,501, respectively. The weighted-average
remaining contractual life of the options is five years.
|
|
7.
|
Related
Party Transactions
|
Interest income of $8,952 and $13,304 was received on notes from
stockholders and a limited liability corporation owned by the
majority stockholder during the years ended December 31,
2005 and 2004,
F-102
Xactware,
Inc.
Notes to
Consolidated Financial
Statement (Continued)
respectively. The Company leases its office facilities from LLCs
owned by the stockholders. During 2005, the Company issued two
short-term notes receivable to related parties in the amounts of
$20,320 and $125,000, respectively.
The Company has a qualified 401(k) profit sharing plan that
allows employees to contribute an elected percentage of earnings
to the plan. The Company makes a matching contribution of 75% of
the contribution up to a maximum of 8% of eligible compensation.
Additionally, the Company can make discretionary contributions.
Employees are eligible to participate in the plan after three
months of service and attainment of age 18.
The Company contributed $525,426 and $419,970 to the plan for
the years ended December 31, 2005 and 2004, respectively.
In addition, the Company also has established a cafeteria
benefit plan, which enables employees to choose among certain
benefits, and have the benefit amounts paid for with a portion
of employee compensation before federal income or social
security taxes are withheld.
F-103
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item 13.
Other
Expenses of Issuance and Distribution.
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
|
|
|
|
to be Paid
|
|
|
|
|
|
Registration fee
|
|
$
|
29,475
|
|
|
|
|
|
FINRA filing fee
|
|
$
|
75,500
|
|
|
|
|
|
Listing fees
|
|
|
*
|
|
|
|
|
|
Transfer agents fees
|
|
|
*
|
|
|
|
|
|
Printing and engraving expenses
|
|
|
*
|
|
|
|
|
|
Legal fees and expenses
|
|
|
*
|
|
|
|
|
|
Accounting fees and expenses
|
|
|
*
|
|
|
|
|
|
Miscellaneous
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
To be completed by amendment.
|
Each of the amounts set forth above, other than the Registration
fee and the FINRA filing fee, is an estimate.
|
|
Item 14.
|
Indemnification
of Directors and Officers.
|
Section 145 of the Delaware General Corporation Law
provides that a corporation may indemnify directors and officers
as well as other employees and individuals against expenses
(including attorneys fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by such
person in connection with any threatened, pending or completed
actions, suits or proceedings in which such person is made a
party by reason of such person being or having been a director,
officer, employee or agent to the Registrant. The Delaware
General Corporation Law provides that Section 145 is not
exclusive of other rights to which those seeking indemnification
may be entitled under any bylaw, agreement, vote of stockholders
or disinterested directors or otherwise. Article Twelfth of
the Registrants Certificate of Incorporation provides for
indemnification by the Registrant of its directors, officers and
employees to the fullest extent permitted by the Delaware
General Corporation Law.
Section 102(b)(7) of the Delaware General Corporation Law
permits a corporation to provide in its certificate of
incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the
directors duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation
of law, (iii) for unlawful payments of dividends or
unlawful stock repurchases, redemptions or other distributions,
or (iv) for any transaction from which the director derived
an improper personal benefit. The Registrants Certificate
of Incorporation provides for such limitation of liability.
The Registrant maintains standard policies of insurance under
which coverage is provided (a) to its directors and
officers against loss rising from claims made by reason of
breach of duty or other wrongful act, and (b) to the
Registrant with respect to payments which may be made by the
Registrant to such officers and directors pursuant to the above
indemnification provision or otherwise as a matter of law.
The proposed forms of Underwriting Agreement filed as
Exhibit 1.1 to this Registration Statement provide for
indemnification of directors and officers of the Registrant by
the underwriters against certain liabilities.
II-1
|
|
Item 15.
|
Recent
Sales of Unregistered Securities.
|
On June 2, 2008 we issued an aggregate of 100 shares
of our common stock, par value $.01 per share, to Insurance
Services Office, Inc. for $.01 per share. The issuance of such
shares was not registered under the Securities Act because the
shares were offered and sold in a transaction exempt from
registration under Section 4(2) of the Securities Act.
Since August 1, 2005, Insurance Services Office, Inc. has
issued to directors, officers and employees options to purchase
184,575 shares of Class A common stock with per share
exercise prices ranging from $445 to $862, and has issued
353,054 shares of common stock upon exercise of outstanding
options. The issuance of stock options and the common stock
issuable upon the exercise of such options to directors,
officers and employees were deemed to be exempt from
registration under the Securities Act in reliance on
Rule 701 as promulgated under the Securities Act. The share
and per share information in this paragraph does not reflect the
stock split the Company will consummate in connection with this
offering.
|
|
Item 16.
|
Exhibits
and Financial Statement Schedules.
|
(a) The following exhibits are filed as part of this
Registration Statement:
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
1
|
.1
|
|
Form of Underwriting Agreement*
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation*
|
|
3
|
.2
|
|
Amended and Restated By-Laws*
|
|
4
|
.1
|
|
Form of Common Stock Certificate*
|
|
5
|
.1
|
|
Opinion of Davis Polk & Wardwell*
|
|
10
|
.1
|
|
401(k) Savings Plan and Employee Stock Ownership Plan**
|
|
10
|
.2
|
|
Verisk Analytics, Inc. 2008 Equity Incentive Plan*
|
|
10
|
.3
|
|
Form of Letter Agreement
|
|
10
|
.4
|
|
Form of Master License Agreement and Participation Supplement.
|
|
21
|
.1
|
|
Subsidiaries of the Registrant*
|
|
23
|
.1
|
|
Consent of Deloitte & Touche LLP
|
|
23
|
.2
|
|
Consent of Deloitte & Touche LLP
|
|
23
|
.3
|
|
Consent of Ernst & Young LLP
|
|
23
|
.4
|
|
Consent of Davis Polk & Wardwell (included in
Exhibit 5.1)*
|
|
24
|
.1
|
|
Power of Attorney**
|
|
|
|
*
|
|
To be filed by amendment.
|
(b) The following financial statement schedule is filed as
part of this Registration Statement:
|
|
|
|
|
Schedule
|
|
|
Number
|
|
Description
|
|
|
Schedule II
|
|
|
Valuation and Qualifying Accounts and Reserves
|
|
|
|
|
Years Ended December 31, 2005, 2006 and 2007
|
II-2
The undersigned hereby undertakes:
(a) The undersigned registrant hereby undertakes to provide
to the underwriter at the closing specified in the underwriting
agreement certificates in such denominations and registered in
such names as required by the underwriter to permit prompt
delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the registrant
pursuant to the provisions referenced in Item 14 of this
Registration Statement, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred
or paid by a director, officer, or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered
hereunder, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this Registration Statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Jersey City, State of
New Jersey, on the 7th day of October, 2008.
Verisk Analytics, Inc.
Name: Frank J. Coyne
|
|
|
|
Title:
|
Chief Executive Officer, President and
Chairman of the Board of Directors
|
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Frank
J. Coyne
Frank
J. Coyne
|
|
Chief Executive Officer, President
and Chairman of the Board of Directors (principal executive
officer)
|
|
October 7, 2008
|
|
|
|
|
|
/s/ Mark
V. Anquillare
Mark
V. Anquillare
|
|
Chief Financial Officer
(principal financial officer and principal accounting officer)
|
|
October 7, 2008
|
|
|
|
|
|
/s/ *
J.
Hyatt Brown
|
|
Director
|
|
October 7, 2008
|
|
|
|
|
|
/s/ *
Glen
A. Dell
|
|
Director
|
|
October 7, 2008
|
|
|
|
|
|
/s/ *
Henry
J. Feinberg
|
|
Director
|
|
October 7, 2008
|
|
|
|
|
|
/s/ *
Christopher
M. Foskett
|
|
Director
|
|
October 7, 2008
|
|
|
|
|
|
/s/ *
Constantine
P. Iordanou
|
|
Director
|
|
October 7, 2008
|
|
|
|
|
|
/s/ *
John
F. Lehman, Jr.
|
|
Director
|
|
October 7, 2008
|
|
|
|
|
|
/s/ *
Stephen
W. Lilienthal
|
|
Director
|
|
October 7, 2008
|
|
|
|
|
|
/s/ *
Samuel
G. Liss
|
|
Director
|
|
October 7, 2008
|
|
|
|
|
|
/s/ *
Andrew
G. Mills
|
|
Director
|
|
October 7, 2008
|
II-4
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ *
Arthur
J. Rothkopf
|
|
Director
|
|
October 7, 2008
|
|
|
|
|
|
/s/ *
Barbara
D. Stewart
|
|
Director
|
|
October 7, 2008
|
|
|
|
|
|
/s/ *
David
B. Wright
|
|
Director
|
|
October 7, 2008
|
|
|
|
|
|
|
|
*By:
|
|
/s/ Mark
V. Anquillare
Attorney-in-Fact
|
|
|
|
October 7, 2008
|
II-5
Schedule II
Valuation and Qualifying Accounts and Reserves
Years Ended December 31, 2005, 2006 and 2007
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
Costs and
|
|
|
Deductions
|
|
|
Balance at
|
|
Description
|
|
of Year
|
|
|
Expenses(1)
|
|
|
Write-offs(2)
|
|
|
End of Year
|
|
|
Year ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
3,750
|
|
|
$
|
1,554
|
|
|
$
|
(1,681
|
)
|
|
$
|
3,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance for income taxes
|
|
$
|
|
|
|
$
|
2,144
|
|
|
$
|
|
|
|
$
|
2,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
3,623
|
|
|
$
|
3,069
|
|
|
$
|
(1,419
|
)
|
|
$
|
5,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance for income taxes
|
|
$
|
2,144
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
5,273
|
|
|
$
|
6,807
|
|
|
$
|
(3,833
|
)
|
|
$
|
8,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance for income taxes
|
|
$
|
2,144
|
|
|
$
|
|
|
|
$
|
(610
|
)
|
|
$
|
1,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Primarily additional reserves for bad debts.
|
|
|
(2)
|
|
Primarily accounts receivable balances written off, net of
recoveries, and the expiration of loss carryforwards.
|
S-1
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
1
|
.1
|
|
Form of Underwriting Agreement*
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation*
|
|
3
|
.2
|
|
Amended and Restated By-Laws*
|
|
4
|
.1
|
|
Form of Common Stock Certificate*
|
|
5
|
.1
|
|
Opinion of Davis Polk & Wardwell*
|
|
10
|
.1
|
|
401(k) Savings Plan and Employee Stock Ownership Plan**
|
|
10
|
.2
|
|
Verisk Analytics, Inc. 2008 Equity Incentive Plan*
|
|
10
|
.3
|
|
Form of Letter Agreement
|
|
10
|
.4
|
|
Form of Master License Agreement and Participation Supplement.
|
|
21
|
.1
|
|
Subsidiaries of the Registrant*
|
|
23
|
.1
|
|
Consent of Deloitte & Touche LLP
|
|
23
|
.2
|
|
Consent of Deloitte & Touche LLP
|
|
23
|
.3
|
|
Consent of Ernst & Young LLP
|
|
23
|
.4
|
|
Consent of Davis Polk & Wardwell (included in
Exhibit 5.1)*
|
|
24
|
.1
|
|
Power of Attorney**
|
|
|
|
*
|
|
To be filed by amendment.
|